Halfords Group PLC

LSE:HFD

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the Halfords Group plc Third Quarter Financial Year 2018 Trading Update Call. [Operator Instructions] And just to remind you, this is being recorded as well.And today, I am pleased to present Guy Stapleton, Chief Executive Officer; and Jonny Mason, Chief Financial Officer. Please begin.

[Graham Stapleton]

Good morning, everyone, and thanks for joining the call today. I'm Graham Stapleton, new Chief Executive of Halfords, and with me is Jonny Mason, Chief Financial Officer. I'd like to take off by saying I'm delighted to join Halfords. Clearly, as I am only 4 days into the role, I won't be commenting on any historical performance or future plans today, but I look forward to doing so in due course.I'll now hand over to Jonny, who, as you know, has been leading the business in the interim period since the departure of Jill McDonald in September last year. Thank you.

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Thanks so much, Graham. I'll talk about our Q3 trading results for a few minutes and then, we'll take any questions that you have afterward.As you know, this quarter is an important one for us, covering a 15-week period, including both the Cyber and Christmas peaks. Overall, it was a good performance against strong comparatives in what has been widely reported as tough market conditions for nonfood retailers. We achieved best-ever sales for Black Friday and Christmas because of good planning and execution with great products and services.Group revenue was up 3.2%, with Retail revenue growing 3.3% and Autocentres up 1.9%. Group like-for-like revenue was up 2.7%, with Retail like-for-like growing 2.9% and Autocentres up 0.7%.So let's look first at Retail Motoring. Like-for-like sales were slightly up in the period against the strong comparative of 6.8%. Car Maintenance sales were up 2.1% like-for-like. There was good growth in 3Bs' fitting services and associated parts as well as Workshop products, although there was a little bit less wintry weather this year compared to last.Car Enhancement sales decreased by 1.1% on a like-for-like basis, driven by a continued decline in Sat Nav sales. Car audio products were also down, but this was offset by growth in dash cams and their associated fitting services.In Travel Solutions, sales declined by 4.1% due to the annualizing of last year's child car seat legislation changes, and that helped to drive 15% like-for-like for Q3 last year. So on a 2-year basis, Travel Solutions has delivered growth of over 10%.Now let's look at Cycling. Good like-for-like growth of 7.8% reflected increases in bikes, cycle repair and PACs, which is parts, accessories and clothing. Particular highlights included adult mainstream bikes, electric bikes and kids' ride-on toys. Our Christmas offers resonated well with customers. We saw good attachment rates of PACs to bikes and promotional activity was in line with our expectations. As we've previously explained, bike prices across the market have increased this year in response to higher costs from the weaker pound, and we've increased our prices as well. Reassuringly, our volumes were marginally up in the quarter despite these price changes. Indications from the market are that volumes are lower in general, and therefore, we are confident that we continued to increase market share.Other key specifics included growth in service-related sales of 8.6% in the period from the fitting of the 3Bs, dash cams and also, cycle repair services. This was a slower growth rate than in previous quarters that are partly because of the milder winter weather in October and November, reduced the job numbers. However, we are pleased that the penetration of fitting services has increased to 45% as customer awareness of our suite of services is growing. More and more customers prefer assistance, service and advice for their car maintenance rather than doing it themselves, which is positive for Halford's future growth.Group online sales grew by 13%, and around 80% of halfords.com online orders continued to be collected in-store, further evidencing the customers' preference for some form of service, advice or assistance with their transactions.Now turning to Autocentres. Like-for-like sales grew by 0.7% in the period. The reduction in sales from our planned transition out of low margin sales via third parties was more than offset by increased service, maintenance and repair work as well as direct tire sales. And the implementation of the improvement plan, following the operational review last summer, is on track. And in initiatives implemented last year, such as the changes to technician pay grading, continued to have a positive impact on the business, for example, improving colleague turnover.Now regarding the delivery of our strategy. We made further progress in the quarter. We now have 40 shops refurbished in the latest format, and we opened 2 new Cycle Republic shops in Derby and Canary Wharf, which look great, taking the total to 19. We increased further the use of our customer data, for example, supporting our best-ever Black Friday sales performance with targeted e-mail campaigns. We achieved our training targets in Autocentres so that we now have hybrid- and electric-qualified technicians covering the whole of the U.K. And as I mentioned previously, we made good progress on implementing the improvements from our operational review. And of course, our new CEO arrived.So a few words on outlook before I wrap up. Sales growth was slightly ahead of expectations for the period, and that was led by the lower-margin Cycling business. As a reminder, the weaker pound brings an increase to our cost of sales of about GBP 25 million this year, split GBP 15 million in the first half and GBP 10 million in the second, and this is on top of GBP 14 million last year. At the interim results, we reported on how we were making good progress in mitigating the impact of this FX cost, and these plans remain on track and are delivering as expected.The U.K. retail sales environment is subdued at present, as has been widely reported. We anticipate that this will continue for the rest of the financial year and that our group profit before tax will be broadly in line with current market expectations.To summarize, it was a good trading performance in a difficult market. We did particularly well over Black Friday and Christmas with some well-executed plans. Service-related sales continued to grow at a faster rate than total sales, and there was further progress in delivering our strategic initiatives as we continued to strengthen Halford's credentials as a specialist service-led retailer.The results for our full year will be reported on the 22nd of May. Thanks so much for listening, and we'll now be happy to take any questions that you've got.

[Operator]

[Operator Instructions] Our first question is from the line of Charlie Muir-Sands with Deutsche Bank.

[Charlie Muir-Sands]

I've got a couple of questions on a couple of different categories. Firstly, on online. You said halfords.com Click & Collect is now 80% of sales. I think, for a long time, it was over 90%. I don't know whether that's a seasonality effect or there has been a category mix shift. But I wondered if you could talk about why you think that timed delivery is disproportionately taking share of that channel at the moment. Secondly, it was a -- partly related to that. The like-for-like sales in Cycling clearly strong. I just wondered, I guess, Tredz and Wheelies, and now within that like-for-like sales base, could you talk about the performance of the Cycling category within the Halford stores? And then thirdly, I appreciate that this is new news this morning but the news that the U.K. government decided to stick with a 3-year start to MOT testing rather than pushing that to 4 years. Is that something that you think is materially positive to all retail systems?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Okay, Charlie. I'll take those in order. Online, yes, so Click & Collect -- the Click & Collect proportion has come down over time. I think that's a representation of our improved offer on home-work delivery rather than the other way around. It was about 6 months ago, I think, that we moved towards next-day delivery for orders placed by 8:00 p.m. the evening before, and so we've seen home-work delivery grow rather than Click & Collect in-store decline. I'm very happy. Click & Collect, 80%, still a very high proportion, no issues there. On like-for-like, you're absolutely right that the number includes Tredz and Cycle Republic in the like-for-like, as it always has the headline number. The performance in retail was good as well. Tredz and Cycle Republic are delivering higher like-for-likes, but they're still a very small proportion of the total. And so the retail like-for-like is strong single digit as well, and importantly, the volumes of bikes in retail are also positive. And then, on the 3-year [ royalty ], yes, we're pleased about that. And remember that our main population of customers is second life of the car. It's the older cars. The average age of the cars we look at is 8 years. So this is marginally positive, but I don't think it would have been very damaging if it had moved because it's more in the new end of the car spectrum.

[Operator]

We're now over to Peel Hunt and Jonathan Pritchard.

[Jonathan Pritchard, Retail Analyst]

Question on the broadly in-line delivery of consensus for the full year. Clearly, it's a bit of a consensus in terms of like-for-like. I know it's -- that it's bikes, and obviously, I know that that's a lower-margin catch stream. But is that the only thing that perhaps is driving forecast down this morning? Clearly, it's a good like-for-like number. But was -- is there anything else perhaps in the cost base or perhaps, in the gross margin that is causing consensus to come down today? Or is it just purely that mix effect?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

I think we just wanted to be balanced, Jonathan, and it's a tough retail environment out there. So we just wanted -- with a quarter to go, we want to be a bit cautious. There's nothing else in the margin. Our promotional activity was as expected, and the FX mitigation plans are also going as expected. And we are expecting costs -- cost growth slightly higher than it was last year, and that comes back to the increasing home-work delivery. Our -- our supply costs will be higher than they were last year, reflecting those new fulfillment options for customers. So a none jump on cost growth versus last year, but nothing else really other than caution around Q4.

[Jonathan Pritchard, Retail Analyst]

Okay. And just another two quickly, if I may. Just in the stores, I've noticed you're pushing the credit offer quite hard. Is that just a -- I might have just stumbled across a week when you were doing that. Or has that been a bit of a factor? And then, Graham, when will we expect to hear from you in terms of strategic updates? You've probably given yourself 6 or 9 months with your -- or what's your thinking?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

So let me take the interest-free credit first. It's a very small part of the business in Retail. We do go for offers every now and again, but there's no particular trend. It's not material to our sales growth there. And Graham? Yes.

[Graham Stapleton]

Okay. I'm obviously, day -- I'm on day 4, so I'm still really getting to go through the business. And in terms of timing, I think I'll make that decision when I know a little bit more about the business. I mean more are things that attracted me to help, which is the logical clear strategy that they have at the moment and the progress it's making in delivering against that. That's what I would say. But in terms of timing, at this date, I don't know.

[Operator]

Okay, we're now over to the line of Dan Homan at Citi.

[Dan F Homan, Vice President]

I've got questions from the -- first of all, just on the gross margin, the negative impact that you're expecting from the mix in the second half. If you could just maybe quantify what you think that might be? And then also, do you think that will assist into next year? Do you think the trend of the lower margin in Cycling category is growing faster? Is that something that you're factoring in over the next couple of years? And then, just on the Cycling. You mentioned volumes are positive. I just wondered if you could tell us what you think your pricing has done over the period versus what the market has moved at.

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Sure. Well, when you do the numbers, you'll see that the mix impact of the factor cycle in growth in Q3 was about 50 basis points. And as we look forward into Q4, part of our caution is related to the fact that that could well continue because the effect of the Cycling sales are growing whilst volumes are protected as we thought would be the case with our FX mitigation plans. So that direction could well continue into Q4. For next year, there's not really any change on what we've said previously. We're not signaling that today. I think all the growth factors from this year to next year remain as we've previously said. Over the last 5 years, Cycling has been growing faster than Motoring consistently, and therefore, we've been guiding to a continuing reduction in gross margin based purely on that mix, kind of year in, year out. And I suppose that long-term trend is likely to continue. And then, in terms of Cycling volumes and prices, very similar to what we said at the half-year. We've seen Cycling prices go up 10% to 15% in many areas this year. It tends to be an annual -- excuse the pun, an annual cycle of price rises, so that hasn't changed. Our price rises have been a bit below the bottom of that range overall, partly it's purely mix because the price rises have been bigger in the premium end, less, at, say, the kids' end. So our rises have been a bit less than, I think, we said high single-digit at the half-year, and that's right. And that -- so a small volume growth plus those price rises is what has led to 8% like-for-like sales growth in this quarter.

[Dan F Homan, Vice President]

Okay. And could I just ask one more question? Just on the comment about the retail sales environment will remain subdued. I think that's the first time you've put it in those words. I'm just wondering if you've seen anything in the market over the last 15 weeks that's making you, perhaps, more cautious than when we expect here at the interim results.

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Only the market data, only the BRC. Everybody else -- we haven't seen any particular changes in customer behavior as a result of our trading to this point.

[Operator]

We now go to the line of Matthew McEachran at Nplus1 Singer.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

A couple of questions from me. And I was just wondering if we could just start off with the -- talking about price and margin. I mean, the exchange rates, obviously, bottomed out at 1 20 having fallen from 1 50, whatever it was previously. And -- but we've now recovered a lot of that ground. I'm just wondering if as you've seen that trend come through, whether or not you remain committed to the price increase plans that you've put in place? Or whether or not anything has just been kind of either moderated a little bit given where -- given the direction of the currency?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Well, Matthew, that the impact of our FX hedge is to delay any impacts on our P&L from FX moves. So the movement in the exchange rate favorably is, of course, welcome news, but it won't help us until later into next year or -- and then, the year after. So we are expecting that the Cycling market will move again on its prices at the beginning of this next season, in March, April time. We've always been a bit circumspect about the timing of our FX mitigation recovery because we'll watch the market and we'll always insist on providing best value to our customers. But that said, we do expect the market to move because the market hasn't recovered the full cost inflate -- the input cost inflation yet. And it needs to. You only need to look at the Cycling press about how many of our competitors are finding it really tough to get that cost inflation recovered, and we'll do so as well.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

Understood. That's very clear. Second question was in relation to the kind of -- the ebbs and flows in the Car Maintenance side driven by what was, clearly, the ebbs and flows in terms of the wintry or -- actually, very mild weather in October. And how did your -- or did your labor scheduling, your new labor scheduling system and your supply chain actually allow you to respond to that efficiently? Or were you kind of inefficient for the start of the season and then struggling to keep up at the end of the season?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

No. I think, generally, through Q3, our execution was great. We traded through the peaks of Black Friday and Christmas without a problem. The website stayed up the whole time unlike some of our competitors. It is -- anyone who visited shops early in the winter season will have seen that we do tend to load the shops up with winter products, ready for a quick, unexpected cold snap. And so they were heavy with winter stock for a bit longer than we wanted them to be because of that mild patch in October and through November. But it came late, it came in the end. We were very happy with it, and I think the colleague scheduling worked according -- worked well according to the sales flows.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

And the -- in terms of the delivery of the wefit service, when that cold weather and the snow really came quick -- came through pretty quickly and pretty intensely, were you able to back that up with the labor hours -- on the shop floor and the car parks?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Well, we certainly try. Our colleagues in-shop have -- are all -- are largely multiskilled now and can turn their hands to whatever the customers want them to be doing at that moment. So when the frost arrives, we'll have more colleagues out in the car park changing batteries than on other days when they might be inside selling Sat Navs. The colleagues are working well. We look at the weather forecast, we try and we adjust our labor schedules every week to try and take account of anticipated demand. There will be some times where we do get overrun because the frost is colder or less well predicted, but we do our best to respond to that.

[Operator]

[Operator Instructions] Okay, we have one that's popped up, and that's over to Michelle Wilson at Berenberg.

[Michelle Wilson, Analyst]

I've just got a follow-up on the growth margin comments and around the mix effect. If I do a kind of quick back-of-the-envelope calculation on a negative 50 bp mix effect, I don't think that fully offsets the like-for-like benefit that you would get from the like-for-likes that are coming through. So should we assume given your kind of cautious comments on Q4, within your guidance, you're assuming a slowdown on the top line in Q4 in the Retail business?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Well, that -- I mean, the calcs -- remember, we are anticipating that the dilutive effect will continue through Q4. So it's not just the Q3 effect you need to do the calcs on. I reckon they're pretty close in terms of up and down. The other things that we're thinking about the Q4 -- we're not thinking of a slowdown versus Q3 overall, but we are expecting that mixed effect to continue into Q4. And then, as we indicated to Jonathan as well, we are thinking that cost increases for the year will be a little bit ahead of what it was last year based on these new fulfillment options we've got going to home and work. And so the -- the combination of those factors plus the negativity in market measurements around customers, it's just making us a bit cautious as regards how this year might turn out.

[Michelle Wilson, Analyst]

Okay. So we can assume I guess kind of flattish on a 2-year stack, on a like-for-like is what's gone into your assumption?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Well, we're not being precise about like-for-like sales. We never have, and we don't want to do that. But we are cautious that sort of current growth rates are about right but that they -- diluted mix.

[Operator]

Okay, we now go over to the line of Georgina Johanan of JP.

[Georgina Sarah Johanan, Analyst]

Perhaps it's a silly one but just perhaps, a clarification. When you're talking about OpEx growth being a touch ahead of last year, can you, perhaps, just remind us what the underlying OpEx growth was in the Retail business last year? And presumably, you are talking about it being ahead on an underlying basis rather than the [indiscernible] to [ 5% ] increase that you saw as Tredz and Wheelies' OpEx came in.

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

Yes, it's not a silly question at all. You're absolutely right. So underlying last year it was 2.4%.

[Operator]

As that was the final question in today's queue, can I at least pass it back to you for any closing comments at this stage?

[Jonathan P. Mason, Interim CEO, CFO & Executive Director]

We'll just say thanks very much for taking the time to listen today. Obviously, we'll be very happy to see you with any follow-up questions that you have. You know where to find us, and we look forward to talking to you on May 22. Thank you. Bye for now.

[Operator]

This now concludes today's call. So thank you all very much for attending, and you can now disconnect your lines.