Halfords Group PLC

LSE:HFD

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the Halfords Group update call. [Operator Instructions] And just to remind you, this conference call is being recorded. I'll now hand the call over to the speakers from Halfords Group. Please go ahead with your meeting.

[Graham Stapleton, CEO & Executive Director]

Good morning, everyone, and thanks for joining the call today. I'm Graham Stapleton, Chief Executive of Halfords, and joining me is Loraine Woodhouse, our Chief Financial Officer. I'll start by giving you a brief overview of this morning's statement, and then we'll be happy to take your questions. Looking back at the period, against the backdrop of low consumer confidence and an exceptionally mild winter with few, if any, frost days, we saw a solid sales performance from the group. This was primarily on the back of strong Cycling sales and continued growth in Motoring services and B2B. As a result, our total group revenue was up 4.6% for the quarter with like-for-like sales ahead by 1.3%. We took the decision to focus on retaining margin rather than chasing unprofitable sales, the impact of which saw our solid sales performance being complemented by gross margin growth alongside our continued focus on tight cost control. Looking now in a bit more detail. Retail was up by 0.8% like-for-like on the back of a strong Cycling performance and an improvement in our Retail Motoring categories. In Cycling, we saw strong like-for-like growth of plus 5.9% in the quarter. This was the result of our product innovation and exclusive ranges alongside our service and bike build proposition. Whilst Retail Motoring like-for-like has declined by minus 2.7%, this was an improvement on previous periods. With very few frost days versus an average winter, we saw no material benefit year-on-year from the weather. Yet we continued to take market share in many categories, demonstrating the strength of our offer. Looking now at online. Online like-for-like revenue grew plus 27% in this period. Black Friday delivered a strong digital performance with online conversion up plus 6% year-on-year and attachment rates up plus 9% year-on-year. This was our biggest ever day of online sales, but it was superseded by Christmas, where we broke our online order value records on Christmas Eve, Christmas Day and Boxing Day. Around 80% of online orders were click-and-collect in the period. This continues to highlight the importance of our store network in the delivery of added value and of the web replatform scheduled for this financial year. The new website will significantly improve the digital experience for our customers, enabling them to access our entire offer across stores, carriages and mobile all in one digital location. Now let's move on to look at the detail behind Cycling. We are very pleased with our Cycling performance in this period. The growth that we saw here was driven by a number of factors.Firstly, our late reserve and collect deadline with a successful drive to boost collection rates. Also our unique bike build service, which adds real value for our customers and was offered right up until Christmas, long after others have already stopped taking bike orders. The uniqueness of our range with 85% of this being exclusive to us. This includes being first to market with the Disney Frozen 2 range, but also the exciting development of the entirely new and exclusive range of bikes with Trunki.Growth was also delivered through better availability of our best-selling bikes. All of this was supported through the space relay program in Cycling, which we code-named Project Peloton. This has delivered a better shopping experience for our customers and helped secure strong sales growth, better margins and reduced working capital levels. In terms of the trading period for Cycling, we had successful Black Friday. Momentum continued in the run-up to Christmas, with new orders continuing to come through. And we ultimately experienced our highest-ever sales of kids' bikes in this period. Christmas collection certainly came late this year. We saw tens of thousands of bikes being built for collection in the last week before Christmas. And Monday, the 23rd of December, represents our highest-ever cycling sales day yet. Moving now to Retail Motoring. Low levels of consumer confidence continued to impact the market. Spending on bigger-ticket discretionary items, such as premium tech and workshop, remains subdued. This was compounded by the lack of frost days versus an average winter. Consistent subzero temperatures or frost days are what drive materially higher demand for maintenance and servicing products. Of course, this year, like last, has been mild. As a result, Motoring has been more challenging. However, despite this, we grew market share in a number of categories, including tech. We also saw positive impact through product innovation. For example, sales of our newer -- new car security range, consisting of GPS trackers, locks and new own-brand RFID wallets are up 50% year-on-year. Our core maintenance and service offering showed improvement. This was due to pricing, better merchandising, range rationalization and the growth in demand for do-it-for-me services, all of which have had a positive impact. Our 3Bs proposition, bulbs, blades and batteries, also saw growth even though we saw no benefit from winter weather conditions. As we grow our strategic focus on our service proposition, the impact of the U.K. with increasingly variable weather should, over time, be mitigated. Looking now at our group services business and service-related sales. Our group service-related sales now represent 27% of total sales, an increase of 3 percentage points between now and last year. Motoring services sales were particularly strong with growth of plus 17% year-on-year. We saw growth both across the business and through the recent acquisitions we have made in Autocentres. Autocentres continued to perform well with like-for-like revenue up plus 4.6%. We have continued to invest in colleague training and the rollout of our work scheduling and workflow management system to improve our customer experience. As a result, we continue to see a growth in our Net Promoter Scores. I'm also pleased to say that after having won the award in 2019, we have again been nominated for the 2020 Garage Chain of the Year in the Car and Accessory Trader Aftermarket Industry Awards, which is a big achievement. The integration of McConechy's and Tyres On The Drive into the group is also progressing well and to plan. Both are trading in line with our expectations, and these acquisitions have helped drive total sales growth of over 30% in the Autocentres business. We continue to see services as a key differentiator for us. Visibility of our servicing offer will increase through our new website with customers being able to book services across store, garage and mobile on one website for the first time. Moving now to our strategy in B2B offer. Again, this is an area where we have seen success continue with double-digit growth achieved in the period. B2B, which includes Halfords for Business, Cycle to Work and Tradecard, has seen a 32% growth year-on-year and now accounts for 16% of the group revenue. We have launched the U.K.'s first Garage Gift Card in Halfords Autocentres. This acts as a saving or [ busting ] plan with access to finance and I believe will be a real benefit in helping customers manage unexpected costs. Financial services has continued to deliver for us, and the launch of our Bike Club Gift Card has performed well. We have talked a lot about sales revenue across the business, and I now want to spend a little bit of time on margin. As I've said, we took deliberate action to ensure we control gross margin. As a result of our actions, we managed to deliver better gross margin across the group. This was delivered through strong product selection with new, innovative ranges, which combined with our financial services proposition, negated the need for heavy or early discounting. We also saw uplift through service revenues and higher margin -- margins attached to product sales. Finally, cost control remains an important factor for us. Operating costs has been well controlled again and are marginally below last year on a like-for-like basis despite upward cost pressures. Lastly, we've seen a good position on our working capital. As you know, the group remains cash-generative and at a strong balance sheet, and we remain confident that we will grow free cash flow over the medium term. We have made good early progress in our cost and working capital improvement programs. So to summarize, despite lower customer confidence and challenging U.K. retail -- and a challenging U.K. retail market and the mild winter, we have delivered a solid set of results. Within Retail, innovation in our product ranges and a differentiated proposition has enabled us to deliver sales growth. Not only have we grown sales, but we've also improved margin, reduced stock levels and increased market share. In line with our strategy, our group service revenue increased 16% year-on-year and now accounts for 27% of total sales value. Autocentres has continued to demonstrate good sales growth and remains well on track to deliver a solid year of profit growth. Finally, our B2B business continues to go from strength to strength, with growth coming from Cycle to Work, Fleet and Halfords for Business. Overall, I'm pleased with our performance. We made a conscious decision to protect margin where appropriate, and I'm particularly pleased with the like-for-like sales growth achieved alongside the gross margin improvement. I believe the results reflect the positive actions taken across the group and our continued focus on our Inspire and Support a Lifetime strategy. Looking ahead, we are not anticipating a near-term improvement in market conditions with consumer spending on big-ticket, discretionary items likely to remain subdued. Our focus will continue to be on improving our customer proposition, building our services business and manage our costs and operations tightly. Our strategic focus remains the same, an evolution into a consumer and B2B services focused business with a greater emphasis on Motoring, generating higher and more sustainable financial returns. As a result of all of these actions, we reconfirm our expectation that FY '20 underlying profit before tax, on a pre-IFRS 16 and 52-week basis, will be in the range of GBP 50 million to GBP 55 million. Thank you. We'll now take your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Matthew McEachran of Nplus1 Singer.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

A couple of bits and bobs, really. In reference to the absence of any freezing conditions, are you kind of indicating that the needs-driven winter Motoring products were, again, down year-on-year? Or was it more just a case of flatlining?

[Graham Stapleton, CEO & Executive Director]

Yes. I mean there's certainly -- we certainly, against an average winter, not -- and we have to remember, year-on-year, last year was also very mild. So we're not saying against last year necessarily we're seeing a big drop in sales on those products because it was very mild, with very few frost days last year, too. The message to everyone today is more about against an average winter that we've seen over the last 5 to 10 years, we haven't seen any material improvement because of the weather. All that said, we have done quite a lot of self-help now that we might have faced this. And we have -- we've done quite a bit of work in the proposition side, particularly in 3Bs, the batteries, bulbs and blades, to help mitigate any impact of mild weather. We've actually seen some growth as a consequence in those categories year-on-year. But the weather certainly hasn't helped us against an average winter.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

Yes. So would it be fair to say that in terms of pointing a finger at the drags in the performance that it's the big-ticket areas that are still weighing on performance rather than any particular seasonal differences year-on-year?

[Graham Stapleton, CEO & Executive Director]

Absolutely. It's the big ticket, particularly discretionary purchases. So if you were looking at expensive dash cams, sat navs and audio products, the premium part of that range, customers are just thinking a bit more carefully about whether they proceed with that purchase. Not that they won't do it, but they want to have more confidence before making those very discretionary purchases. That's what we're seeing in -- particularly in the motoring areas, in technology, workshops, toolboxes, that type of product.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

Yes. Okay. So the other question really is around gross margin. You're obviously quite pleased with the gross margin performance. You've been able to offset the dilutive mix effect in terms of strength in Cycling versus Motoring. I'm just wondering a little bit about whether or not the B2B growth that you've been driving, is that also dilutive? And maybe just qualify a little bit, in terms of Cycling, whether or not the sales performance there was ahead of your expectations and actually margin is particularly up in Cycling.

[Loraine Woodhouse, CFO & Director]

Matthew, so margin actually is up in both categories, Motoring and Cycling. So we were quite pleased with that. Obviously, as you say, we have a negative mix effect that we have to offset. But the incremental margin in both categories allowed us to do that. B2B isn't -- it is and it isn't a drag on margin. It depends on the category. Cycle to Work is a key booster for Cycling business, and our margins were stronger in Cycling. But clearly, there is some kind of commission effect. Fleet, which is another core part of the B2B business, is a little bit dilutive in margin. But then there are other areas like [ gift cards ], et cetera, where it's -- the effect is negligible. So it's some and some. But overall, those categories improved margin.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

Yes. And just -- if you could just qualify a little bit. Some really pretty good cycling performance. You've kind of talked about the key drivers, but was that ahead of your plan? Was the late uplift in purchasing, was that greater than you anticipated?

[Loraine Woodhouse, CFO & Director]

A little bit, yes. So we planned for a strong Christmas. We were thinking about the proposition on range obviously very early on in the year. We bought into a good Christmas, certainly in terms of kids' bikes. So we were pleased with the outcome. But we were pleased because it was the execution of a plan, effectively, rather than a really material surprise. We felt we delivered on the plan well.

[Matthew Neil McEachran, Senior Research Analyst of Retail]

Yes. Yes, understood. And in terms of where you're left on inventory, what's the profile of stock now in Cycling? Are you -- does that leave you short of stock in certain areas? Or was it all about just getting the child -- some kids' gifts out the door?

[Loraine Woodhouse, CFO & Director]

So we've come out of stock pretty clean, actually. We don't have significant overhangs of seasonal stock, which is good. A lot of online continuity buying, obviously. We've got 1 or 2 areas where bikes sold through incredibly quickly and managing bikes is an example, where we have just fantastic demand. So there's 1 or 2 areas that have come out a little bit short, but we're already rebuilding those stock.

[Graham Stapleton, CEO & Executive Director]

Because we forecast for a good -- we were forecasting a strong Christmas anyway because we were confident with the unique and differentiated and new ranges that we've got. Because it's not too much over where we forecast it to be. It had meant that we've come out pretty much as planned. And certainly, seasonal stock will come out in a good place year-on-year.

[Operator]

Our next question comes from the line of Adam Tomlinson of Liberum.

[Adam Stuart Tomlinson, Analyst]

Three quick questions from me, if that's okay. The first one, just picking out the -- I guess, the strong growth rates in Cycling and Autocentres there. So it feels like those were quite a way ahead of market -- the general market performance. So it would be useful just to get your understanding in terms of what the market looked like over Christmas in terms of growth.And then the second part of that question, just around the sustainability of not necessarily those exact like-for-like growth rates, but just driving that positive like-for-like. Is it a case of more of the same in terms of what you're doing to self-help? Are there particular initiatives you don't yet think have impacted but will come into play? Just some thoughts around the outlook going forward. That's the first question. The second question with regards to online. I guess very strong growth, looks a little bit ahead of what we're used to from your reporting. Was that in line with your expectations? And I guess that's before the relaunch of the website in Q4. So it looks like a strong performance. I'm just wondering a little bit more color around the drivers of that. And then just thirdly, on gross margin. Noting the comments in the update around not needing to heavily discount, feels like that's going against the grain of generally what we're seeing in retail. So obviously, confidence in your offer and your ranging there. But again, just what's happening in the market in terms of the competitive environment and price cuts, anything going on there that you could give as well, that would be great.

[Graham Stapleton, CEO & Executive Director]

Yes, yes. I'll talk and let Loraine chip in. So in terms of Cycling and Autocentres, yes, they've both grown very well. I mean just under 6%, and just under 5% like-for-like, respectively, in any market is pretty good at the moment. So we are pleased with the performance of those 2 areas. In terms of our Autocentres business, yes, it is -- we don't get market share data in the [ garages ] world, so I can't give you a sense of whether that's a market share growth or not. In terms of the sustainability of the growth in the Autocentres business though, we are confident that this is the start of seeing some of the investment that we have made and are making coming through. So the full benefits of the workflow management system, the operational systems, we will not have seen yet. We will see more next year. In fact, the second version of that workflow management software is only just going into our business this quarter in time for peak trading. We haven't seen the benefits yet of the financial services offer fully in our Autocentres business for sure either. We know that there is more demand for the Autocentres. There's more demand coming into the Autocentres business than we're able to fulfill currently, so we are recruiting more technicians. That can give us growth. And then of course, as we add additional businesses to our mix, be that more scale in our traditional business through McConechy's and, therefore, the opportunities and synergies that come with that, albeit more mobile bands for our mobile business with the acquisition of Tyres On The Drive, you'll start to see the benefits of those 2 acquisitions coming through next year more than you will obviously the benefits in this year where we're concentrating on integration. So I think you could -- you still sense that it's the start and a journey that we're continuing to develop with the investments that we're making, not the end. We're very, very confident there. In terms of Cycling, I think -- we've talked in the past about the conditions for cycling, the macro conditions for cycling being good. And I think some of that you'll see within the performance of the Cycling business now, where -- with the growth of electric, with health, climate, all the things that customers you see talking about, they talked about it even at Investor Day. That is definitely feeding into the momentum we've got in Cycling. I do think we will have grown share in Cycling. We don't have the granularity that we do in the Motoring side with GfK, but we do get enough information from our suppliers and the general market and some sense of what's going on. And I will be surprised if we haven't grown market share in this space. The business is -- from a sustainability perspective, I would expect that growth to continue because we've seen it come through electric and through new and innovative and unique products. And that's where our focus has been and will continue to be. In terms of online, to your second question. Yes, I mean online -- I think online, we've seen really good growth. How has that happened? Certainly, the optimization of the existing revenue platform. That's where our focus has been. We've seen better conversion on Black Friday and the peak events in last year, I think it's 5% up. And we've also seen better attach rates for sales online as well. They were 9% up on Black Friday. So it is all about optimization, that experience. And then obviously, in parallel to that, we've been developing a new web replatform with the hope to bring all of that best practice on to a new web replatform that brings together all of our business into one place digitally. So -- and with the Salesforce engine behind that new web replatform we'd expect over the course of next year for that growth to accelerate further.

[Adam Stuart Tomlinson, Analyst]

Okay. And just -- sorry, just on that web replatform. Obviously, the hope is for that to go as smoothly as possible. Is there expected to be some sort of disruption to online there? Or do you see that as being pretty seamless in terms of the customer offering, just keeping the sales growing?

[Graham Stapleton, CEO & Executive Director]

I mean it's a very significant web replatform that we're undertaking. So there is always risk in anything transformational of this scale. We have some contingency in the plan to mitigate some of that risk. With any web replatform of this scale, you have to be mindful of that. We're -- one of the reasons we're deciding to launch this in this quarter, it is one of our quieter trading periods. So if there is any risk, it's mitigated also by the lower levels of trade going through this quarter traditionally. And we obviously want it to be in the right place for peak, which comes in the spring. So everything we're seeing suggests that we'll be in a good place, so just to give people confidence. We are on track to deliver that still this quarter by the end of the financial year. In terms of your third question, which was gross margin management, yes, you're right. We are -- we have taken a different stance to perhaps some other retailers over this period. We have deliberately reduced our focus on chasing unprofitable sales and just cash and being a bit more deliberate about where we promote and how we promote. We've been able to do that because of the strength of the underlying offer. As I said earlier, yes, 85% of our bike range is unique and exclusive to Halfords now, so you can't get it anywhere else. So it means our requirements to discount is different because we're not having to -- customers aren't able to compare and contrast a lot more of our products. And we will -- our aim is to continue to grow the scale of that within our business. So our relevance is there and the need to discount is less.

[Operator]

Our next question comes from the line of Ben Hunt of Investec.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

I was just wondering if you could tell us where you are in terms of FX and where you're hedged for going forward and compared to where you were at the moment.

[Loraine Woodhouse, CFO & Director]

Ben, so we're obviously 100% hedged for the current year now. We are just over 50% hedged for FY '21. And at the moment, we're hedged at just over 1.29. Where -- all things being equal, we expect to be able to move that up to 1.30 or just above by the time we're fully hedged out for the year. So we've managed to carefully hedge through some quite challenging times of sterling, obviously. So we've been smart about when and by how much we hedge over that period in order to be able to mitigate any downside risk. So I think we're in a reasonable position given where the market has been.We implemented some -- not a huge number, but a small number of derivatives that allowed us to participate in any upside. Should the market move upwards, that will probably give us a little bit of a bag and help us to move towards that 1.30.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

All right. And then secondly on your Cycling performance. Have you been able to pinpoint any benefit you might have had from wherever the stores have been closing at all? Or are you really not seeing any major read-through from the closing?

[Graham Stapleton, CEO & Executive Director]

I mean there's no doubt, wherever stores have closed very close to our Cycle Republic stores particularly, we have seen some sales transfer. So there was no doubt that there has been that. In the last quarter, the performance cycling market has become very promotionally aggressive, so we have seen a lower level of sales growth through quarter 3 performance cycling than we've had through previous quarters in this financial year. Because basically, that part of the market has been very aggressive on price. We haven't followed that because we said at the start, we made a conscious decision not to go for unprofitable sales.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Yes. Okay. Cool. And then finally, is it -- could you give us any more sort of details on the progress accelerating the Autos business and Mobile Expert. I mean it sounds like it's been more of integrating the 2 recent acquisitions. But any sort of color on how that's all going would be great.

[Graham Stapleton, CEO & Executive Director]

Yes. I mean it's going absolutely as we planned it to. So it's going to our forecast. I've been -- Loraine and I have both been up actually, to see McConechy's in Scotland. We're really pleased with what we've acquired. Particularly the colleagues were fantastic that we met. They're really pleased that they -- that we've -- they've joined the Halfords family. Very excited and engaged. We see as much opportunity there as we saw before, if not a little more.And the same from the Tyres On The Drive perspective. We've been recruiting additional technicians for that part of the business so we can fulfill the demand. And of course, that mobile part of our business, I think, will benefit more than any other when we launch the new web replatform. Because at the moment, that's not as visible to customers because it's relatively new. And on top of the -- it will be visible to everybody that visits the Halfords brand. So that I think is very exciting for the end of this quarter.

[Operator]

Our next question comes from the line of Tony Shiret of Whitman Howard.

[Tony Shiret, UK General Retail Analyst]

Yes, just a couple of things. First of all, in terms of the longer-term sort of customer positioning regarding sort of female customers, younger customers. Is there anything you can tell us about the progress you might or might not have made there?And secondly, in terms of the sort of way in which you're able to contain costs through the OpEx and working capital programs, can you give us your sense of how much more or how easy it is going to be to sustain those sort of mitigating programs as it were during the sort of tougher 2020 or a tough 2020?

[Graham Stapleton, CEO & Executive Director]

Okay. No problem, Tony. I'll pick up the customer one and I think Loraine will pick up the cost one. In terms of younger and female customers, there are 2 -- there are a few things that we've done very consciously over the last year to attract more of that customer demographic. Klarna, our financial services offer, which we really have focused on heavily, we've doubled them out of financial services business that we've had in the course of this year. We've -- what we're finding with Klarna is that we are getting more of that type of customer into our business, particularly younger customers in Klarna because we're providing sort of better, easier options to pay across the business. Equally, some of the product development and innovation that we brought in, things like e-scooters, for example, which we've seen huge growth in this year, that's also attracting a younger demographic of customer. So if you think -- if you just take these cases for example, now that we're offering that type of product which is more suited to a younger customer, we're also then offering a Klarna financial services option as a way to pay for that product. So there's -- in some instances, they're coming together to provide a very compelling proposition with different types of customers. The Halfords Mobile Expert division that we're developing with the integration now of Tyres On The Drive, that's also more attractive to younger female customers. They prefer service -- motoring services work to happen either at home or work than potentially some sort of go into a garage. And the Do It For Me and weCheck options that we put into the market and more -- even more aggressively over the last quarter have also resonated with those customer groups. So there is some very deliberate actions that we are taking to change that.

[Tony Shiret, UK General Retail Analyst]

Will you be able to give us some data at the prelims, you think, on penetration of those groups?

[Graham Stapleton, CEO & Executive Director]

Yes, we can certainly have a look at that. So leave that with us.

[Loraine Woodhouse, CFO & Director]

Tony, if we talk about, I guess, costs and working capital, you can tell from the statement that we're reasonably pleased with where we've landed on both cost and working capital stock particularly. It's fair to say that we went after the lower-hanging fruit initially, as you would expect, so there were some areas where we could go after both of those quite quickly, particularly around stocks and putting in really good discipline about the level of stocks that we buy and being very analytical about our gross margin return on investment. So we have some good, I think, robust analytics that go around how we purchase stock. So all of that has gone in over the last year, and we're pleased with the impact of that. Similarly, on the cost base, a better procurement function. And again, better discipline around the spending of cost. So all of the approval processes that you would expect. There is further opportunity. It becomes a bit harder to get after, naturally, as you get beyond the lower-hanging fruit. But we have cost opportunity in supply chain, in property and in our support center still to go after. It's more structural, so it takes a little bit longer to get after, and you have -- we need programs in place to target it. But we have that underway. And then in stock, similarly, we think there is more opportunity. Probably not at the scale that came out over the last year because that really was quite significant on an average basis, but there is certainly more to go for, and our plan is to access that. It's through a combination of things. So better means of buying that stock, so shortening lead times, which is something we're working hard on, particularly in Cycling. It's also around the range that we hold in store. So we were successful in changing Cycling. We will go after Motoring this year to make sure we put the same discipline in. So it's a little bit harder to get, but it's definitely there, and we still see opportunity going forward.

[Operator]

[Operator Instructions] And we have no further questions on the line, so I'll hand the call back to our speakers for closing comments.

[Graham Stapleton, CEO & Executive Director]

Thank you very much. Thanks, everybody, for joining the call today, and we look forward to catching up with the end of year results. So if there's anything in the meantime, please come back to us.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.