Halfords shares slump to new low

Shares traded a 12% range in little over half an hour in early trade. Why the volatility?

Despite being dubbed "our favourite recovery play" by one City broker, Halfords Group (LSE:HFD) continues to frustrate investors after weaker-than-expected sales kept shares near a record low.

The trouble with the cycling and motoring specialist remains that it's still far too vulnerable to swings in weather or economic conditions, as happened in January when a profits warning wiped out a fifth of its stock market value.

In fairness to CEO Graham Stapleton, he's made strides in the past year to transform Halfords into a services-led business more able to build longer term relationships with customers. And while like-for-like sales declined 3.2% in the first 20 weeks of the financial year, there were some encouraging signs in terms of improved market share in core motoring categories.

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The 3Bs of bulbs, blades and batteries returned to growth, but the performance was still weaker in more expensive categories such as in-car technology. The same trends were seen in cycling, where like-for-like sales were down 1.1% after last year's warm and dry summer.

Stapleton is not expecting any respite from the squeeze on big-ticket discretionary spending in the current half, meaning that profits for the year will be between £50 million and £55 million. This compares with £51 million for the year to March and £67.1 million the year before, with the range of City forecasts before today stretching from £50 million to £59 million.

Despite Stapleton's services-led strategy, shares have now almost halved since he was appointed to the top job at the start of 2018. In the week that Marks & Spencer (LSE:MKS) was given notice of its eviction from the FTSE 100 Index, it's another reminder about the fading stock market influence of some of Britain's best known retail stocks.

Halfords shares fell as much as 6% to a new record low of 162p in early deals today, although this masked a curious and fluctuating performance in which they initially opened 6% stronger. This may well have been due to relief that the company hadn't veered too much from its guidance for similar profits to last year. There was also encouragement from areas such as online and business-to-business.

Source: TradingView Past performance is not a guide to future performance

The update also eased some fears about the dividend, given that Halfords shares currently yield 9.3% based on Liberum's expectations for a 16p pay-out in 2020. An award at this level would still represent a 14% fall year-on-year, despite the retailer's stated target to grow the dividend. It has done so by 3% every year since 2015.

Liberum said today's update showed its dividend forecast safely covered by free cash flow, following a focus by Stapleton on driving working capital and supply chain efficiencies.

His long-term strategy announced last September 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 its 450 Halfords stores and 318 Autocentres.

Describing Halfords as its favourite recovery play, Liberum has a target price of 300p, with the high dividend yield seen as providing investors with "ample reward" until profits rise.

Liberum added: "Halfords has been hit hard this year but this should not cloud the fact that a return to sustainable profit growth is on the horizon.

"We think the group will soon overcome the legacy of the past having invested heavily in the business over the past five years and with a bold, yet very credible strategy under a new senior team, we think an inflection point is in sight."