Halfords Group Plc Interim Results FY20

7 November 2019                                                                                     

Halfords Group plc 

Interim Results and Strategic Update: Financial Year 2020

H1 profit in line with expectations, good strategic progress, acceleration of our
motoring services business

Halfords Group plc, the UK's leading provider of Motoring and Cycling products and services, today announces its interim results for the 26 weeks to 27 September 2019 ("the period"), together with a strategic update. All numbers shown are after adopting IFRS 16 and before non-underlying items unless otherwise stated.

Group Financial Summary

* Alternative performance measures are defined and reconciled to IFRS amounts in the glossary on page 15

H1 Profit in line with expectations; growth from strategic investment, gross margin improvements and tight cost control partially mitigated the impact of a challenging retail backdrop and tough weather comparators year-on-year

·      Group LFL sales declined by 2.4% in a tough market; sales returned to growth in the last six weeks of the period

·      In Retail, cycling sales grew and in motoring our core categories gained market share, however, sales of big-ticket discretionary products were softer

·      Autocentres, Group services, Online and B2B all delivered strong sales growth in the period

·      Autocentres EBIT pre-IFRS 16 increased 39.1% to £3.2m. The business continues to make strong progress on its transformation and remains on track to deliver a third year of profit growth

·      Group remains cash generative; Free Cash Flow* of £44.2m, up 29% on H1 last year. Net Debt to Underlying EBITDA pre-IFRS 16 on a comparable basis* 0.7 times (FY19: 0.7 times)

·      Strategic buying alliance agreed with Mobivia, a leading player in the European motoring products and services market

·      Post balance sheet acquisition of 100% of the share capital of McConechy's Tyre Service Limited and the trade and assets of Tyres on the Drive, for a combined consideration of £9.3m

·      FY20 Underlying Profit Before Tax guidance, pre-IFRS 16, reconfirmed at £50-55m

·      Interim dividend flat at 6.18p (FY19 6.18p); final dividend reduced to 8.0p. Full year dividend rebased to 12p for FY21 onwards

*after adjusting for post period end payment run (see page 15 for further details), on the last day of the period

Strategic update; To inspire and support a lifetime of motoring and cycling

A year ago, at our Capital Markets Day, we laid out our customer strategy 'To Inspire and Support a Lifetime of motoring and cycling'. The strategy emphasised the importance of product differentiation, the value of unique and convenient services and the need to build long-term relationships with our customers. A year on, we have made significant progress against our objectives:

·      Group web-platform remains on track for launch in Q4, transforming our digital experience and, for the first time, allowing customers to access an integrated services offer across mobile, stores and garages through one website

·      Optimisation of cycling space in all Retail stores, delivering a better shopping experience for customers through a 'right range, right store' approach. The enhanced offer led to a 2.5pts improvement in Customer Net Promoter Score ("NPS"), whilst driving sales, margin and working capital improvements

·      Sales of exclusive products increased by c.30% via investment in product proposition

·      Acceleration of our growth in Autocentres through the acquisition of McConechy's Tyre Service Limited, one of the UK's leading garage chains; 60 sites and 100 vans, establishing strong coverage in Scotland and the North of England

·      Continued development of our Halfords Mobile Expert proposition, delivering best-in-class customer service. The acquisition of Tyres on the Drive increases our mobile hub footprint from 1 to 7 and provides a strong platform for future growth

·      Double-digit growth in Group services jobs, with the launch of weCheck free and premium services delivering over 30,000 consultations a week

·      On-demand retail motoring services trial in Autocentres garages continuing to deliver promising results

·      Major enhancement of our Group financial services offer, resulting in substantial double-digit growth year-on-year and attracting new customers

·      B2B now represents 15% of Group sales, with 24.4% growth driven through investment in our cross-group sales team and online platform

·      Delivered significant cost and efficiency benefits through value chain analysis, supply chain efficiencies, Retail productivity programmes and improved procurement practices across all cost categories.

Accelerating our strategy

·      Accelerating the growth of our motoring services business, to generate higher and more sustainable financial returns

·      Building on our unique proposition of garages, retail stores and mobile vans to increase our services footprint to over 1,200 locations in the medium-term, including 550 garages and 200 mobile vans

·      Leveraging our trusted household brand to become a clear market leader in Motoring services

Within our strategy, we articulated the strengths of our motoring services businesses alongside the growth opportunities going forward. In a large and fragmented marketplace, with no clear market leader, we have a strongly differentiated business. We are a trusted household brand, providing customers with a unique proposition, delivered through a combination of garages, stores with on-demand fitting services, and a mobile services offer. This unique offer is supported by well-trained and highly engaged Colleagues across a broad geographical network.

Over the last year, our motoring services and B2B businesses have continued to deliver strong growth and have remained materially more resilient against volatility in consumer confidence and weather. As macro-customer trends change, customers are seeking more convenience and cars are becoming more complex, accelerating the requirement for easily accessible Do It For Me ("DIFM") services. We believe therefore, this is the right time to accelerate the growth of our existing services business by building on our growing and unique market position and leveraging the positive macro-customer trends to become a clear market leader.

Investment in the expansion of our motoring services business will enhance our differentiated position in the market and provide a less capital-intensive source of profitable growth. We believe our plan enables the business to evolve into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating higher and more sustainable financial returns. Our motoring and cycling products businesses remain core but, beyond this, we need to deliver a substantial shift to services in order to drive growth and address the headwinds faced by retailers of products.

Over the medium-term, as our business evolves, service-related sales will double as a % of total Group sales and Autocentres will represent a materially larger proportion of our Group profit. As a result, motoring will inevitably grow in focus. Notwithstanding the early investment required to build a scaled services operation, the business will subsequently return to sustainable profit growth and return on invested capital ("ROIC") will improve as greater investment goes into businesses that naturally consume less capital.

Full year outlook and financial guidance

The Group reconfirms its guidance on FY20 Underlying Profit Before Tax (pre-IFRS 16), on a 52-week basis, to be within the range of £50m to £55m. Capital investment, previously guided at c.£35m for FY20, will increase by c.£11m, for the acquisitions of McConechy's Tyre Service Limited and Tyres on the Drive. Similarly, the exceptional costs of restructuring related to these two businesses will further impact cash flow by c.£2-3m in H2 FY20.

Looking forward, in order to support our plan, our capital expenditure guidance remains unchanged at between £40m and £60m per year over the medium-term. The Group may also consider appropriate acquisitions, to the extent they are in support of the strategy. The operational cost base in FY21, however, will increase as we upweight our relative investment in core infrastructure to support the services business, including a new customer contact strategy and investment in ensuring that we have the right number of appropriately trained colleagues to build a market leading services business.

Post the approval of the interim dividend, the Board considered the full year position and is expecting to recommend a final dividend of 8p per share, (FY19:12.39p). On this basis, the proposed full year dividend would be 14.18p (FY19: 18.57p). The reduction of the final dividend would have the effect of rebasing future dividend pay-outs, with the FY21 full-year dividend expected to be reset to c.12p per share.

The opportunities for growth, coupled with the results we have seen against key parts of our strategy have given us confidence to invest. The accelerated strategy will deliver an improvement in return on invested capital, targeting growth in less capital-intensive areas of the business. The resultant future cash generation will sustain the reset dividend going forward.

Graham Stapleton, Chief Executive Officer, commented:

"In a period where retail sales were impacted by weakened consumer confidence, we are pleased to have successfully increased gross margin, kept a tight control over costs, and seen growth from our strategic investment.

"Twelve months on from the launch of our strategy to inspire and support a lifetime of motoring and cycling, we have made encouraging early progress. Our Autocentres business delivered strong growth in the half, while new initiatives helped to drive top line momentum in Group Services, Online and B2B.

"We are clear that our service-led strategy is the right one for Halfords. Our unique position, growing services business and positive macro-customer trends, gives us confidence that this is the right time to accelerate investment, leveraging our trusted household brand to become a clear market leader in Motoring services. 

"Over the medium-term, we expect service-related sales to double as a percentage of Group sales and Autocentres to represent a materially larger proportion of Halfords' profits. As a result, motoring will inevitably grow in focus for the Group. We are confident that this strategy will drive long-term sustainable growth."

 Enquiries

Investors & Analysts (Halfords)      

Loraine Woodhouse, Chief Financial Officer  

Neil Ferris, Corporate Finance Director                                                                                              +44 (0) 7483 360 675  

Media (Tulchan)                                                                                                                                 +44 (0) 207 353 4200

   Jonathan Sibun

   Will Smith

Financial Guidance reference

For ease of navigation, the following lists the references to financial guidance contained in this statement:

Results Presentation

A presentation for analysts and investors will be held today starting at 09:30am at Investec, 30 Gresham St, London, EC2V 7QP. Attendance is by invitation only. A live webcast of the presentation will be available at www.halfordscompany.com.

Forthcoming Newsflow

On 16 January 2020 we will report on trading for the 14 weeks to 3 January 2020, which includes the peak Christmas trading period.

Notes to Editors

www.halfords.com                                 www.halfordscompany.com                                  www.halfordsautocentres.com     

www.cyclerepublic.com                         www.boardmanbikes.com                                     www.tredz.co.uk

Halfords is the UK's leading provider of motoring and cycling services and products. Customers shop at 448 Halfords stores, 26 Performance Cycling stores (trading as Cycle Republic, Tredz, Boardman and Giant) and 317 garages (trading as Halfords Autocentres). Customers can also shop at halfords.com, cyclerepublic.com and tredz.co.uk for pick up at their local store or direct home delivery, as well as booking garage services online at halfordsautocentres.com.

Note: store and garage numbers as at 27 September 2019

Cautionary Statement

This report contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Halfords Group plc.  These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future.  There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast.  Except as required by law, Halfords Group plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Chief Executive's Statement

Summary of Group Results

Group revenue of £582.7m reflected a like-for-like ("LFL") decline of -2.4%, with all areas of the Group in sales growth outside of Retail motoring. Retail performance was impacted by tougher weather comparators year-on-year and consumers delaying big-ticket discretionary purchases, reflecting the current economic and political uncertainty. Autocentres continued to deliver strong growth, with LFL sales of +2.1% in the period.

Gross margin improved by 70bps versus the prior year, with both Retail and Autocentres ahead. The improvement reflected several factors including buying efficiencies across the Group and better cycling margins delivered through an improved customer shopping experience and more focused promotions. These were partially offset by the mix effect of softer motoring sales and a small negative FX impact.

Group operating costs pre-IFRS 16 were broadly flat year-on-year (+0.1%). The increased focus on costs at the beginning of the year delivered strong results. Retail costs were down -0.7% reflecting a rigorous cost control programme across supply chain, Retail operations, property and utilities, to give just some examples. In line with our guidance, cost investment in the strategy was self-funded through efficiency savings across the Group.

Underlying Profit Before Tax pre-IFRS 16 was £25.9m, in line with expectations and £4.6m less than FY19, reflecting gross margin improvements and well controlled costs partially mitigating the impact of the sales shortfall. Underlying Basic Earnings per Share pre-IFRS 16 were 10.4p, down from 12.4p last year.

Cash generation was strong, with Free Cash Flow* of £44.2m, up £10.0m on H1 last year. The result reflects the positive impact of our working capital programme, including the impact of lower stock levels arising from cycling space optimisation. Group Net debt was £62.6m on a comparable basis*; the ratio of net debt on a comparable basis to the underlying EBITDA, pre-IFRS 16, was 0.7x at the period end (FY19: 0.7x).             

The Board has approved an interim ordinary dividend of 6.18 pence per share, which is flat year-on-year (FY19 interim ordinary dividend: 6.18 pence). This will be paid on 17 January 2020 to shareholders on the register at the close of business on 5 December 2019.

After the balance sheet date, Halfords Autocentres, in line with our strategy, acquired 100% of the share capital of McConechy's Tyre Service Limited on 5 November 2019 for cash consideration of £8.5m. The acquisition increases our garages footprint by 60 sites and establishes strong coverage in Scotland and the North of England. On the 14 October 2019, we acquired the trade and assets of Victor Holdings Limited (trading as "Tyres on the Drive") for an immaterial balance. The acquisition secured the outright ownership of market leading mobile services software for Halfords Mobile Expert and acts as a significant enabler in the acceleration of our growing Halfords Mobile Expert business.

*after adjusting for post period end payment run

Operational Review

Total Retail revenue was £500.0m, which was -3.1% down on a LFL basis. Cycling sales delivered LFL growth of +0.2% in the period, driven by performance ahead of expectations in the last six weeks and continued strong growth in electric bikes and kids bikes, which more than offset weaker sales of big-ticket discretionary mainstream cycling products. Our own-brand and exclusive ranges of electric bikes and kids scooters offer our customers unrivalled levels of choice at all price points.

We continued to grow market share in our core motoring categories within a challenging market.  LFL performance declined -5.3% year-on-year as growth in our core 3Bs (bulbs, blades and batteries), car cleaning and exclusive security ranges was offset by a weaker performance in big-ticket discretionary categories such as car technology and workshop. Tough weather comparators in the first 20 weeks of H1 saw camping and touring in decline year-on-year.

Retail gross margin increased by 40bps in the period. The improvement reflected several factors including buying efficiencies across both cycling and motoring, cycling margin improvement through investment in creating a better shopping experience for our customers and more focused promotions to protect margin in areas where demand has softened. These were partially offset by the mix effect of softer motoring sales and a small negative FX impact.

Retail operating costs pre-IFRS 16 were well controlled, reducing by -0.7% to £210.0m. Increased strategic investment was self-funded through rigorous cost efficiency plans driven by better procurement and operating efficiencies. Underlying cost inflation in H1 was partially offset by a one-off adjustment to the claims provision, driven by better visibility of the level of future claims.

Total Autocentres revenues were up +2.1% on a LFL basis, reflecting strong growth in sales of servicing, MOT and repair. Delivery of the Autocentres transformation plan, through the introduction of a new garage management system which enables enhanced technician scheduling and improved parts ordering, has not only improved financial performance but has also significantly improved the customer experience; NPS at 68 has improved by 5 points year-on-year. Our 8 Halfords Mobile Expert vans continue to provide best in class customer service, with a 4.8 out of 5 Trustpilot score. The financial performance of the 5 vans based in the Greenford regional hub is encouraging. EBIT pre- IFRS 16 in Autocentres increased significantly by 39.1% to £3.2m and a clear focus on the operating model, along with good revenue growth, means that Autocentres remains on track to deliver a third year of profit growth.

Group service-related sales, which consist of the revenue generated from paid fitting and repair services plus the associated product attached to the transaction, grew 2.2% year-on-year, through improved service penetration and the introduction of new weCheck and cycle care services. We currently complete over 30,000 free weCheck services a week, with the introduction of a premium paid-for service in October. The number of service jobs completed increased by 12% in the period. In Retail, nearly 40% of 3B's sold ("penetration") were fitted to customers' cars by our colleagues with penetration up 200bps year-on-year. This continues to reflect the increasing relevance of our services proposition to the growing proportion of 'do-it-for-me' customers.

Group online sales were up +10% in the period, with 22% of our total Group sales now being delivered through our online platform. In the period, we focused heavily on improving our search, navigation and store locator pages, making it easier for customers to find products, services, help & advice and information regarding their local store. The importance of our store network and service overlay continues to be highlighted by the strength of our click & collect proposition, with around 85% of Halfords.com online orders being collected in-store. The new Group web-platform remains on track for launch in Q4, transforming our digital experience and, for the first time, allowing customers to access an integrated services offer across mobile, stores and garages through one website.

B2B sales represent 15% of Group sales and delivered 24.4% growth year-on-year, following investment in our cross-group sales team and online platform. We continued to see good growth from all areas within B2B, which include Cycle2Work, Halfords for Business, Tradecard and Autocentres Fleet.

Sales through financial services, through a strengthened customer offer, delivered substantial double-digit growth year-on-year and attracted new customers.

Strategic Update

Context

Halfords Group plc is the UK's leading provider of motoring and cycling products and services. We have nationwide coverage and, today, our customers shop at 448 Halfords stores, 26 Performance Cycling stores (trading as Cycle Republic, Tredz, Boardman and Giant). 317 garages (trading as Halfords Autocentres) and 8 Halfords Mobile Expert Vans.

A year ago, we laid out our customer strategy 'To Inspire and Support a Lifetime of motoring and cycling'. The strategy emphasised the importance of product differentiation, the value of unique and convenient services and the need to build long term relationships with our customers. A year on, our strategy remains absolutely the right direction for our business and we have made significant progress against our objectives.

Within our Capital Markets day presentation, we highlighted the fragmented nature of the motoring services market, which, with no clear market leader, provided us with a significant opportunity to increase our market share. Over recent years we have invested in, and developed, a much more profitable garage operating model that we are confident we can scale. In addition, our motoring services business provides a clear source of differentiation against our competitors through a unique combination of stores, garages and mobile together with a trusted household brand. Equally, over the last year, our services business has delivered strong growth and has remained materially more resilient against the volatility in consumer confidence and weather. As macro-customer trends change, customers are seeking more convenience and cars are becoming more complex, accelerating the requirement for Do It For Me ("DIFM").

In summary, our unique market position, growing services business and the positive macro-customer trends gives us the confidence to accelerate investment in our service-led strategy.

Accelerating our Strategy

Evolving into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating higher and more sustainable financial returns

To address the considerable market opportunity available to us, we will be accelerating investment in the following areas:

·     Increasing our Autocentres garage footprint to 550 garages over the medium-term, growing both organically and via appropriate acquisition

·     Growing our mobile services proposition to 200 Halfords Mobile Expert vans, providing a wider, more convenient, range of mobile services to our customers

·    Investing in the provision of weFit services in our Retail stores, enabled by a best in class customer contact strategy and the redeployment of labour in store to allow well trained colleagues to better service customer needs

·     Trialling a more inspirational, convenient, integrated and digitally enabled shopping experience in two locations next year. This will encompass a new destination retail store, an updated Autocentres garage, a new format that will combine a garage with a small store for motoring products, and a Halfords Mobile Expert offer, all operating in conjunction across a major town or city. In addition to significantly improving the customer experience, the trial will also test whether we can deliver a similar, or greater, level of sales from a lower fixed cost base

Delivery of our objectives will require additional investment in the following:

·     Investment in the infrastructure necessary to drive fast growth in our motoring services business, including a new customer contact strategy and investment in our store colleagues to deliver appropriately trained resource

·     Improving our services customer experience through investment in a digital services management system; creating one seamless journey for all bookable services across the Group to support our customers and colleagues

·    Continued investment in our B2B systems and infrastructure, maximising our growth potential by increasing our market share in known markets and, simultaneously, leveraging new opportunities

·      Successfully consolidating and integrating the McConechy's Tyre Service Limited and Tyres on the Drive acquisitions

·      Investment in marketing to drive awareness of our services, with an increased focus on social and digital marketing

Incremental investment required will be part-funded through further efficiency programmes:

·    An increased focus on improving the profitability of our cycling businesses, through building on our existing GFR value chain workstream. Leveraging our sourcing partnership with Mobivia, with an initial focus on Far-East sourcing 

·    Continuation of our cost and efficiency programmes across the Group, with specific focus on supply chain, property costs and procurement practices across infrastructure costs

The direction laid out, we believe, exploits our market growth opportunities and builds on our successes delivered to date. The acceleration of investment in our services business will make us materially more resilient against external headwinds. The plan allows the business to evolve into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating higher and more sustainable financial returns. Our motoring and cycling product businesses remain core but, over and above this, we need to deliver a substantial shift to services in order to drive growth and address the headwinds faced by retailers of products, such as secular trends and the impact of today's economic environment.

Over the medium-term, as our business evolves, service-related sales will double as a % of total Group sales, Autocentres will represent a materially larger proportion of our Group profit and, as a result, motoring will inevitably grow in focus. Notwithstanding the early investment required to build a more sustainable services operation, the business will return to sustainable profit growth and return on invested capital ("ROIC") will improve.

Focus for FY21 

The focus for FY21 will be on continued delivery of our CMD strategy, targeting greater investment in our services business:

·      Optimisation and further development of our integrated Group website

·     Growing our Autocentres footprint to 400 garages, in part via the consolidation and integration of our McConechy's Tyre Service Limited acquisition

·      Integrating our Tyres on the Drive acquisition and increasing our Halfords Mobile Expert offer to 100 vans

·      Scaling our weFit proposition in Retail stores, through increased investment in our customer contact strategy, increasing the number of trained colleagues and investing in a supporting digital services operating platform

·      Trialling a more inspirational, convenient, integrated and digitally enabled shopping experience in two locations

·      Strengthening and improving the profitability of our core motoring and cycling product offer

·      Continued investment in our customer-led product development and innovation

To facilitate the investment required, we will be continuing to drive the cost and efficiency enablers of our plan.

Financial Outlook

The Group reconfirms its guidance on FY20 Underlying Profit Before Tax (pre-IFRS 16), on a 52-week basis, to be within the range of £50m to £55m. Capital investment, previously guided at c.£35m for FY20, will increase by c.£11m, for the acquisitions of McConechy's Tyre Service Limited and Tyres on the Drive. Similarly, the exceptional costs of restructuring related to these two businesses will further impact cash flow by c.£2-3m in H2 FY20.

Looking forward, in order to support our plan, our capital expenditure guidance remains unchanged at between £40m and £60m per year over the medium-term. The Group may also consider appropriate acquisitions, to the extent they are in support of the strategy. The operational cost base in FY21, however, will increase as we upweight our relative investment in core infrastructure to support the services business, including a new customer contact strategy and investment in ensuring that we have the right number of appropriately trained colleagues.

With regard to the full year dividend, the Board has considered the current market outlook, the need for investment in the business and the importance of the dividend payment to investors. In a challenging retail and consumer market, Group profitability has been lower and, as a consequence, operating cash flows have also reduced. Whilst the Group remains highly cash generative, the Board believes it is prudent to preserve cash in order to facilitate sufficient investment in business growth whilst, at the same time, maintaining a healthy balance sheet.

As a result, the Board is expecting to recommend a final dividend of 8p per share, (FY19:12.39p). On this basis, the proposed full year dividend would be 14.18p (FY19: 18.57p). The reduction in the final dividend would have the effect of rebasing future dividend pay-outs, with the FY21 full-year dividend expected to be reset to c.12p per share.

The opportunities for growth, coupled with the results we have seen against key parts of our strategy have given us confidence to invest. The accelerated strategy will deliver an improvement in return on invested capital, targeting growth in less capital-intensive areas of the business. The business will remain highly cash generative, supporting the reset dividend going forward.

Graham Stapleton  
Chief Executive Officer, November 2019

Halfords Group plc's LEI code is 54930086FKBWWJIOB179