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

Good morning or good afternoon all, and welcome to the Halfords Group Financial Year '22 20-week Trading Update. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand you over to Graham Stapleton to begin. Graham, please go ahead when you are ready.

Thanks, Adam. Good morning, everyone, and thanks for joining the call today. I'm Graham Stapleton, Chief Executive at Halfords. And joining me on the call 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 the outlook for the full year. Loraine and I will then be happy to take your questions. Before I start, I'd like to point out that, clearly, last year's numbers were heavily skewed by the effects of COVID lockdowns and store closures. Therefore, for ease of comparability, we have deliberately chosen to compare our performance on a 2-year like-for-like basis. So let me begin with what we believe are the key highlights from the first 20 weeks. Turning over this period of FY '22 has been strong, with group sales up plus 18.7% on a 2-year basis. This has been driven by multiple factors. Firstly, the increased scale of our Autocentre business, which has seen almost -- seen sales almost double over 2 years. Secondly, the growth in our Retail Motoring business. Here, we have seen an increase in demand for staycation products and services as customers buy equipment for their trips. We've also made gains in market share across our Retail Motoring offer. And lastly, growth in our Cycling business, albeit within an extremely challenging trading environment, which I'll come back to in a moment. We've also done exceptional performances in areas of strategic importance, giving us real confidence in our plan. These include service-related sales growth of plus 78%, business-to-business sales growth of plus 80% and online sales growth of plus 83%. So overall, we feel this is a very good trading performance particularly given some of the numerous and well-documented supply chain changes we're facing into. Some of these have had a broader effect across many industries, including freight disruption and general capacity constraints alongside shortages of heavy goods vehicle drivers and wage inflation. But we've also seen some more acute Cycling-specific supply chain challenges such as factory closures and capacity constraints on bikes and component parts. And at the same time, here in the U.K., we continue to face into the very tough recruitment landscape, directly impacting our ability to recruit both retail colleagues and auto centers and mobile service technicians. All of these factors combined have resulted in some difficult conditions to overcome. And unfortunately, these look like to continue to impact trading as we move into half 2. Moving on now to a look at our overall sales performance in a bit more detail. In Retail, total revenue growth was plus 7.8% with like-for-like sales plus 17.1% on a 2-year basis. You'll notice that like-for-like sales are higher than total growth, and this is because like-for-like sales account for the customer transfer we achieved after our store closure program last year. This is a particularly pleasing result as it indicates that, to date, we successfully retained a lot of customers. Retail Motoring grew plus 6.5% and plus 11.2% like-for-like over 2 years. I'm really pleased to say that we saw a strong performance across maintenance products and services, gaining market share as more customers get back in their cars. Blades, bulbs and batteries grew plus 6.9%, and maintenance products, such as oils, coolants and [ car gears ] were up plus 4.3%. As I referenced earlier, the staycation trend also benefited our touring-related products such as roof boxes, roof carrying and cycle carriers. We saw exceptional growth of plus 53% on a 2-year basis. In Cycling, growth over 2 years was plus 9.9% and plus 24.2% on a 2-year like-for-like basis. But the supply chain issues I have already mentioned did contribute to materially lower growth rates towards the end of the period. Considering the global challenges of bike manufacturing and sales, this is still a good result. We've seen significant constraints on factory production as component shortages create bottlenecks in factories, coupled with temporary factory closures as COVID-19 remains a challenge across the globe. These factors have seen a very erratic supply of bikes much worse than those experienced with a height of the pandemic last year. And whilst we have utilized our relationships to source more bikes from different countries and suppliers, shortages in components used in the final production processes have resulted in very low supply and availability everywhere. We are experiencing the lowest availability we have seen on adult mechanical bikes, which makes reading supply and demand patterns very difficult indeed. In Autocentres, we saw total revenue growth over 2 years, up plus 86% and plus 15.5% on a like-for-like basis. Our efforts to increase the scale of our garage business have resulted in the revenues almost doubling over 2 years. Our existing garages, Halfords Mobile Expert vans and our acquisitions have all contributed to what is overall a very strong result. Last year was an exceptional year for our Halfords Mobile Expert business, but I'm really pleased to say that we are seeing continued growth on a 1-year basis of plus 62%, a fantastic result demonstrating the relevance proposition and continued customer demand. The garage business has not, however, been immune to the ongoing COVID trends impacting the U.K. The recruitment of service technicians has been difficult, and absences from COVID are still higher than we'd like. Before we move to Q&A, I'd like to briefly cover the outlook for the rest of this financial year. I mentioned earlier the very low availability of adult mechanical bikes and how this has more recently materially impacted our like-for-like performance. We don't see this easing anytime soon with bike availability having a continued impact across the rest of this financial year. That said, we have seen a resilient and robust performance in our garage services and B2B businesses. And we also continue to see strong demand for our Retail Motoring products and services. The group also continues to see good cash generation, and our balance sheet remains strong. These factors continue to give us confidence in our strategy and the financial strength of our business. We are, therefore, planning to continue investing in the key strategic initiatives we highlighted in our FY '21 preliminary results back in June. These include an investment in Retail Motoring pricing, which will offer customers greater value while simultaneously providing a stronger foundation for our services business. Secondly, Project Fusion, our new trial towns where we are seeking to deliver a seamless, convenient and consistent experience to our customers across the town. As a reminder, Project Fusion encompasses a destination Retail store and updated Autocentres garage and a Halfords Mobile Expert offer, all operating together in conjunction with centralized customer support channels and an online and home delivery proposition. This really is about leveraging all that Halfords has to offer in a single town to deliver a material movement in customer experience and service, winning market share and gaining new customers. Thirdly, we will continue to scale our Motoring services business through our network of garages and vans. And finally, continued investment in our group cross-shop and launch of a new industry-leading Motoring Loyalty program. We remain confident in targeting a full year PBT of about -- of above GBP 75 million on a post-IFRS 16 basis. That concludes today's update. Thanks for listening. We will now be happy to take questions.

[Operator Instructions] Our first question today comes from Jonathan Pritchard from Peel Hunt.

The usual 3, if I may. Just on bikes demand more recently, I guess it is a bit difficult to work out whether it's fundamental or short term because of supply. But can you perhaps have another go at talking about some of the drivers? Is it perhaps a lot of people -- more people on holiday, et cetera? I'm sure you've taken that into account. But what might be going on there? A little more on Project Fusion. I know it's very early days, but how many -- let's say on a 2-year view, how many towns and cities could have been Fusion-ed? And the investment into price within the Motoring business, how far through that process are we now?

Okay. I'll pick that up. Thanks, Jonathan. In terms of bike demand, we're still seeing more customers searching for bikes than we did in FY '20. So we obviously can look at Google Search activity, we can see what customers are doing not just in our business but across the market. So demand is still there. Is it as high as it was in the height of pandemic last year? No. Why is that? It could be a multitude of factors. It might be because some customers bought bikes early last year. It could be that the bike availability issues that we've got at the moment mean that some customers have just stopped searching because they've been searching for a while and can't find the bike that they want. So bike demand has softened a little, but we're not sure -- we can't be absolutely accurate exactly why that would be because of those factors. And it's still -- bike searches are still higher than they were in FY '20. In terms of -- I think your second question was around Fusion. We're only 3 weeks into our first Fusion town in Colchester. Everything has gone to plan. We're very proud of what we've delivered in that town. It's very, very early to get a read on results and trends and themes. And the second town we're planning to put in before the end of this calendar year. I think once we've got those 2 towns up and running, we're really clear that they're optimized and we've seen the results, we've looked at the opportunity equally to value-engineer what we put in, I think then we'll be in a really good position to say how many towns could this go into in the following years. At the moment, it's just too early to make that call. But so far, the results are encouraging. In terms of the Motoring pricing and investment, again, we've only just made the changes on pricing for Motoring. If you remember, it's very much about the mid- to longer-term positioning of our Retail Motoring offer, making sure it's competitive and that we drive more services business into Halfords. Again, very early. The signs are exactly as we'd hoped, if anything, just a little better. We are likely to see in the short term some margin dilution as we try and build the halo of this price change and movement over the midterm. But that's in the GBP 75 million that we have guided today. So we've factored that into that.

Our next question comes from Matthew McEachran from Singer Capital Markets.

Well, one of those questions have been answered. Thanks, Jonathan. The second question I had was just in relation to specifically within the availability question. I mean it's clear that you're suffering some gaps, and that might persist a little bit, albeit kind of maybe off season now. How do you feel your availability is compared to the peers and some of the major -- well, not major but some of the changes that you benchmark against? Do you think that your advantage has dissipated compared to the initial kind of COVID demand cycle? Or do you think that you've retained an advantage or maybe the advantage is growing, I don't know?

Well, we get -- we do get some market share data now, and we have been growing share on bikes. I think everybody though in the market is now suffering a similar amount of shortages because we -- when you've got someone like Shimano, for example, closed for many weeks, that those components go into all bikes or most bikes, and therefore, the ripple effect, it gets to be a bit more even. So I think we're working hard, as we said in the update, to look at different suppliers, different countries. But there is a limit to what you can do when the actual componentry that goes into bikes is sure everywhere. We're also -- there is some evidence on the shipping side that I think that the U.S. is getting quite a bigger share of the containers, and therefore, a bigger share of the production. So it's not just even within this country we have to look, it's a global supply of bikes. And actually, the shift into other countries is causing some challenges for us.

Okay. And one of the things I'd have expected to see, I'm sure you'd be the same after kind of record bike volumes since early 2020, would be a pickup in PACs. Could you just -- you haven't mentioned PACs actually for a little while. Can you just talk us through performance in there and maybe just tie it in if there is any availability shortages in that side as well?

Yes. No, we have had some availability shortage in PACs as well because the global demand for PACs has also moved up. And it just takes time for the supply base to catch up and accommodate that. The other thing to say is that there is a direct correlation between bike shortages and PAC sales. The bike shortages that we have at the moment are in the mid- to high-tier bikes. And in the mid- to high-tier bikes, you see a much higher attach level of PACs. because, obviously, you're selling to people who are more enthusiastic about using the bikes and want to get more from them. So we've got a sort of double whammy on PACs. Availability, yes. But actually, because it's the mid- to high-tier adult mechanical bikes that are so short, we're also seeing an impact on PAC sales through that as well.

So does that mean that there hasn't been any pickup in PACs consumption away from the attach rates at the point of the bike sale despite like massive growth in terms of bike sales in preceding kind of 18 months?

Yes. No, we've seen some growth in PAC sales. What I'm saying is that in relative terms, it's been impacted in the same way that the mid- to high-tier bikes have been out of stock. That's impacted the growth of PAC sales because we see a bigger proportion of PAC sales to those bikes than we would a basic bike. A basic bike, the customer will come in and tend to just buy the bike, maybe one accessory to go with it. If they're buying a Boardman bike, there is a much higher chance that they will then accessorize that bike with multiple items. And that then just -- yes, extrapolated out, that has a big impact on ourselves, which is why one of the things we've been doing more recently is trying to encourage customers to trade through the range, not just to get more revenue on a bike but then to get a much bigger attach rate on accessories and services.

Yes. Okay. And then just a final one, just on freight. I mean my understanding is that you've got good protection in terms of freight -- sea freight cost inflation through the contracts. I think the guidance at the time of the prelims was for roughly about GBP 5 million headwind. Could you just elaborate a little bit more on that structure? And if there's been any change, is it modest, nonexistent? Just a little bit of flavor would be helpful.

Yes. Matthew. So yes, you're right, the GBP 5 million we've already flagged and that hasn't changed. We've done quite a good deal, I think, on freight if I look at some of the deals that I've been able to get visibility of and also certainly when I look at the spot rate. So although our freight rates moved up as we contracted, we managed to contain it well, I think. So we are protected for this financial year, with the one exception that if for any reason our shipping volumes were way above our own forecast, you have to give a forecast when you contract, then you start to get pushed towards spot rates. But I think given the shortages that we've seen in Cycling, that's probably quite unlikely. So for this year, we are protected. The GBP 5 million still holds. And I think it was a relatively good deal. But obviously, that shipping market is very painful, particularly for anybody that needs to go into the spot market.

Our next question comes from Wayne Brown of Liberum.

I've got 3 questions. Just following on from the last one, when do you go into contract for next financial year on the freight costs? And what is the kind of headwind that we'd look at from that perspective? Or are you being forced to go into spot for the next financial year? And then there's been a fair bit of focus on Cycling. If we're looking at the Retail business, if you can just talk about availability across the product launches within the Retail business and if there's just been good availability because you've had good inventory levels. Is it fair to assume that there will be availability issues as we potentially work through that inventory? And if so, when or maybe not? And then lastly, looking into next financial year, not this financial year, if we assume that the supply chain issues and the freight issues and the labor cost issues and the lorry driver issues all annualized, what's the kind of headwind on cost pressures are we looking into next year? And how much pricing power do you actually have left to offset those?

Wayne, So I'd pick up your -- maybe the first and last one. So on freight, we will go back into contract negotiations towards the end of this financial year. We wouldn't go into the spot market, so we will be negotiated ahead of time. It's quite difficult at the moment to determine what freight rates will look like next year. You'll read the same material that I do, so you'll know that there is sort of a tendency for those to think that freight rates, certainly for the first half of FY '23, will remain elevated. But we will see as we get into those negotiations. And we'll have more insight into that when we're talking to you probably in January time, I would say. But no, we wouldn't go into the spot market because, as you can see, the spot rates are multiple times the contracted rate payment. On next year's cost inflation, yes, challenging clearly. I think cost inflation as a retailer, to be frank, has been challenging for many, many years. It's just the nature of the inflation that changes. So we've all picked up over time very significant increases in national minimum wage. As an example, we're now seeing a different set of inflationary cost base -- cost rates. It's too early, I think, for us to be commenting on what the next year's cost base looks like. I've seen your note this morning. You're obviously bearish on the cost base and the implications of that. I think we consider -- we continue to focus on the things that we can do, which is making ourselves more productive and efficient as a business, continuing to innovate from a product perspective. And the more differentiated we are, the more strength we have as a market leader, gives us more pricing power ultimately. Where the balance of that, too, will land next year is hard to say. But it isn't the first time that we've faced significant cost inflation, and we know we still have opportunities across our business to remove costs. I'll hand over to Graham for the point on availability of -- outside of Cycling.

Yes. So Wayne, availability outside of cycling, Retail Motoring products, has been much better. We have had some ripples in the motoring technology space. It's widely reported, the chip component part, there are shortages in that world everywhere and we're not immune to that. But that tech part of our Motoring offering is relatively small. So I think we're in good shape this year, and I can't see that changing materially next year looking at the supply base. The supply base in Motoring hasn't had to deal with the rollercoaster of supply and demand issues that the Cycling industry has had to. It's been -- if anything, it's had time to regroup and get more efficient and effective during the pandemic as motoring and cars have been off the road.

[Operator Instructions] Our next question is from Kate Calvert from Investec.

A couple from me. The first one is on the Motoring side. You've been talking about the restricted availability of technicians I think for quite a while, though probably not at current levels. Is this impacting your ability to execute on existing business? Or is it sort of going to manifest itself and come through in much higher cost inflation in the future? And the second question is could you just give a little bit more color about the price investments in Retail Motoring in terms of sort of what is the scale of the gap you're looking to close? Or are you just taking prices down to a new level to be more competitive and drive higher volumes potentially?

I'll pick up [indiscernible]. Do you want to pick up the price investments?

Yes.

So in terms of colleague availability in all centers, there certainly is some impact at the moment particularly in our mobile business, where we've seen the impact of COVID most recently. So yes, could we do even more than we are in that Autocentres business with full availability of technicians right now, we could do. It's not disastrous by any stretch, but there is certainly a bit more opportunity there if we were fully resourced. Will there be potential inflation here going forward? Again, it's very difficult to say at this stage because some of what's happening in the recruitment space is a direct consequence of absence with COVID. So because you've got people isolating or sick or absent, the recruitment market, I think, is even more hot than it would normally be because people are desperate to replace some technicians and just get a better underlying colleague base. So I think it's too early to say will this be -- what we're seeing now, is this going to carry on and be maintained. If it does carry on and we do find it difficult to recruit, we obviously have to look at the salary and benefits that, I also said, our colleagues get. We've got to remain competitive. What I would say in that part of our business is we have probably more opportunity to move retail pricing up than we would in our Retail business, where products are directly comparable and very visible online. Obviously, the services we offer in our garage services business are not in that space, so there is a bit more oxygen to pass some of that cost through in pricing than we would have in retail.

Kate, so to go back to your point on price investment, we've not quantified it in the statement. As you know, it would be quite competitive for us to release that. But clearly, it's significant enough for us to mention, otherwise, we wouldn't flag it. We're doing exactly as you say. We're taking the items that we know to be key in a customer's basket, particularly those that are associated with a fitting service. And we are taking the price down to be competitive. We're not seeking to undercut but to be extremely competitive, with the explicit intent of driving volume and associated fitting services with that. So we started with oils and bulbs. We've made quite a significant investment. We're very carefully monitoring what happens to that by way of volume increment. And so far, we're pleased with what we're seeing. But we'll continue to test the market. But it is very much about getting a value message out there on the things that are core in a customer's basket and encouraging them to have those items fitted at the same time, which therefore also boosts our service proposition.

[Operator Instructions]

Okay.

We have no further questions.

Well, thank you. Thanks, Adam, and thanks to everyone for joining the call today.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.