What's in store for Halfords as boss defects to Tesco

A slick third-quarter trading update from Halfords (HFD) was largely overshadowed by news that chief executive Matt Davies is to step down. Mr Davies has been the architect of Halfords' turnaround strategy, so his departure, to head up Tesco’s UK operations, was seen as a major setback.

The change of management is clearly bad news, but investors can take some reassurance from the third-quarter numbers themselves. Like-for-like sales in the 15 weeks to 9 January - so including the crucial Christmas trading period - rose 7 per cent, driven by an 8 per cent rise in cycling-related sales even against very tough comparatives. Encouragingly, car maintenance revenue was running 11 per cent ahead of last year's result as Halfords' 'we fit' service achieved record levels of parts fitting and strong battery sales. The travel solutions division also delivered underlying sales growth, boosted by new seasonal gift offers.

A big area of focus this past year has been the struggling autocentres, so it was good to see sales there grow 6 per cent. Operating costs will be higher than expected this year, management said, offset by lower finance charges and better-than-forecast gross margins. Halfords unveiled its first Cycle Republic store in London, with a second due to open at the end of the month.

Cantor Fitzgerald Europe says…

Hold. Halfords has a growing share of the £1bn UK cycling market - over 20 per cent, according to our figures - and is also selling more premium bikes as an increasing number of men and women take up competitive cycling. That means the cycling division - which accounts for 36 per cent of group sales - continues to benefit from trading up, a growing consumer interest in bikes from a busy calendar of major events, and sales of more cycling clothes, parts and accessories. We are maintaining our 2014-15 EPS forecast of 31.6p, based on pre-tax profit of £79m within a consensus range of £71.7m to £80.9m. But we could see consensus rise slightly on the back of these figures, given the operational leverage Halfords is generating.

Peel Hunt says…

Buy. Halfords is not a particularly Christmas-centric retailer, but this year the team aimed to maximise the seasonal potential. It focused marketing on children's bikes and gifts more generally (including a car cleaning gift pack - thankfully not under my tree this year). This helped drive incremental sales in all categories. It's still early days to judge the store transformation, and we would expect the sales-driven recovery to continue as Halfords rolls out its standalone bike shops. Our pre-tax profit forecast for the full year is £79.6m, and the shares are not highly rated on 12 times that. But the loss of Matt Davies to Tesco is a significant blow to the investment case, and is likely to keep a cap on the share price in the short term.