18 November 2010

 

HALFORDS GROUP DELIVERS 13% PROFIT BEFORE TAX GROWTH

 

Halfords Group plc, the UK's leading retailer of automotive and leisure products and leading operator in garage servicing and auto repair, announces its Interim Results for the 26 weeks to 1 October 2010.

 

Group Financial Summary

	26 Weeks	26 Weeks	52 Weeks
	to 1 October 2010	to 2 October 2009	to 2 April 2010
	Reported	Reported	Pre non recurring1
Revenue	£456.3m	£425.1m	£831.6m
Like-for-like Sales2	-4.9%	1.7%	1.3%
Operating Profit	£69.1m	£62.0m	£119.7m
Operating Margin	15.1%	14.6%	14.4%
Profit Before Tax	£68.7m	£60.9m	£117.1m
Basic EPS	24.1p	20.6p	39.7p
Net Debt	£109.8m	£106.0m	£155.5m
Interim Dividend	8.0p	6.0p	20.0p

 

Financial Highlights

On a comparable 26-week basis the Group's performance is summarised:

·   Revenue £456.3m, 7.3% increase with like-for-like sales² decreasing by 4.9%

·   Operating profit £69.1m up 11.5%, representing 15.1% of sales (2009: 14.6%)

·   Profit before tax  £68.7m up 12.8%

·   Basic earnings per share 24.1p up 17.0%

·   Net debt at £109.8m (2009: £106.0m) represents 0.7x pro-forma EBITDA

·   Interim dividend 8.00p (2009: 6.00p), up 33.3%

 

Business Highlights

·   Sales and market share growth in Car Maintenance, Premium Cycling and Outdoor Leisure

·   Service differentiation continues, with strong growth in wefit and werepair jobs

·   Multi-channel accounts for c.9% of total revenue after further strong growth

·   Retail gross margin gains reflect increased service penetration & active trading strategies

·   Successful delivery of infrastructure initiatives, reducing annualised costs by £8m per annum

·   Autocentre development plan on track, rebranding of all centres to be completed early 2011

·   Successful refinancing of Group's maturing debt arrangements.

 

David Wild, Chief Executive, commented on the results:

"This has been a period of considerable progress for the Group. In addition to increasing profits, we have successfully completed a number of significant change initiatives. These include the reconfiguration of the Group's warehouse and distribution network, the remodelling of staffing structures and the closure of our Central European operations. In total these reduce costs, enhance customer service and provide a strong platform for our next phase of growth that will be clearly focussed in the UK. We are also pleased to have concluded the refinancing of the Group's debt arrangements on favourable terms.

 

Our Autocentres business has made good progress, gaining market share. Our development plan is on track with 15 new centres to be opened and the entire network to be re-branded Halfords Autocentres by the end of the financial year. In Spring 2011 we will launch a national advertising campaign to drive sales and firmly position Halfords as the UK's leading independent operator in garage servicing and auto repair. We remain enthusiastic about our investment in this adjacent sector and the opportunity it provides for further profitable growth. 

 

During this period we have demonstrated that Halfords is a resilient and cash generative business that can adapt to our customers' changing needs and deliver growth initiatives for the future. Consumer spending is clearly under pressure and we believe this environment will continue into 2011. We hold market-leading positions however and remain confident that our strategy will deliver long-term sustainable earnings growth.

 

In the six weeks since the end of the half-year, trading conditions for Retail have remained challenging with like-for-like sales at -5.0%. Autocentres' performance has been encouraging resulting in like-for-like sales growth of 1.2%. We would expect profits for the full financial year to be within the range of market expectations."

 

 

Notes:

1.     Non-recurring items represent the exit costs associated with the closure of the Group's Central European Operation.

2.     Like-for-like sales represent revenues from stores trading for greater than 365 days. Where appropriate, revenues denominated in foreign currencies have been translated at constant rates of exchange.

3.   Consensus FY11 Profit before Taxation is £132m representing a year-on-year increase of 12.7%, with a range of £127m to £136m. (Source: Bloomberg 16 November 2010)

 

Enquiries:

 

Analysts:

Halfords Group plc

Nick Wharton, Finance Director                                          44 (0) 1527 513047

Tony Newbould, Investor Relations Officer                           44 (0) 7753 809522 (on the day)

                                                                                        44 (0) 1527 513113 (thereafter)

Media:

Maitland

Neil Bennett                                                                      44 (0) 207 379 5151

Richard Farnsworth                                                           44 (0) 207 379 5151

 

Results presentation

A presentation for analysts and investors will be held, today, at 9.30 a.m. at The City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP. An audio recording of the presentation will be available on the corporate website later today.

 

An interview with David Wild will be available on the Halfords corporate website later today and can be viewed by clicking on the following link http://www.halfordscompany.com/hal/pr/video).

 

Forthcoming Newsflow

Halfords Group will provide a trading update on 13 January 2011 for the third quarter that will cover the 13 weeks and 39 weeks to 31 December 2010.    

 

Notes to Editors:

 

www.halfords.co.uk

www.halfordscompany.co.uk

www.nationwideautocentres.co.uk

 

Halfords Group plc

The Group is the UK's leading retailer of automotive, leisure and cycling products and through Nationwide Autocentres also the UK's leading independent car servicing and repair operator.

 

Halfords employs approximately 11,000 staff and sells over 12,000 different product lines with significant ranges in car parts, cycles, in-car technology, child seats, roof boxes, outdoor leisure and camping equipment.  Halfords own brands include the in-store Bikehut department, for cycles and cycling accessories, Apollo and Carrera cycles and exclusive UK distribution rights of the premium ranged Boardman cycles and accessories. In outdoor leisure, we sell a premium range of camping equipment, branded URBAN Escape. Halfords offers customers expert advice and a fitting service called "wefit" for car parts, child seats, satellite navigation and in-car entertainment systems, and a "werepair" service for cycles.

 

Halfords customers shop at 462 stores in the UK and Republic of Ireland and at halfords.com for pick-up at their local store or direct home delivery.  Halfords Autocentres operates from 227 sites nationally and offers motorists dealership quality MOTs, repairs and car servicing at affordable prices.

 

Cautionary Statement

 

This report contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Halfords Group plc.  These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future.  There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements.  These forward-looking statements are made only as at the date of this announcement.  Nothing in this announcement should be construed as a profit forecast.  Except as required by law, Halfords Group plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Chief executive's Review

 

The first half-year performance provides a good foundation for the rest of year and the medium-term.  Operational efficiency initiatives have delivered a strong platform to facilitate future revenue growth and generated cost savings at a time when consumer confidence is adversely impacting retail demand.  

 

Group Operating Profit at £69.1m represents year-on year-growth of 11.5% with Halfords Retail contributing growth of 5.5%, with the balance from Autocentres that was acquired in February 2010.  While we were disappointed with Halfords Retail revenue growth, there have been sound like-for-like performances from Premium Cycles and Camping and further like-for-like progression from Car Maintenance.  Gross margin per cent continued to increase year-on-year, improving by 170 basis points ("bps") at the Group level and 40bps within Halfords Retail where sales mix to higher margin categories remains positive and traction on key trading strategies such as fitting continues. 

 

Our ongoing focus on cost management has delivered, through a number of key strategic programmes, a substantially and sustainably lower base with like-for-like Group Operating costs reducing significantly.

 

Progress against the Autocentre development plan remains on track.  A strong pipeline of potential new sites provides the prospect of substantial organic portfolio expansion and following the completion of the re-branding exercise by early 2011, the marketing of Autocentres under the Halfords brand provides an opportunity to substantially increase operating profits within this segment and further establish its market leading credentials. 

 

Robust cash flow remains a hallmark of the Group and as a consequence of higher profits and ongoing investment discipline, net debt reduced by £45.7m to £109.8m.

 

The Group has secured a £300m revolving credit facility, which will operate for four years, with a fifth year option, from 5 November 2010.  This provides the Group with sufficient headroom and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing capital investments.

 

BUSINESS REVIEW

 

Financial year 2011 has seen an extended period of economic uncertainty and a fragile consumer market.  Recognising this backdrop, the Group has focused on delivering the development plan within the recently acquired Autocentres business and on the core Halfords Retail division. Specifically, the Group successfully introduced a number of changes to deliver a more efficient, flexible and cost effective retail business model.  The Group remains committed to its strategy, investment of capital in high return projects and exercising strong financial discipline.

 

The first half of the financial year saw the completion of the project to reconfigure the Group's distribution infrastructure. The relocation of the principal warehouse to Coventry and the rationalisation from three sites to two, will result in annualised savings of £4m. This was achieved with only minor implementation challenges early in the transition period when a number of stores experienced stock shortages which had an estimated negative impact on sales of c.2.8% across a 6-week period, and first half sales being depressed by c.0.7%. 

 

Store colleagues successfully implemented a remodelled store rota initiative during the first quarter of the year resulting in improvements in colleague availability and a more efficient utilisation of resource in store.  Key service performance indicators in both service and accessory attachment have continued to show significant improvement that has been in part facilitated through improved colleague scheduling.  These cost saving initiatives increased by a further £2m to that originally planned and will deliver £4m on an annualised basis.

 

The Group's Central European operations were closed at the end of the March.  The majority of trading locations were assigned to a single new market entrant reducing the Group's financial exposure and providing employment opportunities for our colleagues. 

 

The exit from Central Europe, will eliminate annualised operating losses of c. £3m, and leaves the Group firmly focused on domestic activities, which are represented by two core businesses: Halfords Retail and Halfords Autocentres.

 

The preliminary results in June articulated the Group's long-term aspirations to deliver sustainable earnings growth averaging at 15% over the medium-term, through a combination of:

 

1.   The ability to drive high single digit operating profit growth from its retail operations,

2.   The growth opportunity provided through the acquisition of quality, adjacent, domestic businesses.

3.   The operation of an efficient balance sheet with excess capital being returned to shareholders. 

 

The management team remain committed to delivering against the medium-term target. The first half-year, despite a challenging trading environment, has seen earnings per share grow at 17%.

 

Halfords Retail Growth Strategy

 

The Group's ability to leverage its leading positions in growing markets, a successful multi-channel offer, and a unique service proposition are at the core of the Group's strategy which has been consistently adhered to.

 

The four elements of Halfords Retail organic strategic growth plan are:

 

1.     Extending range and service advantage

2.     Leveraging the Halfords brand in multi-channel

3.     Ongoing focus on cost control

4.     Investing in the store portfolio

 

1. Extending range and service advantage

 

Halfords Retail maintains market-leading positions across a unique blend of categories with ranges of unrivalled breadth and depth. Halfords constantly strives to enhance its position in each of its markets, seeking out product innovation and new ranges. To complement the product offer, store colleagues are trained to provide expert customer advice and deliver a suite of value-for-money wefit services. These factors differentiate the offer from the competition and act as a considerable barrier to market entry.

 

Car Maintenance

 

Halfords is the UK's number one parts retailer and a destination store for "needs-driven" transactions where customers are looking to purchase replacement products such as car bulbs, windscreen wiper blades and batteries ("3Bs").  The wefit service proposition continues to gain traction with the consumer. Growing customer awareness of Halfords fitting of the 3Bs and high levels of in-store stock availability continue to drive revenue.  Furthermore, our scale provides a unique ability to develop and source high quality, own brand alternatives to branded ranges, and to bring the latest "new car" technology quickly to the after sales market. Revenues in the period increased by 0.6% on a like-for-like basis, reflecting the resilient nature of this category.

 

Car Enhancement

 

This category covers staple products, such as car cleaning and car accessories and larger ticket items including car audio and portable satellite navigation devices.  Halfords is the market leader in in-car technology, where our exclusive ranges and unique "set-up and demo" proposition provide a clear point of competitive differentiation. We firmly believe that the ongoing innovation of new technologies for use in the car will provide a constant source of new sales opportunities but equally recognise the natural and relatively short lifecycle of those products.

 

The market for satellite navigation devices is mature and although manufacturers continue to innovate, consumers have reduced spending on such discretionary purchases, significantly reducing sales volumes. While revenues have declined in the period by 16% on a like for like basis for these products, we remain the clear leader in this market and have been partially successful in compensating for reduced revenues through a focus on significantly increasing sales of higher margin satellite navigation accessories, where the attachment penetration has increased to over 60%.

 

Technology innovation provides a flow of important and high value products for the car aftermarket and Halfords' leadership in this market means we can secure distribution from major manufacturers to capitalise on the next wave of development.  The introduction of the UK's largest range of digital (DAB) radios and converters has allowed Halfords to clearly establish its credentials in this market in advance of the significant opportunity that will ultimately be provided by the switch to digital later in the decade.

 

Leisure

 

The leisure category consists of Cycling and Travel solutions, with the latter including roof box, child travel and safety and camping offers.

 

Cycling

 

Cycling continues to grow in popularity, powered by demand for a healthier lifestyle, environmental concerns and economic pressures.

 

Halfords' leading position in this growth category is underpinned by its market leading own brands, including Apollo, Carrera and Boardman, with Apollo remaining as the biggest selling bike brand in the UK. This is supported by a strong before and after sales service proposition and direct sourcing capability from the Far East.

 

The Boardman range, designed by Olympic Champion Chris Boardman, leads our premium bike offer through an exclusivity agreement in the UK. The Boardman range has been widely acclaimed for its leading designs, construction and price competitiveness. Sales have grown significantly since the launch two and a half years ago to a level that we believe to be in line with some of the more established premium brands distributed via independents.

 

Halfords' cycle service proposition clearly differentiates us from other mainstream-market participants and continues to be well received by customers; with more than 95% of the bikes we sell being built in-house. All new bikes purchased come with the offer of a free six-week check-up and we aim to develop an ongoing service and repair relationship through the sale of a Bike Care Plan, providing customers with the certainty of labour-free repairs.

 

The small like-for-like revenue decline experienced in the period was disappointing even when set against the strong comparative in the previous year where sales increased by over 20%.  Sales were adversely affected by Far East supply disruption impacting the introduction of our new Apollo range of mainstream cycles and from reduced availability of key cycle accessories at the time of transition to our new distribution centre configuration. 

 

Each of these issues has now been addressed leading to improved ranging and availability in the second half of the financial year.

 

Travel Solutions

 

Halfords has established a reputation as the destination store for travel solutions. Products such as roof boxes and bars, cycle carriers and child seats help make our customers' journeys easier, while our camping range means they can enjoy their leisure time more actively.  

 

While core travel and touring products declined in sales versus a particularly strong comparative, Camping had another successful year with record sales in key lines enabling a clean stock exit and achieving further gains in market share. Our direct sourcing capabilities allow us to provide customers with great value offers like our market leading family tent pack at £99.99. 

 

A range of mobility aids, including scooters, wheelchairs and walking aids are now firmly established in many of our superstores. The mobility market is valued at an estimated £500m in the UK and is set to grow with one in three people in the UK forecast to be over 60 years by 2024. In addition, there are currently 9 million permanently or temporarily disabled people in Britain, many of whom also need mobility aids. With a shortage of accessible retail outlets, selling mobility products at competitive prices, this initiative has been welcomed by customers and mobility represents a further opportunity for Halfords as a natural extension of our travel solution ranges.

 

Service

 

The macro economic challenges faced by the UK and its impact upon the consumer has resulted in consumers demanding a strong value proposition and perceived "deals" from retailers.  Halfords Retail provides the consumer with the largest range of automotive and leisure products and within the core areas of Car Maintenance and Cycling has a price architecture that provides choice to our customers.  Complementing the price points is a national network of trained store colleagues that provides expert knowledge, advice and service that makes the Halfords offer a compelling value proposition.

 

All product categories include a core service element, for example Bike Care Plan, Free Bike Build (webuild) and 6 week service (wecheck) within cycling and "Set-up and Demo" within technology.  The platform for the proposition remains, wefit, being the on-demand fitting of Car Bulbs, Windscreen Blades and Batteries ("3 Bs") and although we set stretching targets to increase awareness, uptake and service revenue, we continue to exceed our internal expectations.  During the first half of the year the 3Bs penetration has doubled over the last two years with currently 20% of all batteries, 48% of bulbs and 33% of wiper blades that are sold being fitted. The investment made in remodelling colleague rotas and training, has ensured colleague availability and visibility to meet real time customer fitting requirements. 

 

Assisted purchases by our knowledgeable and informed store colleagues have seen attachment rates of accessories continue to increase with the penetration in both cycle accessories and satellite navigation accessories at c.60%.  Internet sales continue to grow strongly and with more than 80% of such sales involving a visit to the store, store colleagues have the opportunity to ensure that sales made are fit for purpose and have the opportunity to assist customers in trading up and purchasing essential accessories, such as cycle helmets when purchasing a cycle. 

 

During the first half of the year c.1.0 million wefit and werepair jobs were completed and we remain confident that fitting penetration can be increased further.  Service remains at the heart of the Halfords customer offer, generating value to the customer, providing differentiation from the competition and generating attractive levels of return to the Group. 

 

2. Leveraging the Halfords brand in multi-channel

 

The Internet is increasingly shaping consumer shopping patterns and behaviour through the ability to research products, and identify real-time stock availability and prices. 

 

Halfords Retail provides 3 ways to shop online:

1.   Reserve and Collect - a service where products researched online are reserved for immediate collection at a convenient nearby store.

2.   Order and Collect - allows customers to order products from our more extensive online catalogue and have it delivered to their local store for collection free of charge.

3.   Direct delivery - products ordered online are delivered direct to customers' homes.

 

Halfords strong brand, leading internet site and focus on developing this channel has seen a 57% increase in our online business, which currently represents approximately 9% of Halfords Retail overall sales.  Visitor numbers to our website, which is now firmly established in the IMRG Hitwise Hot Shops' top 30, exceeded 20 million, a 47% year-on-year increase. 

 

Our strategy continues to be the integration of halfords.com and our store operations. This strategy delivers what our customers have said they want, namely that they like the convenience of buying online but also want to visit our stores for knowledgeable, expert advice and recommendation and benefit from the added value services such as fitting.

 

Online participation is strongest in child travel and safety where one in four child seats are purchased through the web with 21% of premium bike sales and 15% of satellite navigation devices and accessories being sold online.  While there exist opportunities to significantly extend the range of products we offer there is also a large opportunity to grow the participation of existing product lines sold on the web such as in-car entertainment units such as MP3 connectivity and CD audio, as well as cycle accessories and hand tools.

 

Enhancing our online offer, whether for normally ranged products or for our increasing number of extended ranges held outside of stores, and further extending our multi-channel presence remains a priority.  Halfords continues to encourage customer ratings and reviews to the site, which together with the site's "Ask and Answer" facility, allows customers to benefit from the expertise and experience of other users and customers.

 

3. Ongoing focus on cost control

 

The efficiency and operational effectiveness initiatives that have been in planning during the last two years are now being delivered with all areas of the Retail business having been reviewed.  This strategy ensures an efficient use of resources and an appropriate and flexible operating base for the current economic environment.

 

Logistics

 

During the second quarter of the financial year Halfords Retail completed the reconfiguration of its logistics infrastructure.  This reconfiguration, which has seen the reduction of three warehouses down to two, will deliver annualised cost savings in excess of £4m, including rent savings, transport reductions and labour efficiencies.

 

At the heart of the new configuration is a new 320,000 sq ft national distribution centre ("DC") located at the Retail division's centre of gravity in Coventry that became fully operational in September.  In addition to operating at a lower cost, this facility, which, is equipped with contemporary logistics technology such as radio frequency scanning also has capacity to support the future growth of the Group's retail and web operations and will ensure the more efficient delivery of stock to Halfords stores enabling further labour efficiencies in store.

 

Store Operations

 

Following the initial improvements made to store colleague rotas in the first quarter of the 2010 calendar year, a further efficiency programme in stores has been implemented which will reduce labour costs while improving colleague availability and therefore providing better service for our customers. The savings from this programme total £4m on an annualised basis.

 

The programme has realigned store grades, rostering and schedules across the store, week and network, delivering a net reduction in colleague hours with resource being removed from low footfall periods and in-store processes being made more efficient. Improved performance across the suite of our key service metrics around fitting and accessorisation provides high confidence that the reductions have been made while maintaining our key customer service differential.

 

The changes, which have impacted the majority of store-based colleagues, provide clearer career paths for colleagues and strengthens our position in the recruitment market.

 

Cost Discipline

 

A culture of cost control discipline has been firmly established within Halfords.

 

While the most significant opportunity now rests within property, where rent settlements are at a historic low and near term lease maturities provide a further opportunity to reduce rental cost, opportunities have been identified across the business including product sourcing which represents our largest cost.

 

We continue to identify products that could be sourced directly from manufacturers across Asia increasing the level of direct sourcing from its present 30%. Furthermore, our Far East sourcing team, based in Hong Kong and Shanghai, China, operates an agile sourcing model, moving manufacture of products designed by the Group's category management resource in the UK, between regions and countries as cost and duty profiles change.

 

4. Investing in the store portfolio

 

The quality and layout of Halfords Retail 462 store estate is a key element of its customer proposition and a source of competitive advantage. This national scale also supports our position as the store of first choice, as 90% of our customers are with a 20-minute journey of one of our stores.

 

Accordingly, the Group's strategic focus remains in the development and progressive refurbishment of the two formats of choice, the superstore and the smaller format Compact store. Compact stores provide a comprehensive Halfords offer to smaller catchments, carrying some 6,000 of the 10,000 lines available within an average superstore.

 

Halfords Retail operates from 462 stores in the UK and Republic of Ireland including 397 superstores, 33 compact stores, together with 31 small format Metro stores located on high streets where no suitable edge of town retail opportunity is locally available. During the half year, the Halfords Retail portfolio reduced by a net seven stores reflecting the closure of the Central European stores, the closure of a Bikehut store and the opening of a new superstore in Lichfield.

 

Halfords Retail continues to invest in its existing estate to ensure that it remains contemporary and management focus has involved the development of a refresh and reconfiguration project, "Store of the Future", which is designed to introduce new ranges, rebalance space allocation, improve merchandising and in-store navigation. The project is currently in a pilot phase and results so far have been very encouraging.

 

The Group is confident that there is a long-term opportunity to grow the retail store portfolio by a further 50 stores.  During the second half of the year there are a number of conversions and relocations planned although there is unlikely to be any material net increase in the portfolio as the lack of quality, new retail sites and the poor condition of recycled property provides a challenge in developing new store opportunities. 

 

Halfords Autocentres

 

The recently acquired Nationwide business complements Halfords Retail closely and builds on our growing car parts and wefit service business creating the largest specialised UK operator focussed on the car maintenance, servicing and car repair market.

 

There is significant scope to grow the acquired operation, that will be rebranded during the current year to Halfords Autocentres, establishing a unique proposition within this £9bn market, delivering the quality and trust expected from the Dealer network at a more affordable cost presently associated with independent garages. Operational scale will significantly increase by opening 200 further centres in key towns over the next seven years, with 80 centres anticipated to open in the next three years. Further growth opportunities exist from cross marketing the Group's complementary customer base, increased fleet penetration and there will also be cost and purchasing synergies.

 

Progress against our development plan, in the first seven months of ownership, has been extremely encouraging. 

 

Six new Autocentres have opened to date, including two Nationwide centres that were relocated and re-opened as Halfords Autocentres, and we have established a significant property pipeline to under-write our ambition to open up to 15 Autocentres this financial year, accelerating to between 25 and 30 in FY12.  

 

A cost effective re-branding model has been developed and to date 50 centres have been branded under the Halfords logo, a further 120 centres are planned to be completed before Christmas and the chain completed towards the end of the 2011 financial year-end.  The completion of the re-branding will enable the commencement of a national advertising campaign that will be designed to build awareness of the Halfords Autocentre brand and service proposition.

 

Purchasing synergies have also exceeded our initial expectations.

 

Operational performance in the period has been challenging as consumers seek to defer non-essential purchases. We are however encouraged by the growth achieved within the Fleet market and the growth in customer numbers and market share. Our belief that purchase deferrals in the first half were not sustainable in the long-term appears to be supported by the return to positive revenue growth in the six weeks after the half-year.

 

In line with our guidance at the time of acquisition operating profits in the period are broadly flat in the year after adjusting for development costs.    

 

Outlook

 

In the six week trading period since 1 October conditions have remained challenging, with like-for-like revenue declines within Halfords Retail of 5.0%.  However, continued growth in customer numbers and an improvement in average transaction value from increased discretionary purchases has generated consistent positive like-for-like sales growth within Autocentres of 1.2%.

 

With the cost savings from the programmes delivered in the first half year now firmly on stream, we would expect profits for the full financial year to be within the range of market expectations.

 

Although we expect the consumer environment to remain challenging, we have again demonstrated that the Halfords business can make good progress in these conditions and improve operating returns. The Group's strong market positions, ongoing actions to reduce costs and strong cash flow characteristics provide a solid platform for future sustainable earnings growth through our core strategic growth initiatives.

 

 

 

 

 

 

 

 

 

 

 

Financial Review

 

Halfords Group

 

Performance Summary

 

Unaudited		26 weeks to
	1 October 2010	2 October 2009	Change
Revenue (£m)	456.3	425.1	7.3%
Gross profit (£m)	251.1	226.6	10.8%
Gross margin (%)	55.0%	53.3%	170 bps
Operating profit (£m)	69.1	62.0	11.5%
Operating margin %	15.1%	14.6%	50 bps
Profit before tax (£m)	68.7	60.9	12.8%
Basic earnings per share	24.1 pence	20.6 pence	17.0%
Dividend per share	8.00 pence	6.00 pence	33.3%

 

Reportable Segments

 

Halfords Group operates through two reportable business segments or strategic business units:

Halfords Retail and

Halfords Autocentres.  

 

Income Statement

 

Group revenue for the 26 weeks to 1 October 2010 was £456.3m (2009: £425.1m) an increase of 7.3% on the comparable period last year. Reported revenue for the period includes £49.1m from Halfords Autocentres, following its acquisition in February 2010.

 

Gross profit at £251.1m (2009: £226.6m) was up 10.8% with gross margin, at 55.0%, representing a 170bps improvement compared to the prior year (2009: 53.3%). This gross profit performance includes a £32.4m contribution from the Autocentres segment for the half-year.

 

Operating profit increased by 11.5% to £69.1m (2009: £62.0m) reflecting the strengthening of gross margin and the disciplined reduction in operating costs year on year this represented 15.1% of sales, an increase of 50bps on the margin achieved in the corresponding period in the prior year.

 

Profit before tax increased by 12.8% to £68.7m (2009: £60.9m).

 

Halfords Retail

 

Revenue

Revenue for the 26 weeks to 1 October 2010 was £407.3m (2009: £425.1m) a decrease of 4.2% on the comparable period last year, representing, on a constant currency basis, a decrease in like-for-like sales of 4.3%. As was illustrated in the Business Review, identifying suitable retail sites that would satisfy the Group's capital discipline has proved challenging and the absence of new store openings is reflected in the year-on-year reduction in contribution from new space to 0.6% (2009: 1.7%).  Retail like-for-like sales declined year-on-year by 4.9% (2009: 1.7%) and by 3.5% (2009: 1.2%) on an underlying basis, adjusting for the timing of Easter (40bps), the closure of Central European stores (30bps) and revenue disruption arising from transition to the Coventry distribution centre (70bps).

 

Gross Margin

Gross profit at £218.8m (2009: £226.6m) was down 3.4% and gross margin at 53.7% (2009: 53.3%) represented a 40bps improvement compared to the prior year.  This performance, against a significant currency headwind, reflects the continued successes in margin accretive activities such as source cost improvements, accessory attachment rates and increased penetration across the suite of fitting services that generate 100% gross margin.

 

 

 

 

 

 

Operating Costs

Halfords Retail continues to control operating costs while funding investment in strategic growth initiatives in order to manage overall cost growth. In the current environment it is also important that the retail cost base is both appropriate and flexible to changing levels of revenue. Significant progress has been made over the past year in both reducing the absolute level of our key cost elements, such as store colleague costs, while increasing their availability to assist in customer purchases. 

 

As an example, following interventions to store based structures made in the second half of the previous financial year, the ratio of store labour to sales has reduced while increasing both sales of accessories with core product purchases and the contribution from service related revenues.  Whilst making such changes we are always mindful not to sacrifice our core assisted service proposition for all customers.

 

Upward cost pressure from the store portfolio continues but at significantly reduced levels. While business rates and utility costs have increased, the rate of rental settlement inflation has slowed. Reflecting the more benign property environment, and the quality of Halfords as a tenant, we are adopting a more demanding stance on each rent review and expect rent inflation to slow further. In addition, we believe a more significant opportunity to achieve cost reductions in this area will arise at the point of lease maturity, where there are a significant number of such expiries in the next ten years. 

 

The opportunity for Halfords to leverage value from its store portfolio through tactical re-sites and format re-configuration continues to exist, although the current economic climate has meant that the opportunities are arising less frequently and there are no signs of any significant improvement in the property market. There were no landlord contributions during the period, compared to £0.1m last year and the Group's guidance is for a full year contribution of between £0.5m and £1.0m.

 

Operating expenses as a per cent of Retail revenue at 37.7% decreased by 100bps versus the prior year (2009: 38.7%). This decrease represents a £11.2m reduction in costs and reflects the delivery of strategic efficiency initiatives, reduced colleague incentive provisions, the closure of the Central European stores and the release of property related provisions following reduced rent review settlements.  A similar year-on-year quantum of savings will be achieved in the second-half as the strategic initiatives, warehousing and distribution and store colleague labour continue to flow through as well as the ongoing reduction in the level of costs associated with colleague incentives and property.  Looking to next financial year our strategic cost initiatives provide sustainable cost saving opportunities with further property cost benefits anticipated from both rent renewal and rent maturity negotiations. 

 

As a consequence of the actions outlined above operating profit increased by 5.5% to £65.4m (2009: £62.0m) and represented 16.1% of sales (2009: 14.6%).

 

Halfords Autocentres

 

Revenue for the 26 weeks to 1 October 2010 was in line with last year's performance at £49.1m. During the period five new centres were opened, of which two were relocations, generating a new centre contribution of 80 bps and resulting in a year-on-year like-for-like decline of 80bps.

 

Gross profit at £32.4m (2009: £32.8m) was down 1.2% and gross margin at 66.0% represented an 80bps reduction compared to the prior year (2009: 66.8%).  This performance reflects the diluting impact from the increased penetration from lower margin tyre sales and reduced average service transaction values, offset by cost price gains achieved through buying synergies principally through the Group-wide purchase of oil.

 

The Autocentre cost base remains well controlled, with operating costs maintained at the same level as the prior year after the investment associated in new centres and re-branding.   Adjusting for strategic investments where benefits will accrue in future financial periods, headline operating profits at £4.8m are broadly consistent with those delivered in the previous financial year (2009: £5.2m).

 

Finance Costs

 

Net finance costs for the half-year were £0.4m (2009: £1.1m).  Finance costs continue to benefit from a prevailing lower level of average net debt and lower LIBOR that followed the Base Rate reductions last year and have resulted in interest on bank borrowings being £200k lower than last year.  The reduction in net debt, leading to higher balances held on deposit have generated interest receivable £200k higher than last year.

 

Taxation

 

The underlying taxation charge on trading in the 26 weeks to 1 October 2010 is 29.8% (2009: 30.0%) principally due to the non-deductibility of depreciation charged on capital expenditure in respect of mezzanine floors and other store infrastructure.

 

The effective tax rate of 26.3% (2009: 29.2%) is lower than the underlying tax rate due to the reassessment of historic tax provisions required against tax uncertainties. The effective tax rate for the full financial year is, however, anticipated to be approximately 27.5%.

 

Net Debt and Cash Flow

 

Total net debt at 1 October 2010 was £109.8m (2 April 2010: £155.5m) including £11.9m (2 April 2010: £12.0m) in respect of the Head Office finance lease. The Group continues to generate strong net cash flows from operations, which prior, to financing and taxation payments, was £88.4m for the 26 weeks to 1 October 2010 (2009: £112.3m) and represented a cash conversion from EBITDA of 109%. (2009: 153%)

 

The reduction in cash flow from operations compared to the prior year primarily reflects the one-off working capital benefits crystallised in 2009 from the material reduction in inventory levels achieved in the previous financial year. Cash payments against year-end provisions, including the transition to our revised distribution configuration and the exit of the Group's Central European operations, have further reduced operating cash flow in the period.  

 

Inventory levels have increased by 2.3% at a Group level compared to the inventory held at 2 October 2009, of which 0.9% is represented by the inclusion of Autocentres inventory, and 1.4% represented by increased Retail inventory. The net increase in Retail reflects an increased investment in inventory to secure peak requirements, particularly in the Cycles category.  We are confident that the Group inventory will exit the financial year at a level in line with our guidance of reducing or growing at a rate marginally less than sales. 

 

Capital expenditure during the first half of the year totalled £7.9m of which £1.1m related to the acquired Autocentres segment (2009: £6.6m). Including the strategic investment in the Group's distribution infrastructure and the rebranding of 225 Autocentres, the Group is forecast to spend approximately £24m for the full year (52 weeks to 3 April 2009: £20.4m).  We continue to invest to support strategic growth, with £3.5m expended in the period on new and refurbished locations (2009: £4.3m), and approximately £2m was spent on the DC project in the first half of the year and £2m investment in information technology infrastructure.

 

Free cash flow from the business totalled £47.6m (2009: £73.8m) after the payment of dividends to shareholders of £29.3m, 29% higher than the dividend flow of £22.8m in the equivalent period in the prior year. At a free cash flow cover of 2.6x, the dividend remains extremely well covered.

 

Balance Sheet and Bank Financing Arrangements

 

As illustrated by the performance in the period, the Group remains strongly cash generative with an organic growth plan that does not demand high capital investment.  The Board's long-term intention remains to maintain an efficient capital structure, investing in value creating business development or returning excess capital to shareholders.

 

The Group has renegotiated its' debt facility with effect from 5 November 2010 and secured a four-year £300m revolving credit facility from that date (with an option to extend by a further year).  While variable in line with the level of Group debt, at the Group's optimal gearing level of 1.5x EBITDA, the facility carries an interest margin of approximately 200bps. 

 

With revised facilities in place the Board has determined that it has sufficient facility in place to resource the Group at its optimal level of gearing and has sufficient working capital and undrawn financing facilities to service its operating activities and ongoing capital investments following the signing. The Board retains its preference for financial flexibility and lower gearing whilst pursuing high return investments. Accordingly the Group's pro-forma gearing at the end of the period was 0.7x EBITDA.

 

Dividend

 

The Company is committed to a progressive dividend policy and continued investment in the growth of the business, both through organic development and other business development opportunities as they might arise. 

 

Furthermore, having considered in 2009, and given the consistent nature of the Group's earnings and cash-flow profile, it is the Board's intention to increase, over time, the proportion of the full year dividend represented by the interim dividend to approximately 40%.

 

In line with this intent and reflecting the Group's increased profitability the Board has increased the interim dividend by 33% to 8.00 pence per share (2009: 6.00 pence per share).

 

The dividend will be paid on 24 January 2011 to shareholders on the register on 17 December 2010.

 

Third Quarter Interim Management Statement

 

The Halfords Group will announce its interim management statement on 13 January 2011, covering trading for the 13 weeks ended 31 December 2010. Group revenue is not significantly seasonal in this or any quarter as, typically, sales in each half of the year are broadly similar.

 

Principal risks and uncertainties 

 

The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving Halfords' strategic corporate objectives, and in the Annual Report 2010 it set out what it considers to be the principal commercial and financial risks to achieving the Group's objectives.  The main areas of potential risk and uncertainty in the balance of the financial year are described in note 3 to the condensed consolidated interim financial statements.