Change up a gear with Halfords

Halfords operates 446 stores in the UK and Ireland, where it sells bicycles, cycling clothing and accessories, and car parts. It also offers a range of services in-store and through its 371 ‘autocentre’ garages. Garages accounted for 14 per cent of sales in its 2019 financial year. Meanwhile about a fifth of its sales are online and nearly a quarter of the total are service-oriented.

A trading update earlier this month revealed that strong cycling sales (accounting for about one-third of the total) have pushed Halfords' full-year profits above expectations. Halfords has kept most of its stores open, but offering a limited service. It helps that Halfords has an established ‘click and collect’ service – click and collect accounts for about 85 per cent of transactions on halfords.com. The group's balance sheet also looks in relatively good shape to weather the coronavirus storm, with available liquidity rising from £138m at the end of March to £159m on 1 May. 

With 19 per cent market share, Halfords is the leader of a cycling market that is dominated by small independent retailers. The company is able to offer a wider range of own-label and third-party bike brands, including its exclusive Carrera brand, the UK’s most popular cycling marque. It also leads the cycling clothes, parts and accessories market. 

Given its position in the market, Halfords looks very well placed to benefit from the government’s recent £2bn pledge towards cycling. The money will go towards subsidies for bicycle repairs, promoting the Cycle to Work bike discount scheme, and making roads more cycle-friendly. Around half of respondents to a Transport Focus survey said recently that they are more likely to walk or cycle instead of using public transport in the future. 

We can also expect an uplift in the retailer’s automotive work. Halfords has a 20 per cent share of the car parts market. Its car servicing, meanwhile, offers a significant opportunity to create a stream of higher-margin and recurring sales. It only has 2 per cent share of what is a highly fragmented car service market.

Halfords’ autocentres have struggled during lockdown, with many cars remaining in driveways. But it anticipates a pent-up need for servicing (flat batteries, for example) in what is traditionally a recession-resilient part of the car market. The business should also benefit from £9.3m spent recently on acquisitions. Halfords says customers typically don’t want to drive more than 20 minutes to a garage and its acquisition of the McConechy's garage chain in November puts it within 15 minutes of more than half of UK households while significantly improving its presence in the north of England and Scotland. Meanwhile, the purchase of Tyres on the Drive in October will help towards achieving its 2021 target of having 100 mobile service vans on the road.

The group's profitability should also benefit from the disposal of its performance cycling stores; it now aims to cater for cycling purists through its predominantly online Tredz brand. Many of Halfords’ store leases will expire in the next three to four years, which will allow the group to negotiate rent or relocate.