Halfords continues its ride towards services

Halfords (HFD) shares fell by 10 per cent after the motoring and cycling services and products provider said it now expects full-year underlying pre-tax profits to come in at the lower end of its £65-£75mn guidance. This highlights the difficulty retailers have when it comes to future earnings visibility in this tough macro environment. Deutsche Bank analysts said this week that “given inflationary pressures, we believe consumers are already reducing discretionary spend with fewer presents purchased [ahead of Christmas] and a shift to cheaper retailers to make budgets stretch further”. In other words, one might think that the outlook isn’t the most cheery for consumers splashing out on expensive bikes.

This narrative is supported by Halford’s warning that “more discretionary areas have softened” in the second half to-date and chief executive Graham Stapleton’s statement that “focusing on the kind of predictable and recurring revenue that comes from motoring services and needs-based products has never been more relevant”. In this context, the company’s acquisition in October of commercial tyre company Lodge Tyre looks like an important step. According to management, this will help the company’s services sales streams take over half of total revenues in financial year 2024 and means that motoring will contribute over three-quarters of all sales.

A shift away from discretionary spending was also apparent in the mixed top-line performance in the first half, where autocentres sales boomed but the retail side of the business struggled. Autocentres revenue grew 70 per cent against last year, while retail revenue slumped 7 per cent. On a three-year basis, autocentres sales were up 221 per cent in comparison to retail’s measly 0.1 per cent uplift. This makes the direction of strategic travel clear. More services demand was also seen in the company's announcement of an autocentres recruitment drive for 1,000 technician positions, along with solid membership figures for its motoring loyalty club.

Costs, unsurprisingly, bit into profitability in the half, though motoring investment and the impact of acquisitions also had an impact. Gross margin fell by 39 basis points, with a 40 basis point decline in retail and 215 basis points contraction in autocentres.

Peel Hunt analysts said that “whilst trading is anything but straightforward, there is undoubtedly a brighter future ahead for Halfords as a service-provider-that-does-some-retail and not vice versa”. The house broker argued that the shares, which trade at an undemanding 8 times its financial year 2024 earnings forecast, “still discount more bad news than they should”. We think that’s right, and with strategic progress being made we remain bullish. Buy.

Last IC View: Buy, 157p, 16 Jun 2022