What's new:
■ Underlying sales down, current trading still weak
■ On track to meet full-year profit targets
■ Half-year dividend increased by a third
Results from Halfords confirmed the grim trading news the company had already revealed in October's trading update, with like-for-like sales in the six months to 1 October falling 4.9 per cent. That was partly the result of stock shortages caused by the reorganisation of its distribution network, which knocked 0.7 per cent off sales, a problem that has now been addressed as has supply disruption in its key cycle category. Even so, current trading remains weak, with like-for-like sales in its retail arm down 5 per cent in the six weeks since the half-year end.
At least there was better news from its car service arm, Autocentres, formerly the Nationwide business acquired in February. Although underlying sales in the half year were flat, sales have climbed 1.2 per cent since the year-end, and plans to develop the business are on track - rebranding acquired centres will be completed by the end of the next financial year, and 80 new centres will be opened over the next three years. However, lower average service values meant operating profit slipped 7.7 per cent to £4.8m.
Even so, overall profits ticked up 12.8 per cent to £68.7m, partly the effect of the contribution from Autocentres - which also helped lift total sales 7.3 per cent to £456.3m - but also as a result of gross margin improvement in retail as the sales mix shifted to more profitable lines. As a result, management said it was on track to hit full-year pre-tax profit estimates of between £127m and £136m.
Execution Noble says...
Buy. Halfords' issues are short-term cyclical, rather than structural. While the Halfords retail number was disappointing, the improvement in Autocentres (where there has been growth in customer numbers and average transaction values) is encouraging. The statement suggests that cycle ranges and availability have been improved, but given that this category represents around 30 per cent of gross profit a recovery is key to meeting full-year numbers. The other big issue from the first half, distribution centre problems, seems to have been resolved, which is again reassuring for the outlook.
Seymour Pierce says...
Hold. Despite very aggressive cost-cutting planned for the second half we believe there is a question mark over whether Halfords can achieve 2011 consensus pre-tax profits of £132m. Further share price downside is probably limited by an undemanding valuation of nine times forecast earnings and a 5.6 per cent dividend yield. However, with tough car maintenance comparables ahead and concern that cycling growth has peaked, we believe management needs to prove the core business is stable and its acquisition a success before being given the benefit of the doubt.
