Buy into Halfords' cash-rich future

Halfords hit an important milestone at the time of full-year results in early June, when it reported that sales for the full year had come in at more than £1bn for the first time and a year ahead of plan. Adjusting for one week's extra trading during the financial year, that translated into 11.4 per cent pre-tax profit growth and a 13.8 per cent improvement in basic EPS.

This growth is the result of two years' hard work, during which the group has poured its efforts into improving its entire retail offering, from customer service to the premium products it stocks. Last year, sales in the retail division rose 6.8 per cent to £858m, with like-for-like sales growing at a similar rate of 7 per cent. Cycling sales, which account for the majority of retail sales, grew the fastest, up 11.4 per cent. 'Premium' bikes - meaning high-spec and special-performance models - are selling particularly well and children's bike sales were strong, too, helped by a nostalgic and well-timed advertising campaign.

But Halfords isn't just relying on the UK's growing obsession with cycling to drive sales. Other parts of the retail business are also now growing well. That includes car maintenance and travel products, where sales grew 8.5 per cent and 5.4 per cent, respectively, last year. Encouragingly, most of that momentum has carried over into the new financial year. First-quarter figures showed like-for-like retail sales up 3.5 per cent, with cycling up 2 per cent and car maintenance revenues up by almost 6 per cent. Travel solutions - once a weak spot for Halfords - reported a 9.2 per cent improvement in sales, while the group's autocentres (numbers of which are still growing) reported a 4 per cent like-for-like rise. Like-for-like sales in the parts, accessories and clothing division were flat, but volumes were up.

Halfords has credited much of this growth to its 'Getting into Gear' initiative, which is aimed at improving staff training and customer service in store. But it shouldn't be underestimated how well Halfords has navigated the online arena either. Last year the group hit another record: £100m in online sales. There are more than 165,000 products available online and the convenience of a click & collect service has been well received by customers (approximately 90 per cent of online orders are picked up in store).

New chief executive Jill MacDonald, who joined in May, hasn't been in post for long, but she reassured investors at the time of full-year results in June that there would be "no great change". Based on the success of the three-year-plan to date, the stady-as-she-goes approach of the new lady at the helm should be welcomed and the shares have responded well to her appointment. It is also highly likely that debt reduction will continue. There's been excellent progress here already and broker Investec reckons the group could be debt-free by April 2017 and generating surplus cash of £40m a year. Broker Peel Hunt, meanwhile, believes a 75p special dividend could be paid in the year to the end of March 2018 while not pushing net debt above annual cash profits.