View from City Road: BTC suffers at its sisters' hands

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The Independent Online
Boots' shares have had a dramatic fall from grace, tumbling by a fifth since the beginning of the year, underperforming other retailers by the same margin and the market by even more. Yesterday's full-year figures sent them down just 3p to 444p, suggesting the market has got over its nerves.

Although profits were usefully ahead, the bears were given little encouragement to change their tune. Arguably both the core chemist shops and Do It All, the DIY joint venture with WH Smith, still face ruinous price wars. Uncertainty still dogs Manoplax, the great hope for the drugs division. The Ward White retail operation is still a disaster.

Sir James Blyth, chief executive, likes to point to a 20 per cent annual increase in shareholder value since 1989 when he spent pounds 900m on Ward White. Investors might like to ask what their return would have been had he left well alone. It looks unlikely that there will ever be a decent return on that acquisition.

Halfords, admittedly, seems to have begun to get its act together, reversing last year's pounds 10m loss into a pounds 4.7m profit. On sales of pounds 327m, however, that still represents a pretty dismal margin. We are promised sales of pounds 800m in the future and an 8 per cent return on turnover.

Do It All, however, undid all the good work. It lost pounds 10m in the second half after a pounds 5m deficit in the first. Prices have apparently stabilised but Boots has vowed, ominously, to continue to fight for market share at the expense of margin. Similar pressures are starting to dog BTC, with Superdrug making tactical forays into Boots' dominant positions in perfume and suncream. Again, a promise to 'withstand our competitors' aggression' suggests the BTC juggernaut may be slowing, although ever-wider margins underline the high quality of the business.

The pharmaceutical division enjoys the fattest margins so the market is right to worry about the possible withdrawal of Manoplax. A lack of further news on the recent study bombshell, which suggested that the 100mg version of the heart drug might actually hasten death, indicates that the regulatory authorities are taking a suspiciously close look.

Having plunged so precipitously, the shares are now on a market p/e, assuming pounds 445m of profits next year, a 10 per cent increase. Blowing away the drug stock froth is appropriate given the worries. And until the market senses firmer management in retail, the excellent BTC will have to live without a premium rating.

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