Interactive Investor

Halfords warning causes share price crash

16th June 2022 12:51

Graeme Evans from interactive investor

Halfords is a high quality business but gloomy guidance on profits has triggered downgrades in the City. 

Praise for a revamped Halfords Group (LSE:HFD) counted for little today as shares veered to their lowest level in almost two years amid a fresh bout of heavy selling across the retail sector.

Annual results from the motoring services and bicycles retailer showed the fruits of a strategic overhaul, although for City investors the only focus was on the external picture as Halfords warned of reduced demand for higher ticket items and of significant cost inflation.

Halfords said forecasts were particularly challenging to make but “based on what we see today” it now expects underlying profits to be in the range of £65 million and £75 million. That compares with the £89.8 million reported today.

Shares were down 39.4p by lunchtime, which at 158p means the stock is back to where it was in the early days of its turnaround strategy in the pandemic-hit summer of 2020.

That’s despite a shift to make Halfords a stronger and more resilient business by focusing on “higher, more predictable and more sustainable” returns in motoring services.

The recent acquisitions of National and Iverson Tyres means motoring now accounts for over 70% of total revenue, with products and services in this category tending to be needs-based rather than discretionary.

Electric forms of transport are also increasingly important to Halfords after sales of e-bikes, e-scooters and accessories rose by 74% over two years ago and servicing for electric cars in its garages jumped 140% year-on-year.

Chief executive Graham Stapleton said leadership positions in both motoring and cycling meant Halfords should emerge from the downturn in “a relatively stronger position.”

Despite his optimism, the 2023 profits guidance came in 15% below City forecasts while a lack of near-term catalysts also contributed to a series of downgrades today.

The FTSE All-Share stock has already de-rated materially since the highs of July 2021, leaving it on seven times earnings. Broker Liberum removed its “buy” recommendation and slashed its price target from 410p to 160p following today’s results.

Liberum analyst Adam Tomlinson said: “We acknowledge the progress with the service-led strategy, the growing mix of defensive and higher margin revenues and stronger net cash which will support M&A in garages and a solid dividend.

“That said, against the current market backdrop and outlook, we think Halfords sits in the ‘high quality, but limited near-term catalysts’ basket.”

Peel Hunt also downgraded from 525p to 350p but notes that a single-digit earnings multiple for a market leader like Halfords looked to be “very good value”.

The broker said: “There is a lot to like about what is going on at Halfords. Many strategic developments are bearing fruit and market share is rising.

“However, Halfords is not immune to the gravity applied by the wider consumer malaise and cycling has been especially sticky of late.”

With interest rates rising and household budgets increasingly squeezed ahead of what looks set to be a tough winter, investors took the opportunity to dump retail shares today.

Sentiment wasn’t helped by fast fashion retailer ASOS (LSE:ASC) reporting a significant increase in returns rates as shopping behaviour changes in the face of inflationary pressures.

Its profits warning left shares below where they were before their pandemic boost and at their lowest in more than a decade at 821.5p, having fallen by 335.5p today.

Rival operator Boohoo Group (LSE:BOO), which reported its first drop in UK sales today, fell 9.4p to a level last seen in 2016 at 55p as the sector’s once lofty valuations continue to unravel.

Retailers also dominated the FTSE 100 fallers board, despite relief that the Bank of England had resisted pressure to raise interest rates by half a percentage point. Big fallers included Next (LSE:NXT), which dropped 332p to 5710p, its lowest level since August 2020.

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