29th Nov 2023 16:57
(Alliance News) - The wheels came off shares in Halfords on Wednesday after it lowered its sights for full-year profit amid softer demand for big ticket items.
The Worcestershire-based motoring and cycling products retailer now expects underlying pre-tax profit for the year ending March 2024 will fall within a narrower range of GBP48 million to GBP53 million, compared to the GBP48 million to GBP58 million previously forecast.
"Trading patterns have been volatile across the first half of the year, and in the last couple of months we have seen some market softening in our discretionary big-ticket categories, which has been reflected in slower [like-for-like] sales growth," the company said in a statement.
Shares fell 18% to 187.60 pence in London on Wednesday.
Peel Hunt said while there was plenty to be "impressed by, strategically and tactically," the problem is that "hardly any of the broader markets have lived up to the growth expectations set out in the summer, so profit is becalmed."
The broker has lowered financial 2024 pretax profit forecasts by GBP5 million to GBP50 million and taken GBP10 million off each of the outer years.
"We sense this could be too cautious," Peel Hunt analysts said, adding conditions could "hardly be any more difficult for Halfords, especially in tyres and bikes."
It felt the downgrades were "unfortunate rather than careless, and we urge investors to look at the glass half full, as we see value here."
"It may take the consumer perking up for it to emerge, but we are sure it will," the broker added.
Russ Mould at AJ Bell pointed out the warning comes less than a fortnight since takeover talk surrounded Halfords and certainly changes the narrative.
"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. The share price has understandably taken a beating," he said.
Mould questioned whether cycling had a long-term future within the business. "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," he pointed out.
"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," he explained.
He believes 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," he said.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown agreed with Mould on the importance of the motor repair business to Halfords.
He felt the shift towards more reliable service-based revenue is one that should be "applauded, and the strategy looks to be paying off."
Revenue is being driven higher by its autocentres business, where needs-based categories are delivering very strong growth.
"Car servicing or a new battery isn't negotiable, so it's encouraging to see almost half of total revenue now coming from the group's robust services offerings," he pointed out.
But Chiekrie noted for all the positives around the growing autocentres division, a lack of skilled labour has been holding back progress to some extent. That has made it more difficult to service demand and could limit the group's ability to carry out more complex and lucrative work, he suggested.
By Jeremy Cutler, Alliance News reporter
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