Business Analysis: Body Shop bucks the gloom on the high street

For years, the Body Shop has been relegated to retail also-ran. But yesterday, following a comprehensive makeover, the group stole the high street limelight with an attractive jump in underlying sales across its UK store estate.

Just as sales growth has shuddered to a halt at one of its biggest rivals, Boots, the Body Shop seems to have concocted a magic potion that has smoothed the slide in its like-for-like UK sales.

New products, new-look shops and a new-and-improved philosophy have helped to bolster the group's reputation with consumers and investors.

Comparable store sales in the UK soared 9 per cent in the first eight weeks of its financial year, outperforming the 6 per cent jump in comparable group sales. And this despite a backdrop of doom and gloom that has furrowed worry lines into even the best respected retailing brows.

Ultimately, it is the group's push upmarket that its shareholders have to thank for the transformation in their company's fortunes. From the packaging to the products to the shopfits, the Body Shop has transformed itself into more of a premium player, regaining credibility and hauling itself into the 21st century in the process.

The group's chief executive, Peter Saunders, has even coined a new term, "masstige", to explain the mass-market appeal of new "prestige" products, such as its Skin Focus Face Illuminator face cream.

Shares in the Body Shop surged 16 per cent higher to 191.25p yesterday, more than recovering from the tumble they took as part of this week's retail sell-off after Kingfisher's profit warning.

The value of the ethical cosmetics company - and consequently its founders, the Roddicks' 20 per cent shareholding - has quadrupled to £410m in the past two years as Adrian Bellamy and Mr Saunders, the duo at the top, have smartened up each of the group's four global regions.

Yet it wasn't just stronger store sales driving last year's better-than-expected 21 per cent jump in pre-tax profits to £34.5m. Just months after the girls from Tupperware packed up their tubs for good, consigning their cheese straw-packed parties to the annals of history, the phenomenon is back, this time in the form of cosmetics evenings.

The group's Body Shop at Home outfit gives budding hostesses the opportunity to host a party for their girlfriends - and make some money. It also provides a useful third sales channel in addition to its stores and its nascent on-line site for the company to tap new customers.

Last year, turnover from Body Shop at Home, which is operational in the US, the UK and Australia, surged 30 per cent to £46.1m. The biggest growth came in the US, where sales from the division rose 57 per cent to £22.1m. Growth in the UK was more modest, at 8 per cent to £17m, but Mr Saunders has big plans to improve on that in the months to come.

The company is cagey about how many At Home parties were held last year, but did reveal it was about to launch a massive recruitment drive for more consultants. At Home sales in the UK accounted for barely one-tenth of its total retail sales, but analysts estimate this proportion could increase to one-third over the next few years.

Paul Smiddy, at Robert W Baird, said: "You won't see a huge increase in UK store numbers so you will see growth from the internet and parties."

The group has hired a former executive from Tupperware to head its global At Home business and intends to launch the operation in Germany among other countries this year. "It's something we believe we can growth extensively. It's still in its infancy but it will be the driver of growth [in the future]," Mr Saunders said. "The parties are popular because the whole cocooning thing is for real. They are a girls' night out - or in, I guess - and we get two hours to talk about Body Shop product."

Party hosts get to choose their theme, from home spa specials to facials to an entire head-to-toe MOT to help their guests prepare for the onslaught of summer. They can look forward to freebies and discounts on goodies depending on how much business their invitees rack up for the Body Shop.

Analysts believe the success of At Home is part of a wider trend that is increasingly seeing shoppers eschew the high street in favour of internet sites and other forms of direct selling. In the 10 years to 2002, the value of the direct selling market in the UK soared by 145 per cent to £2.04bn, according to the Direct Selling Association.

As well as At Home, the Body Shop plans to tap new markets such as Russia, India and China for growth. It expects to launch the chain in Russia later this year, with help from a franchise partner, and in India within the next 18 months. South America is also within his sights, particularly for the opportunities the region poses for its At Home business. "Avon and Mary Kay [another big US cosmetics company] are very big in South America where the party plan works great," Mr Saunders added.

The group intends to increase its capital expenditure to £44m this year, from £18m last year. It recently negotiated a new £130m revolving credit facility to cover the money it needs to give its 2,045-strong store estate a facelift as well as open new stores.

Its progress last year prompted Richard Ratner, an analyst at Seymour Pierce, to upgrade his profit forecast for the current year to £45.5m from £42m. He said: "Overall, a stunningly good performance, and with what looks like the UK now having turned into positive territory, the potential leverage of profitability is considerable."

The company itself predicted that operating profits would increase by 15 to 20 per cent next year, although it said the recent acquisition of franchises in the UK, Canada and Hong Kong would hit its first-half profits because it would sell fewer products wholesale and more in its shops over Christmas.