News Analysis: 'Nasty surprises' put Boots in dock

Hit by profit warnings and bid speculation, Boots is preparing to hire a new financial comms adviser. Tom Williams looks at the retailer's status in the City.

As they prepare to pitch to Boots chairman Sir Nigel Rudd and CEO Richard Baker for the company's financial comms account, the agencies vying for the business might be tempted to ask how the retailer ever got into its current morass.

But Boots' travails predate Rudd and Baker's arrival. It was once the darling of the high street, the de facto choice for consumers picking up prescriptions and having photographs developed. But increasing competition from the supermarkets, and its diversification into new areas, have taken their toll in the past five years.

The axe-wielder

To be fair, after Baker took over the reins as chief executive from Steve Russell in September 2003, he warned there would be 'no quick fixes' and diagnosed 'under-investment and insufficient focus on the core'.

Baker initiated a three-year £390m investment programme in IT and supply-chain processing and a radical streamlining of the business.

This involved axing 900 jobs at head office. Well over half of Boots' communications team (in excess of 40 posts) were lost and the firm withdrew from its unsuccessful forays into laser eye correction, dentistry, chiropody and laser hair removal, at a total cost of £54.5m.

In addition, Boots' prices on 2,000 lines have been cut by an average of 18 per cent.

But despite Baker's efforts, last week's decision to part company with Tulchan Communications (PRWeek, 15 April) coincided with a nadir in the company's relations with the City and the financial press, and followed a turbulent seven months in which two profit warnings were issued and finance director Howard Dodd resigned.

Boots' half-year profits fell 24 per cent last October to £205m, and eyebrows were raised in January when it said it expected to hit market expectations for full-year 2004/05 operating profit of £500m. Indeed, its broker Merrill Lynch cut its forecasts for 2006 by ten per cent.

The company itself had given no specific details on performance for 2005 and 2006, but in March warned full-year profits could be as low as £465m - a figure that would still be the envy of many retailers.

But this month it admitted it would not meet that target. It also announced the sale of profitable drug-making arm Boots Healthcare International, which produces Nurofen, Clearasil and Strepsils and had sales of £500m in 2003/04. The City is notorious for taking a dim view of nasty surprises and Boots' stock watchers have reacted accordingly.

A Thomson Financial Datastream study for PRWeek shows that while the number of analysts lowering their predictions for Boots' stock increased from four to seven in the month following the profit warning last October, the figure jumped even more, from four to nine between March and April.

'Boots has got to stop these negative surprises,' says Evolution securities retail analyst Nick Bubb. 'Hopefully, forecasts are now down to more realistic levels and it can under-promise and start overdelivering.

'The relaunch of the company's flagship Oxford Street store in a few weeks' time will be important. Once the investment in IT is over, it needs to start reinvesting in store formats to improve ambience.'

Boots head of financial media relations Donal McCabe says the company is well aware of feelings about Boots' profit warnings, but argues that the short-termist nature of the City means that it is expecting far too much from Baker after only 18 months in the job.

'We are aware of the problem but the reality is that sorting out a business, whose strategy was unsustainable, takes time. Things haven't always gone perfectly,' McCabe says.

But some City journalists argue that Boots, and Baker in particular, could have done a better job in preparing them and institutions for bad news. Boots' relations with The Sunday Times, for example, have been poor since the company denied Dodd's departure two days before announcing it.

McCabe insists the incident was an example of how Boots and Baker have maintained a consistently open and honest policy, and that Boots had decided to announce Dodd's resignation when it did because although The Sunday Times story was 'wholly inaccurate', it 'had a kernel of truth'.

Not a City darling

Tulchan's departure may be unconnected with the Sunday Times fiasco.

But some say the decision to appoint a new agency shows Boots is rattled by the City's failure to understand the company's strategy.

'Baker is a good retailer but not yet an expert CEO. He can be naive about how the City and the financial press work,' one watcher says.

'Rudd feels nervous and wants to have his own advisers around him,' says another. 'But people at the company do not feel that Tulchan should take the heat for this, and neither should Baker. He has only been in the job for 18 months.

'Less than six months ago, people were saying Justin King would not achieve a recovery at Sainsbury's. But even now, as the company overtakes Asda in sales growth, King remains in the eye of the storm.'

Some argue that Boots needs to decide what it stands for and better compete with brands such as The Body Shop rather than invite an unwinnable price war with the supermarkets.

For all the background noise, no journalist or analyst has openly called for Baker's head. Indeed, Bubb's suggestion that the worst may already have passed could be seen as a vindication of Boots' comms strategy.

But Boots investors are now eyeing the hard cash a predator might bring them in the event of a takeover of the company. It is a moot point whether they will let Baker finish the job he has started.

BOOTS' FRONT LINE

There are around 32 people in Boots' comms division, a reduction of around 60 per cent on the beginning of last year. The main players involved with financial and City comms are:

- Donal McCabe, head of financial media relations

- Chris Laud, head of investor relations (replaced director of IR Peter Baguley, who left last September. Boots' IR team was cut after Baguley's exit, leaving Laud as Boots' sole IRO) - Jayne Mayled, director of communications.

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