Halfords says inflation remains a 'material headwind' as profits slip

Halfords has warned inflation 'remains a material headwind' for the motor services and cycling retailer after profits fell last year.

The group told investors it was working to minimise the impact of a 10 per cent national minimum wage bump and 'significant increases' in sea freight rates since the start of 2024.

It came as Halfords reported a drop in annual profit, with the firm blaming a slump in footfall across its stores on weaker consumer confidence and poor weather.

The company posted an underlying pre-tax profit from total operations of £36.1million for the year to 29 March, down from £44.2million a year earlier and just shy of analyst forecasts of £36.2million.

Halfords warns on costs as consumer demand continues to be squeezed

Halfords said its cost base had increased by approximately £37million over the period, offsetting group revenue growth of 7.9 per cent and bringing cumulative cost inflation to around £120million over the last three years.

Freight rates have soared to their highest levels outside the pandemic era, partially due to disruption in Red Sea shipping.

Halfords said it has successfully secured freight rates 'well below market spot rates', but still forecasts freight costs to be £4million to £7million higher than anticipated at the start of 2024.

It said: 'Against this backdrop, we continue to focus on optimising the platform we have built, and controlling what we can.

'As such, we plan for proportionately fewer resources to be allocated to strategic transformation, as set out in more detail at the end of the strategic and operational review.'

It added that it had delivered cost savings of over £35million over the financial year, ahead of its original target of £30million and bringing cumulative cost savings to around £70million over the last three years.

Halfords shares were up 4.5 per cent to 142p in early trading.

The company's shares have lost around 35 per cent of their value over the last year as markets reacted to profit warnings on the back of wet weather and weaker cycling demand.

Mark Crouch, analyst at eToro, said: 'It wasn't too long ago when Halfords enjoyed something of a bonanza during the pandemic.

'Consumer spending was rampant during lockdowns with millions of us taking up cycling for which Halfords was there to meet the surge in demand.

'From one extreme to the other, the pendulum has now swung back, putting Halfords in a vulnerable position. The company's decision to shift focus toward motoring services may have softened the blow, however only slightly.

'Numerous profit warnings will be a major concern to shareholders. And in a period when consumer spending has dried up, the demand for bicycle products and services seems to have all but evaporated.'

Halfords said bike and tyre volumes remain 40 and 14 per cent down on pre-Covid levels, respectively, having suffered a worse decline than the industry had forecasted.

It also said customers has cut their spend on big-ticket, discretionary products 'even further', and Halfords now expects cycling and consumer tyre volumes to fall again next year.

Halfords said: 'Whilst these headwinds have inevitably impacted the group's financial performance in the short-term, our strong and growing market positions provide us with significant opportunities for profitable growth.

'For example, the consolidation of the cycling market had a severe impact on Halfords in FY24, but as the clear market leader we expect to emerge in an even stronger position once market conditions normalise.

'In addition, a recovery in the consumer tyres market closer to pre-Covid levels would provide significant opportunity for revenue growth. The group's ability to capitalise on these opportunities is underpinned by its strong balance sheet.'

Boss Graham Stapleton added: 'This has been a year of strong strategic and operational progress for Halfords, and we are pleased to have delivered a resilient financial performance against challenging core markets.

'We have continued to invest in our strategically important services business, which for the first time now represents over half of our total revenues.'