Wheels come off at plunging Halfords

Fortunately for Halfords (HFD) and those income investors attracted by the company’s 5% dividend yield, there are plenty of us on the road in need of help fitting bulbs, blades and batteries to our cars.

Targeting these do-it-for-me customers, particularly in Halfords’ higher margin category of car maintenance, will be a key focus for new CEO Graham Stapleton as he looks to accelerate a more services-driven strategy. He will update investors on his plans in September.

In the meantime, however, the recent strong growth in car maintenance has been insufficient to offset challenges elsewhere in the business. Halfords has taken a £40 million hit from the weaker pound since 2016, and any hopes of mitigating this figure in full have now been put back until the 2020 financial year while Halfords focuses on margin investment in the current year.

A slow start to the cycling season hasn’t helped, with recent poor weather causing a 4.1% fall in like-for-like sales in this category for the most recent quarter. As a result, it won’t increase bike prices this summer.

Profits are now likely to be unchanged for the current year, following on from today’s drop of 5% to £71.6 million for the year to the end of March. The 2019 guidance compares with Stifel’s above-consensus forecast of £82.9 million.

This disappointing update put paid to the company’s recent share price progress, having rallied by almost 20% since the start of April. The recent improved performance reflected Halfords’ resilience in the face of the storm impacting many other well-known retail names, while its strong balance sheet, cash flows and dividend yield continue to attract investors.

Source: interactive investor             Past performance is not a guide to future performance

Today’s full-year pay-out increased by 3% to 18.03p, although this was delivered without a repeat of last year’s special dividend of 10p. Free cash flow of £41.5 million was up £3.8 million on last year.

Stifel reported a projected 2019 price earnings (PE) ratio of 13.1x and said it would expect to see share price support at around 330p. They added: “The shares remain an attractive option for income investors in our view.”

Kate Calvert, retail analyst at Investec Securities, sees Halfords as a business capable of delivering double-digit total shareholder returns through self-opportunity. Her calculations are based on mid-single digit earnings per share (EPS) growth, a 5% dividend yield and potentially a regular special dividend.

She still cut her target price by 10p to 370p today, reflecting another new CEO “announcing further margin investment before growth”.

The group margin fell slightly to 50.2% for the year, partly due to the sterling impact on the cost of imported goods in its retail business.

Stapleton said there were still a “few areas of hidden potential” which Halfords has not yet fully leveraged. He plans to accelerate investment in the current year in further developing its services proposition and in customer relationships and data.

He said: “Customers are becoming more demanding and new entrants continue to disrupt the market. This brings its own challenges but it also brings real opportunities for those who can truly position themselves as service-led specialists.”

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