Halfords skids lower as profits expected to remain flat

Halfords reported lower annual profits as the bike and car parts retailer was hit by the increased cost of goods due to the weak pound, with a similar result expected this year as selling prices remain flat.

However, a 3.7% increase in revenue to £1.14bn for the 12 months to 31 March, was a solid performance against what remains a challenging retail backdrop. Retail sales were up 4.1% or 2.3% on a like-for-like basis, including service-related retail sales rising 14.2% and online sales by 11.8%. Autocentres, which had been struggling, delivered a 0.2% LFL rise.

Underlying profit before tax fell 5% to £71.6m and earnings per share falling 2.3% to 29.6p, which compared to City analyst expectations of £71.4m and 29p respectively.

A final dividend of 12.03p will take the full year total to 18.03p, with no repeat of the previous year's special dividend, which analysts said was possible but more likely to be deferred.

New chief executive Graham Stapleton, arriving in January as the FTSE 250 company's fourth boss in six years, felt it was a pleasing performance in a challenging retail environment.

"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," he said, repeating a promise to reveal the group's longer-term plans to investors in September.

Looking back at the past year, he said the impact on the cost of imported goods pound against the US dollar led to gross margin being squeezed 78 basis points to 50.2%, though the currency effect was partially offset by gross margin improvements in the Autocentres business. Operating costs increased 2.9% reflecting continued investments staff, online and offline infrastructure and fulfilment.

At current exchange rates Stapleton does not anticipate any further FX headwind in the current or next financial year and continues to anticipate fully recovering the impact over time.

On the general outlook, he said directors anticipate the motoring market will remain robust and continue to see good growth prospects for the cycling market although the company does not feel it will be able to hike prices in cycling this year as in the previous year.

Given this, underlying profit before tax is currently anticipated to be "broadly in line" with last year's. With the City having pencilled in PBT of £76.5m for 2019, this is likely to mean a 6-7% cut to the consensus forecast.

Halfords also announced the appointment of a new chairman in the shape of former British Airways boss Keith Williams, taking over from Dennis Millard, who has been in place since 2009. Williams is currently a non-executive director of Aviva, deputy chairman of John Lewis and a non-executive director of Royal Mail.

Shares in Halfords skidded 11% lower to 346p on Tuesday morning, giving up most of the strong gains seen since early April.

This was due to to "what looks likes pretty light guidance", said market analyst Neil Wilson at Markets.com, with results broadly in line.

"Not a bad performance amid a pretty tough retail environment but the lack of meaningful guidance for 2019 has rattled the market. Profits 'broadly in line' with 2018 is not particularly positive and the market probably also wants to see some more detail from Graham Stapleton after four months in charge," he said.

"The reasonable 2018 results belong to Jill McDonald and investors want to see what the new man in charge is about. There is also some concern that the weaker pound will continue to hit earnings, whilst it will also struggle to improve margins from cycling."

Broker Canaccord said bikes sales were a bit weaker in the fourth quarter but offset by car maintenance as a result of unseasonable weather, and the dividend was a fair bit ahead of its forecast, but agreed the talking point was the outlook.

"Two factors, equally weighted: first, the new CEO is looking to accelerate investment in customer service, staff training and marketing. Second, the company no longer expects to be able to put through price increases on bikes in the year ahead, partly reflecting a tough Q4 which is likely to exacerbate difficult market conditions going into the summer. FX benefits are still expected to flow through, but only as hedges drop off going into FY20E.

"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."

Ahead of Stapleton's presentation of strategy in September, Canaccord said his initial thoughts suggest a focus on "specialisms and services".