Accident-prone Halfords crashes 28%

It's developed a habit of disappointing investors and, after a decent few weeks, the car parts and bikes retailer has reverted to type. Graeme Evans reports.

Only weeks after unveiling a new strategy, the motoring and cycling retailer Halfords (LSE:HFD) has left income investors wondering whether this high-yielding stock really is able to ride out a pledge to preserve and grow its dividend. 

Shares slumped to a new six-year low at 220p as a profits warning triggered by the mild weather caused the FTSE 250 Index stock to lose a fifth of its value.

The slide represents a rocky start to the ambitions of CEO Graham Stapleton to create a "truly differentiated, service-led super specialist".  His strategy involves upping capital expenditure by £20 million to £60 million a year, alongside a commitment to preserve the dividend and "target to grow it every year".

Halfords has lifted the dividend by 3% every year since the 2015 financial year, reaching 18.03p in 2018. Its forecast dividend yield is currently 6.6%.

Source: TradingView (*)  Past performance is not a guide to future performance

Despite the profits downgrade, Stapleton did his best to reassure investors today as he highlighted that free cash flow for the current financial year will be up on last year.  "This, combined with positive longer-term prospects for the group, gives the board confidence to maintain its dividend policy," Halfords said.

Stapleton admitted, however, that it had been a challenging third quarter for the business, driven by the impact of mild weather on demand for weather-related motoring parts. Like-for-like sales in the retail division were 2.2% lower.

Profits for the 2019 financial year will now be in the range of £58 million and £62 million, which represents a 19% cut to forecasts. Halfords warned investors not to expect a pick up the following year, with 2020 profits likely to be flat on the year before.

Investec Securities analyst Kate Calvert thinks this may prove to be too conservative, given the needs-driven nature of much of Halfords' offer.

She has cut her target share price from 350p to 300p, adding that the current valuation for a projected price/earnings multiple of 11.5x failed to take into account the strength of Halfords' robust cash generation.

JP Morgan Cazenove has a price target of 290p, while continuing to assume the dividend will be held this year due to the uncertain consumer backdrop.

Stapleton said in September that his new long-term strategy involved making Halfords far more focussed on the motoring and cycling categories that the company is already well known for.

This included creating a more convenient, easy to shop and scaled services business across one thousand locations, including its Autocentres. 

Stapleton said:

"We have an exciting future ahead and I am confident that we will become even more relevant to motoring and cycling customers in the future."

Unfortunately, today's update shows that Halfords is far from weather proof. Car maintenance sales were down 4.6% on a year earlier in the 14 weeks to January 4, although they were 0.7% higher across the first 40 weeks of the financial year. 

Cycling sales were 0.3% lower on a comparable basis in the festive quarter, driven by a decline in bigger-ticket adult bikes.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.