More on Boots
Boots: 2006 results
Boots core retail chain Boots the Chemist suffered a slight like-for-like decline in sales and margin declines.
The company explains away the fall in operating margin as the result of spending on shop-refits and other improvements to the business, and the reduction in gross margin has been slight at 20 basis points. However we still believe that many of Boots product lines are likely to face a level of price competition from the supermarkets that will put pressure on margins.
The low like-for-like growth is the result of falls certain product categories, notably food and photo sales. The decline in food sales is a one off but the decline in photo sales is a result of the long term switch to digital - and the digital printing market is likely to end up considerably smaller than film.
Other toiletries and health (which includes both prescription drugs and OTC) saw low, but positive, growth of 2.7% and 2.4%. New regulator imposed price changes in prescription drugs had little impact.
The merger with Alliance Unichem means that buyers of Boots (at 714p) will be getting are far more geographically diverse company that Boots is at the moment. The effective prospective PE for the combined entity is attractive at around 14×, but the yield is likely to be closer to Allaince Unichem levels (around 2%+) rather than the current Boots level of 4.2%.
The combined business is likely to remain focused on acquisitive growth (which is where the money being retained by lower dividend payouts will go).
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