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Halfords to cut costs in 2020 to boost profit amid challenging retail market

Halfords posted a 17.9% drop in underlying pre-tax profit for 2019 as mild winter weather and subdued consumer confidence hit motoring sales
Halfords said continues to expect flat pre-tax profit in 2020

Halfords Group PLC (LON:HFD) said on Tuesday it would cut costs and reduce capital expenditure in 2020 to lift profit as a challenging retail market continues to weigh on its performance.

The retailer, which sells bikes, car parts and camping equipment, made the remarks as it posted a 17.9% drop in underlying pre-tax profit to £58.8mln for the year to 29 March 2019.

READ: Halfords' shares veer off road as profit guidance slashed

Total group revenue increased 1.1% on a like-for-like basis to £1.1bn with retail sales up 0.8% and autocentre sales up 2.6%.

Mild winter temperatures boosted cycle sales, which rose 2.6% on a like-for-like basis, but dragged like-for-like motoring sales down 0.4%.

Halfords said profits were hurt by the lower motoring sales mix, which was also hit by subdued consumer confidence in the run up to Christmas, retail cost inflation and investment in strategic projects.

The group proposed a full-year dividend of 18.57p per share, up 3% on last year’s 18.03p payout.

Cost cuts in 2020 to deliver profit growth in 2021

On the outlook for 2020, Halfords said it continues to expect flat pre-tax profit, assuming weather conditions and an economic outlook in line with that experienced in the second half of 2019.

“The current economic environment and consumer confidence continues to remain challenging,” the group said.

“As a business we are continuing therefore to put greater emphasis on improving our cost base and maximising efficiencies across the group.”

Halfords now expects a capital investment of £35mln in 2020, compared with the £40mln to £60mln previously planned, and said revenue investments will be “self-funded via rigorous cost-efficiency programmes”. 

The group said emphasis on cost and efficiency will continue to be a key priority for 2020 to support profit growth in 2021.

It added that it remains “confident” in its ability to generate “consistent levels” of free cash flow in 2020, supported by working capital efficiencies.

Halfords shares were little changed at 238p in morning trading.

Liberum keeps 'buy' stance

Liberum maintained a 'buy' rating and target price of 325p, saying headline numbers were broadly in line with expectations while underlying pre-tax profit was slightly ahead and the dividend beat the 18.2p consensus forecast. 

"Halfords has been hit hard this year but this should not cloud the fact that a return to sustainable profit growth is on the horizon," the broker said.

"We think the group will soon overcome the legacy of the past having invested heavily in the business over the past five years and with a bold, yet credible strategy under a new senior team, we think an inflection point is in sight."

It reckons the shares are cheap - they trade on a 2019 price-earnings multiple of 10-times. Free cash flow, meanwhile, is rising and Halfords has a strong dividend yield of 7.5%.

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