Halfords hurt by discretionary spending weakness

Halfords (HFD) shares were marked down by over a fifth after the motoring and cycling services and products business cut its profit guidance due to “some market softening in our discretionary big-ticket categories”. Management now expects underlying pre-tax profits for the full year of between £48mn and £53mn, a narrower forecast than the previously guided £48mn-£58mn. As we have noted before, it isn't a surprise that consumers feeling the strain from cost of living pressures aren't rushing out to buy the company's bikes. Demand weakness was seen in a 5.8 per cent year-on-year drop in cycling volumes across the market in the six months to September. 

Investors also didn't like the fact that Halfords restated its prior-year numbers due to a cocktail of accounting errors and reclassifications around foreign exchange and supplier arrangements. While there was no cash impact, the result was the prior-year pre-tax profit figure being cut by £10.6mn. 

Despite these issues, there was some solid trading on show in the key motoring part of the business. Motoring retail revenue was up 7.9 per cent, highlighting that customers will keep shelling out for needs-based car services. Autocentre revenue surged by 34 per cent despite softness in the tyre market. 

Meanwhile, market share gains were made across all categories, and share targets for the full year include a 0.6 and 0.7 percentage points uplift for retail motoring and cycling respectively. 

The profit warning came a week-and-a-half after a £1.4bn approach from van rental business Redde Northgate (REDD) about a merger was turned down by Halfords, according to media reports. Whether the share price will gain from future news on a tie-up remains to be seen. And while management reiterated medium-term underlying profit guidance of £90mn-£110mn, we are now a bit warier on that front. Hold. 

Last IC view: Buy, 200p, 21 Jun 2023