Rich Boots prepared for a scrap

Investment Column

Asda's price-cutting antics in the medicines market have created a cloud over Boots' share price. Having enjoyed a good run early in the year they have slumped by almost 10 per cent since Archie Norman started to portray himself as Medicine Man.

But it is an over-reaction to suggest that Boots would struggle if resale price maintenance collapsed and the supermarkets sparked a price war.

Boots is well placed whether RPM stays or goes. Just as the Net Book Agreement suited WH Smith, the price maintenance on non-prescription drugs is very convenient for Boots. It is quite happy to cream off chunky margins on maintained prices. But as the largest pharmacy chain, with 1,200 of the UK's 12,000 pharmacies, it could use its marketing and buying muscle to cut prices and grow market share if a price war broke out. It would be the smaller, independent pharmacies that felt the pain.

Boots has already proved it can scrap with the best of them after its run-in with Superdrug over discounted perfumes a few years ago. The group's real problems are the weak housing market, which is crippling its DIY businesses, and the burning question of what to do with its pounds 400m cash pile.

Boots must be thankful that the chemist chain is motoring nicely. Of the group's pounds 196m operating profits in the six months to September, Boots the Chemist accounted for pounds 164m.

Like-for-like sales were up 4.5 per cent, a laudable performance given high street gloom.

Sales of sun creams were boosted by the summer heatwave and the No 7 brand of cosmetics performed strongly after a February re-launch.

Elsewhere, it was a pretty sorry tale. Losses at the Do It All joint venture with WH Smith almost trebled to pounds 4.8m. Losses also trebled at the AG Stanley business, which includes the Fads and Homestyle high street stores. Like-for-like sales fell 4.5 per cent at Do It All and by a thumping 13 per cent at AG Stanley. Like-for-like sales at Halfords are flat and down slightly at Children's World. Not very cheerful.

Given Boots' Ward White experience, which saddled it with many of its current turkeys, it seems unlikely that the group will countenance a retail acquisition with its cash. The two most likely possibilities remain a deal to bolt on to Boots Healthcare International, or a second share buy- back.

Analysts were downgrading forecasts yesterday but this was due to investment plans at Boots Healthcare International. Boots plans to increase investment in its Healthcare business by 50 per cent in the second half. NatWest Securities is forecasting profits of pounds 495m for the full year, which puts the shares, down 11p to 540p yesterday, on a forward rating of almost 16. Unexciting but fair.

Kwik Save runs

to stand still

There is a nice irony in the market slashing 10 per cent from the market value of Kwik Save yesterday, a 69p fall to 609p - an everyday low price for a company whose 979 stores are selling a litre of bleach for a ludicrous giveaway 7p. The loo cleaner is plainly a bargain - whether the shares are such good value is less clear.

Graeme Bowler, Kwik Save's ebullient Australian chief executive, found plenty of excuses for the disappointing performance in the year to August, but they don't make Kwik Save's future any clearer.

It is still squeezed between the superstores gearing up for another price war on the one hand and the continental discounters on the other.

Although sales were up 7 per cent to pounds 3.2bn in the 12 months, the important like-for-like figure slipped 3 per cent as lower volumes were only slightly offset by price inflation. Most of the increased turnover came from new stores - 128 were added in the period - and the addition of Shoprite.

The Scottish discounter, however, contributed a negative pounds 6m to pre-tax profits of pounds 125.5m, a 7 per cent decline, while earnings suffered even more, down 10 per cent to 51.7p.

The 4 per cent rise in the dividend to 20p, although well covered, appeared to be justified as much by reaching a nice round figure as anything more tangible.

Kwik Save is having to run extremely fast just to stand still. Capital expenditure doubled during the year to pounds 200m, partly to fund what looks like a rather desperate rearguard action to tart up 350 underperforming smaller stores.

The problem outlets, which were suffering a 6 per cent like-for-like sales decline, have been turned around to a 7 per cent increase but the cost in hard cash, downtime of about two weeks per refurb and management effort has been heavy.

Analysts were busy with their red pens yesterday and NatWest Securities now expects flat profits of pounds 128.5m this year and pounds 140m next time. At that level the shares stand on a prospective price/earnings ratio of barely 10, a sizeable discount to the rest of the market. Cheap, but given the uncertainty, not necessarily cheerful.

Shell facing

chemicals glitch

The oil giant Shell has looked less sure of itself of late. Since the radical management shake-up and cost-cutting programme initiated by BP in mid-1992, its shares have been left in the shade compared with its arch-rival's.

Shell's own cost reductions have had less effect on the bottom line, so recent profits performance has been heavily dependent on the worldwide recovery in the chemicals business which started last year.

There are now worrying signs that could be slowing.

Yesterday's nine-month results continued to reflect the dowry of soaring chemicals earnings, which chipped in pounds 769m of the pounds 1.18bn increase in group net earnings to pounds 3.61bn. But the third-quarter figures told a different story. Although chemicals earnings doubled to pounds 317m over the same period of last year, they were well down on the pounds 398m achieved in the second three months of 1995, suggesting at the very least a hiccup in the upward trend.

All the damage came outside the US, where earnings slid 29 per cent on the back of weaker demand and thinner margins.

Shell warns that the weaker chemicals market is likely to continue into 1996, but believes the current glitch does not herald a cyclical downturn. That prediction is dependent on increased demand absorbing the increased output from previously shut-down plants and hence world growth continuing to be strong.

The story is similar in refining and marketing, where earnings bounced back, rising 13 per cent over 1994 to pounds 513m, despite a difficult market. But continuing chronic over-supply in Europe and looming capacity increases in the Far East do not bode well for next year. Upstream exploration and production earnings, down just 2 per cent at pounds 344m, held up well before a pounds 32m charge for the sale of some Columbian assets.

Full-year earnings of pounds 4.75bn would put Shell's shares, down 16.5p to 729p, on a prospective multiple of nearly 14. With a forward yield of 5.2 per cent they are worth holding, but BP may continue to prove more exciting.