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Halfords - full year profits to be at lower end of guidance

Sophie Lund-Yates, Equity Analyst | 25 March 2020 | A A A
Halfords - full year profits to be at lower end of guidance

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Halfords Ordinary 1p Shares

Sell: 268.00 | Buy: 270.00 | Change -2.50 (-0.92%)
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The coronavirus pandemic means Halfords expects full year underlying pre-tax profit to be at the lower end, or slightly below, the guidance range of £50-55m.

As a provider of 'essential services' stores are legally allowed to remain open. At the moment Autocentres, Mobile vans and the website are operating, and the group's working on providing partial store coverage in the coming days.

To preserve cash, Halfords has decided to suspend the dividend.

The shares rose 4.5% following the announcement.

View the latest Halfords share price and how to deal

Our view

Coronavirus is a problem for Halfords.

Government restrictions mean sales volumes are expected to drop sharply, and that will have an immediate impact on revenues, profits and cash flow.

Halfords is in a slightly better position than some peers because it can legally remain open. Being responsible for maintaining vehicle fleets for the likes of the Ministry of Defence and British Transport Police means some revenue streams will keep flowing during the difficulties too. But overall the next few months are going to be challenging, and the extent of the damage will depend on how long restrictions remain in place.

Investors should also keep in mind the economy could take a while to recover from the pandemic, which means sales could be subdued for a longer period.

The current conditions aren't ideal because Halfords' retail sales, which make up the bulk of the business, were lacklustre before the outbreak. Coupled with heavy investment in boosting services and upskilling the workforce this meant profits were already set to decline for the next couple of years.

But there is some good news. There were signs Halfords' transformation had been gaining some traction. The performance from Cycling sales, Autocentres and services had been very positive. In fact, the increasingly skilled workforce was 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. While the current situation could be good for online sales as more people stay at home, we suspect this will largely be a replacement of physical store transactions.

The balance sheet is in reasonable health too, with net debt less than a year's cash profits at the last count. But this will be something to keep an eye on. If trading is materially worse than planned and cash flow is squeezed, it won't take long to burn through the newly drawn credit. At that point, paying down the debt pile would be a lot harder.

Overall, Halfords faces some real challenges in the coming months, but it's on a slightly better footing than peers. What will be important is making sure the group gets the balance right between providing enough of a stripped back, essential service and not firing on too many cylinders while customer traffic is a lot slower than usual.

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COVID-19 trading update

Trading in recent weeks has been very strong, but Halfords thinks the new government restrictions mean sales will drop sharply. This led the group to soften full year guidance.

Once stores are re-opened customers will be able to continue using the click and collect service.

The group is responsible for maintaining the fleet of a number of 'key workers', including the Ministry of Defence, the British Transport Police and several large UK utility companies.

Halfords has modelled a range of disruption scenarios, the median of which suggests sales volumes will fall around 25% or £300m over the course of a full year, "with the most material impact being seen in the first quarter of the new financial year".

The group is taking a number of steps to preserve cash including: suspending the dividend, negotiating with landlords to move to monthly rent payments instead of quarterly, halving capital spending and deferring VAT payments. Changes are also being made to the timing and size of stock purchases.

The business rate holiday will save around £26m, and the group expects to access government support on salary payments for closed shops and garages.

Halfords has fully drawn down its available credit of £180m, and now has around £118m of cash on deposit, and a £20m overdraft facility. It's confident it won't breach any agreements with its lenders for the current financial year.

Due to the uncertainty Halfords is unable to provide guidance for the next financial year.

Find out more about Halfords shares including how to invest

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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 disclosure for more information.