Separating fluke from substance is the key challenge in determining the longevity of so-called pandemic winners. Take Halfords, for example: investors have grown circumspect about the chain since the summer, wary of rising supply chain and inflationary pressures. Its shares have fallen by more than a quarter from a five-year peak hit in July. Yet an increase in underlying profit guidance for this year to between £80 million and £90 million, from at least £75 million expected in June, has helped the credibility of its shift towards higher-margin services and business-to-business sales.
The retailer’s services business encapsulates garages, mobile service vans, commercial fleet services and in-store bike and vehicle repairs. Revenue from that segment has risen by three quarters on a two-year basis, via a mix of acquisitions of independent garages in what is a highly fragmented market and some underlying growth. It now accounts for a third of the group total, up from 24 per cent over the whole of 2019 and against a target of generating 50 per cent of revenue from the services business.
The rationale for that shift is threefold. First, services purchases are driven more by need than fancy and are less weather-dependent than retail. Second, customers tend to be more sticky, for instance bringing their car back for an MOT the following year, and so revenues tend to be easier to predict. And, third, transacting locally means revenues are less at the mercy of currency fluctuations than pure retail.
https://www.thetimes.com/article/cycling-boom-helps-halfords-repay-furlough-cash-wds6qf7j9 The retail business has been moulded into a leaner shape, too, as shop closures and renegotiated rents helped to reduce the rent bill. During the first half of this year, 28 retail lease renewals on better terms translated into a 25 per cent cut on rents for those stores. Lease liabilities had fallen to £324 million at the end of September, down almost 15 per cent on the same time last year.
Eschewing new store openings means one less outlet for capital expenditure, which, together with a highly cash-generative business model, historically has meant good things for income investors. The dividend was scrapped last year, but was reinstated with an interim payment of 3p a share, which is forecast to come in at 11p a share for the full year by Peel Hunt, the house broker. At the present share price, that equates to a decent potential yield of 3.4 per cent.
Excluding the skew of last year’s lockdowns, retail like-for-like revenue was ahead by almost a fifth on a two-year basis, although that was from an anaemic rate of underlying revenue growth in both motor and cycling businesses before the pandemic. The question is whether that heightened sales growth can be sustained in the longer term. Some trends that have boosted sales, such as a sharp increase in staycation products and the boon of having essential retailer status, may fall away. There’s also the cost of increasing motor retail sales in a mature market, which has partly resulted from lowering overall prices rather than predominantly trying to compete with promotions.
Cycling sales growth has eased, as well, partly because of supply chain constraints. Admittedly, the company has said that such pressures have started to ease.
The extent to which better pre-tax profit guidance will translate into upgrades for next year is limited by the cost of cutting prices and the £9 million boost from business rates relief, which will fall away next year. Analysts at Peel Hunt raised their pre-tax profit forecasts for this year by 10 per cent to the midpoint of the new guidance, but see it falling back to £81 million next year. Halfords, though, is on the right track.
ADVICE Hold
WHY An increase in service revenue could generate a higher rate of growth at the group level
JD Wetherspoon
The cheap and cheerful allure of fare served up at JD Wetherspoon’s pubs isn’t an attribute shared by the FTSE 250 group’s share price. At almost 18 times earnings forecast for 2023, the business is valued at a premium to its rivals, credited for generating strong returns and funding a rapidly expanding estate in its relatively short history.
Yet worries over the pace of recovery have taken the sheen off the shares. Reticence to get back into the pub among the group’s bedrock of older punters has weighed on sales, which in the 15 weeks to early this month were just under 9 per cent lower than they were at the same time in 2019.
Towns and cities generally have held up better than the suburbs, but in London, which accounts for about 14 per cent of the group’s estate, sales were down by just over 17 per cent during its first quarter. The PR generated this week by cutting prices on some products could lift customer numbers or hurt profit margins.
There’s also the risk of wage inflation. On average, Wetherspoon employees above the age of 18 are paid above the minimum living wage, but Peel Hunt, the broker, thinks that should rise faster this year with the company wanting to keep ahead of the pay floor. Tim Martin, the founder, has played down staff shortage issues, stating that the company may have had “isolated difficulties in staycation areas in the summer and during the pingdemic” and that generally there had been a “reasonable” level of job applications.
These are not the only pressures facing the budget pubs group. Higher price points and more freehold properties mean that rivals generate higher margins than Wetherspoon, which even before the pandemic stood at 7.3 per cent before exceptional items. Hope for some analysts also rests on the pub operator’s ability eventually to increase its prices again. Peel Hunt estimates that a 2 per cent increase in sales prices next year would translate into a 25 per cent boost to pre-tax profits, based upon forecast revenue of £1.9 billion. That remains to be seen. There may be better value ways to play the post-pandemic reopening trend.
ADVICE Avoid
WHY Sluggish sales and the risk of a rise in costs could lead to more downgrades
