Halfords Group plc (HDK.MU) Earnings Call Transcript & Summary

Good morning, everyone. And thanks for joining the call today. I'm Graham Stapleton, Chief Executive of Halfords, and joining me on the call today is Loraine Woodhouse, our Chief Financial Officer. I will start today's update with the top level trading highlights, then we move into a more detailed look at our sales performance, followed by some strategic highlights. We will conclude with the outlook for the rest of this financial year. Loraine and I will then be happy to take your questions. So let me begin with what we believe are the key highlights from the last 20 weeks. Trading in the first 20 weeks of FY '21 was clearly dominated by the impact of COVID-19 and the various stages of lockdown across the U.K. As an essential retailer, we remained open and trading throughout the period to support our customers with their motoring and cycling journeys. Despite the challenging retail environment created by COVID, trading has been ahead of our expectations, and performance across the group has accelerated as lockdown peaked. Both Cycling and Mobile Services performed strongly during the peak of lockdown. And as restrictions have eased and traffic has normalized, we have returned to strong growth in Motoring products and Services. As a result, group revenue was up plus 7.5% and plus 5% on a like-for-like basis. This is a good trading performance, primarily driven by a significantly larger cycling market and the current trend towards staycations within the U.K.; the benefits of our new group web platform, which, as you know, brought together our Retail, Autocentre and Mobile Products and Services for the first time on one website; and increasing scale in our Motoring Services business with the recent acquisitions of both McConechy's and Tyres on the Drive. In each of these areas, we executed our plans well and demonstrated good operational agility, and this allowed us to fully capitalize on the current market tailwinds. Beyond our strong sales performance, our Cycling optimization plan, which we both communicated last November, had also been gaining real traction within the business, resulting in good underlying improvements in the Cycling gross margin. At the same time, with good cash management and faster stock turn has meant that liquidity remained strong throughout the period with net cash of GBP 105 million on the 21st of August 2020. So looking now to our overall sales performance in a bit more detail. In Retail, Cycling like-for-like revenue was up plus 59.1%, with growth across all categories, the most significantly in electric parts and scooters, which grew by over 230% year-on-year. And increased focus on bringing unique and differentiated products to market meant that sales of new products were up 114% in the period, with the highlight being our new Carrera range offering customers market-leading specification and outstanding value for money. Retail Motoring like-for-like revenue was down 28.6% for the 20-week period, but returned to strong growth in period 5 as car journeys return to more now levels. A combination of more customers getting back into their cars and our unique fitting proposition drove good growth in batteries, bulbs and blades, which were up plus 13% in both periods 4 and 5. We also saw a significant shift towards vacation-related products such as roof bars and boxes, which grew by plus 28.4% in the same period. In our performance cycling business, Tredz, we saw sales up by 76% in the period, reflecting strong demand from cycling enthusiasts and the successful transfer of customers from our Cycle Republic business, which we exited during the spring. In Autocentres, total revenue was up plus 30.2%, with our acquisitions of last year contributing strongly alongside new service offerings. Our Autocentres business also benefited from increased online bookings to our recently launched group web platform and the upgrade of our digital operating model, PACE. As you would expect, with the U.K. lockdown in place, demand for our mobile services proposition remained high throughout the period as customers look for more convenience and stay socially distanced methods of services and repairs. So as you can see, a very strong period of trading where we've worked hard to capitalize on the emerging trends and market tailwinds. Turning now to look briefly at the progress we're making against our vision to inspire and support a lifetime of motoring and cycling and our strategy to build Halfords as a consumer and B2B services-focused business with a greater emphasis on motoring and the more profitable cycling category. When we presented our preliminary results on 7th of July, we laid down our strategic projections for FY '21 with particular focus on our cost and efficiency programs to create an even leaner and more effective businesses to move into FY '22 and a great emphasis on the support pillar of our strategy to transform and optimize our [ versatile ] business. I'm pleased to say that we have already made strong progress this year against these objectives. Turning first to our group services delivery where total sales growth of plus 6.3% in the period was driven by our increasingly scaled Autocentre business taking share in a very fragmented market. After weaker demand during lockdown, like-for-like growth of plus 8.8% in periods 4 and 5 demonstrated the strength of our underlying business and its ability to meet pent-up demand for servicing and MOTs. In fact, since the start of lockdown, we have seen both MOT and servicing levels increase significantly now ahead year-on-year. Encouraged by the significant demand for our Mobile Expert proposition, we added 16 new vans during the period, bringing the current total to 91 and well on the way of our target of 125 by the year-end. To drive awareness of our integrated motoring services offer across retail stores, garages and mobile vans, we invested in our first-ever, group-wide media campaign. This drove considerable uplift in awareness metrics and helped boost consideration of Halfords by nearly 40%. In Cycling, our services were up plus 17.5% in the 20-week period and plus 48% in periods 4 and 5, boosted by our free 32-point bike check and the government's Fix your Bike Voucher Scheme, where we've gained significant share. Finally, looking at cost efficiency. We're on track to improve our Cycle gross margin by 300 basis points in FY '21, driven by more favorable buying terms, component rationalization and more effective promotional activity. Regardless of stronger-than-expected sales so far this year, we will continue to target operating cost reductions across the group through location closures, labor efficiencies and other initiatives. Specifically, we are making good progress towards our target of closing up to 10% of our property estate in FY '21, which includes the previously announced 22 Cycle Republic stores and 7 additional stores and garages closed so far this financial year. We're confident that the successful execution of our strategic areas of focus in FY '21 and a strong balance sheet to enable further investment will place the group in a strong position to continue its strategic journey in FY '22. Turning to our outlook for the rest of the year. In our preliminary results announcement on the 7th of July 2020, we provided details of potential outcomes for profit and net debt based on different like-for-like trading scenarios for the remaining 3 quarters of the year. This included insight on the margin and cost impact of a higher cycling mix and the incremental costs associated with operating in a COVID-19 trading environment. These factors remain unchanged, and so the relative dynamics of the scenarios remain valid today. Since our last market update, our trading performance has strengthened, and the 7 weeks since Q1 was significantly better than we anticipated in early July. This gives us more confidence in our profit outturn for half 1, which we now expect to be in the range of GBP 35 million to GBP 40 million. This assumes expected levels of trading in September and stability in the relative value of the U.S. dollar. We have seen stark differences in the relative performance of different product categories, and this is further exacerbated by significant uncertainty on macro factors such as the impact of a second wave of COVID-19 and economic contraction driven by rising unemployment and the impact of Brexit. All of these factors, combined with the relatively high operating costs, mean that the range of possible profit outcomes for half 2 is very wide. The macro headwinds we are likely to face, together with a natural falloff in the relative strength of Cycling and staycation products during the winter months, means that profit in the second half could be significantly lower than the first half. That concludes today's update. Thanks for listening. We will now be happy to take questions.

[Operator Instructions] We have a question from Tony Shiret of Panmure Gordon.

And very well done. Questions really about the gross margin or first part, and that is really whether you could clarify your comments a little bit. Is the gross margin, in actual terms, going to be up or down in the first half, would you say? Will you know? And within the Cycling gross margin, how much of the underlying benefit is from reduced markdown? And how much do you think you'll hold on to? And the second question is, what your view is of the cycle market next year, bearing in mind how strong it's been this year? And whether we should anticipate you sort of adjusting your capacity for Cycle sales next year.

Loraine, do you want to pick up -- thanks, Tony. Loraine, do you want to pick up the first question? I'll pick up the second one.

Yes, sure. So GM, I am expecting still to be down for the first half, but there's no doubt it's been on a better trajectory. So I think it'll be close by the time we get to the half year. So obviously, it was very challenging in the first few months of the year as -- even with sales coming through. I'm talking gross margin percent, by the way. So even with sales coming through, they were coming through much more strongly, obviously, from Cycling. So GM percent, I think, will be a little bit down year-on-year. In terms of Cycling, quite a bit of the margin has come through, as you might expect, from reduced promotional activity. We've obviously seen very strong demand. But not all of it. We think quite a chunk of it is sustainable, some through the actions we've already taken on Cycle Republic, which allowed us to consolidate some of the buying through our Performance Cycling business, but also through Halfords mainstream, where we've been buying better and buying deeper on popular lines for quite some time. So I think there could be some exaggeration in the gross margin impact over the last couple of months because of the extraordinary demand. But I'm confident we will hold on to margin gains as we go forward, too.

Okay. So in terms of the cycling market, your second question, in terms of cycling market next year, Tony. I think, firstly, I'd say that even before COVID, our Cycling business was in growth. We finished last financial year with the Cycling business growing, and that's because of the underlying fees that we're seeing around fitness, health, climb, all of those things, infrastructure investment, all of those things were true then. So I do think that as we go into next year, we will still see a good Cycling business into next year. We also, I think, are seeing some change over the -- after 20 weeks towards Cycling becoming more of an essential purchase rather than just a ledger purchase. So customers buying bikes to get around because they're trying to avoid public transport, certainly buying bikes more for exercise and keep fit. So again, as we stand now, that trend is likely to carry on alongside the government infrastructure investment that is starting to take place. So I think there's some -- there'll still be some strong tailwinds. The -- obviously, there may -- there could have been some business pulled forward, of course, in the last 20 weeks that would have been potentially spent next year. We don't know how much that would be, but there is a risk around that, too, which is some of that out. So in summary, it's difficult to be absolutely sure where the market is going to be next year. So I guess what I would say is there are both positive reasons to believe that we'll certainly -- well I think, will balance out some of the challenges as well.

We now have a question from Matthew McEachran of Nplus1 Singer.

Well done on a good update. A couple of questions from me. Can we just start a comment around, any caution around the second half and the perspective around your scenarios, your 3 scenarios that you laid out? I mean, just looking at the worst scenario, it would appear that you would require a loss in the second half of about GBP 45 million, and in the best scenario, a loss of between GBP 15 million and GBP 20 million, that sort of order. Can I just double check, are those outcomes in the second half really within your forecasting range?

Matthew, so what we were trying to convey with the scenario is that the relative movement as you apply differential like-for-like growth is still relevant, not that you would take the second half of those scenarios and add them to our first half guidance. So we were trying to say that as you move like-for-like by x percent, then the margin and cost movement is still relevant. So all we're saying on the second half for now is that we're taking a prudent approach. And at this stage, we believe it is likely to be lower than what we've seen for the first half for all of the reasons that we've spelt out in the statement.

Yes. Okay. That makes sense. And just in relation to kind of labor and productivity, I mean, you've obviously traded very hard during this latter 2 periods. Did you have any [indiscernible] furlough? If so, roughly what proportion? And what's the kind of likely improvements in productivity that you've been able to achieve as a result of this performance against the backdrop of reduced head count?

So it's been really significant, which is one of the reasons we were confident in putting out a range on our half 1 performance. I would say in both businesses, we've seen incredible productivity, particularly Autocentres, but in retail, too. The challenge has been, obviously, when you get such sharp uplift in demand, trying to find and apply colleague hours quickly enough is really challenging. So therefore, you get an unexpected boost to productivity. And I would say we probably run too hot at times because we've had such incredible and unplanned demand. So we would try to moderate that in the second half to give a better colleague experience and customer experience. But there's no doubt that, that productivity will benefit first half. To your explicit question, we have no one left on furlough now. I've been running with very few hedge on furlough for the last 6 weeks or so, I would say. Furlough for us was heaviest in the first 2 periods of the year.

Yes. Okay. And just one final one really. Could you just give us some qualitative comments around availability and flow of stock? If you've got insight into an order book, which presumably you still do, any comments on that would be very helpful.

Shall we take that, Loraine?

Yes, go for it.

Yes. I mean availability of Motoring products has been pretty good all the way through. And we're obviously now starting to exit the campaign and staycation part of our range. So obviously, [indiscernible] on those categories we'll be seeing now because we're moving out of season. In Cycling, I think we've benefited from being open earlier than some of our competitors. And therefore, we've been able to plan our stock more effectively over the last 20 weeks as we knew that there was going to be a big demand perhaps earlier than some and so built it all again accordingly. So whilst we're not back into full stock yet on Cycling, we believe we're in a better position than some of our competitors are in terms of the breadth of range on offer and the depth of stock that we have in the products that we've got. I think kids' bikes are pretty much fully back in stock. Adult bikes will probably take a bit of the time as we get into the autumn to get fully into the stock position that we would normally expect to trade with because demand has been so strong, the lead times are long. There is -- I mean, at the moment, there is quite a challenge on Cycling stock globally because it's not just the U.K. that are seeing the uptick in bike adoption. It's many countries around the world. So what we are doing is using our relative scale in the U.K. and are to the specialist focus on this to make sure we get the right proportion of stock when we're trying to fight for that on the global market that we're in. The advantage -- a couple of other advantages we've got is we have 85% of our bike sales are own brands. So we have relationships directly with the manufacturers and the component suppliers. And that does give us some advantage when stock is short. So that's where we are. Not a perfect world, but we think we're doing a good job relatively of getting that Cycling stock through.

We now have a question from Jonathan Pritchard of Peel Hunt.

Can I just ask Matthew's question perhaps in a bit of slightly different way on the second half? The last 4 second halves, you've made 35, 35, 28 and 28. So essentially, what you're suggesting is that the second half this year, when you're entering with a very serious tailwind, is that you're going to make significantly less than you've ever made in a second half before. I just don't quite understand the sort of almost catastrophic assumptions that you'd have to make for that to be the case. I understand prudence, but are you not taking it to a bit of an extreme?

We'll find out, Jonathan. So I think there are a few things in what you've just said. The tailwinds that we've undoubtedly benefited from in the first half, I think, are generally more beneficial to the first half of our calendar year because of the nature of them, so cycling, staycation being the 2 sort of obvious examples. So even if you assume those tailwinds persist, and we do, the likelihood is they'll have a less positive effect on the second half. We're nervous about the economy and any potential impact of a further lockdown or even localized lockdowns. Because for the same reasons, we think that wouldn't be -- we wouldn't potentially trade as well through a second lockdown in our winter months as we did in our summer months. And then we've got the cost of COVID-19 that we flagged previously. So for all of those reasons, we're not guiding on the second half, but we are saying that cautiously, as we sit here today, we can certainly see a scenario where the profit will be or could be materially lower than the first half of the year. To your point, we really don't know and we could see a more positive pattern than we're currently predicting. Certainly, if we continue to see very strong Motoring sales, then that helps us through the second half, obviously. So I think we're unsure as we sit here. We take a prudent approach and then try to manage it as best we can. I think what you can see from the first half is if the demand is there, then we will be able to take the necessary actions to benefit from that demand.

Okay. And just 2 quickies. Firstly, just your comment on e-scooters. Have you've seen a pickup in demand since they -- since hiring them became legal? And then just attachment rates on bikes, have you seen -- is that a KPI? And have you seen any progress in it?

Do you want me to take that?

If I do the second one -- shall I do the second one quickly and then you can do the scooters?

Yes.

So attachment is absolutely a KPI, really important for us because it drives additional margin. Attachment rates have typically been lower through this first period because we've sold a lot more online, and it is much easier to attach if you are face to face with the customer. So we expect that to continue to improve as more sales become physical once more but online. But over that first 20 weeks, Jonathan, attach is down.

Yes, yes. I mean just to build on that, selling solutions as a super specialist is absolutely where we're headed. So there was a very big focus on attached solution billing because we think the combination of omnichannel assets that we've got gives us an opportunity to do that better than lots of our competitors do, particularly those that are just online. So there's a very big focus in that space to build out that over the coming months and years. In terms of electric scooters, as I think most people know, there is a trial, a reasonable trial taking place at the moment where the governments are looking to see what would need to be true to legalize the use of electric scooters on the road. We're obviously watching that very closely. And we're hoping that, that trial is successful and that we can join the other countries around the world that have electric scooters for use on public highways. In the meantime, we are still selling a lot of electric product. Our scooters and bikes is one of the highlights of our results today. 30% of all adult bikes were electric during this period against 14% the previous year. So a very, very big shift into electric. And I think taking my point earlier, it may well signal this move more towards potential usage as well because electric bikes do get used for commuting and not just leisure.

We now have a question from Adam Tomlinson of Liberum.

I had just 2 or 3 follow-ups from me, please, if that's okay. First question on Motoring and the Autocentre side of the business. Having used your garages a couple of times over the last few weeks, it feels like waiting is quite long there or reasonably long. Any -- has the strong demand, the success of that part of the business changed your plans in terms of, I guess, the number of people you need and the hiring intentions in those operations? That's the first question. The second question is on the COVID-19-related costs. So I think you've previously given guidance there of around GBP 20 million for this year. So just any updates on that and changes to your thinking on that. And the final question around the 10% closure of the property estate. I know you've noted previously that, that will depend on lease negotiations. So just wondering when you're negotiating what kind of results you're getting on those? And presumably, they're in line with what you are planning, given that you're still aiming for that target.

Thanks, Adam. Should I take the first question, Loraine, and then perhaps you pick up the second, too?

Yes, no problem.

So in terms of Autocentres, we have, as you can see through the results, seen a very significant increase year-on-year over the last couple of months particularly. But I think we're managing that pretty well. Our average wait times for bookings is 7 days. So 7 days from the call, that's the average at the moment. And that's not too dissimilar to what we would find trading through a peak period, which is what we're in at the moment as September is one of those peak periods. That said, we are looking to potentially recruit more MOT testers at the moment because we do expect to see a very significant uplift in MOT in October as those that have been deferred come back into the market. So you will see us recruiting for technicians currently in the market.

Adam, so in terms of COVID-19 costs, there's no real update. We could see relatively clearly a little while ago what the on costs were likely to be. So there's no great change to those. Obviously, the most significant of those tend to be carriage, the shift to online, but also the additional labor costs in retail tools where you've got to have somebody at the front of the store helping customers navigate to the store. And given, I guess, the latest on COVID, I don't really see that changing in the near term, so that's unchanged. On the store and garage closures, we're making good progress with our plan. We've got a tight list now of stores and garages that are go through a much more detailed assessment to make sure we understand the potential transfer rate of sales, which is important, but also what the likely customer proposition would be in any given geographical area. So we're making good progress on that. We've done relatively few lease negotiations in the first part of this year, mostly because we think we will have higher chances of success as we go into the second part of the year. But those that have been done, have been done at very attractive rates, better than last year on average, particularly for Retail stores. Garage is a different market, but much lower rents, but more rental inflation. But particularly, within Retail, we're seeing some good results. Within each of the mini appraisals of the stores that are on the list for review, if you like, we already have assumptions in there around what we might be able to negotiate from a lease perspective. So we have an expectation of what we might be able to get to. And we'll be, I think, in a position to announce more either in November or at our trading statement in January.

We now have a question from Kate Calvert of Investec.

Just 2 for me. The first one is in terms of Autocentres, have you seen adjacencies in periods of trade from catch-up MOTs? Or is that just going to be weighted towards the second part of the year? And the second question is just on the store closures. You haven't done that many at the moment. But I assume most are going to come after Christmas. Is that fair?

Do you what pick up the first one, Loraine?

Yes. So in terms of Autocentres, we've started to see some catch-up on MOT, but we do think there is more to come. So interestingly, quite a lot of the recent business that we've seen has been in services or servicing and repair, which we think has certainly been aided by quite a prominent position on the group website now. So quite a lot of the growth in periods 4 and 5 was actually full service. MOTs, I think, from memory, were down in that period. So I think there's probably a little bit more to come from MOTs as we go through the next few months. And then on closures, Kate, you're absolutely right. Any closures are likely to be back-end weighted because we would want to be able to take the benefit of any Christmas trading and the associated stock clear-down that comes with that. So I would say penciling in Q4 for any closures that we do decide to do is probably right.

We have -- currently have no further questions. [Operator Instructions] We have no further questions.

Okay. Great. Well thanks for joining the call today. Thank you.

Thank you.