The Investment Column: Strong figures at Boots fail to dispel fears of price war fall-out

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ONE LOOK at Boots' share price is enough to send any shareholder reaching for the Nurofen. The dramatic drop, down from 1,053p to just 630.5p in less than a year, is a direct result of the Asda-Wal-Mart threat. The fear in the City is that a supermarket price war will savage the fat margins at Boots the Chemists, commoditising the health and beauty market Boots has dominated for so long.

Indeed, Boots' operating margins of 12 per cent in the core business makes it ripe for the picking. Analysts say the anticipation that those margins will halve is already in Boots' share price. Whether the collapse will be that bad is anyone's guess, but the City hates uncertainty and has punished the shares regardless.

Boots' defence strategy is to move up the value chain. Yes, it will be aggressive with promotional price cuts - but it will also concentrate more on differentiating itself from the wire-basket brigade. That means higher levels of service and new offerings, including skin treatment, in-store dentistry and exclusive product ranges. More will be made of the Advantage loyalty card, and the 10 million-strong database will be employed to devise special offers and target direct-mail catalogues.

While emphasis is on defending the turf at home, Boots is looking to expand overseas. The company is taking the Boots brand to Holland, Thailand and Japan with a view to creating a chain of some 400 stores. Other countries, in Europe and Asia, are also on the hit list.

So far the plan seems to be working. Yesterday's half-year results were better than expected, and the main chemists chain is holding up well. Like-for-like sales are improving and market share in the health and beauty market is up strongly.

Even so, the jury is out on whether Boots can pull off the great escape. On full-year profit forecasts of pounds 590m the shares trade on a much reduced forward multiple of 13. It will need a couple more sets of steady results before the City is convinced, and until then the shares are unlikely to make much headway. Hold off for now.