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Halfords - higher costs squeeze profits

Halfords' full-year like-for-like revenues grew 2.4% to £1.6bn, with growth in Autocentres more than offsetting a decline in Retail...

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Halfords full-year like-for-like revenues grew 2.4% to £1.6bn, with growth in Autocentres more than offsetting a decline in Retail.

Underlying operating profit fell 37.1% to £63.6m as inflation and acquisitions pushed costs higher.

Free cash flow was £3.1m compared to an outflow of £14.9m last year. Net debt remained broadly flat year-on-year at £348.7m.

Halfords said that trading in the current year has been good and expects underlying pre-tax profits of around £53.3m, up from £43.5m last year. The group's expected to end the year with a small net cash position, with cash generation weighted towards the second half.

A final dividend of 7.0p per share takes the total dividend up to 10p, representing 11.1% growth.

The shares rose 5.7% following the announcement.

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Our view

Halfords full-year results reflected the impact of significant inflationary headwinds, which alongside acquisition-related costs, took their toll on profits.

A lack of skilled labour is holding 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. Cycling and consumer tyre volumes declined significantly, reflecting the tough economic environment as people have less to spend.

Zooming out to longer-term trends, there are bright spots. We're especially supportive of the shift toward more reliable, service-based revenue. Car servicing or a new battery isn't negotiable, which is why we're very happy to see that almost 50% of sales now come from this area. And the new Motoring Loyalty Club, which offers discounts on certain services, has mushroomed to 1.7m members - well ahead of target levels for the first year. That's adding weight to Halfords' lofty expectations that pre-tax profits will double between this year and next.

The group's also aiming to become a market leader in the servicing of 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 recent renegotiations have seen cost savings of 22% and average contract lengths in Retail of around 3.3 years. 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.

The balance sheet is also 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 4.6% 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: 21st June 2023