- Autocentres almost doubled sales in past two years
- Sales of electric vehicles up, but market under pressure from government subsidy cut
A weakening consumer outlook for bikes and cars hammered shares in Halfords (HFD), which dropped by 21 per cent after the retailer forecast a fall in profits next year.
Underlying pre-tax profits are now expected to fall to between £65mn and £75mn, down from £89.8mn in the year to the beginning of April, with the company saying it is “not immune to the external challenges, with reduced demand, particularly for more discretionary, higher-ticket items, and significant cost inflation impacting our financial performance”.
Halfords’ shares have halved since the start of the year, having become unseated after its Covid-related bump in cycling sales started to wane. Consumers are becoming less eager to splash out on expensive bikes as living costs spiral, while supply chain issues also affected Halfords’ sourcing of cycling components, leading to a 27.2 per cent decline in cycling sales in the past year. In its higher-margin motoring business, which now accounts for 70 per cent of revenues across repairs and retail, Halfords is attempting to stave off negative consumer sentiment by investing in pricing and launching a loyalty scheme in March.
Autocentres, which perform car servicing and MOTs, have benefited from six strategic acquisitions over the past couple of years, which included two tyre businesses – Universal Tyres and National Tyres – last year. Sales have nearly doubled over the past two years to £368mn, including 47 per cent growth in 2021 alone, although gross margins have fallen slightly to 57.3 per cent, down from 61 per cent. Since repairs are less discretionary than other types of spending, this could give Halfords' future earnings a defensive edge.
Elsewhere, Halfords’ ‘green’ mobility push is bearing fruit, with sales of e-bikes, e-scooters and accessories rising by 74 per cent over the past two years, while 140 per cent more electric vehicles were brought to its garages for servicing last year. This source of earnings could be in jeopardy, though, as earlier this week the UK Department for Transport said it is scrapping its £300mn subsidy scheme for electric cars, which Halfords’ chief executive Graham Stapleton called a “backward step” that will “delay mass adoption”.
Broker Peel Hunt cut its price target from 525p to 350p, but retained its buy rating, saying that shares are discounting “much more bad news than a single-digit percentage downgrade” and offer “very good value” for a market leader such as Halfords. Trading on a forward price/earnings ratio of 7, we agree, and view its progress towards being a “services-focused” business as encouraging given the consumer climate. Buy.
|ORD PRICE:||157p||MARKET VALUE:||£344mn|
|TOUCH:||156-157p||12-MONTH HIGH:||442p||LOW: 150p|
|DIVIDEND YIELD:||5.7%||PE RATIO:||4|
|NET ASSET VALUE *:||252p||NET DEBT:||63%|
|Year to 1 April||Turnover (£bn)||Pre-tax profit (£mn)||Earnings per share (p)||Dividend per share (p)|
|*Includes £442mn of intangible assets, or 127p per share|
Last IC View: Buy at 304p, 10 Nov 2021.