A pragmatic perspective from Hargreaves7 Jul 2020 16:36
Halfords is in a better position than many retailers. Its "essential" status means it continued to trade throughout the lockdown, keeping revenue relatively healthy. However, it would be a mistake to assume that profits are coming along for the ride.
Not only are shops operating at lower capacity, but a large chunk of revenues depends on customers' discretionary spending. A gloomy economic outlook means people are already spending less on higher margin gadgets and gizmos for their cars, and growth will be harder to come by in the current financial year.
We're also mindful disruption means Halfords has applied the brakes to its strategic turnaround. The plan aims to boost services and upskill the workforce, allowing the group to capitalise on what its online competitors can't offer - face-to-face service. We understand the need to reallocate cash to more essential areas while the climate is so tricky, but it is a shame. With lacklustre sales already a problem before the outbreak, we're going to have to wait even longer for top-line rejuvenation.
There's reason to be hopeful where the online business is concerned. Over 80% of online orders are collected in store, so online sales tend to complement physical stores rather than cannibalising them. The website now accounts for almost a quarter of all sales too, which we think is a step in the right direction.
There's also a big growth opportunity where cycling's concerned. The group's benefitted from a surge in bike demand since lockdowns began, and it's a category that will always favour a visit to a physical shop, where you can talk to a knowledgeable store assistant. At the moment this is a lower margin category compared to Motoring goods, but we view this as a profit-boosting opportunity over the longer-term.
The balance sheet is in reasonable health too. With net debt less than a year's cash profits at the last count we don't have immediate concerns over Halfords' liquidity. Remember though, if trading is worse than planned and cash flow is squeezed, it won't take long to burn through the newly drawn credit.
Overall Halfords is starting from a far sturdier base than peers, and its end markets have shown considerable resilience so far. However, from here it will need to focus on how to get the top line moving again, and how to best prepare for a real squeeze in discretionary spending. While we think Halfords has a lot of the right ideas and some great opportunities, we'll need to see some evidence of strong execution this year before turning more positive.
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