Recovering Halfords has more in the tank

The shares have bounced again and there's certainly interest ahead of an investor day soon. There could be more to go, reports Graeme Evans.

The stop-start performance of Halfords shares was in evidence again today as an improved summer of trading put the FTSE 250 stock back on the accelerator.

Today's update lifted shares by more than 6%, but whether this heralds the start of a smoother ride for shareholders may well depend on the outcome of a strategic review by new CEO Graham Stapleton on September 27.

His challenge will be to show that Halfords is not only able to ride its way out of recent short-term margin frustrations and back to profit growth, but also deliver on longer-term City hopes for double-digit total shareholder returns.

There's certainly plenty of goodwill heading in Stapleton's direction, given that Halfords boasts an attractive 5% dividend yield and robust balance sheet. The retail segment in which the company operates is also helpfully defensive, based on the needs-driven nature of the car maintenance market.

Stapleton has only been in the job for a few months, but he's already impressed in terms of shoring up the trading side of the business. Today's update offered encouragement with a 2.6% rise in retail like-for-like sales in the 20 weeks to August 17, ahead of the consensus for growth of 1.5%.

The performance was sustained by the motoring segment, with like-for-like growth of 3.8% driven by demand for fitting services, car cleaning products and staycation-related products. In cycling, sales were 0.8% higher as a strong peak summer period offset the impact of poor weather in the spring.

Online sales growth of 11% was also reassuring when so many other traditional retailers have been struggling to compete.

Source: interactive investor            Past performance is not a guide to future performance

Offsetting this progress has been the £40 million hit from the weaker pound since 2016, with any hopes of mitigating this figure recently put back a year while Halfords focuses on margin investment and its service-led proposition.

Investec Securities analyst Kate Calvert expects that this will be a key theme of the upcoming Capital Markets Day, with Stapleton likely to focus on an "evolutionary service-led and digitally-integrated strategy".

She is keen for answers on eight areas, including the shape of the retail portfolio and whether 474 stores is the right number. The cost of modernising the store estate and whether the company is still confident that it can fully mitigate the £40 million FX hit seen since the Brexit vote are among other questions.

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Calvert also wants to know where the investment in service will be spent and when returns should come through, as well as guidance on what a medium-term sustainable margin might look like. 

Her other points cover the longer-term outlook for Halfords Autocentres, which posted 4% like-for-like sales growth today, and the opportunity to drive group efficiencies and leverage IT investment.

Calvert continues to believe that Halfords is capable of delivering double-digit total shareholder returns based on single-digit EPS growth and capital returns.

She has a price target of 370p reflecting a projected price earnings multiple of 11.2x. Calvert said shares failed to take into account strong cash generation, a robust balance sheet and the "defensive, needs-driven nature of its product offer". A return to profit growth should drive a re-rating, she added.