Over the past 12 months, shares in retailer Halfords (LSE: HFD) have kept pace with the FTSE 250, rising 6.5% excluding dividends.
However, today the shares have slumped by more than 13% at the time of writing, undoing all of the gains made over the past year after the firm issued a worrying update.
Time to abandon ship?
It announced that profit would be flat in the current year, held back by several factors. These include a lack of price rises in cycling, currency issues and a step-up in investment in the business.
For the year to the end of March, the firm produced an underlying pre-tax profit of £71.6m, down from £75.4m last year, but in line with City expectations. Turnover for the period increased 3.7% to £1.1bn.
Put simply, Halfords profits are falling, and management does not expect the group to return to growth anytime soon. At a time when the rest of the retail industry is struggling, this is a concerning outlook. What’s more, before today’s warning, shares in the firm were trading at a relatively rich forward P/E of 14, compared to the sector average of 12.
What worries me is that it now looks as if growth has peaked, and the business is going to struggle to return to an upward curve. Indeed, management talking about that lack of price rises in cycling looks to be a tell-tale sign that competitors are aggressively fighting for market share.
There’s no telling how much longer this environment will last or if the business will be able to compete effectively. With this being the case, I’d avoid the retailer for the time being until such time as there is concrete evidence that growth is returning.
Out of favour
Another former FTSE 250 growth darling I am avoiding is Metro Bank (LSE: MTRO).
As one of the fastest growing challenger banks in the UK, shares in Metro currently command a premium valuation of 55 times forward earnings. However, over the past few months, City analysts have started to air their concerns about the state of the group’s balance sheet. Its common equity tier 1 (CET1) ratio, a key benchmark of balance sheet strength, fell from 18.1% at the start of last year to 13.6% at the end of March as management pushed ahead with targets to grow the business substantially. If the bank continues on the current course, one set of analysts is expecting the CET1 ratio to fall to 11.5% by year-end, below the firm’s own minimum of 12%.
These numbers suggest Metro has to make one of two choices, either raise more capital or put the brakes on growth. Neither of these is favourable for investors. A capital raise would dilute existing holders, and if management lowers growth targets, the market might reconsider the lofty growth valuation it has awarded the bank.
As it is unclear which route management will take, I believe it might be best to avoid the bank for the time being, or at least until there’s more clarity on its outlook.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.