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Halfords - Sales fall on warm winter and cool consumers

Nicholas Hyett | 10 January 2019 | A A A
Halfords - Sales fall on warm winter and cool consumers

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Halfords Ordinary 1p Shares

Sell: 167.10 | Buy: 167.50 | Change 2.00 (1.21%)
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In a tough third quarter, Halfords saw total revenue fall 2% compared to the same time last year - as a slight improvement in Autocentres was more than offset by weak Retail results.

Full year profit before tax is now expected to be between £58m and £62m, compared to £71.6m achieved last year, with 2020 expected to deliver a similar result.

The shares fell 14.6% in early trading.

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Our view

A poor Christmas has completely reversed what was shaping up to be quite a good year for Halfords.

Halfords' strategy calls for investment in staff, stores and services - taking the hit on margins to keep prices low. Full year sales may still be ahead of the same period last year, but not by enough to make up for the margin fall.

With consumer confidence in the floor, next year's not expected to be much better. But long-term we continue to think it's the right strategy

Halfords has to compete with online rivals if it's to succeed, 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 are growing faster than total sales. In the long-term this should allow the group to charge a premium to online rivals.

The fact 80% 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 new CEO Graham Stapleton's transformation plan, and there are some early signs of progress. 152,000 Retail customers signed up for Halford's cross-group MOT promotion, and an impressive 70% of those were 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.

It looks like that transformation is going to take longer than expected though, and the journey has already been painful. A healthy balance sheet and plenty of free cash should mean the dividend isn't under immediate threat.

But with profits set to be lower this year and next, dividend cover is well below target - putting growth on the back foot. We wouldn't rule out a cut in the future if management feel investment is needed to jumpstart a recovery.

A P/E ratio of 9.7 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 retail sector.

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Q3 Trading Update

Third quarter Retail sales fell 2.2%. That was driven by a 3.4% decline in Motoring sales, as good results from non-weather related motoring consumables failed to offset lower sales of weather-related and discretionary products and services.

Cycling sales declined just 0.3%, as lower discretionary and big-ticket adult bikes offset growth in cycle accessories and children's cycling.

The Autocentres business saw like-for-like sales rise 1.4%, thanks to growth in services and maintenance work.

Online sales, which now account for 20% of total sales, grew 7.5%, with over 80% of orders collected in store.

Despite the lower profit before tax, Halfords expects free cash flow to be higher this year than last. It remains confident that free cash flow will grow over the medium term - supported by progress in the cost and cash efficiency programmes.

The group remains committed to its existing its dividend policy, which aims for two times dividend coverage on average.

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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.

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