Fundamental Analysis of Halford's - HFD

I have to say reading through the investor documents and website, Halfords is very transparent. I was surprised how open they are with investors about potential issues, actions they are taking, and the financial impact. Which might sound expected, but some of the companies I’ve looked at don’t make it easy.

With the 2020 results coming out 7th July, and the last trading notice published 6th May, there is unlikely to be any new announcements. We have some insight into the business during COVID-19 as well as how their plan is going. Let’s ride on down to analysis town.

What Does Halford’s Do?

Most of us would remember going down to Halford’s to pick up some car oil, new car mats, or even getting our first bike. What are they doing now though, and have they adapted over the years?

Source: Halford’s 2019 Annual Report

Halfords is the UK’s leading provider of motoring and cycling services and products. With 446 Halfords stores, 4 Performance Cycling stores (trading as Tredz and Giant), 371 garages (trading as Halfords Autocentres and McConechy’s) and access to 77 mobile service vans (trading as Halfords Mobile Expert.) Their business is split across vehicle parts, vehicle servicing, and performance cycling (we’ll touch on their regular cycling business too.)

halford car parts
Source: Halford’s Market Breakdown

The car parts aspect of the business is for DIYers who want to pick up individual parts and tools to help them service their cars and vehicles. These day’s Halford’s have their brand in-store and online (rather than just selling other manufacturers goods), but this isn’t a focus for the business going forward. The longer-term view is owners will not be able to keep up with more complex modern cars and to focus on their servicing solutions rather than selling products and parts. Expect your traditional large Halford’s stores to be refurbished or closed down.

halford car service
Source: Halford’s Market Breakdown

The car servicing business is all about their garages, mobile fleets, and general “do-it-for-me” services they can offer for your vehicles. Modern cars need to be serviced less, and on the whole are more reliable. However, the cost per service is increasing. The added complexity and increased integrated technology mean more specialism is required. Excellent news for servicing providers like Halford’s, terrible for anyone who wants to change a headlight.

Source: Halford’s Market Breakdown, left is regular cycling, right is performance cycling

The cycling business is slightly different as this graphic is now out of date.

Halford’s had its mainstream cycling focus with the Cycle Republic brand. 16th March Halford’s confirmed they would be closing the Cycle Republic brand. They want to focus on the online brand Tredz and zero in on the performance cycling industry, think e-bikes and high-end luxury branded bikes. The Cycle Republic made an of loss of £4.3m last year and is expected to post a loss this year too. 6th of March it was confirmed that 11 Cycle Republic stores would transfer to Pure Scooters Limited, though finer details of the deal are not currently known.

Cycle-to-Work vouchers are a big driver for Halford’s and servicing new electric-assisted pushbikes is a growing market. Likewise, with cars, more complex and expensive vehicles are translating into higher service costs which require specialist skills.

Source: Halford’s 2019 Revenue Split

What About COVID-19?

I’m sure you have seen the queues outside Halford’s and the influx of cyclists around the country. Has this influx of discovering and fixing your bike and doing some work on your car, translated into more sales for Halford’s or has the increase not offset the losses of lower car service requests?

25th March and 6th May we had some updates relating to COVID-19. Starting with the first update we saw some tactical decisions being made. As you would expect the first action was to bolster the company’s cash position. They drew down on the revolving credit facility in full giving them approximately £118m of cash on deposit, plus roughly £20m of an overdraft if required. Critically they suspended their dividend, resulting in a cash saving of approximately £24m for 2021. Halford’s has offered an increasing dividend, which makes it an attractive investment, which many will be keen to see returned. Additionally as one of Halford’s biggest expenses is the physical stores which also hold stock (fun fact, 85%~ of online order are click-and-collect!) they have applied for business rate relief for the whole of 2021, this translates to a cool £26m per year saving.

All in all, we saw a lot of financial bracing for the unknown. We can compare this with the trading update on the 6th of May to see some more clarity in the business changes.

They have been able to keep open 325 retail stores, 346 garages, and 77 mobile service vans. Which results in the coming financial results looking better than expected in terms of sales. The expectation is Adjusted Profit Before Tax will be at the upper end of their targetted £50-55m range. Sales during lockdown were 23% below last year on a like-for-like basis, which is better than they initially expected. They did see strong performance in cycling and motoring essentials, but generally, they have felt the pressure of lockdown still. We also saw an update on their cash, with Halford’s having approximately £159m liquidity available, an increase from £138m (£118m cash + £20m overdraft) a month and a half ago.

While they have been harmed by COVID-19, we have seen some robust measures put in place and seen an appropriate response from the business.

What About The Financials?

Source: Genuine Impact

We are looking at a business which is competent in terms of their quality, with revenues of £1.12bn and a profit margin of 3.68%. Historically they have offered a strong dividend offering 11.22% yield, however, we know the next one has been cancelled.

Source: Yahoo Finance

With the value, we know the business has been heavily discounted, but understandably so. Keep in mind a lot of the value ratios are based off official figures, and we haven’t seen updated COVID-19 impacted numbers. This does mean the cheap value score should be taken with a pinch of salt. Remember the majority of revenue comes from the car arm of the business, and that is feeling the pressure the most right now. While 2020 profits are on track, it’s the 2021 numbers which will feature the true impact of COVID-19.

Source: Genuine Impact

In terms of sell-side analysts, we are seeing a heavy leaning towards a buy rating. While the future revenue and earnings are weaker than the rest of the market, they have a high sentiment from analysts.

Now I’ve looked into this a bit more as there seems to be some different data depending on who you ask.

halford yahoo
Source: Yahoo Finance Analysts

Here we see more of a hold position (still a few strong buys) but you also see a high target price. With even the lower estimates being higher than the current price. The target prices are generally set to be achieved within the next 12 months.

Source: Genuine Impact

We see a high target price rank here as well, though not quite the rank I would expect for an almost 100% increase in target price.

Source: Market Beat Target Price

Looking at market beat we see a very different set of analysts views and target prices again.

Seems data for the analysts is a bit spotter than you would hope for. Sadly with a lot of US-focused research tools out there, this happens more than I would like.

Why A Buy?

Looking at the data there is something which stood out to me. While some of the target price estimates look tasty, the different data points raise a lot of questions.

For me this is a strong long term buy because of the strength of the management team. I like their approach during COVID-19, they have closed down one of the brands to keep the business-focused, and they are zeroing in on the brand they want to be tomorrow.

The 2018 investor day presentation gives a lot of insight into the business and how they see it transforming. Released in September 2018 it gives you a real flavour of what they hope to achieve, and it’s interesting to compare the vision from then to now.

This details their transition into a do-it-for-me service provider who offers a very select and focused range of products. They have actively gone out to research why people don’t shop at Halford’s and what don’t they like. Looking back at 2018 they had 6 vans doing at home and work car services. During the lockdown, we have 77 of these vans is operation.

They highlighted the growth of the cycle industry but also the fact 10% of cycle shops close each year, and the majority are independents, they are now focusing on their digital experience and leveraging their “service” buildings rather than expanding the underperforming retail outlets. We are seeing more synergies, more personalisation, and a lot more future positioning for a world where Halford’s doesn’t think your kids will be drivers or car owners.

These are bold bets, backed by data. This is the kind of turn around strategy and focus I like to see.

I feel like there is a lot to like about Halfords, but in the short term, I would expect some pain. 2021 will show the full impact of COVID-19 so expect some corrections and volatility in the current year.

Looking ahead they are positioning themselves for an increased dividend and strong future growth. The lower 2021 figures are expected, while not detailed as guidance hasn’t been provided, we know this is on the cards. I see a brighter future for a new digitally focused service orientated Halfords, and now is a cheaper price to buy into that future.

Hope you liked the write-up if you think I’ve missed anything please do let me know! I love to hear your thoughts and feedback.

Thanks for reading and stay safe.