More on Boots
Sale of Boots Healthcare, trading statement
The proposed sale of Boots Healthcare International will make Boots much better focused as a pure retailer, but it will also remove the strongest growth driver in the group. As the sale price should reflect the performance there should be no loss of shareholder value as a result, but the company will look very different.
Boots the Chemist’s sales growth remained subdued at 1.1% with LFL sales falling 0.9%. The company points out that comparatives are distorted by the extra day in February 2004 (a leap year) and the underlying LFL growth was +0.7%. However this is still close to flat. Although gross margins are 80 basis points better than expected it is likely that margins will continue to be under pressure as competition from the supermarkets intensifies.
Boots Healthcare international continued its strong growth with sales up 5.7%.
Boots expects profits to be in line with market expectations, which implies EPS will be down about 5%.
In the next financial year (to March 2006), although Boots expects gross margin to be stable this is because improvements to prices from suppliers and the sales mix should offset price cuts, but this has considerable downside risk. In addition operating costs are expected to rise around 6%, which with sales and gross margins not likely to be much better than stable, implies significantly lower operating margins.
As there is not indication yet of what Boots Healthcare International will sell for, valuation still needs to be done on the combined business. The PE of 13× 2005/6 earnings is not expensive against other retailers but Boots has poor growth prospects. On the other hand the 5% yield is well above sector norms (although there are retailers with better growth prospects who come close) and the sale of Boots Healthcare International will release some value.
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