Halfords – Annual profit unchanged


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In the first 20 weeks of the year, total revenue increased 9.2% but fell 1.9% on a like-for-like basis (LFL), excluding acquisitions. This was against a strong comparator last year as the end of lockdown boosted sales. Compared to the pre-pandemic period, all lines of business showed strong growth on an LFL basis.

The group is aware of rising costs and is progressing well with cost reduction and inflation mitigation targets. They continue to expect full-year underlying profit of between £65m and £75m.

Shares rose 6.4% after the announcement.

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Our point of view

Halfords’ pivot to automotive services is progressing well.

As inflation bites household incomes, it’s good to see the Halfords moving away from discretionary spending towards more needs-based incomes. Car maintenance or a new battery are not negotiable, which is why we are very happy to see that more than 70% of sales now come from Automotive and services. And the new Motoring Loyalty Club, which offers discounts on certain services, should bode well with its already half a million members seeing their disposable incomes drop as inflation soars.

That said, the company faces short-term challenges in the name of cost inflation and it still isn’t immune to lower discretionary spending. Last year’s results were disappointing and earnings are expected to fall north of 20% this year.

Beyond the short-term challenges, we continue to believe that the group has fundamental strengths.

The success of the new ‘Mobile Expert’ offering, which sees Halfords technicians come straight to your doorstep, is testament to what the combination of the right product and staff expertise can accomplish if delivered at the right time to the right place. . The offering is in its infancy and margins are very low, but the growth is impressive and has the potential to sustain expansion while encouraging cross-selling in Autocentres themselves. Discounts for Motoring Loyalty Club members will also support this cross-selling.

The fact that MOT Autocentres and Experts Mobiles can be booked directly from the merchant site should help the group make the most of its large customer base of retailers.

Online sales grew 77% year-on-year and given the growing importance of digital sales, it’s no surprise that physical real estate is being streamlined. The group benefits from the fact that the physical assets are subject to rental contracts with average contracts of less than 6 years. This gives an element of bargaining power during renewal talks or quick elimination if attendance levels drop too low. The remaining stores are also focused on providing what their online rivals can’t: click and collect and face-to-face service from an employee who knows what they’re talking about.

The balance sheet is also healthy, with a net debt to cash flow ratio of 1.7. This helps support the restored dividend and leaves room for new acquisitions. However, we do not expect large increases in shareholder returns any time soon, cash is still needed to integrate acquisitions and grow the automotive business. Early results look promising, however, with acquisitions helping to fuel growth for the start of the year.

The combination of an online sales portal and real-world expertise is a long-term winning formula and a move towards needs-based products and services is, in our view, a good move. But there is no escaping the short-term challenges ahead and this is reflected in the current valuation, suggesting real market concern.

Highlights of Halfords

  • Forward price/earnings ratio: 5.0
  • Ten-year average price-to-earnings ratio: 11.8
  • Prospective dividend yield (next 12 months): 7.0%

All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that key numbers shouldn’t be considered alone – it’s important to understand the big picture.

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20-week transaction details (figures are on a like-for-like basis and compared to pre-pandemic levels, unless otherwise stated)

Auto centers recorded strong revenue growth of 28.2%. Total growth compared to 2022, which also includes acquisitions, was 67.8%. Autocentres now represent around a third of the group’s sales. Tire market share has increased, although a slow recovery means the market remains below pre-pandemic levels.

Detail exchanges were in line with expectations and turnover increased by 8.9%. Automotive sales continued to increase market share, increasing sales by 8.5%. Cycling also increased revenue by 9.5% as higher market share partially offset the impact of a declining market.

Over half a million members have joined the Loyalty Club program, which launched in March 2022.

More than 70% of sales now come from Automotive and services. Management believes this “leads to a very resilient Group performance” because these items are based on needs rather than discretionary spending.

Halfords expects second-half earnings to top first-half earnings. Inventory levels are also in line with expectations.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including forward-looking returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors could suffer a loss.

This article is not advice or a recommendation to buy, sell or hold an investment. No opinion is given of the present or future value or price of any investment, and investors should form their own opinion of any proposed investment. This article has not been prepared in accordance with legal requirements intended to promote the independence of investment research and is considered marketing communication. Non-independent research is not subject to FCA rules prohibiting trading prior to research, but HL has controls in place (including trading restrictions, physical and informational barriers) to manage disputes. potential interests presented by such a negotiation. Please see our full non-independent research for more information.


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