The Motley Fool

Will a no-deal Brexit mean the end for Halfords?

As a recreational cyclist, I like Halfords (LSE:HFD). For bikes and accessories, it’s got a good range, reasonable prices and plenty of gear for children. However, I’ve always found its customer service to be slow or lacking enthusiasm.

I recently booked a bike into my local Halfords for repair and was told I’d have to wait a month because the technician was going on holiday. Whether that’s down to a lack of staff or demand for repairs I’m not sure, but considering many families make cycling a priority in the summer holidays, it’s a poor example of customer service at a time of the year I’d expect to be their busiest.

Customer service is just one challenge facing the firm, so how do I think it will fare in the event of the biggest challenge of all, a no-deal Brexit?

The share price has taken a hammering in the past year, dropping 45%, while pre-tax profit fell by 24% to £51m last year. Its trailing price-to-earnings ratio is just 8.4.

Buy on the dip?

Like other UK retailers, it has issued several profit warnings (three in 20 months), despite having a 19% share of the £2bn-and-growing UK market. Growth in this market is predicted at 3%.

Its share for car products and related fitting is 20% of a £3bn market, and car servicing is 2% of a £9bn market, both with forecast 2% growth. I consider none of these annual growth projections high.

The firm’s margins have fallen from an operating profit margin of 8.8% in 2013 to 5.4% today but despite all the doom and gloom (and maybe because of it), the firm has an incredible dividend yield of 13.4%. 

Rocky descent ahead?

With the apparent increase in recreational road cycling and mountain biking, its increase in service offerings and cycle maintenance plans, I feel this retailer should have great potential. However, appearances can deceive and although it may appear that our roads are full of cyclists and everyone is taking to two wheels to meet their weekly fitness targets, this is not reflected in profits.

So why is that and where does Brexit come in? Most UK bikes are manufactured abroad, and reliance on foreign shipments could drastically affect Halfords’ pricing in a no-deal Brexit, adding import duties and other shocks to an already slim profit margin.

Evans cycles narrowly avoided administration before Sports Direct bought it last year, Halfords considered rescuing it but halted and probably doesn’t regret that decision as half of Evans stores are facing closure. Cycle surgery, a smaller rival, also closed stores and small independent stores don’t stay open for long. At least two in my local area have closed after a short time trading.

Brexit is partly to blame, but e-commerce also plays a part, as keen cyclists echo the rest of the population and are migrating online in large numbers.

So, will a no-deal Brexit mean the end for Halfords? I would be shocked if it goes under, but I think scaling down or restructuring is a possibility. As enticing as its low share price and tempting dividend are, I’m still wary of the damage Brexit could do. I’ll be keeping it on my watch list but won’t buy for now.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

Kirsteen has no position in any of the shares 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.