Halfords (HFD) Ordinary 1p Shares
HL comment (28 February 2024)
In Halfords’ third-quarter results on 25 January 2024, the group had expected full-year pre-tax profits to be in the £48-53mn range.
But since then, due to “material weakening” in three of its four core markets (Cycling, Retail Motoring and Consumer Tyres), there has been a “significant” drop in like-for-like revenue growth.
Full-year pre-tax profits are now expected to land in the £35-40mn range.
Halfords remains cautious about seeing a market recovery in the short term. For 2025, the group expects pre-tax profits to be broadly in line with 2024 levels.
The shares fell 30% in early trading.
Halfords has issued another profit warning. The underperformance has largely been driven by the more discretionary areas of the business such as Cycling and Retail Motoring (things like Sat Navs and car cleaning products), which both saw mid-to-high single-digit declines in volumes in January.
Coupled with weakness in the Consumer Tyre segment, full-year pre-tax profit guidance has been revised significantly lower. That’s not good news for Halfords, and we think the trading backdrop is likely to remain challenging for some time.
Gross margins have also been under pressure, as input costs have risen and lower-margin tyre sales have become 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.
While Halfords' discretionary sales remain subdued, the group’s been trying to shift its focus towards more reliable, service-based revenue in recent times. That’s something we’re more positive about, and sales of non-discretionary services in its Autocentres business look to be holding up much better. Things like car servicing or a new battery aren't negotiable, so it was encouraging to see around 50% of sales come from this area at the last count.
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.
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. But with revenue stalling, free cash flow could come under pressure in the second half, so we're not expecting any increases in shareholder returns anytime soon. The cash is still needed to integrate acquisitions and scale up the motoring business.
The downgrade to profit guidance has put a huge dent in the group’s valuation. We’d like to see Halfords review its options for underperforming areas of the business, which could include divesting some units. Although, nothing is guaranteed.
The mix of online sales portal and real-world expertise has potential long term, and shifting further toward needs-based products and services is a good move in our view. But consumer spending is likely to remain weak in the near-to-medium term, and there could be more challenges ahead to test the group's mettle.
Halfords key facts
Forward price/earnings ratio (next 12 months): 10.6
Ten year average forward price/earnings ratio: 11.2
Prospective dividend yield (next 12 months): 5.0%
Ten year average prospective dividend yield: 4.8%
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
Previous Halfords updates
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