Car parts-to-cycles specialist Halfords (HFD) warns profits will be flat this year, no longer expecting to be able to push through price hikes in bikes this year and speeding up investment to drive custom in a cut-throat market.
Investors are evidently unimpressed, sending shares in the camping equipment and bulbs, blades and batteries purveyor skidding 11% lower to 345.8p, halting their recent strong run.
COUNTING THE CURRENCY COST
Results for the year to 30 March from Redditch-headquartered Halfords, also a market leading car servicing and repairs player, may be in line with consensus expectations, but they hardly inspire confidence in Halfords as a compelling growth story.
Amid tough retail industry conditions, underlying profit before tax is down 5% at £71.6m, Halfords having to absorb around £25m of additional costs due to the weaker pound against the US dollar, while group like-for-like growth was a rather muted 2%.
Cycling sales improved 2.9% on a like-for-like basis, with weakening fourth quarter bike sales reflecting the cold, wintry weather conditions, which actually boosted car maintenance revenues.
Halfords, which also owns the Cycle Republic chain, reports a softening in retail gross margin from 48.6% to 47.4%, the cost of imported goods rising due to sterling’s weakness versus the US greenback.
OUTLOOK IS THE TALKING POINT
All eyes however are on the outlook statement. Halfords anticipates ‘the motoring market will remain robust’ and flags continuing ‘good growth prospects for the cycling market’, although the retailer warns ‘we do not expect prices to rise in cycling this year as in the previous year.
Given this, the phasing of our remaining foreign exchange mitigation actions and decisions to accelerate investment in services and customer capabilities, we currently anticipate full year 2019 underlying profit before tax to be broadly in line with full year 2018.'
Put simply, new CEO Graham Stapleton is looking to accelerate investment in customer service, staff training and marketing, while Halfords no longer expects to be able to put through price increases on bikes in the year ahead and is relying on an improved exchange rate to offset currency headwinds.
This is clearly disappointing news, as Canaccord Genuity was looking for growth in profits to £80.8m this year. Consensus was pitched at £76.5m, implying we’re now likely to see a 6-7% downgrade to consensus estimates.
On the positive side, Halfords’ online sales rose 11.8%. And having churned out £41.5m of free cash flow, the retailer is keeping income investors sweet by raising the full year dividend 3% to 18.03p.
Stapleton insists ‘Halfords is a good business with a great future. By focussing more on our specialisms and our services, ensuring that we always provide best value to our customers and presenting a more seamless and inspirational omni-channel experience, there is a really exciting future of growth ahead of us. I look forward to presenting our longer-term plans in September.’
Russ Mould, investment director at AJ Bell, comments: ‘News that Halfords’ 2018 underlying pre-tax profit is down on the previous year, plus guidance for no profit growth in the new financial year, would suggest the chain has fallen off Halfords’ bike and it is just peddling without moving forward.
‘The cycling-to-car accessories retailer is in a tricky position. It is on the ball with all the latest trendy products such as electric bikes and dash-cams and is trying to be even more helpful to customers by fitting products on site or undertaking more cycle repairs.
‘However, it has been fighting the effects of unfavourable exchange rates and future profit will be held back by a need for increased investment in customer service, training and marketing.
‘At some point you would hope these efforts result in greater earnings, however at the moment it is clear that patience is required while it gets its house in order and sharpens its proposition.’
Canaccord Genuity analyst Sanjay Vidyarthi, a buyer with a 436p price target, writes:
‘It was ever thus with Halfords. Having turned more positive on the stock in January, given the improving trends in bikes and a potential earnings inflection point, we are now back to a flat profits scenario.'
Vidyarthi adds: ‘We will hear more from the new CEO on his detailed vision for the company in September, but his initial thoughts suggest a focus on “specialisms and services”. There is no change to capex or capital allocation being flagged at this stage.'
