Halfords reported a 3.9% fall in total revenues during the first 20 weeks of the year, with store closures and a weak retail performance both weighing on results. Like-for-like (LFL) sales fell 3.2%.
The group put the poor sales performance down to unfavourable weather and weaker consumer confidence. Lower sales are expected to be partially offset by higher margins and tighter cost control.
The shares were broadly flat in early trading following a dramatic fall yesterday.
Halfords' strategy calls for investment in staff, stores and services - taking the hit on margins to keep prices low.
Unfortunately practice is rather different to theory, and the economic realities of an increasingly challenging retail environment are proving difficult to overcome. Bikes and discretionary car spending are the kind of big ticket purchases that consumers delay when times are hard. With consumer confidence on the floor sales are struggling, and despite cutting investment plans, cost savings haven't been enough to keep profits steady.
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 the ability to deliver face-to-face service and expertise 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.
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 that, in theory at least, the dividend isn't under immediate treat. But with profits set to remain depressed this year, dividend cover is well below target and we wouldn't rule out a cut if management feel increased investment is needed to jumpstart a recovery. A prospective yield of 10% suggests the market thinks a cut is more likely than not.
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 7.5 times earnings, well below its longer term average, implies Halfords could end up a shadow of its former self.
Full Year Results
LFL Retail sales fell 3.9%, with motoring sales down 5.9% and cycling down 1.1%.
Both motoring and cycling showed weakness in big-ticket items, although the group continued to take market share in its core motoring categories. Online sales grew 8.4% year-on-year, with service related sales also showing positive momentum year-on-year.
Autocentre sales rose 1.1%, with the division on track to deliver year-on-year profit growth.
Full year profits for the group as a whole are now expected to between £50m and £55m, lower than had been expected.
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