The Investment Column: Boots heads for pastures new

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The Independent Online
Boots shares have been under a cloud in recent weeks thanks to the OFT's decision to home in on non-prescription drug price maintenance, the UK's last legal price-fixing agreement. With 80 per cent of the group's profits coming from the core chemist chain, the conclusions of the Restrictive Practices Court are of more than passing interest. Some estimates suggest a price war could knock up to 6 per cent off group profits.

Even without that worry, there are concerns that the main business has gone ex-growth although the company has gone to great pains to convince analysts that is not the case. Whatever it says, however, it is hard to escape the conclusion that moves to set up pilot operations in the Far East and Holland represent a tacit acknowledgement that real growth will have to come from pastures new. For investors, that transforms the risk/reward profile of what has hitherto been a safe, predictable and cash-generative stock.

Figures for the six months to September were impressive, even given the buoyant consumer background. Boots The Chemists powers on with healthy like-for-like growth and an improvement in the unspecified gross margin. Elsewhere, the various components of the disastrous 1990 Ward White continued their convalescence.

Underlying profits at Halfords were 19 per cent higher with own brands proving increasingly popular. Do It All, which Boots now owns completely, having bought out former partner WH Smith, is on the mend. It may break into profit next year. Even Fads owner AG Stanley reduced its loss, although at pounds 6.9m in the half, from sales of just over pounds 50m, it is still pretty unacceptable.

Recent comments from a range of consumer-sensitive companies confirm a real improvement on the high street and Boots is benefiting from this. The market remains suspicious, however, and yesterday Boots's shares closed 10p lower at 611p. On the basis of profits this year of about pounds 540m and maybe pounds 600m next time, the shares trade on a prospective p/e ratio a year hence of no more than 15 - a sizeable discount to many of its retailing peers. Under a cloud of uncertainty, the shares are good value.