Stock Brief - Halfords (LON:HFD)

1st Nov '21 by Keelan Cooper

16 comments 3292 reads

After a stellar 2020 (FY21), the UK’s largest bicycle and motoring parts retailer, Halfords, has seen its fortunes take a turn for the worse. Whilst the lockdowns led to a significant rise in the demand for bikes, and the travel restrictions a notable increase in the demand for spare car parts necessary for domestic travel, the company is now suffering from some post-lockdown headwinds.

h-d-M27dmaEHmsKi0nb1NFzxLVv9StAsiTa8C0IehhUb6NBRokSvKyiPC8HwP-l7iVKK7uA6RilMv2u9Ac1nBZmKq7knzS1-4Ur4v6tBo-7-Uz7EGEIH1lfkUdyziLxVS9A0U_o1

Source: Halfords website (The Investment Case pdf)

Halfords managed to generate £96.3 million in profits before tax last year, being a clear beneficiary of the government's granting of ‘essential’ status for its shops during lockdown and the subsequent unprecedented demand for its products & services.

However, in the company’s most recent trading update it announced that despite a strong start to the year, the trading environment was ‘challenging’. This has been primarily due to global supply chain issues, which have had a notable impact on the group’s cycling division.

Since reaching a high of £4.35 a share last summer, the shares have fallen over 36% despite upbeat comments from management about prospects for the next year. Trading on a forward price to earnings ratio of 8.5, does Halfords represent an interesting contrarian opportunity?

Profile

What are the company's principal business activities, how does it generate its revenues?

With 404 retail stores, 3 performance cycling stores, 374 garages, 143 ‘Mobile Expert’ vans and 185 commercial vans, Halford’s is the market leader in the UK for cycling and motoring products and services. The company currently holds around a 20-25% market share in its respective markets.

U2WFP6a3Vx8gJstJDsQiPIch4bxbWrc-L_LCbkEF6MrVoh0MVRJMFXkV4r_jDgQGYu1TGe04r9hzWAJIjcmLgdNC-HeW-hMd7U2LQ31EJydHJfUXMVRpoyt__8QBHeotG0mfk_DC

On the product side, Halfords offers Mainstream Cycling, Performance Cycling and Motoring Products. In 2020, the company saw sales of electric bikes, e-scooters, performance bicycles and traditional bicycles soar as people took to bikes during lockdown.

When it comes to services, Halfords is a specialist in not just Retail Cycling, but also car servicing and aftercare through its Autocentres/Mobile Experts and Retail Motoring divisions.

Halfords currently derives the majority of its revenues from mainstream cycling division (33%), whilst motoring products comes in at a close second (32%). However, the company’s fastest growing division over the last few years has been its services offering, in particular its Autocentres Mobile Expert services, which have proven…

Unlock with Email

Unlock with Google

Already have an account?
Login here

willhampson

1st Nov '21

Excellent overview, thank you very much. Not much I can add, but I would suggest that a further longer term catalyst is potential traction for its Avayler software (see the RNS from 13 July 2021, announcing the first large conglomerate take-up). If this does gain traction and the market starts valuing Halfords (LON:HFD) as a software company or at least less of a bog standard bricks and mortar entity then there is very substantial upside here. I also expect HFD to be bought if this rerate doesn't happen in the next 1-2 years. Talking my own book as I hold so take what I say with that in my mind. All the best, Will

Caper4

Great overview . I am a long term holder of this company and have bought more today. It represents superb value at this price .

Momoko Miyamoto

Halfords (LON:HFD) was a lockdown winner, thanks to many people stuck in the UK deperate to buy cycles, bike racks, roof boxes and other accessories for their staycations. However these items are not recurring purchases for most and sales volume and profit margins will likely not be repeated anytime soon. The costs of manufacturing and shipping these products have also increased significantly. The accelerating shift to electric cars is also negative for the servicing business as they require less maintenance and parts (although wear tyres faster). Virtually everything in a Halfords shop is available cheaper online e.g. Amazon, Aliexpress, Ebay. The only reason to go to a shop is urgency.

BnB

I'm not sure I see long term value at all in a business whose CAGR over the current 3 years of forecasts is barely 1%. Possibly a good trade though since expectations are low.

gus 1065

Is anyone here a regular customer of Halfords? I bought my first bicycle there in about 1981 and having found what I thought was a minor problem with the bottom bracket took it to the local bike shop that identified about 30 faults, three of which were potentially life threatening. Not sure much has changed over the years, Have been in again from time to time but found it a pretty soulless experience - large warehouse with few staff not especially interested in offering any form service and pretty difficult even if you know what you’re looking for to find the right item (whereas it takes a few clicks on a decent internet site). I wonder how many customers go there to browse for the pleasurable retail experience and of those that do how many go back a second time? Hard for me to look beyond this poor impression to consider becoming a shareholder.

Gus.

Rusty2

It’s not always cheaper onAmazon, I know who bought some car polish on Amazon for about £45, I looked on Halfords and the same product was only £20. Some people assume Amazon is cheap, it is often not, I find it quite expensive. Ali express comes from China, good luck with returns and refunds.

You’re correct about Aliexpress returns but prices for items such as cycling accessories can be as little as a third of Halfords retail prices. Halfords also continue to sell e-scooters which are still illegal to use on public roads and pavements. I’ve come across riders who have sustained serious injuries using these and police are increasingly confiscating them, I think it unlikely they will become legal for public use in the UK. I enjoy visiting Halfords for a browse but rarely end up buying anything (due to prices, limited range and quality) and the stores are usually virtually empty. I held some shares last year as a COVID/lockdown trade but am bearish now even before considering the shipping and production inflation.

Zoiberg

2nd Nov '21

Apologies, but I'm having difficulty getting my head around what you are saying. As I see it you bought a bicycle forty years ago in Halfords . At that time you took it to a bicycle 'expert' who identified 30 faults, 3 of which were life threatening.

For starters could you identify the three 'life threatening' faults.

A bicycle is a pretty simple device so why did you not see some of the other 27 faults for yourself?

Hi Zoiberg.

I was about 15 at the time and didn’t know much about bikes (obviously). From memory the issues related to the brake pads being set up/aligned wrong, the headset was installed incorrectly (put in upside down) and the rear wheel had a split in it from metal fatigue that could have collapsed while riding. So apart from not stopping, not steering and being at risk of falling apart when ridden it was fine. Much of their stuff is better sourced nowadays (Boardman bikes have a good reputation) but in much of the cycling world Halfords have a pretty poor reputation for the quality (and safety) of some of their kit and in house servicing capabilities. Agree bikes are only part of their offering but it doesn’t fill me with confidence about their other business lines hence my question about other customers’ experiences.

jonathanrix

Double digit growth on a 1 & 2 year view indicates a strong strategy against this backdrop. COVID boosted some of that growth but also stripped some away; more people cycling / supply chain issues; as the table in the analysis shows.

I like the strategic acquisition to expand geographic coverage, market share and increase outlets.Especially as it was an affordable acquisition and not burdened the company with debt. Given the fragmented market, it would be good to see more of this in coming years.

Financials and fundamentals are strong in my view: good Rev growth, acceptable net gearing, good free cash flow, double digit ROCE and nice cash pile. Would like to see margins increase up to the 8-10% range but that may come once the growth part of the strategy is embedded and synergies flow through.

I’m a current shareholder and will continue to add if the market presents a nicer entry point. Halfords (LON:HFD)

I bought an ex display carbon fibre Boardman road bike from a local branch of Halfords 2 years ago and had to sign a disclaimer to take it away that day as the on duty bike mechanic was not qualified to conduct basic safety checks. Otherwise would have to have waited several days. I would say that independent bike shops have far more experienced and knowledgeable staff. Boardman bikes (Halfords owned brand) are high quality and great value yet inexplicably few of them are sold in Halfords branches. For a no nonsense budget bike, Decathlon offers far better value and choice IMO.

KevinS1

3rd Nov '21

I've just popped into my local Halfords in a large town in the NW of England. This was at about 5.30pm and there was nobody in the shop.

I had a good look around and couldn't see many bikes - and no Boardman's. When I asked the sales assistant about this he said they couldn't get any - and it wasn't a problem of them being stuck in containers, but the company that manufactures them couldn't get any parts/components so none were being made for large parts of the time. He said they get a number turn up once in a while and it was luck of the draw as to which models/sizes. He said to keep an eye on the website and if my model of choice appeared grab it quickly.

He did say things were better than before, but if things didn't improve within the next few weeks it was going to be a very quiet Xmas.

I think I will hold fire on investing until I see what the next TU brings. If sales numbers don't improve they will take a huge hit.

Keelan Cooper

5th Nov '21

Hi Will,

Thank you for your kind feedback.

That is very interesting re Avalyer, I've just had a quick read of the announcement (which you can see here) and this bit stood out to me in particular:

'The platform delivers a vastly superior customer experience, with no direct equivalent on the market today. Halfords has been using the platform for 3 years and today it manages over 70,000 services per week. Halfords Mobile Expert van operation, which has a 4.8/5 Trustpilot rating, has seen an 70% increase in job productivity and more than 200% increase in utilisation since it started using the platform, demonstrating the potential benefits to businesses and end-user customer satisfaction.

Avayler will be based in the UK but will serve customers internationally. The company is on track to expand its workforce to more than 45 people over the next 2 years, including 30 software engineers and will continue to develop its IP as an omni-channel service management platform.'

I agree with your sentiment that Halfords could also be a takeover target if the valuation remains at current levels. The balance sheet is also very healthy when you take out the capital lease obligations.

Hope you have a nice weekend!

Kind regards,

Keelan

Edward Croft

10th Nov '21

Nice timing Keelan - up 17% today.

Thanks, Ed! Excellent H1 results this morning. FY22 profit guidance has now been upgraded to between £80m and £90m. There's been strong growth across all divisions and the supply chain disruptions are now beginning to ease. It looks like H2 has started well too, with the company gaining market share in Retail Motoring and Autocentres in particular.

Sheru The Vegan Westie

18th Jun '22

Bought Halfords yesterday.

After it's recent crash, I think it is now oversold.

Hopefully all the bad news is now priced in.

A good contrarian value stock? :-)

Stock Brief - Halfords (LON:HFD)

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Keelan Cooper

16 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...