Halfords pounded for currency threat

There were things to like in Halfords' full-year results. Boss Jill McDonald talked about market share growth, better cycling sales in the second half, and a tenth consecutive quarter of like-for-like sales growth in the Autocentres business. But the strong dollar looks like putting a hole in previous profit guidance and the hoped-for special dividend has not yet materialised.

Including restructuring costs, pre-tax profit fell 1.2% to £79.8 million in the year to 1 April, and cycling sales were hit by a wet summer and heavy discounting among rivals. However, bike sales returned to growth both in the third and fourth quarters, and underlying pre-tax profit of £81.5 million was up a fraction on last year and 2% better than consensus of £79.7 million.

Like-for-like sales at the retail division rose 1.3% and a 1% dip in profit there was still better than feared. Sales growth of 2.5% at the Autocentres business was decent, too.

However, expectation that US interest rates will rise sooner and faster than elsewhere, plus major concerns about the impact of Brexit on sterling, have strengthened the greenback. That's bad news for Halfords, which buys goods worth around £200 million, only half of which is hedged.

Guidance given last November for pre-tax profit to remain "broadly unchanged" in 2016/17 was based on a US Dollar exchange rate of $1.50. It's currently $1.45 and has been as low as $1.40 this financial year. Every 5-cent move is a £3 million hit to profit.

It's why Halfords' share price is down as much as 5.6% Wednesday, handing back all the gains of the past two weeks. It matters not to technical analyst Alistair Strang, however.

Alistair told us that a "trade was brewing" at Halfords, precisely as the last leg of the rally began. "There's a heck of a strong argument favouring 445p on the immediate price cycle," he said. Within a week the price had hit 447p before topping out a few pence higher.

Much to do

Clearly, Halfords has much to do, and it's working on reversing a decline in sales of parts, accessories and clothing. The improvement in cycling sales is encouraging and the opportunity to return excess cash to shareholders is still very much a possibility.

Halfords targets a net debt/cash profit ratio of 1 times, with flexibility to 1.5 times "for appropriate Mergers and Acquisitions". Whatever's left could end up in shareholders' pockets. Remember, this is still speculative, but the ordinary dividend still offers a prospective yield of more than 4%.

Currency issues have forced Investec Securities to cut forecasts for 2017 by 4.5% to £80.1 million, giving earnings per share of 32.8p. That puts Halfords on a forward price/earnings (PE) ratio of 12.7 times, still a big discount to peers and below the long-run sector average PE of around 14 times.

Before a sustainable bounce-back gets underway, further evidence of stability in cycles and growth in autos may be required in a first-quarter trading update slated for 14 July.

"The development of a deeper customer relationship based strategy is interesting and could change the investment characteristics if it can be successfully executed," admits Haitong Securities retail analyst Tony Shiret.

"Investors may pay a premium for this to look through current year flat-slightly down eps. But the current valuation looks appropriate to us."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.