Halfords disappoints despite results beating forecasts

Halfords full year numbers were largely flat but ahead of market expectations as new chief executive Jill McDonald claimed to be making progress with her Moving Up A Gear strategy, announcing new capital and debt targets "to allow for appropriate M&A".

Shares moved lower initially as some investors had been hoping for news of a capital return.

The auto accessories and bicycles retailer's revenues, which had already largely been reported, came in at £1.02bn, up 1.7% on the previous year, with like-for-like sales up 1.5%.

Profits before tax and non-recurring items profits increased 0.5% to £81.5m, with the consensus of analyst expectations pointing to nearer £80m. Earnings per share rose 1.5% to 33.2p, ahead of the forecast 32.5p.

A 3% step up in the total dividend to 17p was also ahead of the consensus 16.8p.

Having set guidance for dividends to be covered two times by earnings, McDonald announced a target for debt of 1.0 times EBITDA "with a range up to 1.5 times to allow for appropriate M&A" but said this would be superseded by the importance of the Moving Up A Gear, which aims to drive sustainable long-term growth based on a "step-change in customer data, the introduction of new services, product innovation and exciting collaborations".

Perhaps giving a clue as to the future, said the company had enjoyed strong growth in its service-led offerings, including its '3Bs' fitting service in motoring, to which she has added a similar motorbike service.

In cycling, while cycle repair delivered good growth and sales improved in the second half of the year, LFL cycling sales were down 0.9%.

McDonald said the recent acquisition of Tredz alongside the continued expansion of its Cycle Republic brand and the launch of a new bike range in collaboration with Olympic champion Laura Trott demonstrated the "strength and breadth" of the cycling offer

Halfords aims to beat the forecast annual market growth in the cycling market of around 3-5% a year, slower than the downhill run in 2013-14 but worth pursuing, with the company estimated to have a market shares of around 24% for bikes, 15% for parts, accessories and clothing and 10% for cycle repair.

In motoring, McDonald is embedding a new motorcycle product and service offer, building a new windscreen chip repair service, launching exclusive in-car technology products, further expanding ranges and developing the trade offer.

In Autocentres she is committed to continuing to open new centres and refreshing the estate, while also selling retail products in these centres.

Independent analyst Nick Bubb said while the results were at the upper end of the previous £78m-82m profit range, "there’s not a lot to shout about”.

"There is nothing new in the forward guidance either - with another flat year expected - apart from a caveat about the possible hit to gross margins from dollar weakness below $1.50".

Broker Canaccord said the lack of a cash return "could disappoint in some quarters", while the "small wrinkle" of the adverse impact of the dollar rate will likely see a small net reduction of circa £1m to consensus 2017 PBT of £80.5m after allowing for circa £1m enhancement from the recent acquisition.

Canaccord added that the stronger trading in recent months after the disappointing second-quarter setback has "underpinned confidence in the group's cash generation and de-leveraging, raising hopes of special returns of surplus cash to shareholders, even though these remain the fourth priority in the pecking order of capital prioritisation - behind growth capex, the ordinary dividend, and 'appropriate M&A opportunities'".

Halfords shares, which have recovered 40% since January to almost 450p on the back of two solid quarters of trading, were down nearly 5% to 417.8p just before 0900 BST on Wednesday.