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Halfords cycling to success

As next week's results should show, Halfords' turnaround - since suffering unexpectedly weak trading in the first quarter - will continue to drive an impressive share price rally
November 15, 2012

Bikes and car accessories retailer Halfords (HFD) coped well during the tough times that followed the financial crisis - delivering robust growth when other retailers struggled - but it seemed to stumble earlier this year. First-quarter trading was unexpectedly dismal, with group like-for-like sales slumping 5.6 per cent. Since then, however, Halfords has staged a remarkable comeback and its second-quarter performance delivered like-for-like sales growth of 5.6 per cent. That turnaround has prompted a robust rally in the share price, but there should be more to come.

IC TIP: Buy at 353p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Impressive retail turnaround
  • Fast-growth car servicing business
  • New boss looks a good fit
  • Fat dividend yield
Bear points
  • Retail conditions remain tough
  • Car enhancement and travel units struggling

To an extent, Halfords' turnaround reflects good fortune. Grim weather helped explain the first-quarter's poor trading. Then the group undoubtedly received a boost from the UK's summer of sport as consumers - inspired when Tour de France winner Bradley Wiggins took a gold medal at London's Olympics - rushed to Halfords to snap up bikes. Sales were particularly strong among Halfords' premium range of Boardman and Pendleton cycles.

But it's not all down to luck. Halfords' bosses acknowledged that they could have done a better job at meeting customers' needs. So along with the full-year results in May came a plan to revitalise growth. That included such measures as redesigning and relaunching many of its cycles as well as greater focus on cycle parts and accessories. In its car parts range, management has worked to bolster awareness of Halfords' fitting capabilities - a quarter of all bulbs, batteries and wiper blades sold in 2011, for example, were also fitted by Halfords. More focus on travel-related accessories - such as car roof-boxes - is also an important part of the plan.

HALFORDS (HFD)

ORD PRICE:353pMARKET VALUE:£703m
TOUCH:352-353p12-MONTH HIGH:360pLOW: 187p
DIVIDEND YIELD:6.2%PE RATIO:13
NET ASSET VALUE:144pNET DEBT:48%

Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20098107826.615.9
201083211036.820.0
201187011840.722.0
201286394.134.222.0
2013*8657127.022.0
% changenilnil

*JPMorgan Cazenove estimates (profits and earnings are adjusted and not comparable to prior years)

Normal market size: 8,000

Matched bargain trading

Beta: 0.6

Some of Halfords' operations have needed a makeover less than others - the group's car servicing autocentres operation has flourished since it was bought in 2010. Like-for-like servicing revenues grew 9.2 per cent in the first quarter, followed by 12.4 per cent underlying sales growth in the second.

While Halfords turned the first-quarter's 7.5 per cent slide in like-for-like sales at the retail business into second-quarter like-for-like growth of 4.6 per cent, some areas of retail continue to struggle. For example, sales at both travel solutions (camping, caravan equipment and child-safety stuff) and car enhancement (audio, SatNav and car cleaning) are still falling, even though both have improved dramatically since the first-half's dire outcome.

The group's new chief executive - Matt Davies took the helm last month - looks well suited to Halfords, too. Mr Davies spend eight years running Pets At Home, where he is credited with having helped build that operation into a market-leading UK retailer. Moreover, there are striking similarities between the two operations. "He [Mr Davies] successfully built a business with many parallels," say analysts at broker Numis Securities. Those parallels, says Numis, include being "a marketing-leading, out-of-town, destination store, selling product that has not been commoditised by online or supermarkets".