Freewheeling downhill, it is easy to pick up speed (in a bad way). That seems to be the case for car parts and cycle retailer Halfords (LSE: HFD). The Halfords share price has fallen 54% over the past year.
So does that make the company a bargain I ought to add to my shopping list?
What I like about the business
In general I like the business model of specialist retailers, whether they focus on cycling gear, angling supplies or power tools. For some purchases, customers like the ability to speak to someone who can advise them on different options. Having made the purchase, they will often go back to the same retailer in future if they want accessories, or to upgrade their kit.
That is how I see the business model at Halfords both for motorists and cyclists. Indeed, I think the cycling market in particular will keep growing. The National Cycle Network covered over 12,000 miles in 2020, after more than doubling in size over just 15 years. I expect continued cycle path expansion, high fuel costs and health benefits to mean the number of cyclists keeps increasing.
Why has the Halfords share price fallen?
Given that, why has the Halfords share price been stuck in the wrong gear?
It is worth noting that what looks like a big fall in the past year simply unwinds a lot of the increase seen during the pandemic when cycling became especially popular. In fact, the Halfords share price today is within a few pence of where it began 2020.
More specifically though, the company issued a profit warning last month. Alongside its results for last year, Halfords said that profits before tax for the current 12-month period are expected to come in at £65m-£75m. Compared to £97m for last year, that is quite a big step down.
Like-for-like cycling revenues last year fell by a quarter compared to the prior 12 months. But they were still well ahead of 2020. So although 2021 may have been exceptional, I think the uplift to Halfords’ cycling business we saw in 2020 may be here to stay. Meanwhile, both the motoring retail and autocentres divisions showed strong revenue growth last year.
Health of the business
However, while profits are expected to slide significantly this year, I do wonder whether the share price fall has been overdone. Last year, profits before tax grew almost 50%. So the baseline is high.
Meanwhile, the company is clearly performing well in many ways. 2022 revenue of £1.4bn was 6% higher than the previous year, which was itself very strong. Cost inflation is a risk to profits, but I expect the company to manage inflation in the long term by pushing up prices.
Valuation
At the moment, Halfords has a market capitalisation of £375m. Even if profits this year come in at the bottom end of the company’s expectations, that means the prospective price-to-earnings ratio is in the mid-single-digits.
Net debt at the end of last year was £345m, which is higher than I would like. There is a risk that servicing debt will eat heavily into profits.
However, I reckon the shares offer good long-term value and would consider purchasing them for my portfolio.
