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Halfords - On the right road

Nicholas Hyett | 8 November 2018 | A A A
Halfords - On the right road

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Halfords Ordinary 1p Shares

Sell: 347.20 | Buy: 347.80 | Change 3.00 (0.87%)
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Half year results saw group revenue rise 2.5% to £599.9m. However planned restructuring costs meant profit before tax fell 17.1% to £30.5m. This was broadly in line with expectations and the outlook for the full year is unchanged.

An interim dividend of 6.18p will be paid in January 2019 to those on the register by 14 December.

The shares rose 1.4% following the announcement.

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Our view

When a new CEO, CFO and Chairman entered the scene earlier this year, some sort of shakeup was always on the cards. New man Graham Stapleton hasn't exactly broken the mould though, instead opting for more of the same - investing in services and taking the hit on margins to keep prices low.

Store refurbishments are increasing, and those costs are contributing to unexceptional profit performances. Growth from there on is expected to be relatively modest, but long-term we think it's the right decision.

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. An increasingly skilled workforce means service related sales like this are growing faster than total sales, and long-term should allow the group to charge a premium to online rivals.

The fact 85% of Halfords' 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.

Cross-selling opportunities are an important part of Stapleton's transformation plan. And this is being executed pretty well. 152,000 Retail customers signed up for Halford's cross-group MOT promotion, and an impressive 70% of those are new to Autocentres.

That's important because Autocentres have functioned as a separate business up until now. Efforts to bring the centres and retail in line with each other hasn't come cheap, but we're seeing the first shoots of success.

A healthy balance sheet and plenty of free cash means the prospective yield of 5.8% isn't under threat, and the board is looking to grow payments to shareholders.

A P/E ratio of 10.4 times earnings, some way below its longer term average, suggests the market isn't entirely convinced Halfords can steer a course through the headwinds facing the whole retail sector though.

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Half year results

Group sales rose 1.9% in the first half of the year, with Retail up 1.7% and Autocentre sales rising 3.1%. Total sales were broadly in line with expectations.

Within Retail, motoring was the stronger performer, with like-for-like (LFL) sales of 2.3% as Car Maintenance- which includes the likes of oil, lightbulbs and car batteries and Travel Solutions (think dash cams and cleaning products), posted growth of 4.5% and 4.0% respectively. Cycling delivered growth of 1% in LFL sales.

As expected, Retail operating costs increased by 8.0% to £211.4m, the increase was driven by inflationary impacts, one off costs and planned investments.

152,000 Retail customers signed up for a cross-Group MOT promotion, 70% of whom are new to Autocentres.

Online sales rose 10.9%, against 10.8% growth in the same period last year. 85% of all online orders were collected in store.

Autocentres saw LFL growth of 3.3% (HY18: -1.3%). With operating profits rising 53.3% to £2.3m.

The group is also upping capital expenditure from £40m a year to £60m as it invests in stores, garages and digital platforms. This additional expenditure will be funded by cost savings elsewhere in the business.

Halfords anticipates full year profit before tax to be broadly flat on last year, with mid-single-digit percentage growth thereafter.

Net debt fell slightly year-on-year to £77.2m, 0.7 times underlying earnings.

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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.