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Halfords - weak retail sales but full year guidance unchanged

Nicholas Hyett | 7 November 2019 | A A A
Halfords - weak retail sales but full year guidance unchanged

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Halfords Ordinary 1p Shares

Sell: 305.60 | Buy: 306.20 | Change -3.40 (-1.10%)
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First half revenues fell 2.9%, to £582.7m, reflecting declines in the retail business. Underlying pre-tax profit declined 15.1% to £25.9m, but this was in line with expectations.

The interim dividend of 6.18p is flat on last year, and the shares were unmoved following the announcement.

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Our view

We think Halfords has the right idea for the long term - spending heavily on its people and services in a bid to turn things around. Unfortunately that's not been enough to offset the headwind from ongoing economic uncertainty which has put the public off bigger-ticket purchases and extra spending is denting margins.

The group has to invest if it's to compete with online rivals, 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 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.

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. With profits still going backwards, management's made the decision to cut the dividend. While that may not sound ideal on paper, we think it's a prudent move. The group still generates plenty of free cash, and this doesn't feel like a snap decision made under unexpected duress. We believe it's the right thing to do for now.

The lower dividend next year still suggests a yield of 7.7%, but there are no guarantees.

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 7.1 times earnings, well below its longer term average, suggests the market's worried Halfords could end up a shadow of its former self.

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Half year results

Retail sales declined 3.8% in the half, to £500m, with like-for-like (LFL) sales falling 3.1%. This reflects weaker sales of big-ticket items, and tough comparisons with last year's weather. Online sales were up 10%, and account for 22% of group sales, although 85% of online sales are still picked up in store.

Cycling sales were broadly flat on a LFL basis, with performance improving in the last six weeks. Motoring retail LFLs declined 5.3%, as trading was softer for more expensive car technology items. This offset better sales on bulbs, blades and batteries.

Autocentre revenue rose 3.2%, with LFLs up 2.1%. That was driven by strong growth in servicing, MOT and repair sales.

Better buying efficiencies across the group, as well as improved cycling margins meant group gross margins were 50.1%, compared to 49.4% last year. Group operating costs were broadly flat year-on-year at £264.6m.

Free cash flow rose 29% to £44.2m, and net debt was £62.6m. Net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) was flat at 0.7x.

Lower profits mean the board's decided to reduce the dividend. The full year dividend per share will be 14.18p (2019: 18.57p), with next year's payment expected to be around 12p.

Full year guidance profit guidance is unchanged.

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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.