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Halfords - better than expected but still tough

Sophie Lund-Yates, Equity Analyst | 7 July 2020 | A A A
Halfords - better than expected but still tough

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Halfords Ordinary 1p Shares

Sell: 347.20 | Buy: 348.20 | Change 3.20 (0.93%)
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Halfords' full year underlying revenues rose 0.3%, to £1.1bn, as strong growth in Autocentres offset declines in Retail. Underlying pre-tax profit was better than previous guidance, falling 4.9% to £55.9m. The decline is a result of weak trading at the end of the year because of lockdown, partly mitigated by improved gross margins.

Trading in the first few weeks of the new financial year has been better than expected, however the group anticipates further disruption at the full year. Given the uncertainty the group has withdrawn formal financial guidance.

As previously announced, no final dividend will be paid.

The shares fell 2.2% following the announcement.

View the latest Halfords share price and how to deal

Our view

Halfords is in a better position than many retailers. Its "essential" status means it continued to trade throughout the lockdown, keeping revenue relatively healthy. However, it would be a mistake to assume that profits are coming along for the ride.

Not only are shops operating at lower capacity, but a large chunk of revenues depends on customers' discretionary spending. A gloomy economic outlook means people are already spending less on higher margin gadgets and gizmos for their cars, and growth will be harder to come by in the current financial year.

We're also mindful disruption means Halfords has applied the brakes to its strategic turnaround. The plan aims to boost services and upskill the workforce, allowing the group to capitalise on what its online competitors can't offer - face-to-face service. We understand the need to reallocate cash to more essential areas while the climate is so tricky, but it is a shame. With lacklustre sales already a problem before the outbreak, we're going to have to wait even longer for top-line rejuvenation.

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. The website now accounts for almost a quarter of all sales too, which we think is a step in the right direction.

There's also a big growth opportunity where cycling's concerned. The group's benefitted from a surge in bike demand since lockdowns began, and it's a category that will always favour a visit to a physical shop, where you can talk to a knowledgeable store assistant. At the moment this is a lower margin category compared to Motoring goods, but we view this as a profit-boosting opportunity over the longer-term.

The balance sheet is in reasonable health too. With net debt less than a year's cash profits at the last count we don't have immediate concerns over Halfords' liquidity. Remember though, if trading is worse than planned and cash flow is squeezed, it won't take long to burn through the newly drawn credit.

Overall Halfords is starting from a far sturdier base than peers, and its end markets have shown considerable resilience so far. However, from here it will need to focus on how to get the top line moving again, and how to best prepare for a real squeeze in discretionary spending. While we think Halfords has a lot of the right ideas and some great opportunities, we'll need to see some evidence of strong execution this year before turning more positive.

Halfords key facts

  • Current 12m forward P/E ratio: 15.4
  • 10 year average 12m forward P/E ratio: 11.3
  • Prospective Dividend Yield: Halfords has suspended its dividend

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Full year results (all numbers on a comparable 52 week basis)

In Retail, sales fell 2.7% to £950.6m, reflecting a 2.3% fall in like-for-like (LFL) sales in the year ended 3 April. Cycling sales rose 2.3% helped by increased demand for E-bikes, but revenue from Motoring fell 5.3% on a LFL basis, as customers held off buying expensive vehicle accessories. Online sales rose 17% and now account or 24% of total sales.

Retail gross margin improved slightly to 48.2% from 48.0% thanks to improved Cycling profitability, better buying efficiencies and more focused promotions. However, this wasn't enough to offset the lower revenue and underlying operating profit fell 8% to £54.1m.

Autocentre revenues rose 18.8% to £191.8m, which meant that despite higher costs and lower gross margins, underlying operating profit was up 21.8% at £6.7m. The revenue boost was mostly from the acquisitions of Tyres on the Drive and McConechy's Tyre Services in November 2019, deals which also led to the gross margin dilution.

Excluding acquisitions, group operating costs reduced by 0.5%, boosted by process efficiencies which offset increased wage costs.

Tighter stock control helped free cash flow improve, rising to £54.6m compared to £42.7m last year. Net debt was £73.2m, £8.6m lower than 2019 and equivalent to 0.8 times cash profits (EBITDA).

Halfords' median scenario for the full year predicts a 7.5% decline in like-for-like sales, which would result in underlying pre-tax profit of £0 - £10m, and net debt of £45m-£55m. The uncertainty means the group will lower capital expenditure for 2021, and this is expected to be £20m - £30m.

Q1 trading update

Halfords also said trading in the 13 weeks to 3 July has been better than hoped, although group sales are down 2.8% overall and 6.5% on a LFL basis reflecting ongoing disruption.

As of 3 July 359 stores are operating with a limit to the number of customers permitted inside at one time, 8 are serving customers at the entrance only and 77 are closed,.

Motoring LFL revenue has fallen 45.4%, reflecting the drop in car journeys, but this trend is starting to improve. The lower margin Cycling category has seen LFLs rise 57.1%. Within Autocentres overall revenue rose 14.8%, driven by acquisitions, and fell 19.2% on a LFL basis.

Online sales have improved around 200% in the period.

As at 3 July, Halfords had access to £200m in undrawn credit, £10m of cash and has relaxed the financial terms agreed with its lenders (covenants). A further £25m of government-backed borrowing has also been secured.

Find out more about Halfords shares including how to invest

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.