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Halfords - strong two-year growth, but challenges ahead

Halfords - strong two-year growth, but challenges ahead

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Halfords Ordinary 1p Shares

Sell: 161.60 | Buy: 162.10 | Change -1.30 (-0.80%)
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Full year revenue of £1.4bn was 6.0% higher than last year. Compared to pre-pandemic levels, that reflects growth of 19.9%, with like-for-like sales up 16.7%. Growth over 2-years was mainly driven by Autocentres, where the group's made several acquisitions.

Underlying profit before tax fell 9.7% year-on-year to £89.8m, on a 2-year basis that was 57.8% higher.

In the year ahead, Halfords is expecting "reduced demand, particularly for more discretionary, higher ticket items, and significant cost inflation". Underlying profit before tax for the new financial year is expected between £65-£75m, but the group said things remain uncertain.

The board has proposed a final dividend of 6p.

The shares fell 20.1% following the announcement.

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Our view

With a relatively new CEO at the helm, Halfords' pivot toward motoring services is progressing. But not fast enough to keep the group insulated from a consumer with less disposable cash, and soaring cost inflation. Full-year results were disappointing, with profits expected to fall north of 20% next year.

Aside from short term challenges, we continue to think the group has fundamental strengths.

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, and margins are very poor, but growth is impressive and has the potential to keep expansion ticking over while also encouraging cross-selling into the Autocentres themselves. The National acquisition added 60 mobile tyre fitting vans to the group's arsenal, helping to boost the number of customers they can remotely service.

The fact both Autocentre MOTs and Mobile Experts can be booked directly from the retail website should help the group make the most of its large retail customer base.

Online sales rose 77% over the year and given the increasing importance of digital sales, it should be no surprise the physical estate is being streamlined - with 4 stores closed last year. Remaining stores are focused on delivering what online rivals can't: click & collect and a face-to-face service from an employee who knows what they're talking about. The result is higher per-store sales at lower overall costs.

The balance sheet is also in good health, with a net debt to cash profit ratio of 1.7. That helps underpin the reinstated dividend and gives some room for further acquisitions. We're not expecting any large increases to shareholder returns anytime soon though, cash is still needed to integrate acquisitions and scale up the motoring business.

The mix of online sales portal and real-world expertise is a winning formula long term and shifting further toward needs-based products and services is a good move in our view. But there's no escaping the short-term challenges ahead and this is reflected in the valuation.

Halfords key facts

  • Forward price/earnings ratio: 6.0
  • Ten year average price/earnings ratio: 11.8
  • Prospective dividend yield (next 12 months): 5.1%

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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Full Year Results (comparisons on a 2-year basis)

In Retail, revenue grew 5.4% to £1.0bn, up 15.2% on a like-for-like (LFL) basis. Motoring grew 6.5% benefiting from strong performance from day-to-day products. Cycling sales grew 2.7%, as very high demand last year began to unwind and supply chain issues continue. Underlying operating profit of £89.8m was 43% higher, driven by improvements in gross margins.

Autocentre revenue almost doubled to £368.0m, up 23.4% on a LFL basis. Headline revenue benefited from six acquisitions over the period. Underlying operating profit rose 46.9% to £14.4m, largely reflecting higher revenue as margins declined, given the new acquisition's focus on less profitable tyre services.

The group had a free cash outflow of £14.9m, from an inflow of £133.2m the prior year. That was largely a result of working capital changes relating to higher inventory. Net debt increased from £277.3m to £344.9m.

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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.