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Halfords - autocentres driving top-line growth

Halfords' revenue rose 7.8% on a like-for-like basis across the first 20 weeks of its financial year...

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Halfords' revenue rose 7.8% on a like-for-like basis across the first 20 weeks of its financial year, with the Autocentres and Retail divisions contributing 16.6% and 3.4% growth respectively.

Performance is being driven by needs-based categories, with service-related sales accounting for nearly half of total revenue. Discretionary areas like cycling and car cleaning have been negatively impacted by low consumer confidence and unfavourable weather.

Market share grew across all categories. The cost-cutting programme is set to deliver £30m of savings this year, in line with targets and weighted towards the second half.

Full-year underlying pre-tax profits are expected to land between £48-58m, compared to £51.5m last year.

The shares rose 2.6% following the announcement.

View the latest Halfords share price and how to deal

Our view

Halfords' trading update displayed some positive signs against a challenging economic backdrop. The shift towards more reliable, service-based revenue looks to be paying off and fuelling solid top line growth.

Car servicing or a new battery isn't negotiable, so we're pleased to see that almost 50% of sales now come from this area. And the Motoring Loyalty Club, which offers discounts on certain services, has continued to mushroom to over 2.5m members. Club members appear to be more engaged, shopping more frequently and spending more per visit.

The group also aims to become a market leader in servicing all forms of electric cars, vans and scooters. The investment in infrastructure and colleague training for this won't be cheap, but if Halfords can solidify its position in consumers' minds early enough in the electric vehicle transition, the investment may just pay off.

Halfords benefits from the physical estate being under lease agreements and average contract lengths in Retail were around 3.3 years at the last count. This gives an element of bargaining power during renewal talks or a quick disposal if footfall levels drop too far. Remaining stores are also 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.

But there are some challenges to contend with. A lack of skilled labour has held back progress in its Autocentres business. That makes it more difficult to service demand and we question if it will limit the ability to perform more lucrative (complex) work. It's a problem that can't be fixed overnight.

Another issue is weakening demand. Spending on discretionary items is on the decline as consumers tighten their belts. And Cycling, which now only represents a quarter of Halfords' revenue, continued to struggle.

Last we heard, the balance sheet was in good health, with a net debt to cash profit ratio in-line with the group's target. Cash generation's expected to be stronger this year, weighted toward the second half. That helps to underpin the relatively chunky 5.5% prospective yield, but remember no dividends are guaranteed. Despite this, we're not expecting any large increases to shareholder returns anytime soon as the cash is still needed to integrate acquisitions and scale up the motoring business. Early results look promising with acquisitions playing a big part in growth.

The mix of online sales portal and real-world expertise is a potentially winning formula long term and shifting further toward needs-based products and services is a good move in our view. But inflationary headwinds are continuing to test the group's mettle, resulting in the current valuation trading slightly below the long-term average.

Halfords key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 6th September 2023