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There’s more pedalling uphill to come at Halfords

Poor weather early in the year dampened cycle sales at Halfords
Poor weather early in the year dampened cycle sales at Halfords
DAVE THOMPSON/PA

Halfords
Since the announcement of Graham Stapleton as chief executive of Halfords last September, shares in the car parts-to-bikes retailer had accelerated by more than a fifth. They hit a bit of a bump in the road yesterday, though, after the new boss suggested to investors that the future was unlikely to be that different from the past.

Mr Stapleton, a former Dixons Carphone executive who took up the role in January, is not due to unveil his strategy for Halfords until September, but his initial plans outlined yesterday indicated that he would not depart radically from the approach of Jill McDonald, his predecessor, who has moved on to run Marks & Spencer’s clothing business. Further investment is required, including in customer service, training and marketing, and hopes of pushing up bike prices again this year have proved too optimistic.

All of which means that rather than profits increasing in 2018-19, as investors had hoped, they are set to be at a similar level to the last financial year.

The outlook was disappointing against a consensus forecast of £76.5 million and it prompted the City to lower profit forecasts by 6 per cent to 7 per cent. That, in turn, more than wiped out the share price gains made this year, with the stock closing 11.1 per cent, or 43¼p, lower at 344¾p yesterday.

There was, perhaps, an element of wishful thinking among shareholders, because incoming bosses at the chain previously have moved to lower forecasts and expectations. As analysts at Peel Hunt put it yesterday, there was a sense of déjà vu in Mr Stapleton falling in “line with a depressingly large number of his predecessors”.

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The group trades from 457 Halfords stores, 20 Cycle Republic outlets and 316 Autocentres and, like many retailers with a large store estate, has been investing heavily in customer service in order to make its stores relevant in an internet age. That struggle was borne out in its results for the year to March 30, published yesterday. Underlying pre-tax profit of £71.6 million was weaker than the £75.4 million in 2016-17 and the second consecutive annual decline, despite revenue rising by 3.7 per cent to £1.14 billion.

Profits were weighed down by a £25 million hit from the weaker pound against the US dollar, which has increased import costs for Halfords, and revenue in the final quarter of the year was affected by the “unfavourable” weather. That benefited its car maintenance sales, as consumers replaced parts, but dampened cycling sales, which fell by 4.1 per cent on a like-for-like basis in the fourth quarter.

For the full year, cycling sales were up 2.9 per cent, helped by the Carrera electric bike range and driving total retail sales up by 2.3 per cent. Bearish analysts warn of signs that Halfords has hit “peak bike” and that it has been pedalling uphill, with a rise in prices helping to offset pressure on volumes. The bull case among those rating the stock a “buy” is that despite the continuing headwinds, Halfords has a strong balance sheet, with a relatively low net debt to earnings ratio of 0.8 times, is a market leader and generates decent amounts of cash. Free cashflow rose to £41.5 million, up £3.8 million.

The upshot of all that is that it seems shareholders will have to wait until 2020 for the benefits of the investments.

The dividend was raised 3 per cent to 18.03p per share, but that was not enough for some investors. The share price reaction to the cautious outlook yesterday suggested that investors were booking profits. Having reset expectations, which perhaps had run away a little bit, Mr Stapleton has given himself more room to outline his strategy later.

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ADVICE Sell
WHY Take profits after recent rally as outlook is subdued

Homeserve
When Richard Harpin finally sits down and tells his grandchildren the story of Homeserve, he will not be short of things to say (Miles Costello writes). It will be a salutory tale of overly rampant growth, followed by brushes with disaster amid a costly mis-selling scandal and then a quiet rebuilding, driven by an expansion in America that could herald yet another new chapter.

Founded 25 years ago in 1993, Homeserve’s business model is straightforward: it acts as an insurance provider, particularly for those who suffer leaky or burst pipes, and you can have a policy with it directly or indirectly via your household insurer or energy utility. Its main markets are Britain, where it has about 2.2 million customers, France and Spain. Yet its growth engine is America, where has pursued the same partnership model — and acquisitions — to get customer numbers to 3.6 million.

Mr Harpin has got Homeserve involved in technology that detects leaks in your pipes and alerts your insurer and someone to fix it; it does smart thermostats and connected boilers. As the new owner of Checkatrade.com, it can link its customers with local tradespeople.

Homeserve’s annual results contained only minor drips. Statutory pre-tax profits rose by 25 per cent to £123.3 million over the 12 months to the end of March, on revenues up 15 per cent at £899.7 million. Adjusted operating profits surged by 146 per cent in the US to $64.4 million and rose by a respective 13 per cent and 20 per cent in France and Spain. In the UK, though, they fell by 3.3 per cent to £61.1 million, depressed by a one-off charge of £2.5 million to cut staff numbers and improve efficiency.

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That initially pushed the shares lower yesterday, though they closed 9p up at 851p. The dividend for the year rose a quarter to 19.1p. The shares give Homeserve a market value just shy of £2.8 billion and, trading on a price-to-earnings multiple of more than 27 times, they are not cheap. The opportunity, however, is America, where Homeserve added 1.1 million policies last year. It can only be a matter of time before profits from the US outstrip those in the UK.

ADVICE Buy
WHY It is proving that it has plenty of opportunity to grow

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