Halfords’ profits slide as consumers struggle

High inflation and weak consumer confidence aren’t great aids to selling bikes, as demonstrated by the 24 per cent fall in cycling volumes at Halfords (HFD) against pre-pandemic levels. But the company, which now makes over 75 per cent of its sales from motoring, still put in a solid revenue performance and made bullish noises on hitting its medium-term profit target despite continuing concerns over the consumer outlook.

Chunky year-on-year revenue growth was posted despite consumer tyre volumes struggling alongside their cycling counterparts against the same pre-virus benchmark, with these falling by 14 per cent. However, Halfords has still grown its market share across all categories. 

The revenue uplift was driven by the autocentre (car servicing and repairs) division's performance, with sales climbing by 61 per cent to £614mn as operations scale up. Acquisitions, including of Lodge Tyre last October, contributed around £170mn of year-on-year sales growth. Retail sales, on the other hand, fell by 2 per cent to £980mn as shoppers bought fewer discretionary and expensive items.

While the business purchases drove the 500 basis point dilution in autocentres’ gross margin, the 240 basis point fall in retail margin was impacted by higher cost of goods and freight rates.

The more than halving in overall statutory profits was driven by £68mn-worth of cost inflation, alongside headwinds of £27mn from declines in core markets and the return of business rates. The board forecasts lower net cost inflation of around £30mn in 2024, which highlights the improving outlook, but also emphasises that margin pressures will not ease in the short term, with Halfords expecting to invest some margin in 2024 to remain price-competitive.

Analysts like the growth of services at the business, with almost half of revenue now coming from services-related sales. RBC Capital Markets analysts noted that this “should be supportive for margins in the long run”. The investment bank also thinks that Halfords could ultimately become a “major player” in electric vehicle (EV) servicing.

Looking ahead, the company expects profit growth in 2024 in what remain challenging trading conditions. But 2025 looks to be key, as management expects a "significant step" will be taken in that financial year towards its goal of an underlying profit of £90mn-£110mn.

Investec analysts said that “the building blocks are in place for Halfords to become a double-digit growth story with an attractive dividend yield”.

With City analysts valuing the shares at 10 times forward earnings, according to consensus forecast on FactSet – a discount to the five-year average of 11 times – we think Halfords can ride to a better future. Buy.

Last IC view: Buy, 195p, 23 Nov 2022