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Halfords - revenue up, outlook unchanged

Sophie Lund-Yates | 16 January 2020 | A A A
Halfords - revenue up, outlook unchanged

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Halfords Ordinary 1p Shares

Sell: 163.40 | Buy: 165.10 | Change 0.70 (0.43%)
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Halfords' third quarter revenue rose 4.6%, driven by a strong performance in Autocentres and cycling.

The group's full year outlook is unchanged and it expects underlying pre-tax profits of £50m - £55m.

The shares rose 6.5% following the announcement.

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Our view

Halfords has made some difficult decisions lately and the road hasn't been smooth. But it looks like the transformation is gaining some traction.

Consumer uncertainty still lingers, which is putting people off buying more expensive items, but the performance from Cycling sales, Autocentres and services has more than offset that. In fact, an increasingly skilled workforce is helping service-related sales grow faster than total sales. In the long term that face-to face service should allow the group to charge a premium to online rivals.

The fact that over 80% of online orders are collected in store bodes well too - online sales are complementing physical stores rather than cannibalising them. An online shop which can deliver real world service offers the best of both worlds.

Perhaps more impressive is the group's strong operational execution. Tight stock control and good buying meant the group could dodge the discount monster plaguing retail and is helping margins. Continued efforts to tie-up retail and Autocentre customers could also be lucrative. Cross selling provides an extra boost, particularly with the launch of the integrated app next quarter, this is an area to watch.

But, as in the past, there are potential bumps in the road. Halfords' face-to-face service is important because it sets it apart from rivals, but getting staff up to scratch hasn't come cheap. Performance from retail - still the biggest division by far - has been difficult, and continues to be lacklustre. Combined with the extra spending on services, profits are expected to decline over the next couple of years.

As a result management have decided to cut the dividend, starting next financial year. We think that was a prudent move. The group generates plenty of free cash, and this doesn't feel like a snap decision made under unexpected duress.

Overall, Halfords is doing the best it can in challenging conditions. The group's warned consumer uncertainty is likely to linger over retail for a while, but that's not really in its control, and it's hard to knock the progress that's been made. We'd still like to see a longer run of positive news, but it feels like Halfords might be turning a corner (we've been wrong about that before though).

The shares currently change hands for 7.3 times expected earnings, some way below the ten year average.

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Third quarter trading details

Within Retail, like-for-like (LFL) sales rose 0.8% and revenue was up 0.6%. Within that, motoring LFLs saw a 2.7% decline, but this was offset by a 5.9% improvement in cycling.

The market remains challenging in retail motoring, as consumer uncertainty led to fewer purchases of more expensive items, but sales grew in the bulbs, blades and batteries category. Group online sales rose 27%, with around 80% of orders collected in store.

Autocentre sales were up 31.2%, including growth from recent acquisitions of McConechy's and Tyres On The Drive. LFL sales from existing Autocentres rose 4.6%.

B2B revenues improved 32%, and now account for 16% of sales. Total service-related revenues rose 16%, and now accounts for 27% of total group sales.

A good range of products combined with the improved sales performance, means gross margins have grown, as Halford's avoided heavy or early discounting.

Despite this quarter's growth, the group is mindful "market conditions remained subdued", and this isn't expected to improve in the short-term.

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