Halfords has agreed to acquired Lodge Tyre for up to £37.2m in cash. Halfords tells us it's already the UK's number one motoring service provider to consumers, and this acquisition will also see it take the lead amongst UK business-to-business (B2B) commercial tyre providers.
Lodge Tyre generated cash profit of £4.7m for the year ending March 2021 from its 50 garages and 248 mobile vans. Halfords expects to see £3.8m of annualised efficiency improvements from merging the operations by the fifth year of ownership.
Halfords also expects the transaction to make a positive contribution to earnings per share in its first year of ownership, and take service revenue to 48% of group revenue on an annualised basis, up from 26% in financial year 2020. The CEO said ''this acquisition of Lodge Tyre is yet another example of Halfords'' strategic aim of becoming a Motoring Services-focused business"
The shares were up 4.5% by late morning.
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Our view
Halfords' pivot toward motoring services is progressing well.
As inflation bites household incomes, it's good to see Halfords move away from relying on discretionary spending towards more needs-based revenue. Car servicing or a new battery aren't negotiable, which is why we're very happy to see that about 77% of sales will come from Motoring following the acquisition of Lodge Tyre. And the new Motoring Loyalty Club, which offers discount on certain services, should bode well with its already half a million members who see disposable incomes fall as inflation soars.
That said, the company is facing short term challenges in the name of cost inflation and it's still not immune to falling discretionary spending. Last year's results were disappointing, and profits are expected to fall north of 20% this year.
Aside from short term challenges, we continue to think the group has fundamental strengths.
The success of the new 'Mobile Expert' offer, which sees Halfords technicians come straight to your door, is testament to what the combination of the right product and staff expertise can achieve if delivered at the right time in the right place. The offer is in its infancy, and margins are very poor, but growth is impressive and has the potential to keep expansion ticking over while also encouraging cross-selling into the Autocentres themselves. Discounts for Motoring Loyalty Club members will also support this cross selling.
The fact both Autocentre MOTs and Mobile Experts can be booked directly from the retail website should help the group make the most of its large retail customer base.
Online sales rose 77% over the year and given the increasing importance of digital sales, it should be no surprise the physical estate is being streamlined. The group benefits from the physical estate being under lease agreements with average contracts less than 6 years. This gives an element of bargaining power during renewal talks or a quick disposal if footfall levels drop too far. Remaining stores are also focused on delivering what online rivals can't: click & collect and a face-to-face service from an employee who knows what they're talking about.
The balance sheet is also in good health, with a net debt to cash profit ratio of 1.7. That helps underpin the reinstated dividend and gives some room for further acquisitions. We're not expecting any large increases to shareholder returns anytime soon though, cash is still needed to integrate acquisitions and scale up the motoring business. Early results look promising though, acquisitions helped fuel growth for the start of the year.
The mix of online sales portal and real-world expertise is a winning formula long term and shifting further toward needs-based products and services is a good move in our view. But there's no escaping the short-term challenges ahead and this is reflected in the current valuation, which suggests genuine concern from the market.
Halfords key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
20 week trading statement
(7 September 2022, figures are on a like-for-like basis and compared to pre-pandemic levels, unless otherwise stated)
In the first 20-weeks of the year, total revenue grew 9.2% but fell 1.9% on a like for like (LFL) basis, which excludes acquisitions. This was against a strong comparator last year as the end of lockdown boosted sales. Compared to pre-pandemic, all business areas posted strong growth on a LFL basis.
The group's mindful of rising costs and is progressing well with cost savings and inflation mitigation targets. They continue to expect full year underlying profit between £65m to £75m.
Autocentres posted strong revenue growth of 28.2%. Total growth compared to 2022, which also includes acquisitions, was up 67.8%. Autocentres now account for roughly a third of the group's sales. Tyre market share increased, although a slow recovery has meant the market remains below pre-pandemic levels.
Retail trading was in line with expectations, and revenue was up 8.9%. Motoring revenue continued to grow market share, increasing revenue 8.5%. Cycling also grew revenues 9.5%, as higher market share partially offset the impact of a declining market.
Over half a million members have joined the Loyalty Club scheme, which launched March 2022.
More than 70% of sales now come from Motoring and services. Management believes this is ''leading to a very resilient Group performance'' because these items are needs-based, rather than reliant on discretionary spending.
Halfords expects profits in the second half of the year to exceed those in the first half. Stock levels are also in line with expectations.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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