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%.
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.
Cycling is booming in Britain as more people take to their bikes for fitness, fun and getting to work. There’s been a surge of interest during the last two years triggered by the success of Bradley Wiggins and Chris Froome in the Tour de France. With the Tour set to visit Britain for three days next summer, Halfords looks well placed to sell more bikes.
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 flow and 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