Halfords profits skid lower on weak pound but new year begins well

Profits at bike and car accessory retailer Halfords Group were deflated by the impact of foreign currency rates on margins, though it pumped up its dividend as cash generation remained strong.

Trading in the new financial year has begun on the front foot, with no noticeable dip in demand from any change in consumer sentiment, good strategic progress on performance and growing traction on its 'FX headwind mitigation plan', likely through a currency hedging contract.

For the year to 31 March, total revenue increased 7.2% to £1.1bn, with retail sales up 8% to £938.4m and autocentre service sales up 2.4% to £156.6m.

Like-for-like sales for the group were up 3.1%, with cycling LFLs increasing 5.1% and motoring by 2.0%.

As Easter came after the year end this year but before it last year, management also gave a trading update for the 15 weeks to the end of April 2017, which includes the 11 weeks to the end of the financial year and the first four weeks of the new year and showed group LFL revenue up 3.9% as cycling accelerated 11.1% and motoring rose 0.9%.

With gross margin narrowing to 48.6% from 51.2% in retail and widening by 80 basis points in autocentres to 65.1%, underlying profit before tax shrank 7.5% to £75.4m but was better than the analyst consensus, with underlying earnings per share down 8.7% to 30.3p.

Reported profits were down 10.5% to £71.4m as they included one-off costs from the acquisition of Tredz and Wheelies, investment in TyresOnTheDrive.com, the settlement of a historic legal case and organisational restructure costs.

Those acquisitions and investment saw net debt climb £38.0m to £85.9m, while free cash flow of £37.7m was down from £45.4m the year before.

A final ordinary dividend of 11.68p will lifted the full-year dividend to 17.51p per share, up 3.0% on the prior year, or if the 10p special dividend from February is included, an annual increase of 62%.

With chief executive Jill McDonald leaving later in the year, chairman Dennis Millard said there was a strong team in place and a "clear direction to drive future growth".

"Our priorities remain unchanged, including consolidating our service and services credentials, continuing to invest in our colleagues, and further investment in our shops and online platforms."

On the outlook, Halfords' said it remained "a challenging period from a macroeconomic perspective, with uncertainty over consumer spending and sterling depreciation bringing input cost headwinds" but with good recent trading and "a position of strength as we have leading positions in fragmented markets and offer a customer driven, service-led proposition that differentiates us from competitors, both physical and online" management expect profit will be in line with current market expectations.

Shares in the company were up 2% yo 366p just after midday on Thursday.

Analyst Nicholas Hyett at Hargreaves Lansdown said that Halfords, has grasped what many UK retailers have failed to: "In order for bricks & mortar retailers to compete with cheaper online rivals they have to offer something digital rivals can’t – face-to-face, hands on service and expertise."

The ‘Moving Up A Gear’ strategy, which was put in place by McDonald's predecessor Matt Davies who has since departed for Tesco, is focused primarily on up-skilling and rewarding the workforce to deliver that service, plus better using customer data to target marketing at customers to suit their needs.

"It’s a strategy that seems to be paying off, and were it not for the fall in sterling, would have delivered results this year. However, it’s taken a long time for Halfords to get its act together and we just hope that the group doesn’t lose its way again once Jill McDonald has left for pastures new.”

Analyst Kate Calvert at Investec noted that PBT was 1.6% ahead of the City consensus and good retail sales momentum over Easter should reassure the market about the robustness of the format.

She was also reassured that despite the higher FX headwind, management confirmed their comfort with the 2018 PBT consensus, leading her to nudge her PBT forecast up by 1% and raise her target price to 400p from 395p.

"The results offer evidence that the ‘Moving up a Gear’ strategy is paying off. Valuation looks undemanding and in our view does not reflect HFD’s strong cash generation and defensive product offer."