Just under a year ago, Halfords had been having a bit of a rough time and profits were going down. With a new chief executive in place armed with a different strategy, we thought the shares could be a turnaround story and tipped them as a buy.
Last week, Halfords confirmed that it has been turning itself around with a nice increase in half-year profits. The stock market liked what it saw and the shares soared. They are now up 40% since we tipped them.
Most of us know that getting customers to spend more money in shops is tough. Halfords has done very well, though, with first-half same-store sales up by nearly 8%. The good summer weather has been helpful, but it seems that Halfords is finally getting round to selling better-quality bikes, sales of which increased by 14%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Selling bikes and accessories accounts for just over a third of Halfords' sales, and success here will be a key factor as to whether profits can keep on going up. For years Halfords has been a place to go to buy children's bikes, but the more serious cyclists have tended to go to specialist shops. That's unlikely to change overnight, but Halfords is getting its act together.
The company's autocentres are not doing as well, however, and still make a very small contribution to overall profits. A big step up is needed here if Halfords is going to make this venture pay off.
Elsewhere, things are looking good. The company's finances are very healthy as it continues to generate lots of free cash flowand pay down debt.
My only quibble with Halfords now is that its share price is starting to look a little expensive. With City analysts forecasting earnings per share of 25.5p for 2014, the shares are trading on 18.8 times earnings.With earnings growth of around 10%, that rating looks pretty full.
A dividend yield of 2.9% is all right, but don't expect much dividend growth as the company looks to keep payouts modest until profits improve.
Verdict: take profits
-
Barclays warns of significant rise in social media investment scamsInvestment scam victims are losing an average £14k, with 61% of those falling for one over social media. Here's how to spot one and keep your money safe
-
Over a thousand savings accounts now offer inflation-busting rates – how long will they stick around?The rate of UK inflation slowed again in March, boosting the opportunity for savers to earn real returns on cash in the bank. But you will need to act fast to secure the best deals.
