Boots blames rising interest rates for slowdown in sales

Boots sent the first signal that the retail sector had failed to bounce back after a disappointing Christmas yesterday with a profit warning that knocked 4 per cent off its share price. Just six weeks after reassuring the City that profits to the end of March were on track, the group admitted its sales growth had dried amid a wider slowdown on the high street.

Boots sent the first signal that the retail sector had failed to bounce back after a disappointing Christmas yesterday with a profit warning that knocked 4 per cent off its share price. Just six weeks after reassuring the City that profits to the end of March were on track, the group admitted its sales growth had dried amid a wider slowdown on the high street.

It has been a mixed year for Boots. Under its chief executive, Richard Baker, it has oscillated between appearing to be on the mend and struggling to maintain its profit margins.

The admission that operating profits at Boots The Chemists would miss consensus forecasts by about 7 per cent prompted analysts to slash their numbers for the fifth time in less than 12 months. Since March 2004, analysts have cut their pre-tax profit expectations by 25 per cent to £480m. The latest round of downgrades followed Boots' January trading update, which prompted its house broker, Merrill Lynch, to cut its forecasts for 2006 by 10 per cent.

Yesterday marked the first time Boots has blamed a profit warning on falling sales since Mr Baker took over. He said like-for-like sales, which rose by 2.6 per cent during its third quarter, had fallen by 1 percentage point during the past six weeks. "Trading has slowed considerably," Mr Baker said. "There is no doubt interest rate rises are sucking disposable income out of the economy." He said that sales at its core chemist business were about 3 per cent below where it had expected them to be.

Shares in Boots, which traded at 740p a year ago, slid 27.5p to 636p. Its share price has been supported by bid speculation but has nevertheless failed to keep up with the rest of the retail sector over the past 12 months (see graph).

Elsewhere, shares in companies from Next, to Matalan, to Woolworths also fell as analysts fretted over which group would be next to disappoint. Iain McDonald, at Numis, said: "My view is the sector's [valued] too highly, largely on bid speculation. This brings a dose of reality back into the market that trading out there is difficult."

The sales slowdown came despite the boost from Valentine's Day, and mainly affected the group's toiletries and electrical goods. The chemist business has also felt the pinch from a lack of cough and cold epidemics this winter.

Mr Baker said Boots, which has suffered at the hands of the supermarkets, would focus on expanding sales of its private labels such as No 7 cosmetics and Botanics skincare products. Private label products contribute one-third of the group's sales by value, but even more of its profits, he added.

The company, which promised to provide a further trading update in four weeks, said in a brief statement: "Subdued consumer spending was expected but since then trading has deteriorated further. This reflects the slowdown in consumer spending across the high street."

Analysts said any damage to Mr Baker's credibility with investors had probably already been done. Anne Critchlow, at ING Financial Markets, said: "I don't think you could get better management in. I think he's facing very difficult market conditions so if his credibility was going to take a knock it would have happened on previous profit warnings." In additional to poor sales, Boots said its operating costs had risen slightly. Mr Baker said the group was being more "careful" about the amount of costs it takes out of stores while trading remains tough.

Although the group has invested millions in cutting its prices by about one quarter over the past 18 months, Mr Baker signalled further investment could follow. "The market is very tough," he said. "You constantly have to adjust your trading position and evaluate whether you're sufficiently competitive."