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Halfords - better than expected trading in Q4

Sophie Lund-Yates, Equity Analyst | 1 March 2021 | A A A
Halfords - better than expected trading in Q4

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Halfords Ordinary 1p Shares

Sell: 161.60 | Buy: 162.10 | Change -1.30 (-0.80%)
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Halfords now expects full year pre-tax profit of £90m - £100m. That reflects better than anticipated trading in the first half of the final quarter. The profit range includes the repayment of £10.7m in furlough payments.

In the seven weeks to 19 February 2021, group like-for-like (LFL) sales rose 6.2%. Despite reduced journeys because of the pandemic, motoring sales have fallen less than expected, meaning overall Retail LFLs increased 5.1%. Autocentre LFLs rose 13.3%. Cycling was up 43%, but growth has been held back by supply chain issues.

Halfords said trading patterns are still "volatile", and it's difficult to predict sales while the UK is still in lockdown. Full year results will be on 17 June 2021.

The shares rose 10.7% following the announcement.

View the latest Halfords share price and how to deal

Our view

Halfords has performed exceptionally during the pandemic. And just when it signalled weaker sales trends coming out of last quarter, it's pleasantly surprised us again with a guidance upgrade.

While its status as an essential retailer and the staycation boom last summer were tailwinds outside its control, we think that performance highlights fundamental strengths the group has built over recent years.

Servicing an unprecedented 50% boom in cycling revenue over the year is a triumph of inventory management. That's been helped by the rapid shift to online sales, which rose 76% in the third quarter.

Given the increased importance of digital sales it should be no surprise the physical estate is being streamlined - with around 80 less profitable sites to close this year. Remaining stores are increasingly focused on delivering what online rivals can't, click & collect services and a face-to-face service from an employee who knows what they're talking about.

The success of the new "Mobile Expert" offer, which sees Halfords technicians come straight to your door, is testament to what the combination of the right product and staff expertise can achieve if delivered at the right time in the right place. The offer is in its infancy, but growth is impressive and has the potential to keep expansion ticking over while also encouraging cross-sell into the Autocentres themselves. The fact both Autocentre MOTs and Mobile Experts can be booked directly from the retail site should help the group make the most of its large retail customer base.

We're also reassured by the fact the balance sheet is in pretty good health. Significant free cash flow so far this year means the group has a net cash position if you exclude leases. That's something of a rarity for a bricks & mortar retailer, and does make us wonder what the group plans to do with the surplus cash - something to watch at the full year.

Overall Halfords is starting from a far sturdier base than some peers, and its end markets have shown considerable resilience so far. We think the mix of online sales portal and real-world expertise is a winning formula long term. That should help it should survive the turmoil engulfing much of the retail sector. If newer initiatives continue to deliver, it may even thrive.

Halfords key facts

  • Price/Earnings ratio: 12.7
  • 10 year average Price/Earnings ratio: 11.5
  • Prospective dividend yield (next 12 months): 3.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Trading Update

Halfords' third quarter revenues rose 11.5% (10.0% for the year to date), including the group's best ever Christmas week. That reflects a 30.5% increase in Autocentre and 7.7% increase in Retail revenue (35.6% and 5.5% respectively for the year to date). The group saw particularly positive results from Online Cycling sales and the Halfords Mobile Expert proposition.

Like-for-like Retail sales growth of 11.7% in the third quarter was driven by a 35.4% increase in Cycling sales. Demand for adult mechanical, e-bikes and e-scooters has remained strong despite supply chain issues affecting availability. Meanwhile Motoring sales fell 8.4%, as UK traffic volumes were 25% below pre-pandemic levels due to lockdowns.

Autocentre sales growth reflects the group's first companywide motoring campaign and the continued expansion of Halfords Mobile Expert. Like-for-like Autocentre sales rose 21.1%.

Service related sales rose 31% in the quarter, despite lower traffic volumes, and Online sales rose 76%. Sales to businesses rose 44%, reflecting growth in Cycle to Work Schemes and the Autocentre fleet business.

33 sites have been shut since November 2019 - including 22 Cycle republic stores. The group intends to shut a further 47 stores and garages before the end of the financial year. This is expected to deliver annual benefits of £6m a year, with an upfront cost of £25m-£30m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.