You can always rely on the British weather to provide a good excuse for a retailer’s profit warning but Halfords was slightly unusual in that it blamed mild weather – plus that other retail standby of fragile consumer confidence – for a sub-par end to 2018.
In the 14 weeks to 4 January (the third quarter of the company’s fiscal year), like-for-like (LFL) revenue was down 1.7% year-on-year (YOY) and would have been worse still but for a 1.4% increase in LFL revenues at its Autocentres division.
On the retail side, the motoring part of the business shifted sharply into reverse, with LFL revenues down 3.4% YOY, while the cycling side saw LFL sales decline 0.3%, albeit against tough comparatives – a year earlier, LFL sales of cycling products had been up 8% YOY.
The group now expects underlying profit before tax for the year to the end of March 2019 will be in the range of £58mln to £62mln; the consensus forecast prior to this morning’s profit warning was for profit of £70.2mln.
The board expects consumer confidence could remain weak into the next fiscal year as well and as such it is not expecting much profit growth – if any – in fiscal 2020. Analysts who follow the stock had pencilled in £70.6mln for fiscal 2020’s profit before tax.
Looking to the bright side, the group emphasised it remains cash generative and has a strong balance sheet. It expects free cash flow for the full year (fiscal 2019) to be up on the year before and management remains confident the group will grow free cash flow over the medium term, which was basically management’s way of saying the dividend looks safe.
In its interim results statement in November, the group pledged to maintain its dividend payment so if it pays the same in fiscal 2019 as it did in fiscal 2018 (i.e. 18.03p), then the shares are currently yielding 8.3% after slumping 22% to 218p this morning.
"This has been a challenging third quarter for the business, driven by exceptionally mild weather and ongoing weak consumer confidence,” declared Graham Stapleton, the chief executive officer of Halfords.
“Together, these factors have led us to reduce our profit expectations. Whilst this has been a difficult period, we have managed costs and margin well and our free cash flow remains strong. Halfords is a robust business and we firmly believe that the strategy we outlined in September is the right direction for the business," he added.
In morning trading, Halfords shares were down 17.5% at 229.80p.
Liberum keeps ‘buy’
Liberum Capital Markets said although Halfords issued a weak trading update it stuck with its ‘buy’ recommendation and 380p target price, pending the company’s conference call this morning.
“Considering there remains the important Q4 period [i.e Jan-Mar] which for auto centres and retail motoring are three important months, moving towards the bottom end of the guided range seems appropriate,” Liberum said.
“Our view does not change and [we] see Halfords as a high-quality business with a more robust strategy as laid out by the new CEO, Graham Stapleton,” the broker said.
The current price/earnings valuation of less than 19 and a dividend yield of more than 6% is “attractive compensation”, in Liberum’s view, for holding on to the shares until, hopefully, the new CEO’s actions kick in during fiscal 2021.
“Despite the downgrades today which are unfortunate, the profile of earnings to income has not changed,” Liberum maintained.
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