There were few surprises in these results, but repairing this tired business will take time.
Plans by Halfords (LSE:HFD) to deflate its prized dividend served up another blow for investors today at a time when shares in the retail chain are already stuck at a record low.
The rebasing of the annual pay-out to 12p in the 2020/21 financial year will enable the company to siphon more cash towards investment, as CEO Graham Stapleton looks to accelerate the transformation of the car parts and cycles retailer into a services-led business.
While his strategy has plenty of support in the City, trading progress has been thwarted by weather and economic conditions, particularly the drop-off in demand for big-ticket items.
This has left the share price at a record low of 152p, compared with 350p at the start of 2018. Today's half-year results highlighted the ongoing pressure, with like-for-like sales down 2.4% and underlying earnings per share off 16% to 10.4p.
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Stapleton said the period had still served up a number of positives, including an increased gross margin of 50.1% and tight control over costs. Over the medium-term, he said he expects service-related sales to double as a percentage of group revenues.
"We are clear that our service-led strategy is the right one for Halfords. Our unique position, growing services business and positive macro-customer trends, gives us confidence that this is the right time to accelerate investment."
This strategy will come at the expense of the chunky dividend, which absorbed £24.4 million of funds in the previous financial year. Today's interim payment was kept at 6.18p a share but May's award will be reduced to 8p for a total of 14.18p, compared with 18.57p the year before.
Halfords said it remained highly cash generative, which should support the re-set dividend of 12p for 2021 and beyond. The cut won't come as a huge surprise to investors, given that the stock currently yields in the region of 12%, or 8% based on the 12p 2021 award.
Analysts at Investec reckon that Halfords' cash generation and strategic options continue to be undervalued by the market, although with profit recovery now likely to take longer they reduced their price target to 205p from 300p today. The broker's 2021 profit forecast has also been cut by 10% to reflect increased service investment.
Halfords, however, is sticking by its previous guidance for the current financial year of profits between £50 million and £55 million. Sales trends also returned to growth in the final six weeks of the half-year, helped in part by motoring services.
The group said the total number of service jobs increased by 12% in the period, with nearly 40% of the 3Bs of bulbs, blades and batteries sold fitted to customers' cars. Halfords said:
"This continues to reflect the increasing relevance of our services proposition to the growing proportion of 'do-it-for-me' customers."
Other parts of Stapleton's long-term strategy announced in September 2018 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 448 Halfords stores and 317 Autocentres.
Halfords accelerated the growth of the Autocentres business today with the acquisition of McConechy's Tyre Service. It is one of the UK's leading garage chains, with 60 sites and 100 vans covering Scotland and the North of England.
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