Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Halfords - profit warning as skilled labour shortage bites

Halfords' third quarter revenue rose 38.3% compared to pre-pandemic levels.

No recommendation - 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.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Halfords' third quarter revenue rose 38.3% compared to pre-pandemic levels. The majority of this was driven by acquisitions. Growth was driven by Motoring and essential products, but overall, revenues were weaker than expected because of weak cycling and tyre markets. Services now represent just over 50% of total revenue.

Autocentres profit is being impacted by a shift to lower margin categories, driven by a "nationwide shortage of skilled labour". There are now 1.2m Motoring Loyalty Club members, which is better than expected.

The tough market conditions, especially an inability to hire enough skilled staff to service demand, means full year pre-tax profit expectations have been lowered, with the group now expecting pre-tax profit of £50-60m compared with prior guidance that this would be at the lower end of the £65-75m guidance range.

Halfords also said: "we anticipate year-on-year cost inflation in wages, energy and currency, however we will partially offset these pressures through realising reductions in freight and product costs, whilst simultaneously continuing to reduce our cost base."

The shares fell 12.8% following the announcement.

View the latest Halfords share price and how to deal

Our view

Halfords is being held back by a lack of skilled labour 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. This a problem that can't be fixed overnight.

Another issue is weakening demand. The consumer tyre market has declined, but so has demand for more expensive, non-essential products. That's a reflection of the tough economic environment as people have less to spend. These unhelpful developments mean profit expectations have been downgraded, which sent a shock through Halfords' valuation.

Zooming out to longer-term trends, there are bright spots. We're especially supportive of the shift toward more reliable, service, revenue. Car servicing or a new battery aren't negotiable, which is why we're very happy to see that about 50% of sales now come from this area. And the new Motoring Loyalty Club, which offers discount on certain services, has mushroomed to 1.2m members.

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. Discounts for Motoring Loyalty Club members will also support this cross selling.

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.

The group benefits from the physical estate being under lease agreements and, last we heard, average contracts were less than 6 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 ratios in-line with the group's target. 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. 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 there's no escaping the short-term challenges ahead, reflected in the current valuation.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 12th January 2023