Britain’s leading bicycle retailer
has seen its shares backpedal 22% in the past 12 months, hurt recently by poor sales from its higher-margin auto repair and accessories business.
The retailer owns 371 Halfords Autocentres, but locked-down customers have been using their vehicles less, requiring fewer services and parts. However, Halfords (ticker: HFD.UK) can’t blame coronavirus for all of its woes. The shares have fallen 72% over five years after a series of profit warnings and a string of chief executive officers.
Like many retailers, Halfords has expensive rent for its more than 440 stores at a time when consumers are shifting to online purchases. But CEO Graham Stapleton instituted a strategy two years ago that focuses on services in which Halfords provides engineers to fit the parts it sells onto customers’ bikes and vehicles.
As shoppers slowly emerge from lockdown they will be seeking alternatives to public transport. Halfords is increasing its margins with enhanced services that include fitting inner tubes onto bicycles, replacing car batteries, and replacing headlight bulbs and wiper blades.
Adam Tomlinson, an analyst at Liberum, has a Buy rating and estimates a 69% rise in the stock to 250 pence ($3.24). Shares are down 12% this year to 149 pence.
In a July note, he wrote that the share price implies a long-term sales decline of 8% per year. “The market appears to be giving very little credit for the progress achieved by management to date under the new strategy,” he said.
“We expect the recovery to be supported by an increasing focus on services, particularly within motoring and Autocentres, driving a greater mix of more nondiscretionary category sales.”
Kate Calvert, an analyst at broker Investec, also marked Halfords a Buy priced at 195 pence.
Based in Worcestershire, the firm fetches 16 times this year’s expected earnings and is valued at a 10% premium to its peers.
It employs 10,200 workers and has a market value of 295 million pounds sterling ($382 million). Earlier this month, it posted pretax profit of £22.7 million for the 52 weeks to April 3, down from £51 million due to one-off costs from closing stores. Sales were flat at £1.1 billion.
“We responded quickly to the surge in popularity of cycling during lockdown, and we are now seeing demand for motoring services and products increase as people start using their cars more regularly.” Stapleton told Barron’s.
“The strong macro tailwinds within our market-leading motoring and cycling businesses give us confidence in the long-term prospects for Halfords.”
The company was started in 1892 by hardwares retailer and cyclist Frederick Rushbrooke. He later moved the business to Halford Street in Leicester, which spawned the company’s name, and started selling cycling goods.
Halfords has market share in its core products categories of cycling, including sales and service (33% of sales), and autos, including parts and repairs (67% of sales). Halfords has strong brand recognition and geographical spread in the United Kingdom, which means it’s where customers turn to for their bicycling and auto needs.
Cycling sales accelerated 60% over the last quarter, but Investec’s Calvert warned that the usual jump in summer cycling sales may already be accounted for.
If Halfords can leverage the brand by adding value with services for the mechanically challenged, the business has a real point of difference. Consumers can buy tires or car radios from Amazon.com, but the online giant can’t install it. Halfords’ focus on full-service shopping gives it an edge over online rivals.