Boots ponders profits or growth

RETAIL giant Boots is contemplating a deliberate cut in annual profits to pay for increased investment in its stores and over-the-counter medicines. Boots directors are understood to be debating the issue, with some keener to maintain short-term profit growth and others arguing that major investment is needed now to sustain momentum in the long term.

In the year to last March, Boots made pre-tax pre-exceptional profits of £581m. City analysts expect the group to make more than £620m before tax this year, rising to at least £660m in 2003. The 2002 forecast is almost certain to be met but strategic questions cast doubt over profit expectations further out.

Boots is about to unveil the results of a review of its overseas businesses and is likely to say that future international expansion will focus on concessions within large department stores rather than stand-alone sites.

Part of the reason for this shift in direction is the desire to concentrate resources on the core British Boots chain and the drugs business, Boots Healthcare International, which makes such best-selling brands as Strepsils and Nurofen.

Next week, Boots is due to present its strategy for BHI to analysts and is likely to reveal a major expansion drive. The group is expected to tell the City it intends significantly to increase its investment in the division, in an attempt to consolidate and improve upon its position as the fifth-largest over-the-counter medicines business in Europe. Huge amounts of money are needed for research and the marketing of existing and future products.

At home, meanwhile, discussions are taking place over the state and direction of the 1,450-strong Boots the Chemist chain. Many of the stores have been starved of cash for years and are in need of modernisation. Certain systems relating to the supply chain are also out of date and require investment.

The business has been criticised for the appearance of its shops and the layout of goods within them. It has also been said that stock replacement is not as efficient as it should be.

Chief executive Steve Russell took up his position in 2000, after Lord Blyth had been at the helm for 13 years. Russell is turning Boots into an upmarket healthcare services provider, offering designer make-up, dentistry and chiropody as well as more pedestrian items.