MARKET COMMENT
Boots Looks Worn

By Stuart Watson (TMFTiger)
November 8, 2001

Boots (LSE: BOOT) continues to be a popular share amongst private investors. It's a steady performer, as today's interim results showed. Sales grew by a pallid 2% to £2.55b but cost cutting measures helped improved profit margins. Profit before tax rose 8% to £248m.

The engine of the business continues to be Boots The Chemist. It accounts for three-quarters of sales and an even greater proportion of profits. Profit margins at this chain are around 15%, which is very high for a retail business. This suggests that further profits growth has to come from increasing sales. However, sales growth is very slow. Overall sales grew by just 1% with like-for-like growth of just 0.5%. This means Boots isn't increasing its sales capacity or the amount it squeezes from each shop.

For growth Boots has looked at various options. It has tried dentists, bootsphoto.com and Japan (both now closed) and the well-publicised trials of outlets in Sainsbury (LSE: SBRY) stores. However, these are all small fry in relation to the main business. The Sainsbury trial is only in six stores. It's hard to see this making a significant contribution to the business, even if it is rolled out further.

But to Boots credit, it is trying its best to grow and taking a realistic view about what is working and what is not. These expansion plans are currently forecast to result in profits growth of around 7% to 8% in the next couple of years. Nothing spectacular, but respectable in the current climate. Net debt comes in at £350m, which looks comfortable. Dividend yield is a chunky 4.5%.

Boots is forecast to make around £600m before tax this year, or around £410m after tax. At 600p, it's market value of £5.4b implies a forecast price earnings multiple of 13 times for the year to March 2002. At this level its hard to make a convincing case to buy the shares. One of the highlights listed in the results statement was that Boots has delivered a shareholder return of 34.4% over the last five years - that's 6% a year compounded. It's difficult to see the next five years delivering significantly more.

More: Boots discussion board