Halfords slams brakes on profit growth

Halfords has emerged from three years of investment a stronger business operating in lucrative markets. It is, but the bikes-to-car parts chain admits "the job is not yet done". That's more than evident, following another slump in the share price just two months after a damaging profits warning.

Poor weather was blamed for deterring the casual cyclist when Halfords last updated in September, and sales in July and August were certainly weak. Cycling like-for-like revenue fell by 2.9% for the half, and 7.6%, for the second quarter. Admittedly, most of the cycle slump happened in the four weeks to mid-August, but it was bad enough to trigger a 5.9% slump in group underlying pre-tax profit to £46.4 million. Analysts had wanted over £47 million.

Halford's new strategy "Moving up a Gear" - the sequel to its "Getting into Gear" initiative - is very customer-focused, aiming to "maximise the lifetime customer value" and improve efficiency. But it won’t come cheap: about £100 million over three years and front-end weighted. About £5-10 million will be spent on growing the Autocentres division, too.

In all, capital expenditure over the next few years will come in at £30-40 million per annum. The national living wage, meanwhile, will cost Halfords £2 million in 2017.

Run those numbers through the wringer and profits are expected to be flat next year. Investec analyst Kate Calvert cuts her forecast for underlying pre-tax profit in 2016 by 2.2% to £82.8 million. They drop by 10% for the following year to £82.9 million.

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"Under the new strategy we will continue to invest to move from fixing the basics to enabling sustainable growth," said chief executive Jill McDonald. "There are a number of significant opportunities for further improvement, which include the leveraging of customer data and analytics, relentless innovation, a better shopping experience, enhanced customer service and services, and a fulfilment infrastructure for modern times."

Falling 10% to 388p on Thursday, Halfords' shares sit at a two-year low. The relative strength index (see chart RSI) suggests the shares may be temporarily oversold, and a forward PE ratio of 11 times, a big discount to the sector, looks undemanding. The dividend goes up 3% to 5.7p, too. However, we know profits will be flat and there is execution risk here, plus a possibility of future slip-ups. A further trading update, normally in January, will tell us whether a new range of Star Wars and Frozen-themed kid's bikes and accessories sold well over Christmas.

Calvert downgrades her target price by 12% to 510p.

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