Summary of Group Results
Group revenue of £1,135.1m was up 3.7%, with like-for-like ("LFL")* sales growth of 2.0%. Group gross margin of 50.2% was 78 basis points lower than the prior year, predominantly due to the impact on the cost of imported goods as a result of the weaker pound against the US dollar, partially offset by gross margin improvements in Autocentres. Group operating costs before non-recurring items rose by 2.9% reflecting continued investments in our colleagues, our online and offline infrastructure and also more convenient fulfilment solutions for customers.
The increase in cost of goods from the weaker pound against the US dollar amounted to c.£25m year-on-year, of which a significant proportion was mitigated in the year. Underlying EBITDA* was up 0.7% to £109.5m and Underlying EBIT* was £74.6m, which compares with £77.1m in the prior year. Underlying Profit Before Tax* was £71.6m and Underlying Basic Earnings Per Share* was 29.6 pence, down 5.0% and 2.3% respectively. Profit after tax for the year was £54.7m (FY17: £56.4m).
Cash generation remained robust, with Free Cash Flow* of £41.5m. Net Debt* at the end of the year was broadly flat against the prior year-end, despite planned follow-on M&A payments and the working capital impact of VAT payment timing. Net debt:Underlying EBITDA* at the year end was 0.8 times on a rolling 12 month basis (FY17: 0.8 times).
The Board has recommended a final ordinary dividend of 12.03 pence per share (FY17: 11.68 pence) which, if approved, would take the full-year ordinary dividend to 18.03 pence per share, an increase of 3.0% on the prior year. If approved, this will be paid on 31 August 2018 to shareholders on the register at the close of business on 27 July 2018. We continue to target dividend coverage of around 2 times on average over time and once the impact of adverse FX has been fully mitigated.
Our capital allocation priorities and debt target remain unchanged. We are currently in the process of developing plans for the next phase of business growth and look forward to presenting these to the market in September.
Retail Operational Review
Halfords Retail sales were up 4.1% to £977.2m. LFL* growth of 2.3% reflected Motoring LFL* of 1.9% and Cycling LFL* of 2.9%. Our service-related sales grew by 14.2% as we continued to increase our service-led retail proposition, training our colleagues and introducing new services across both motoring and cycling categories.
Within Motoring, Car Maintenance revenues increased by 3.7% on a LFL* basis, driven by growth in car parts and associated fitting services. Nearly 42% of the bulbs, blades and batteries ("3B's") sold were fitted to customers' cars by our colleagues, which was up 175 basis points year-on-year. This reflects the increasing relevance of our services proposition to the growing proportion of 'do-it-for-me' customers. The LFL* growth also came from strong sales of workshop and hand-tools, which continued to benefit from the strong credentials of our 'Halfords Advanced' ranges.
Car Enhancement LFL* revenues were -2.2%, principally reflecting the continued market decline in Sat Nav sales. Despite this, we gained share in Sat Navs year-on-year as others exited the market. Dash-cam sales grew strongly in the period, as we continued to invest in colleague training to support our market-leading fitting proposition. Shortly after the year end we launched our own Halfords branded range of dash-cams.
Travel Solutions LFL* revenues increased 3.6%, driven by good growth in roof bars / boxes, cycle carriers and camping equipment, as we supported customers with their 'staycation' journeys throughout the period. The category also benefited from improved fitting capability, with colleagues receiving refreshed training to support an enhanced service proposition. Child car seat sales were down year-on-year, as a result of annualising the legislative tailwind of last year.
Cycling sales improved by 2.9% on a LFL* basis despite the unfavourable weather in the fourth quarter and not repeating the volume-driving summer promotion of the previous year. Whilst our bike volumes declined year-on-year as expected, this was more than offset by an increase in sales value. Parts, Accessories and Clothing ("PACs") sales continued to grow, supported by improved attachment rates.
Sales of electric bikes ("e-bikes") were strong, reflecting the popularity of our new own-brand ranges launched in the year. We also rolled out colleague training so that our trusted, expert colleagues were able to advise on the features and benefits for the customer. Our cycle repair services and 'cycle to work' business also performed strongly.
Tredz and Cycle Republic continued to perform well and deliver good LFL* sales growth. Four new Cycle Republic stores were opened in the year, with one shortly after the year end, taking the total to 20 stores. Last month we opened the Boardman Performance Centre, a state-of-the-art facility to enhance the Boardman brand and provide a destination for cycling enthusiasts.
Service-related Retail sales, which consist of the revenue generated from paid in-store fitting and repair services plus the associated product attached to the transaction, grew by 14.2%, with particularly good performances from our 3B's fitting, dash cam fitting and cycle repair services. This is a reflection of our continued focus in growing awareness of our services and enhancing the delivery of them through regular colleague training.
Retail online sales were up 6.0% on a like-for-like* basis. The importance of our store network and service overlay continued to be highlighted by the strength of click & collect, with around 85% of Halfords.com online orders picked up in store. This high proportion continues to differentiate us from other retailers. Instead of cannibalising our bricks and mortar operation, online sales have driven store footfall; both our online and store sales were in growth for the year.
The impact of the weaker pound has played out as guided. We have now experienced a cumulative additional £40m of input costs compared to FY16. Our plans to offset the impact (through supplier negotiations, operational efficiencies and pricing) have worked well and we have now recovered over half of the gross impact. At current exchange rates we do not anticipate any further FX headwind in FY19 or FY20 and we continue to anticipate fully recovering the impact over time - see outlook commentary in the Chief Executive's Statement.
Autocentres Operational Review
Total Autocentres revenues were up 0.8% and 0.2% on a LFL* basis. As previously guided, we took the decision to exit low-margin affiliate tyre business at the start of the year and instead focused on direct tyre sales and on service, maintenance and repair work. As a result of this decision, gross margin and EBIT have increased year-on-year. We opened 3 Autocentres in the year. Online booking revenues grew 15% and contributed 28% of total Autocentre sales.
As previously noted, we undertook an operational review of Autocentres during the year and identified that there are good opportunities for profit improvement by implementing better systems and consistent application of best practice. This includes improving visibility and control in centres and improving the systems infrastructure. A proportion of our centres have good profit margins and there is an opportunity to share the best practices in these high-performing centres with the rest of the estate. The programme to transform the operating model will take some time, but is well underway and the early progress is encouraging as indicated by improved year-on-year profit, particularly in the second half.
Summary of strategic progress over recent years
The Group has made good progress in recent years. A few of the key improvements are noted as follows:
- Continued investment in our colleagues. We launched the 'Gears' training programme in 2014 and this is now well-embedded in the Retail business and is integral to providing enhanced product knowledge to our customers and our ability to efficiently and effectively deliver our services. Over 70% of Retail colleagues are now trained to "Gear 2" level, up from 46% three years ago.
- Improved colleague engagement. This is evidenced by our own internal surveys and also by the Sunday Times Best Big Companies To Work For in which Halfords came 9th in the year, up from 18th in 2015.
- Better customer insights. We know our customers better than we did before. A single customer view has been implemented across all of our Retail businesses and Autocentres, with a database containing details of millions of customers. We can now match 59% of transactions to customers in Retail, up from 3% in November 2015. The foundations are there to leverage this to be more relevant for our customers in the future.
- Solid foundations have been laid for the services business. These include building the comprehensive suite of services and training our colleagues to deliver them. We now have over 70 in-store services in the Retail business and service-related Retail sales have grown by 46% over the last three years. Investment in colleague headsets across the estate has supported increased colleague knowledge and specialist support for customers.
- Enhanced presence in the cycling market. In recent years we have launched Cycle Republic and acquired Tredz. Through these investments we can now service all segments of the cycling market from a child's first bike to the enthusiast with multiple bikes.
- Selective store refreshes underway. A store refresh programme was launched in 2013 and updated in 2016, focused on the look and feel of stores. Around a third of stores have been refreshed during this period.
- Ongoing mprovements to our infrastructure. After a number of years of under-investment, investments have been made in a more resilient IT infrastructure, the embedding of a new delivery-to-store model in 2015, improvements towards a more agile approach to website development, the launch of a single view of stock and the implementation of the 'Dayforce' colleague resource planning system.
Initial thoughts on joining Halfords
I have been with Halfords for four months now. During this time I have been learning about the business and our markets, customers and competitors, visiting our facilities, meeting with colleagues and have also started to work with the team to identify opportunities for the next phase of growth.
This is a business that has good foundations. As set out above, there has been progress in previous years firstly in colleague development and customer service, and then latterly in becoming more customer-focused.
The business has some key visible strengths:
- strong heritage and brand awareness;
- market leader in many of its categories;
- trained and engaged colleagues with a "can do" attitude; and,
- cash generative with a resilient financial position.
There are also a few hidden gems, which Halfords has not yet leveraged to their full potential:
- services businesses; a key differentiating factor, but many people aren't aware of what we can do;
- group-wide customer database; and,
- established B2B business, across both our motoring and cycling specialisms.
However, the world of retail is ever changing; customers are becoming more demanding and new entrants continue to disrupt the market. This brings its own challenges but it also brings real opportunities for those who can truly position themselves as service-led specialists.
In summary, Halfords is a good business with a great future. By focusing more on our specialisms and our services, ensuring that we always provide great value to our customers and presenting a more seamless and inspirational omni-channel experience, we have an exciting future of growth ahead of us. I will provide further operational and financial detail on our plans in September 2018.
Summary and Outlook
We anticipate the motoring market will remain robust and we continue to see good growth prospects for the cycling market over time. Last year the cycling market was challenging, exacerbated by poor weather in the fourth quarter. We do not now expect to see price rises in cycling this year, like we saw in the previous year. We now anticipate the remainder of FX mitigation to arise from an improved pound/US dollar exchange rate, which will be mostly in FY20 due to the timing of our hedging programme. We also plan to accelerate investments in the current year in further developing our services proposition and in customer relationships and data. In light of the above, we currently anticipate FY19 Profit Before Tax to be broadly in line with FY18.
On 22 May 2018, the Board announced the appointment of Keith Williams as Non-Executive Chairman with effect from 24 July 2018. He will succeed Dennis Millard who will retire from the Board on that date.
I would like to thank all colleagues for the warm welcome they have given me and for their enthusiasm. I am excited about Halfords' future and look forward to working with our colleagues and the Board to drive the next phase of growth.
Chief Executive Officer
22 May 2018
In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs). These are denoted with an asterisk (*) in this report. Further detail on these APMs, including definitions, can be found in the glossary.