Halfords store exterior
Halfords has seen weaker sales of discretionary big ticket products such as bicycles and tyres over recent months / Image source: Adobe
  • First half PBT up 15.8%
  • But full year profit guide downgraded
  • Softer sales in discretionary categories

Car parts-to-bicycles retailer Halfords (HFD) has warned annual profits will fall short of previous guidance after seeing weak sales of discretionary big ticket products such as bicycles and tyres in the past few months as consumers contend with higher interest rates and the ongoing cost-of-living crisis.

The warning from Worcestershire-based Halfords, which has reportedly received takeover interest from van hire group Redde Northgate (REDD), triggered a 21.5% share price reverse to 179.5p as analysts took red pens to forecasts.

DISCRETIONARY CATEGORIES DISAPPOINT

Halfords, which has been shifting its focus to motoring services, explained that while its B2B businesses and needs-based categories are continuing to show ‘very strong growth’, it has seen ‘some market softening in our discretionary big-ticket categories’ in the last couple of months which has resulted in a like-for-like sales growth slowdown.

Given the uncertain outlook for the second half, Halfords is now guiding to full year 2024 underlying pre-tax profits of £48 million to £53 million, towards the low end of the previously guided £48 million to £58 million range.

Like-for-like cycling sales softened 2.8% in the half to 29 September 2023, with unfavourable weather over the summer dampening demand, and Halfords conceded cycling ‘continues to underperform our other product categories’.

SOLID START STALLS

The earnings alert took the shine off a solid start to the year from Halfords, which delivered robust group like-for-like sales growth of 8.3% in the half and a 15.8% jump in underlying pre-tax profit to £21.3 million driven by market share gains in all categories.

Halfords’ autocentres business performed ‘very strongly’, despite a weaker than anticipated tyre market, delivering like-for-like revenue growth of 18%, while the retail motoring segment outperformed the market with like-for-like sales growth of 8.2% thanks to strong growth across across maintenance, parts, bulbs, blades and batteries.

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EXPERT VIEWS

Following the warning, Liberum Capital downgraded its recommendation from ‘hold’ to ‘sell’, slashed its price target from 210p to 170p and trimmed its full year 2024 pre-tax profit forecast by 10% to £46 million.

‘We are concerned that the medium-term pre-tax profit target of £90 million to £110 million looks even more stretching and we note the lower capex guidance should help to maintain the dividend,’ commented the broker.

‘Risks to numbers are a theme that could weigh on the shares, but potential further bid speculation could arise again.’

AJ Bell investment director Russ Mould said the warning less than a fortnight since takeover talk surrounded Halfords has changed the narrative around the stock.

‘No sooner were investors excited about the prospect of Halfords buddying up with van hire group Redde Northgate, we’ve now got reduced earnings guidance amid weak sales of bikes and tyres,’ commented Mould.

‘Apart from a fruitful period during the start of the pandemic where everyone was clambering to get hold of a bike, cycling hasn’t been kind to Halfords for a long time. One has to question the long-term future of bikes within the business.

‘While it has a competitive strength in being one of the few national brands to sell bikes, thereby making it front of mind for consumers looking to buy such products, this remains a highly discretionary purchase and therefore earnings visibility is poor.’

Mould added: ‘The future for Halfords seems to be in motoring services where there is a more of a defensive element to its earnings. People rely on their cars to get from A to B and if something goes wrong most have no choice but to pay for repairs. On the whole this is non-discretionary spend and that creates opportunities for Halfords to find more ways to earn from drivers.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.

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Issue Date: 29 Nov 2023