Unloved car parts, cycles and camping equipment seller Halfords (HFD) rallies 3.3% to 325.7p on Tuesday. The move higher comes in the wake of a trading update that reveals good momentum in retail sales. That reverses previous negative sentiment surrounding a worsening UK consumer backdrop and concerns over a lengthening replacement cycle for bikes.
There’s also relief as the Redditch-headquartered retailer reiterates full year profit guidance and allays fears over the punitive impact of the weak pound.
In a short trading update covering the 20 weeks to 18 August, Halfords reports overall sales up 4.8% driven by a strong performance in its retail division, where like-for-like sales grew 3.5% helped by the UK ‘staycation’ theme.
Investors also welcome news of growing service related revenue and progress with the turnaround at Halfords Autocentres, where sales were down but gross margins up.
HELP FROM HOMEBODIES
Like-for-like cycling sales grew by a better-than-expected 5.2%, with electric bikes, parts, clothing and accessories flying off the shelves; Halfords also reports strong growth at its Cycle Republic and Tredz businesses.
In addition, motoring like-for-likes sped 2.3% higher as the staycation theme amongst UK consumers benefited Halfords, which enjoyed good growth in fitting services and associated parts, dash cams, camping equipment, roof boxes and cycle carriers.
‘This complemented our service-related Retail sales, which grew significantly faster than our total sales, as we continue to demonstrate our relevance to the growing 'do-it-for-me' customer,’ comments CEO Jill McDonald, whose ‘Moving Up A Gear’ strategy is clearly working.
‘Our foreign exchange mitigation plans are working in line with expectations and we are well prepared for the peak trading period through winter.’
ALLAYING FX FEARS
Reassuringly, Halfords still expects to achieve full year profit before tax expectations. While facing a £25m cost headwind this year due to the depreciation of the pound, Halfords is well hedged for the remainder of the year.
Management notes that its foreign exchange (FX) mitigation plans have been implemented and remains confident it will ‘fully recover’ the adverse cost impact over time through pricing, while cost savings and supplier negotiations to mitigate FX costs have progressed as expected.
McDonald’s ‘Moving up A Gear’ strategy has traction. This will frustrate investors as she has already been poached by high street bellwether Marks & Spencer (MKS) to head up its clothing and homewares business and departs in a matter of weeks. There's a risk that a new CEO comes in and alters a winning strategy.
Following Halfords’ recent share price weakness, Liberum Capital upgrades its recommendation from ‘sell’ to ‘hold’, sticking with its 340p price target and forecasting full year adjusted profit before tax of £74.2m (2017: £75.4m).
‘Although we do not expect a material change to consensus forecasts, today's update should be well received by the market,’ comments the broker. ‘Category performance is broadly in line and retail like-for-likes of +3.5% should be seen as positive in the current consumer environment. Strategic progress is continuing to deliver momentum in performance and further strong growth in service revenues and online is encouraging.’
N+1 Singer is a buyer with a 400p 12-month target price, writing: ‘Current years forecasts are likely to remain unchanged today, but Halfords will undergo a substantial (>30%) consensus forecast upgrade by full year 2020 in the event management deliver full mitigation (which they are increasingly communicating).
In addition, we estimate there to be scope for £90m to be returned over 2 years if the optimal gearing target of 1.0x is adhered to. Recent weakness therefore presents a good entry point and today’s update should boost the shares from currently depressed levels as concerns fade.'
