Halfords (HFD) Ordinary 1p Shares

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Halfords’ like-for-like (LfL) sales were broadly flat (-0.1%) in the first half, against a strong comparative period (+8.3%). Growth in its Autocentres division was offset by weakness in the Retail division, where cycling sales “remained challenging”.

The group is “on track” to deliver £30mn of full-year efficiency savings, which will help offset around £35mn of expected inflated costs.

Lower stock and strong cash generation have “further improved” the balance sheet.

Halfords said that the short-term outlook remains uncertain, particularly for big-ticket discretionary items. Despite this, the outlook for the next financial year remains unchanged

The shares rose 2.1% 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. Price-conscious customers have been trading down to budget ranges, and a lack of big-ticket discretionary sales has weighed on performance.

Cycling and staycation products like camping equipment and roof boxes aren’t flying off the shelves like they were in the post-pandemic boom. Coupled with the fact that consumer tyre volumes are 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 3.3% at the last count were 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.

And the Motoring Loyalty Club, which offers discounts on certain services, is attracting new joiners at an impressive pace, with membership doubling to 3.4mn last year. Club members are more likely to be engaged, shopping more frequently and spending more per visit.

The balance sheet is in reasonable health, with a net debt-to-cash profit ratio slightly better than the group's target last we heard. 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. We’d like to see Halfords review its options for underperforming areas of the business, which could include divesting some units.

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 5.7%. 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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