UK: Halfords warns of slow recovery as annual profits fall by 22%

Profits at Halfords have fallen by 22%
Photo: Newscast

Profits at Halfords have fallen by 22% Photo: Newscast - Credit: Newscast/Mathew Growcoot

Halfords warned of a long uphill slog to recovery today as profits tumbled by 22% and its dividend was slashed by a third to pay for a £100million revamp of the struggling car parts and cycling retailer.

New chief executive Matt Davies pledged to refresh tired-looking stores and improve customer service over the next three years but warned that earnings were unlikely to recover until 2016.

The former Pets at Home boss, appointed last year, outlined his plans to turn around the business today as it announced annual pre-tax profits were down in line with forecasts from £92.2m to £72m.

Despite the fall, he insisted that overall store numbers would not be significantly reduced - though it looks likely that some outlets will shrink and others outside London would be closed to make way for a greater presence within the M25.

Mr Davies’s investment programme, named “Getting Into Gear 2016”, will be paid for by cutting the dividend for investors this year by 35%, from 14p to 9.1p per share.

Mr Davies said his plan was designed to “significantly improve retail customer experience and bring about sustainable and profitable sales-growth momentum”.

He added: “We expect these vital investments will inevitably reduce short-term retail profitability but will deliver long-term revenue and profit growth together with sustainable shareholder value.”

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Halfords has 466 stores in the UK and Ireland and 287 Autocentres, employing a total of 12,000 people.

It saw an overall 1% rise in revenue over the full-year to the end of March to £871.3 million, with a fall in retail sales offset by a 13.5% rise in income from its Autocentres - though much of this was derived from low-margin tyre sales.

The business experienced a topsy-turvy year as poor weather hit bicycle sales but they were lifted by the “Wiggins effect” of Britain’s Tour de France and Olympics success while sales of de-icer and screenwash kept tills ringing during the winter.

Mr Davies was hired in October three months after the departure of predecessor David Wild amid a profit warning and a sharp sales decline.

As part of his plan to turn around the business he last week announced the appointment of Walmart Canada’s former chief marketing officer Emma Fox as commercial director.

Today he said that over the next three years, Halfords would spend £50m refurbishing around 150 stores and modernising all its cycling departments, while also investing heavily in IT and digital.

“In terms of the look and feel of our stores there’s a lot of work to do,” he said. “Much of our estate is no longer at an acceptable standard of presentation and significantly lags behind customers’ expectations, especially cyclists, where a fresh and modern store environment is so important.”

Mr Davies said no significant change in overall store numbers was expected, though he said the number of loss-making locations would be kept to a minimum.

“We will re-size where we get the opportunity and will close a few stores as part of business as usual,” he said.

“We do need more stores in London where we are currently under-represented. Over the coming years we will focus on achieving a higher level of store-penetration inside the M25.”

Mr Davies said it was expected that profits would fall again in the next annual results and earnings would not top current levels until 2016.

He insisted that the dividend cut was necessary to “ensure Halfords has a robust foundation on which to build and maximise longer-term shareholder returns”.

Analysts at JP Morgan said despite the cut in profit forecasts, it appeared Mr Davies was building a base for growth, making share falls today a buying opportunity.

However, Kate Calvert of Cantor Fitzgerald said that while the business had embarked on the right strategy, the changes were long overdue and would have a bigger impact on the earnings in the next couple of years than previously foreseen.