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Halfords - weaker consumer weighs on guidance

Halfords has reported first half revenue of £765.7m, on a three-year basis that represents growth of 31.3% or 13.3% when looking at a...

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Halfords has reported first half revenue of £765.7m, on a three-year basis that represents growth of 31.3% or 13.3% when looking at a like-for-like comparison.

Revenue growth was driven by the Autocentres business segment, with growth both organic and acquisition based. Service based sales at the group level now account for 42.6% of revenue.

Year-over-year, underlying profit before tax fell £28.9m to £29.0m. Significant cost inflation, a fall in consumer confidence and a tough comparable period last year were all called out as reasons for the profit decline. Over a three-year period, the profit decline was £1.2m.

The group's delivered £10m in year-on-year cost savings over the half, expecting that figure to reach £20m by the year end - ahead of previous estimates of £15m.

Full year underlying profit before tax is now expected at the lower end of the guided £65-£75m range.

The board has declared an interim dividend of 3p.

The shares down 12.0% following the announcement.

View the latest Halfords share price and how to deal

Our view

Markets didn't react too kindly to Halfords expressing concern over difficult economic conditions and weaker consumer behaviour. Full year profits are expected to be at the lower end of the previous guidance range.

It's true, the near term looks challenging for the more discretionary services on offer and that's one reason it's good to see progress on 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 77% of sales will come from Motoring following the acquisition of Lodge Tyre. And the new Motoring Loyalty Club, which offers discount on certain services, should bode well with its already half a million members who see disposable incomes fall as inflation soars.

Aside from short term challenges, we continue to think the group has fundamental strengths and feel the initial reaction to half year results was little overdone.

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 ratio of 1.8. 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 and of course no returns are ever guaranteed. Early results look promising with acquisitions playing a big part in growth over the half.

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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 23rd November 2022