During Covid, Halfords (LSE:HFD), briefly benefited from the expectation that everyone would become a cyclist. Many people were making changes to their lives, such as adopting a pet, buying an exercise machine, or taking up a new hobby.
Shares in the firms that served these sectors surged, but once the lockdowns ended, many of these interests dwindled, causing the shares to fall back.
Even today, Halfords’ share price is still down 50% from its record peak in May 2021. But recently it has started to take off again and this time the increase could prove sustainable.
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Halfords makes its money from selling accessories and providing repair services for bicycles and cars; it accounts for about half of all bicycles sold in the UK. It operates 370 stores, 496 garages, 21 mobile hubs and 92 commercial depots in the UK and Ireland.
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Although overall sales have grown at a solid rate, increasing by around 40% since 2021, this conceals the fact that profitability has been far less consistent, due to higher costs and the overstocking of bicycles.
Normalised earnings per share are now less than half the level reached in 2021.
Halfords brings in a new broom
The good news is that Halfords' problems led to the appointment of new CEO Henry Birch last year. Birch has come up with a turnaround strategy based on three ideas.
In the short term, Halfords has worked hard to boost margins by keeping costs under control. It has also taken steps to improve its digital platform, making it easier for its customers to book services and sign up for regular plans.
However, the most interesting part of the new strategy is that Birch has been trying to shift Halfords' business more towards cars, which now comprise around 80% of sales.
He wants Halfords to focus on car repair and maintenance. One reason for this is that this part of the company has more growth potential than the stores owing to the greater opportunities for upselling (offering customers more and pricier products and services).
Another big advantage is that it is much harder for drivers to delay essential repairs than the purchase of accessories, making the division more resilient to the economic cycle.
Already this strategy seems to be paying off, with last year's pre-tax loss becoming a comfortable profit in the year to April 2026. Like-for-like sales (those from existing business units) are also growing at a healthy rate, while gross margins have improved too; Halfords recently upgraded its profit guidance for the next year.
Despite all this, the stock's valuation remains cheap at 12 times 2028 earnings and barely the value of the company's net assets.
The shares also offer a very solid dividend yield of 4.4%. Furthermore, they have soared 75% since 1 May, and they trade above both their 50-day and 200-day moving averages.
Go long at the current price of 232p at £15 per 1p. Put the stop-loss at 167p, which gives you a stop loss of £975.
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