- Demand weakened further in Q4
- Profit guidance lowered by 25%
- Flat profits expected next year
Car parts-to-bicycles purveyor Halfords (HFD) has cut its current-year profit guidance by 25% and sees flat profits next year at best, crushingly disappointing news that sent shares in the Worcestershire-based retailer skidding 26% lower to 148p.
Halfords pinned the blame for the material earnings downgrade on a recent weakening in demand for bicycles and ‘unusually mild and very wet weather’, which has affected footfall into stores and sales of winter and car cleaning products in the fourth quarter to date.
BRAKES SLAMMED ON GROWTH
As a result, Halfords expects to deliver underlying pre-tax profit in the £35 million to £40 million range for the year ending 29 March 2024, a savage downgrade from the £48 million to £53 million forecast given at the third quarter update on 25 January and implying a 25% cut to guidance at the mid-point of the range.
Halfords bemoaned a ‘further material weakening’ in its cycling, retail motoring and consumer tyres markets in Q4, resulting in a significant drop in retail like-for-like revenue growth.
It said the cycling and retail motoring markets have both been impacted by continued weak customer confidence and unseasonal weather, which has affected footfall into stores and sales of winter and car-cleaning products.
In tandem, the cycling market has become more competitive as it continues to consolidate. ‘Promotional participation has increased,’ said Halfords, ‘and more customers are purchasing on credit, leading to weaker gross margins than previously anticipated.’ However, management insisted the Halfords’ Autocentres arm continues to deliver good growth.
HARD ROAD AHEAD
Continuing to cut costs, Halfords’ downgraded 2024 profit estimate assumes the same challenging market conditions continue for the rest of Q4, including through the peak Easter cycling period.
With the retailer remaining ‘cautious on market recovery in the short-term’, pre-tax profits for the year to March 2025 are expected to be flat, assuming demand picks up, the cycling market normalises and margin pressure dissipates through the year.
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EXPERT VIEWS
Liberum Capital maintained its ‘Sell’ rating on the shares and slashed its price target from 150p to 100p following the update. ‘Negative earnings momentum reinforces our view that management’s medium-term pre-tax profit target of £90 million to £110 million is unachievable and now becomes a longer-term target,’ said the broker.
‘In the near-term, with inventory levels some 30-50% above pre-COVID, this could bring earnings pressure through the need to clear stock, and reduced free cash flow may mean paring back capex into initiatives such as the roll-out of Fusion sites. The board could now come under increasing pressure to sell the business, but potentially at a much lower price than recent months’ bid speculation.’
Russ Mould, investment director at AJ Bell, commented: ‘Halfords’ profit machine has gone into reverse as a result of customers watching their pennies and wet weather deterring them from visiting its stores and buying winter products. That suggests it could be sitting on excess stock and will need to find a way to clear it.
‘It means Halfords has gone back to days of old where it would regularly disappoint with earnings guidance and always have some excuse as to why its business is not running smoothly.’
Mould continued: ‘Some of Halfords’ problems are out of its control such as weaker consumer confidence. But it’s hard to ignore the shambolic state of its stores. They are unappealing to visit and have some serious flaws which any good retailer would have fixed immediately.
‘Chatter about a takeover approach from Redde Northgate (REDD) last November amounted to nothing, but a resurrection of profit warnings from Halfords could prompt shareholders to push for change which could include new ownership.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
