In its Q3 trading statement the company had said that it expected profits to be largely in line with market expectations, despite describing consumer spending as being subdued at the time. However, the company pointed out that since that statement was made, trading had 'deteriorated further', prompting the company to issue the profit warning.
Boots' investor relations department said it expected operating profits to be somewhere in the region of £465-475 million, reflecting both the poorer outlook and slightly higher operating costs.
"Across the counter we expect that sales of toiletries and lifestyle products will be hardest hit," Boots head of investor relation, Chris Laud said. "On the cosmetics side sales will have been helped by the relaunch of the No 7 line, whereas fragrance sales were boosted by a strong performance in the run up to Valentines."
Analysts had forecast that profits would be in the region of £490-500 million, suggesting that the performance is likely to run at around 5 per cent below expectations.
The warning comes after the retailer revealed that like-for-like sales had only increased by 2.6 per cent during the key Christmas period, dropping back from growth of 3.8 per cent in the previous quarter. This figure came about despite a concerted advertising and marketing campaign aimed at capitalising on an anticipitated strong festive season trading.
In 2003 sales increased by 4.2 per cent from £1.39 billion to £1.45 billion, largely on the back of strong contributions from cosmetics and fragrance products as well as seasonal merchandise.
However, profit margins for Boots have been consistently eroded in recent years as it comes under increasing competition from supermarket retailers such as Tesco, Asda and Sainsbury's. The supermarket retailers have been waging a discounting war on a range of products, including a host of cosmetic and personal care items, in a bid to win a larger share of the market from smaller high street retailers.
In answer to this Boots has been expanding into new lines as well as cutting back on unprofitable areas of business. This plan has led to the company selling off its dentistry division and concentrating on new lines for both its health as well as its cosmetic and toiletry divisions.
The company's first half results revealed that growth in its health division led the way, showing a 6.2 per cent jump to £932.2 million on the back of a significant increase in prescription revenues.
Equally, an increase of 4.1 per cent in half yearly cosmetic and toiletry sales to £893.5 million was led by a 9 per cent increase in sales of premium cosmetics and an 11 per cent increase in fragrance sales. At the time the company said that the increase for this division was down to expanded distribution and promotional activity.