Halfords' third-quarter revenue grew 2.0% on a like-for-like (LFL) basis, driven by a 5.1% rise in the needs-based Autocentres division. Sales in the more discretionary Retail business remained flat as Cycling and Consumer Tyres performed 'significantly worse' than expected. Despite this, market share grew across all major divisions.
The cost-cutting programme is running ahead of plan, now set to deliver more than £35mn of savings this year, compared to the previously announced £30mn target.
Positive cash inflows are expected over the second half, resulting in a small underlying net debt position at the year-end.
There has been a 'strong' start to trading in the final quarter. As such, Halfords stands by its previously lowered guidance range of £48-53mn for full-year pre-tax profits.
The shares fell 2.2% following the announcement.
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Our view
The current trading backdrop is challenging for Halfords and we think it's likely to remain so for some time. Halfords' discretionary sales remain under pressure, but we're pleased to see the continued shift towards more reliable, service-based revenue.
Sales growth is being driven by higher by its Autocentres business, where there's a strong focus on non-discretionary services. Things like car servicing or a new battery aren't negotiable, so we're pleased to see that around 50% of sales now come from this area, which is helping to offset weakness elsewhere.
And the Motoring Loyalty Club, which offers discounts on certain services, has continued to mushroom to over 2.9mn members, up around 1.2mn in 2023. Club members are more likely to be engaged, shopping more frequently and spending more per visit.
The group's reliable store presence is also a big selling point. These 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.
But for all the positives around the Autocentres division, a lack of skilled labour has held back progress in recent times. That makes it more difficult to service demand and we question if it will limit the ability to perform more lucrative (complex) work. Finding enough trained staff to plug the hole won't happen overnight, but the group said it's made consistent progress on keeping hold of the staff it's already got, with colleague retention improving every single month this year.
Gross margins were also down by more than two percentage points at the half-year mark, as goods costs rose and lower-margin tyre sales became a larger chunk of total revenue. These lower margins mean that Halfords is going to have to pedal harder just to keep profit standing still.
Looking to the 2024/25 financial year, Halfords isn't expecting a major uplift across its markets. That means cost cuts are likely to remain a big part of the game plan in the near term.
Last we heard, the balance sheet was in reasonable health, with a net debt-to-cash profit ratio in line with the group's target. Free cash flow's expected to improve in the second half but, we're not expecting any increases to shareholder returns anytime soon. The 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 potentially winning formula long term and shifting further toward needs-based products and services is a good move in our view. But softening consumer spending is continuing to test the group's mettle, resulting in the current valuation trading below the long-term average.
Halfords key facts
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