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Halfords - guidance unchanged but uncertainty lingers

Nicholas Hyett | 21 May 2019 | A A A
Halfords - guidance unchanged but uncertainty lingers

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Halfords Ordinary 1p Shares

Sell: 345.00 | Buy: 345.60 | Change 0.80 (0.23%)
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Halfords full year revenues ticked up 0.3% to £1.1bn, with a mild winter and weak Christmas trading meaning underlying pre-tax profit fell 17.9% to £58.8m.

The group still expects next year's pre-tax profit to be broadly in line with this year - although a tough environment means the group's turnaround plan is taking longer than expected to implement, and investment in the business next year will be lower than previously guided.

A final dividend of 12.39p takes the full year dividend to 18.57p - an increase of 3%.

The shares fell 2.3% following the announcement.

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Our view

Halfords' strategy calls for investment in staff, stores and services - taking the hit on margins to keep prices low.

Unfortunately a poor Christmas period completely reversed what had been shaping up to be quite a good year for Halfords. Full year sales may be ahead of last year, but not by enough to make up for the margin fall and profits are down as a result.

With consumer confidence on the floor, next year's not expected to be much better. Bikes are the kind of big ticket purchase that consumers delay when times are hard, and management's cutting back investment plans to keep a grip on costs.

However, we still think Halfords has the right idea for the long term.

The group 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.

The group's also looking to tie its Autocentre and retail customers together. The two businesses have operated more or less independently in the past - and increasingly cross-selling would be a quick and easy way to boost revenues.

Unfortunately 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 means the dividend isn't under immediate threat. But with profits set to remain depressed next year, dividend cover is well below target - growth is likely to be unexceptional. We wouldn't rule out a cut in the future if management feel increased investment is needed to jumpstart a recovery.

Ultimately while we think Halfords will survive the shakeout in the retail sector, it's not yet clear what sort of company will emerge from the transition. A P/E ratio of 10 times earnings, some way below its longer term average, suggests the market's worried Halfords could end up a shadow of its former self.

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Full year results

In Retail, sales were broadly flat year-on-year, at £977.2m, although like-for-like (LFL) sales rose 0.8%. Retail operating profit fell 19% to £58.8m.

Cycling sales showed an LFL increase of 2.6%, which offset a 0.4% decline in motoring, as the mild weather hit sales of winter car products. Online sales now account for 20% of all sales, and increased 9.5% in the year. Around 83% of web orders are collected in store.

Autocentre revenues increased 2.6%, reflecting strong growth in sales of servicing, tyres and MOTs. Operating profits in the division rose 34.1% to £5.5m.

At the group level, tight stock control and favourable exchange rates meant gross margin improved slightly to 50.9%, which was partially offset by the softer motoring sales trends.

Group operating costs increased by 4.3% in the year, with Retail costs up 5.0% and Autocentres costs up 1.7%. The year-on-year movement reflects inflationary increases, one-off costs in the first half and strategic investments. Free cash flow stands at £42.7m (2018: £41.5m).

Net debt fell 6.8% to £81.8m, which reflects a net debt-to-underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of 0.8, in line with last year.

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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.