The definition of the word ‘essential’ has taken on a whole new meaning in these turbulent times. The Covid-19 pandemic has seen the government enforce a lockdown which has resulted in the closure of non-essential shops. Controversially, Mike Ashley, the infamous Sports Direct mogul, attempted to position his sports equipment and clothing store as essential.
Halfords (LSE:HFD) is a business that has been designated as essential by the government. At the time of writing, the business is open.
Update and response to Covid-19
Yesterday morning, Halfords provided a trading update in the wake of the Covid-19 pandemic and prior to its full-year results which are expected soon.
One of the first takeaways for me was the suspension of its dividend, a move that many companies are making. The suspension will result in a cash saving of £24m for Halfords. This will shore up its balance sheet for the forecasted 25% drop in sales amid the pandemic. It’s savvy move in the face of such adversity, in my opinion.
Halfords anticipates a sharp drop in sales of around £300m following government measures being tightened. Profitability will be impacted, and underlying profit before tax for 2020 could be at the lower end or below the current guidance range of £50m to £55m.
The retailer plans to take full advantage of Chancellor Rishi Sunak’s stimulus package, including business rate relief for the full year, saving it approximately £26m. Halfords also plans to access government support on salary payments where any stores are forced to close.
Halfords has access to a £180m revolving credit facility and a £20m overdraft facility. It has drawn down on the revolving credit facility and has around £118m of cash on deposit. Halfords remains confident that it can operate within its existing debt facilities.
I am always cautious when it comes to companies actively using credit facilities. However in these uncertain times, needs must. I am not overly concerned with this as the business remains open. Despite lack of footfall, an online presence will still see some form of revenue coming in.
Halfords is also responsible for maintaining some very important vehicle fleets, including those of the MoD. That means we can expect a certain stream of revenue to keep flowing. I believe this gives it the edge over peers who have been forced to shut down completely.
Posting profits for the previous consecutive five years, the business remains profitable. The dividend per share has also increased year on year for the past five years. This has been an increase of almost 20% across this period. The current price-to-earnings ratio stands at almost 3, which I do not think will be an issue longer term.
I see Halfords as a potential long-term opportunity that may cause short-term pain. If you are patient, it could be a good growth pick. The shares are relatively cheap right now at less than 100p a share. They surged 56% in the morning trading yesterday after its update.
At this point it may be worth taking a chance on a cheap share that has a strong record of profitability. As always though, in a market crash there is risk involved. I believe patience is the key word in this particular situation.
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Jabran Khan 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.