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Boots full year results
Turnover from continued businesses for the year to March 2005 at Boots was up 2.9% to £5.4bn with operating profit (on continued businesses) down 10.9% to £508m. Interest costs were 3.6× the previous year at £19.8m and should have reduced EPS further. However a lower tax charge (0.7× the previous year) of £124.7m (FY2004: £167.7m) more than offset this impact. EPS was down 4.6% to 45.7p benefiting from a c 5% reduction in the number of shares as Boots returned money to the shareholders.
As expected, Boots The Chemist (85% of profits) reported lower profits. Sales were up 3.9% to £4.7bn with LFL sales up 2.4%. However, operating profits were down 11.7% to £470m with Boots estimating to have lost £200m due to its price cuts. Gross margins were down 80bps: boots estimates that lower prices reduced margins by 260bps which was partially offset by 180bps due to better sales mix and better buying and manufacturing efficiencies.
Any recovery of margins at Boots the Chemist will have to be driven by cost cuts and efficiency improvements as pricing will continue to be under pressure due to supermarkets. In this financial year, Boots expects organic growth to fall further to a maximum 2.0% growth, and expects new opening to increase sales by 2.0%. New openings and higher costs are expected to increase costs by 6%. Margins are expected to be “stable” as Boots cut prices but reduces costs by efficiency improvements and reduced buying costs; this has considerable risk but Boots need to reduce prices to compete with supermarkets.
Boots Healthcare International (15.9% of profit) increased turnover (up 5.8% at CER) with margins improving to 16.8%. Boots did not give any new information about the impending sales, but said that it is progressing well. Boots plans to return a “significant proportion” of the value realised from the sales to the shareholders. Boots did not indicate whether this will be by way of an increase in its share buy back programme or whether they plan to declare a special dividend.
Boots Opticians made a lower profit £4.2m (FY2004:£12.9m) due to lower high margin sales as well as overall reduced sales. This business will now be integrated with Boots The Chemists which will reduce overall costs. Boots Retail International sales increased by 12.3% which reduced operating losses by 21.2% to £8.2m due to operational gearing.
A £118m increase in working capital and a 1.6× increase in capital expenditure to £303m reduced free cash flow conversion (as a percentage of EPS) drastically from 68% to 18.4%. In the current financial year, Boots expects to spend £200m as capex, lower than the previous year.
Boots shares are trading at a prospective PE of 14.1× and has a 5.1% yield. The rating is not expensive against other retailers but Boots has poor growth prospects. On the other hand the 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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