Halfords' road to recovery

In its 20-week update early last month, Halfords sparked excitement with news that like-for-like sales were up 2.8 per cent. This included 2.6 per cent like-for-like retail sales growth and 4 per cent for autocentres. Like-for-like motoring sales were up 3.8 per cent – buoyed by a fall in new car sales and more demand for car maintenance products – while cycling sales managed to eke out a 0.8 per cent rise. Performance was buoyed by 11 per cent growth in online sales, with around 85 per cent of online orders collected in store. While management didn’t provide much detail on margins, there are some hopes among brokers that long-term declines could finally be bottoming out. Gross margins have fallen from a high of 54.5 per cent in 2011 to 50.2 per cent last year, which has caused underlying operating margins to crater from 14.7 per cent to 7.4 per cent.

Given the history of deteriorating returns, it is perhaps not too surprising that the market reacted badly to news that Mr Stapleton wants to pump more money into the business. Late last month, the new boss laid out a strategy which will involve increasing capital expenditure from £40m per annum to £60m over the medium term, with particular focus on store refurbishments, improving services and digital platforms. While this means profits will be flat next year – it is hoped there will be "mid-single-digit-percentage annual growth" thereafter – we feel this investment is something a business like Halfords needs. Efforts will be made to develop a “super specialist shopping experience” and a “more convenient services offer” for customers – something that has the potential to strongly differentiate the company from online and non-specialist competition.

Judging by the share price weakness after the strategy was announced, it’s safe to say the market is sceptical that Halfords can protect and restore margins by turning itself into a “service-led, super specialist”. But, in our view, the company seems well aware of its shortcomings and areas for improvement. For instance, it acknowledges growing demand from customers who want “someone to do it for me”, but don’t currently find Halfords to be the most convenient choice. There’s also scope to improve cross-selling opportunities; it’s estimated only 2 per cent of retail customers have shopped at the autocentres division, for example. Finally, as both cars and bikes incorporate new technology and become more complex, Halfords sees the chance to offer more specialised services in this market. It is also taking advantage of a relatively short average lease lengths on stores of six years to close some of its more traditional retail outlets; six sites' closures over the past 12 months is expected to cut the rent bill by about £1m a year.

But that’s not to say that building scale and market share isn’t a focus. To that end, Halfords plans to more than double the number of ‘performance cycling stores’ to over 50. These aims could be substantially advanced and exceeded should rumours prove correct that Halfords may bid for troubled rival Evans. Such a deal would really establish Halfords in the premium end of the market. Broker Peel Hunt points out that in the past it has “struggled to get on a wavelength with the more serious cyclist”, meaning the deal would be “a very nice solution to a long-standing problem”.