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Halfords - sales exceed expectations, guidance upgraded

Sophie Lund-Yates, Equity Analyst | 6 May 2020 | A A A
Halfords - sales exceed expectations, guidance upgraded

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Halfords Ordinary 1p Shares

Sell: 181.20 | Buy: 182.60 | Change 13.20 (7.76%)
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Halfords expects underlying pre-tax profit to be at the higher end of its £50m - £55m guidance range, after it warned it could miss this target a couple of weeks ago. The improvement reflects better than expected trading in the last few weeks of the financial year during the lockdown period.

However the group's mindful of the ongoing uncertainty and is continuing to take steps to preserve cash.

The shares rose 4.6% following the announcement.

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Our view

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 coronavirus is a problem for the group. With so many cars off the road and squirreled away on driveways, there's less demand for the automotive gadgets, gizmos and services Halfords offer. The extent of the damage will depend on how long restrictions remain in place.

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.

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.

We worry about what the disruption and need to preserve cash will do to the timeline for the transformation - and if social distancing becomes the norm, that face-to-face service will be more difficult to deliver.

There's reason to be hopeful where the online business is concerned. Over 80% of online orders are collected in store, so online sales tend to complement physical stores rather than cannibalising them. While the current situation could be good for online sales, 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 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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Trading and liquidity update

Group sales for the four weeks to 1 May 2020 were 23% below last year on a like-for-like basis, which was better than expected. The better performance was driven by a strong performance in Cycling.

In Motoring, essential categories such as batteries and battery care performed well, but overall weakness reflected a significant reduction in car journeys.

There are currently 325 retail stores open, on a reduced space basis, 346 garages and 77 mobile vans are operating.

The group has access to £159m of total liquidity, including overdraft facilities.

CEO Graham Stapleton said: "considerable uncertainty remains and as such we continue to take all necessary measures to preserve cash and protect our financial position".

Halfords will now report full year results on 7 July 2020, instead of 2 June 2020.

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