Halfords has issued it's updated mid-term and mid-to-long term guidance. Since 2018, the group has transitioned from a retail to a services-focused business, with greater emphasis on motoring.
Halford's mid-term focus is on leveraging its recent acquisitions and growing market share. This should help the group grow sales from around £1.6bn expected this financial year to £1.9bn. Profit before tax is also expected to grow from £50-60m expected at the end of this financial year to £90-£110m over the mid-term.
The mid-to-long term focus is on building a one-stop shop for motoring ownership, including all forms of electric cars.
The group intends to propose a final dividend of 7p when full-year results are announced, which would take the annual dividend up to 10p.
The shares rose 2.5% following the announcement.
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Our view
Halfords is looking to roughly double its profits over the medium term. It's got a plan to get there, but it certainly won't be without challenges.
Halfords is being held back by a lack of skilled labour in its Autocentres business. That makes it more difficult to service demand and we question if it will limit the ability to perform more lucrative (complex) work. It's a problem that can't be fixed overnight.
Another issue is weakening demand. The consumer tyre market has declined, but so has demand for more expensive, non-essential products. That's a reflection of the tough economic environment as people have less to spend. These unhelpful developments mean profit expectations have been downgraded, which sent a shock through Halfords' valuation.
Zooming out to longer-term trends, there are bright spots. We're especially supportive of the shift toward more reliable, service, revenue. Car servicing or a new battery aren't negotiable, which is why we're very happy to see that about 50% of sales now come from this area. And the new Motoring Loyalty Club, which offers discount on certain services, has mushroomed to 1.2m members.
The group's also aiming to become a market leader in the servicing of all forms of electric cars, vans and scooters. The investment in infrastructure and colleague training for this won't be cheap, but if Halfords can solidify its position in consumers' minds early enough in the electric vehicle transition, the investment may just pay off.
The new 'Mobile Expert' offer, which sees Halfords technicians come straight to your door, is still in its infancy. At the moment 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 business.
The group benefits from the physical estate being under lease agreements and, last we heard, average contracts were 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 in-line with the group's target. 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 with acquisitions playing a big part in growth.
The mix of online sales portal and real-world expertise is a potentially 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, reflected in the current valuation which sits below the long-term average.
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.
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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