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Halfords: A solid year

George Salmon | 1 June 2016 | A A A
Halfords: A solid year

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Halfords Ordinary 1p Shares

Sell: 346.20 | Buy: 346.80 | Change 1.80 (0.52%)
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Following on from April's Q4 trading update, Halfords have this morning released preliminary results for its 2016/17 financial year. The share price was down 2% this morning.

Group revenue increased 1.7% over the year, with underlying profit before tax and non-recurring items of £81.5m (+0.5%) and earnings per share before non-recurring items of 33.2p (+1.5%).

The retail division saw like-for-like (LFL) growth of 1.3% over the year, with Motoring LFL sales up 2.5% and cycling LFL sales down 0.9% after a tough summer of discounting and poor weather. Autocentres enjoyed a tenth consecutive quarter of LFL growth, and full year LFL growth came in at 2.5%.

The full-year dividend is set to increase 3% to 17p, in line with the group's target of increasing the dividend while maintaining earnings cover of around 2x. Other goals announced in November 2015 are reaffirmed, including the medium term target of growing sales faster than the market (c. 2-3% for motoring and 3-5% for cycling).

New ranges based around British Olympians past and present, Chris Boardman, Bradley Wiggins and Laura Trott are set to be released, with Orla Kiely contributing to the cycling and leisure products. The group's year-end net debt figure of £47.9m is down from £61.8m last year. Since the company's year-end, Halfords announced the acquisition of 'Tredz' and 'Wheelies', with an initial consideration of £18.4m settled from the group's existing borrowing facilities.

Halfords CEO Jill McDonald described the results as a solid performance, adding that the group's Moving Up A Gear strategy is developing well, including a step change in customer data and the introduction of new services.

Our view:

Halfords have strong positions in the growing cycling and motoring markets. This should mean that the group is well-placed, however analyst forecasts from Bloomberg are for only steady, muted growth over the coming years.

The problem is that historically, the group hasn't got a sales record to justify more lofty expectations. Sales have been held back for several reasons, not least the high staff turnover. This means that all too often staff haven't had the experience and knowledge to provide the advice customers are seeking. The store environment was not conducive to making shoppers want to linger either. However, the group is trying to rectify these failings, with an extensive programme of investment in staff and stores alike.

Halfords are also looking to strengthen the relationship with existing customers, and promote the Halfords brand. The group is getting to a position where it can match more retail sales to individual customers, and this information, together with the growing customer database, should mean that the group can target offers more intelligently.

If CEO Jill McDonald can really move the dial on these issues then Halfords could live up to its promise, but history says that chickens should not be counted until hatched. In the meantime, the stock is trading on a PE of around 13x consensus earnings, with a yield of close to 4%.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.