Halfords (HFD) Ordinary 1p Shares

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Halfords like-for-like revenue was broadly flat at £864.8mn. Marginal growth in Autocentres was offset by declines in Retail, as the Cycling market remains challenged.

Underlying operating profits fell 4.3% to £26.4mn, with cost savings offset by an increase in the National Living Wage and a rise in shipping costs.

Free cash flow improved from an outflow of £19.2mn to an inflow of £28.1mn helped by reduced inventory levels. Net debt, including leases, improved from £372.3mn to £276.5mn.

Halfords is “comfortable” with current market expectations, which points to full-year operating profits of £41.4mn. Changes made in the recent UK Budget are expected to increase its direct labour costs by around £23mn.

An interim dividend of 3p per share was announced, in line with the prior year.

The shares rose 6.4% in early trading.

Our view

It’s been a tough start to the year for Halfords, as weak consumer demand has seen first-half sales growth grind to a halt. The outlook for the new year remains uncertain too, with the recent UK budget set to add £23mn worth of cost next year. But markets were impressed with the response so far, resulting in the share price jumping on the day.

Cycling and staycation products like camping equipment and roof boxes aren’t flying off the shelves like they were in the post-pandemic boom. Price-conscious customers have also been trading down to budget tyre ranges which have much lower prices than premium brands. With consumer tyre volumes expected to fall this year too, there look to be a few bumps in the road ahead.

Good progress has been made on the £30mn of targeted efficiency savings. But expected cost inflation looks set to land ahead of this figure, meaning there isn’t much wiggle room for profitability. Operating margins of 3.1% are already thinner than we’d like to see. And efforts to pedal them towards the 5.5% medium-term target are proving harder than expected.

While Halfords' retail sales remain subdued, the group’s been trying to shift its focus towards more reliable, service-based revenue in recent times. That’s something we’re more positive about, and sales of non-discretionary services in its Autocentres business look to be holding up much better. Things like car servicing or a new battery aren't negotiable, and that’s allowed selective price increases which have had a positive effect on the division’s profitability.

The Motoring Loyalty Club, which offers discounts on certain services, is attracting new joiners at an impressive pace, with membership rising from 3.4mn to over 4mn in the half. Club members are more likely to be engaged, shopping more frequently and spending more per visit.

The balance sheet is in reasonable health. But with revenue stalling, and investment budgets on the increase, free cash flow could come under pressure this year. We’re cautiously optimistic that investments in new store formats, and Halfords’ software platform for the motor servicing industry can generate positive returns, but it’s still early days.

Last year’s disappointing performance put a huge dent in the group’s valuation. That means that despite payments getting wound back, the expected dividend yield is still sitting high at 6.0%. But remember, there are no guarantees of future payouts to shareholders.

The mix of online sales portal and real-world expertise has potential long term, and shifting further toward needs-based products and services is a good move in our view. But consumer spending is likely to remain weak in the near-to-medium term, and there could be more challenges ahead to test the group's mettle.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Halfords’ management of ESG risk is average.

It has set up a dedicated ESG board with independent representation and executive compensation is tied to performance on these issues. There is also an environmental policy, including a commitment to net zero and interim targets, and development programmes to improve diversity in the workplace. However, ESG-related disclosure falls short of best practice.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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