Halfords (HFD LN) - Tough markets

Halfords released a trading update highlighting a sharp deterioration in market volumes in its discretionary categories (Motoring Retail, Cycling Retail, Consumer Tyres). Zeus PBT estimates are reduced by 24.6% to £37.1m in FY24 and by 32.0% to £40.0m in FY25, within the new guidance ranges. Due to this, our average valuation estimate has decreased from 223p per share to 193p. Eventually, though, markets such as Cycling Retail and Consumer Tyres should recover to pre-Covid levels, with Halfords

Halfords (HFD LN) - Initiation of coverage

Halfords is a household name for its motoring and cycling products retail business, but the Group has a growing focus on high-margin services (i.e. autocentres) and is in the early stages of selling its technology platform globally to automotive service and repair companies.

3Q IMS

Halfords 3Q IMS is in our view positive with PBT forecasts for FY 2020 held at £50-55m and good LFL in Retail cycles +5.9% and Autocentres +4.6% where most of new management development work has been focused. Retail Motoring products LFL -2.7% continues to show impacts of discretionary spend softness in our view. Management retains its caution about near term demand prospects overall and its development programme in Autocentres and key aspects of the business overall (notably new integrated webs

Early encouragement

Following the recent 1H Results we are upgrading our recommendation from Hold to Buy. This reflects valuation, the financial disciplines being brought to bear as the company mitigates difficult trading conditions as it is investing and mainly our view that Halfords is beginning to see the benefits of work to make it more future-ready. The re-launch of the suite of group web sites onto an integrated platform in 4Q should help the improvements to date transition from AutoCentres to the Retail busi

Div cut signalled but strategic pivot

Halfords (HFD) has reported 1H PBT of £25.9m against consensus of £22.8m (1H 2018/19 £30.5m) – all numbers pre IFRS 16. It has also maintained current year profit guidance, indicated investment related reduction to consensus for FY 21 and announced that it will cut the full year dividend and re-base FY 21 dividend to 12p.

Reaction

Weaker than previously expected sales in the main Retail business (c85% of Group sales) have resulted in current year profit guidance of “broadly unchanged” being reduced by the company to a range of £50-55m (2018/19 £58m). As the market consensus had moved down to £55m this is effectively a 5% reduction to market consensus which should be seen as positive in our view given market fears.

New Numbers

We are quite tempted to Buy HFD. In our view some of the modernisation stories being worked on in the background are seeing encouraging early results and the aim to move the business onto more of a customerrelationship model is beginning to bear fruit. The forecast reduction guided by the company today – from flat yoy to £50- 55m PBT (£58.8m 2018/19) – suggests that there is still risk in taking that course. But we believe that when we see the Interim results it will become more evident that man

Year of Defence to Come

This note is briefly to update forecasts and Valuation. We found the Prelims, the accompanying analyst meetings and our own discussions with the new management team more positive than we had expected. The current year will be characterised by a major upgrade to online systems alongside running the business as defensively as possible to counter anticipated volatile (and likely weak) demand. This combination may prove relatively benign to the success of the systems piece as it will not have to be

Initial Reaction

In the circumstances of weak and volatile trading we believe that the new management team has done a decent job of managing what was reasonably under its control over the latter part of the year. Strategic changes now have to be balanced against tactical defensive decisions which will limit visibility of recovery potential in the near term.

More strategising and pushing out profit recovery

The problem with new CEOs is that they always feel the need to make their mark on the businesses they have arrived to manage. That’s good if the business is broken and more questionable where it is not. Conceptually we find it difficult to argue with the logic of increasing the service elements of the business, upping own label participation from 50% to 60% over 3-5 years and integrating the online/offline/Retail/Autocentres businesses. But we expect this will be a tougher job than management ex

Morning Song

Clinigen Group (CLIN LN) FY results in line, further acquisitions & placing | CVS Group (CVSG LN) Reassuring tenor to FY18 finals | Halfords Group (HFD LN) New strategic vision launched to build on existing strengths | Itaconix (ITX LN) Focused on commercial progress following recent fundraise | Maistro (MAIS LN) Momentum continuing to build into H2’18 and beyond | Urban&Civic (UANC LN) Contracting parcels, positive developments towards planning | Vp (VP/ LN) Positive H1 update highlights furthe

Halfords Group - A service-led proposition

Halfords has a compelling, differentiated brand strategy that will help it continue to grow its core Motoring and Cycling market shares. Services remain at the heart of the business and investment in this area is expected to accelerate. With earnings expectations now reset and management outlook understandably cautious, we believe that investor focus will now be on the new CEO’s strategic update in September.

Groundhog day as HFD guides to another flat year

We called the stock wrong ahead of these prelims. Instead of market forecasts being upgraded, fresh guidance has led to downgrades. While frustrating for expectant shareholders, this is not a profit warning but a ‘delay’ in the recovery of lost margin (FX mitigation), and an ‘acceleration’ of investment into services and customer capability which should generate a return in outer years. Pending the new CEO’s strategic update in Sept, though, Halfords growth plans in FY20/FY21 are unclear. Includ

Well positioned for future success

Strong performance against tough market conditions

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