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Halfords - Results as expected, but outlook disappoints

Nicholas Hyett | 22 May 2018 | A A A
Halfords - Results as expected, but outlook disappoints

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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: 320.60 | Buy: 322.00 | Change -17.20 (-5.09%)
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A strong final quarter helped full year revenues rise 3.7%, although margin pressure in the Retail business saw underlying profits before tax fall 5% as the weaker pound increased the cost of sales.

The group no longer expects to see price rises in cycling this year, and instead is relying on an improved exchange rate to offset currency headwinds. Those benefits will not be seen until 2020, and as a result 2019 profits are expected to be broadly in line with this year.

The full year dividend rose 3% to 18.03p per share.

The shares fell 12.6% in early trading.

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Our View

With a new CEO, new CFO and new Chairman, some sort of shakeup at Halfords was always on the cards. New man Graham Stapleton doesn't provide a full update until September, but early signs suggest he's opted for more of the same - investing in services and taking the hit on margins to keep prices low.

The extra cost and lack of margin recovery took the market by surprise, knocking the shares at the full year, but long-term we still think it's the right approach.

Halfords has to compete with online rivals if it's to be a success, and it's the group's ability to deliver face-to-face service and expertise that sets it apart. Nearly 42% of bulb, blade and battery sales were fitted to customers' cars last year. An increasingly skilled workforce means service related sales like this are rising, up 14.2% in 2017/18, and long-term that should allow the group to charge a premium to online rivals.

The fact 85% of Halfords' growing online sales are being picked up in store also bodes well. Online sales are complementing physical stores rather than cannibalising them, and an online shop which can deliver real world service offers the best of both worlds.

The autocentres business has delivered some steady growth in recent years, and new openings continue to boost profits. But it's a side show really, and retail remains the main event.

A healthy balance sheet and plenty of free cash flow means the prospective yield of 4.6% shouldn't be under threat. But Stapleton wouldn't be the first new CEO to slash the dividend in favour of investing in growth. We'll have to wait for September to find out exactly what the future holds for Halfords.

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Trading details

Full year sales hit £1.1bn, with underlying profit before tax of £71.6m.Free cash flow rose £3.8m to £41.5m.

Retail revenues rose 4.1%, or 2.3% on a like-for-like (LFL) basis, to £977.2m. Currency movements increased the cost of goods by £25m, and gross margins declined by 1.23% to 47.4% as a result.

Retail revenues rose 4.5% in the final quarter driven by new openings and a strong performance from car maintenance. Together these more than offset weakness in cycling and car enhancement, as poor weather and declining satnav sales dented results.

Autocentres saw revenues rise 0.8% in the year to £157.9m, up 0.2% on a LFL basis. The decision to exit the lower value affiliate tyre business has boosted gross margins and operating profit this year.

Net debt increased slightly to £87.8m, with net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) of 0.8.

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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.