Halfords has produced another excellent set of results, defying the gloom and doom hanging over the rest of the retail sector. Its shares look inexpensive too.
Over the last bank holiday weekend, we visited our local Halfords
(LSE: HFD)
to get a sat nav. It's always dangerous to leap to conclusions based upon one visit but the store was buzzing with activity and there was a fair old queue at the counter. So I wasn't that surprised to see that Halfords' results this morning beat expectations across the board. In short sales were up 7%, profits by 8% and dividends by 9%.
A century of growth
Halfords has been around for over 100 years and now has a total of 430 stores in the UK. It's been a major retailer for decades, having opened its 300th store way back in the 1960s. After losing its independence it was bought by Burmah, Ward White and then Boots before finally being listed on the stock market at 260p per share just four years ago.
Being released from Boots seems to have given the company a new lease of life. Sales have grown by almost 40% since to nearly £800m and operating profits have now exceeded the £100m level for the first time. Investment in its stores, such as adding a mezzanine level in its major outlets, has allowed it add a significant amount of selling space at a very low cost.
Although its traditional market of car maintenance products isn't providing much in the way of growth it brings in a regular stream of customers for its other two divisions, namely car enhancement (sat navs, car seats etc) and leisure (bikes, tents etc). Adding basic fitting and repair services has also worked well, and the new online reserve and collect service is said to have got off to a good start.
Moving overseas
Halfords has started to make tentative moves to expand internationally. In the Republic of Ireland it now has 17 stores. Previously it saw the potential for 20 in total but, buoyed by results to date, its target has been revised upwards to 25.
Eastern Europe is another new area where Halfords has an interest. Three stores have been opened in the Czech Republic in the past year and Halfords intends to at least double its presence there in the next twelve months. The first Polish store is due to be opened later this year. The size of the opportunity in Eastern Europe is a little unclear but there was talk a while ago of up to 150 stores. One thing you can guarantee is that cars will need repairing wherever you are in the world!
Closer to home, Halfords sees scope for about 100 more stores in the UK and plans to open in the region of 15 to 20 a year. It also has five Bikehut outlets and sees the potential for a nationwide chain of 50 stores.
The figures
Funding this growth shouldn't prove too problematic. Halfords net debt is currently £182m and has been at this level for the past few years. As well as its ongoing expansion programme, it has also spent £69m over the last two years buying back its shares. Although share buybacks aren't to everyone's taste, Halfords hasn't been as profligate as many other companies in this regard. The average price it has paid is some 15% higher than the current share price.
Forecasts for next year could be revised upwards given this strong set of results, although there wasn't much detail on how trading has progressed over last couple of months. Shareholders will have to wait until the AGM near the end of July for the next full update.
Taking the existing forecasts, the forward price earnings ratio is a little over the 9 times and predicted dividend yield is 5.7%. The shares have fallen from a peak of just over £4 last summer to their current level of 274p, but this is a relatively mild drop compared with many other retailers.
One unknown at the moment is who will take on the role of chief executive. The previous incumbent, Ian McLeod, left at the end of February to take over the running of Coles, the second largest supermarket chain in Australia. He was only at the helm for three years so it's unclear how crucial he was to Halfords' recent success.
The shares look cheap, although so do so many others at the moment. Yet Halfords is proving far more resilient than most, suggesting its shares should be a decent long-term investment.
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Halfords Pedals Ahead
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