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Halfords - Weaker pound weighs on performance

Nicholas Hyett | 9 November 2017 | A A A
Halfords - Weaker pound weighs on performance

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Halfords Ordinary 1p Shares

Sell: 308.40 | Buy: 309.20 | Change 5.00 (1.65%)
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Revenues were up 3.8% in the first half of the year, driven by a strong performance in the retail division. However, increased input costs (largely thanks to currency movements) meant that margins were squeezed, with the result that underlying profit before tax fell 9.8% to £36.8m

The shares fell 5% in early trading.

The interim dividend rose 3% to 6p per share.

Our View

Former CEO Jill McDonald's 'Moving Up A Gear' strategy grasped what many UK retailers have failed to. In order for bricks & mortar retailers to compete with cheaper online rivals they have to offer something digital rivals can't - face-to-face, hands on service and expertise.

The strategy is primarily about up-skilling the Halfords workforce so that they can deliver that service, rewarding them appropriately so they don't disappear with their new found skills, and creating a store environment in which customers are happy to linger.

The acquisition of online cycle specialists Tredz and Wheelies has significantly boosted the group's online sales and even here the group's service led offering seems to be paying dividends. Strong Click & Collect take-up is seeing customers coming into Halfords stores for advice and fitting of online purchases.

Halfords is even looking to steal a couple of tricks from its online rivals. It can now match 54% of sales to a specific customer, up from just 3% in November 2015, so if you bought a child's bike recently, expect an email offering you the next size up in the not too distant future.

However, it has taken a long time for Halfords to sort itself out and the job is not yet complete. With Jill McDonald off to M&S's Clothing, Home and Beauty division, we just hope the new CEO sticks to the plan and continues down the road she's put it on. For now, the stock is trading on a PE of around 10.9 times expected earnings, with a prospective yield of 5.6%.

Half year results

Retail saw sales rise 4.5% in the first half, to £511m, with growth in both cycling and motoring contributing to like-for-like growth of 1.9%. However, sales growth was more than offset by the increased cost of goods as a result of the weak pound. As a result underlying earnings from the division fell 9.3% to £37.9m.

Autocentres saw revenues fall 0.6% in the half to of £77.7m, with like-for-like sales down 1.3%. This was more than offset by an improved gross margin, as Halfords shift from low-margin third party affiliate tyre sales towards direct tyre sales and service, maintenance and repair work. Autocentre earnings rose 67% to £1.5m.

The group opened two new Cycle Republics in the period, with additional investments including upgrades to till systems.

CEO Jill McDonald left the group in September, with new CEO Graham Stapleton expected to join in January.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.