Is it safe to invest in retail shares after the coronavirus pandemic? I think so, as long as you choose carefully. Today, I want to look at a UK share from the retail sector which I think could deliver attractive growth and income over the coming years.
A surprise winner
Back in March, investors took a dim view of Halfords Group (LSE: HFD). Halfords’ share price sunk to a low of 49p at one point, down 71% from 170p at the start of 2020.
How things change. Halfords has emerged as a pandemic winner and this well-known UK share is now up by around 5% this year. This week’s half-year trading update received a mixed reception, but I think Halfords has the potential to deliver further gains for shareholders.
As I’ll explain, I also think there are a few things we can learn from Halfords’ success that could help us spot other potential winners.
Ingredients for success
With customers stuck at home for months and keen to avoid public transport, Halfords’ focus on cycling has worked well. Although motoring revenue fell by 28% during the first half, cycling sales rose by an impressive 59%. This offset lower motoring revenues, boosting sales for the whole group by 7.5%.
The company also seems to have benefited from its focus on out-of-town retail park stores. Reports suggest that shoppers are returning to retail parks — which they can drive to — more quickly than traditional high streets and shopping centres.
Finally, investment in an upgraded online platform has also paid off. I think there’s been some lucky timing here, but there’s no doubt it worked. The company says e-commerce sales rose by 160% during the first half of its financial year.
Why I’d buy this UK share
Halfords’ adjusted pre-tax profit for the first half of the year is now expected to be £35m-£40m, which is ahead of the £25.9m reported for the same period last year.
However, the company warns that the outlook for the second half of the year is very uncertain. Profits could be “significantly lower” as demand for cycling and staycation products like roof racks falls sharply in winter.
The company reported net cash of £105m on 21 August. This gives me confidence it will be able to survive the second half of the year, however bad trading might be. Given this, I think it makes sense to look beyond this year and focus on the medium-term outlook for this UK share.
Chief executive Graham Stapleton aims to improve the profitability of the cycling business while expanding Halfords’ more profitable car servicing and repair operations. Stapleton believes the fragmented nature of the UK car repair market presents a big opportunity, as do new product areas such as electric mobility.
I can’t argue with this, although I think this year’s staycation boost is unlikely to be repeated in 2021. However, City brokers covering the stock do have a positive outlook on next year. They’re forecasting earnings of 19p per share for 2021/22, with a dividend payout of 7.3p.
That prices the stock at 9.5 times forecast earnings, with a dividend yield of 4%. Based on the strong progress Stapleton has made so far, I think Halfords continues to deserve a buy rating.
