Britain's leading health and beauty retailer Boots has reported a small rise in annual profit as it compensates for cheaper drugs and strong competition from supermarkets in cosmetics market .

Boots reported a pre-tax, pre-exceptional profit rise of 1.8% to �581.1m for the year to March 31 2001, up from �570.8m last year and in line with analysts expectations.

Chief Executive Steve Russell also said the Halfords chain of car and bicycle accessories stores no longer fitted Boot's longer term plan.

Boots' core Boots The Chemist (BTC) chain last year discontinued its leisure products, like music, books and gifts, to concentrate more on health and beauty.

Operating profit at BTC stores, which accounts for 85% of group profits, was up 7%, while like for like sales slipped a shade, down a fifth of one percent.

New stores

The new store format will be called "pure beauty" and will focus on maintaining its 25% share of the health and beauty market that the supermarkets have been slowly taking away.

The company says it expects health and beauty sales to move ahead, with sales margins increasing further. It also says profits will improve in the second half of this financial year.

Boots internet ventures, including the women's site handbag.com, and the Wellbeing TV Channel, lost �22m, while the group said changing the format of Halfords stores led to an 18% fall in operating profits there.

Cheap drugs

With the end of Resale Price Maintenance (RPM) on over-the-counter medicines, the supermarkets have launched a price-war on drugs which means Boots has to find other areas to boost business.

Boots confirmed it expected the recent court decision to abolish of RPM would hit BTC's profits for the current year by some �10m - 20m.

Boots, the UK's biggest pharmacy chain, has already costed the price ruling to knock about �15m off its profits in the next two years.