Since Graham Stapleton jumped into the driver’s seat, Halfords has been in a spin.
In less than two years, the retailer of car parts and bikes has issued four profit warnings, blaming the changeable British weather. The shares have halved to 171p, valuing it at £340m.
The main reason it has not been even more of a bloodbath is the dividend — but now the City is beginning to believe that sacred cow could be sacrificed.
After taking time to assess the business, Stapleton decided it needed investment. Last November, he pledged to raise spending from £40m to up to £60m a year. However, as trading got worse, he throttled it back down to £31m for the year while leaving Halfords’ generous payout untouched.
Last year, the group paid a dividend of 18.6p per share. After the dismal share price performance, the stock trades on a yield of 10.8% compared with an average of 5% for the FTSE 350, making the payout look ripe for a cut.
If the board makes that call, the shares could be in for a further pummelling. The shareholder register is dominated by income funds, and as Marks & Spencer found out when it cut its payout this year, they do not take kindly to such moves — particularly when they are left holding a low-growth, bricks-and-mortar retailer with dwindling profits.
Stapleton, though, is a tech evangelist, hired from Dixons Carphone, where he ran the software business Honeybee. The board, then chaired by retail veteran Dennis Millard, wanted Stapleton, 51, to drag Halfords into the 21st century. Given that everyone from Amazon to Home Bargains sells wiper blades and de-icer, Stapleton’s plan to focus on services is a sensible one. Executed properly, it should give Halfords some insulation from online threats.
Halfords has more than 300 autocentres that can service customers’ cars. If they are not inclined to leave home, one of Halfords’ vans can drive over to fit new tyres — perfect for time-pressured, under-skilled millennials. Halfords has just a 2% share of the auto services industry, which is still dominated by independent garages.
Yet the harsh reality is that pre-tax profits have dropped for four years in a row, falling by 24% to £51m last year.
The Halfords directors, now led by Keith Williams, who also chairs Royal Mail, face a tough choice: brace themselves, cut the dividend and place their faith in Stapleton’s long-term vision; or hunker down, keep the shareholders happy and hope the retail storm passes.
Either way, this looks like a situation that is going to get a lot worse before it gets better. Avoid.
