Halfords Group PLC

LSE:HFD

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Graham Stapleton, executive]

Good morning, everyone, and welcome to the Halfords Group preliminary results for the 52 weeks ending the 29th of March 2024. I'm Graham Stapleton, and joining me today is Jo Hartley, our CFO.

In terms of the agenda for today's presentation, Jo will start with a review of our FY '24 financial performance. I will then give you an overview of the business performance and the strategic progress we delivered last year. I will then cover the outlook for the year ahead, and we will close today's session with the opportunity for you to ask some questions.

Before I hand you over to Jo to talk you through our results, I wanted to give you a few headlines on our overall performance for FY '24. There is no doubt that FY '24 was another very tough year. Business performance was impacted by unexpected continuing declines in the consumer tyres and cycling markets and by softer-than-expected consumer demand for big ticket purchases. At the same time, elevated cost inflation was even higher than we expected. Despite that, we delivered strong revenue growth, and we made good strategic progress, successfully delivering against those areas within our control.

To pick out just a few of the highlights, we made share gains across all 4 of our core markets. We beat our cost reduction target, delivering more than GBP 35 million of savings in the year. And we made significant progress in both of our strategically important areas of services and B2B, with our service-related sales exceeding half of our revenue for the first time. This progress has delivered a stronger platform that positions the business well for future growth.

I'll now hand you over to Jo to talk you through our financial results in more detail. Jo?

[Jo Hartley, executive]

Thank you, Graham, and good morning, everyone. Before I start, the usual reminds that all results are post IFRS 16 unless otherwise stated. I'd also like to draw attention to the fact that the results I'm about to share reflect total operations, which is the sum of continuing operations and loss-making discontinued operations of Viking and BDL.

As you're well aware, FY '24 has been another very challenging year for consumer-facing businesses and particularly those exposed to big ticket discretionary spend categories, and this has been no different for Halfords. Against that challenging backdrop, we've again focused on what we can control. We'll cover this in more detail through the presentation today. But in summary, we've seen market share gains in all 4 key categories. We've delivered over GBP 35 million of cost savings. We've tightly managed stock, working capital and cash, and we've driven very significant growth in garage sales and profitability.

Turning now to our headline results. Sales grew 7.6% year-on-year, with total growth supported by the acquisition of Lodge in October 2022. Like-for-like revenue growth was 5% with particularly strong performance in auto centers, which saw a like-for-like growth of 10.7%. Retail like-for-like sales growth was 2.2%. Group gross margin was resilient, falling 50 basis points year-on-year to 48.2%.

Our very successful Better Buying program partly mitigated the material impact of lower hedged FX rates coming through cost of goods sold, downward margin pressure in cycling as a result of a rapidly consolidating market and the dilutive impact of the annualization of the Lodge acquisition.

Operating costs as a percentage of revenue were up 10 basis points year-on-year at 45.3%. Our cost-saving program and overall good management of the cost base in response to volatile sales trends, and we were able to offset significant inflation in labor and energy costs.

Group PBT on a total operations basis was GBP 36.1 million, a reduction of GBP 8 million year-on-year for the reasons already described. Most notable within our overall results is the Autocentres' performance. Here, we saw very strong profit growth with operating profit up GBP 10.7 million year-on-year to GBP 13.8 million.

We continue to have a strong balance sheet. Net bank debt was GBP 8 million at the end of the year. Retail stock levels fell GBP 24 million year-on-year, and our average retail lease length is now less than 3 years.

A key factor impacting our results in FY '24 was a very weak market for big-ticket discretionary items. Consumers continued to struggle with the cumulative effect of significant price inflation and the highest interest rates in 16 years. As a result, they have cutback on major purchases, particularly for products or services that are more discretionary in nature.

The chart on this slide shows how our revenue splits between big ticket and small ticket purchases. The outer ring of the chart shows the big ticket sales of items retailing at over GBP 150 accounts for 30% of group revenue, with the other 70% accounted for by small ticket purchases. In FY '24, like-for-like sales of big ticket items were 6 percentage points lower than like-for-like sales of smaller ticket items.

The inner ring shows the breakdown of big and small ticket purchases between discretionary and needs base items. Here you can see that big ticket discretionary items represent 11% of group revenue with a further 14% coming from part needs base categories, and like-for-like sales of the purely discretionary spend categories were 9 percentage points lower than purely needs base categories.

Our strategy continues to provide the group with more resilient needs-based revenue streams, which Graham will demonstrate later. As you can see on this slide, we're not immune to such significant consumer challenges.

Before continuing, I wanted to touch briefly on the impact of discontinued operations. In January this year, we announced the intention to transition our tyre warehousing and distribution arrangements to a third-party logistics provider Bond, driving enhanced service levels and materially lower costs as we look forward. I'm pleased to report that the transition successfully completed in March. As a result, we've closed our loss-making warehousing and distribution operations at Viking and BDL and in line with accounting standards, these operations are disclosed as discontinued in our FY '24 accounts.

This slide reconciles the GBP 36.1 million underlying PBT on total operations that we're describing today, and the GBP 43.1 million PBT on continuing operations that's reported in our accounts, showing the GBP 7 million loss of Viking and BDL that's now being discontinued.

We're reporting on underlying PBT on total operations for 2 key reasons. Firstly, this compares to previous profit guidance, which included the results of all operations. And secondly, we believe it's more reflective of ongoing profitability as the cost of tyre distribution will continue to be borne by Halfords, albeit not directly and with a circa GBP 5 million benefit per year.

Slide 10 shows our group P&L. And here, I'll take a moment to talk about non-underlying items, which totaled GBP 16.2 million for the year. GBP 11.9 million of non-underlying charges before tax were incurred related to closure of Viking and BDL. In the continuing business, non-underlying costs before tax of GBP 4.3 million were incurred, a reduction on the GBP 7.8 million incurred in the previous year. Further detail on non-underlying cost is included in the RNS.

Slide 11 bridges the key drivers of the underlying PBT movement between FY '23 and FY '24. The first 2 bars show the material impact of cost inflation and market headwinds year-on-year. Together, these reduced PBT by GBP 42 million, almost eradicating all the profit we made in FY '23. We mitigated these headwinds through focusing on the things within our control, growing market share in each of our key markets and did GBP 3 million of profit, optimizing our Autocentres business, excluding Avayler, did GBP 11 million of profit and our cost savings program delivered GBP 35 million of year-on-year savings across the group.

Towards the right-hand side of the bridge, we have 4 downward bars. These show the losses in our discontinued operations, which grew GBP 4.4 million year-on-year, GBP 1.3 million of incremental losses in Avayler as the business continued to expand; GBP 3.2 million of investment in areas such as data, loyalty and digital; and finally, an additional GBP 1 million of interest charges, reflecting higher interest rates and higher average net debt.

I'll move now to cover some of these dynamics in a bit more detail. As already described, in FY '24, we saw inflationary headwinds of GBP 37 million, around GBP 7 million higher than anticipated, bringing total inflation to around GBP 120 million in the last 3 years. FX was the most material inflationary headwinds. The average FX rate we saw in cost of goods sold in FY '24 was $1.22 versus $1.36 in FY '23, resulting in a headwind of around GBP 18 million that impacted the retail gross margins year-on-year. This was higher than originally expected as a result of slower-than-anticipated [indiscernible], meaning that the better rates we secured more recently have not yet come through the hedged rate in cost of goods sold.

Utilities costs grew by GBP 10 million year-on-year, in line with expectations, and pay inflation added almost GBP 13 million, driven by minimum wage increases and the knock-on impact within stores and garages of maintaining the differential paid for skills. Finally, these headwinds were partly offset by a decline in freight rates. This tailwind amounted to GBP 6 million in FY '24.

Partly offsetting these inflationary headwinds was our cost saving program, which delivered GBP 35 million of savings during the year, GBP 5 million ahead of target. The biggest part of this was from better buying, which saw a reduction in cost of goods sold of around GBP 19 million. This program was externally supported during the year, the benefits predominantly coming through strategic supplier partnerships, tenders for our own label business and supplier rationalization. Significant cost savings were delivered through organisation design and outsourcing because we streamlined our support center, outsource and technology engineering roles and drove further operating efficiency through our stores and garages.

Our strong track record on property lease renewal continued, and we completed 43 retail lease renewals with average savings of 16%.

And finally, we continue to see strong savings from our goods not-for-resale program, so we removed nonvalue-adding spend and retendered contracts set for renewal.

Moving now to our Autocentres business. The results on this slide separate Avayler from the rest of the Autocentres Group to provide greater transparency over the separate performances of Avayler and the Garage businesses. Excluding Avayler, total revenue grew 16.6%, supported by the acquisition of Lodge in October 2022. Like-for-like revenues were up 10.7%. Like-for-like growth was driven by volume growth across both tyres and servicing and increases in average selling prices as we use dynamic and smart pricing to pass on some of the material wage inflation we saw in this part of the business. Graham will cover the drivers of our market share movements in more detail later.

Gross margins grew 150 basis points despite the dilutive impact of the Lodge acquisition, which annualized during the year. This was driven by the success of our Better Buying program, pricing initiative and the beneficial mix impact as the proportion of servicing, maintenance and repair business increased. Operating costs grew 16.4% below total revenue growth, with improved utilization and our broader cost and efficiency program offsetting labor inflation driven by increases to the national minimum wage. As a result, operating profit excluding Avayler reached GBP 15.1 million, GBP 12 million year-on-year.

The bridge to the right of the table shows the drivers of the operating profit movement year-on-year. Here, we see the impact of inflation more than offset by our Better Buying program, which includes realization of synergy benefits from the national acquisition, market share gains, cost and efficiency improvements, better utilization and price optimization. We also see the material growth in profitability of our commercial fleet services business, partly as a result of the annualization of the Lodge acquisition.

And the last bar on the chart reflects the impact of discontinued operations, which we've already discussed.

Finally, on this slide, Avayler's revenue grew 9.5% to GBP 2.3 million, including intercompany sales to other Halfords Group companies, which are eliminated on consolidation, revenue grew to GBP 6.7 million. EBIT reduced from a breakeven position to a planned loss of GBP 1.3 million as we invested in the business to position it for growth.

Moving now to the retail business. And it's here that we've seen the most significant impact from inflationary headwinds, compounded by an exceptionally challenging cycling market. Total sales grew 2% with like-for-like growth of 2.3%, slightly higher as a result of 8 store closures during the year. As we've seen over the last 2 years, there was a significant difference between the performance of our more resilient needs-based motoring category, which saw a like-for-like growth of 4.9%, and our more discretionary cycling category, which saw a like-for-like sales decline by 2.8%.

In Retail Motoring, strong sales growth was driven by volume increases with price investment last year contributing to market share gains. Growth was weighted towards the first half of the year as by half 2, we'd annualized FY '23 price investment, and we're focused on profit optimization.

In Cycling, the market declined again year-on-year. And while we saw strong share gains, this was not enough to offset the scale of market decline. Graham will cover both market and share movements in more detail later in the presentation.

Gross margins fell 190 basis points during the year. And given the scale of decline, that bridged the movement in the chart. Here you see the very material impact of a lower hedged FX rate coming through in cost of goods sold as well as the impact of deep promotional discounting in cycling, partly offset by our Better Buying program.

Operating costs grew GBP 8.3 million or 2% year-on-year, driven by wage and energy cost inflation, which was weighted towards the second half of the year. This was partly offset by our cost and efficiency program, which helped ensure that cost growth was aligned to sales growth. As such, underlying EBIT was down 30% to GBP 41.1 million.

Moving now to our balance sheet. Net debt at the end of the year was GBP 8 million, a significant improvement on the half 1 reported position of GBP 47 million and slightly higher than at the end of FY '23. Operating cash flow of GBP 167.4 million, with GBP 13 million better than in FY '23, largely driven by good working capital management with retail stockholding down 11%.

I would also point out that there was a GBP 10.2 million outflow during the year relating to the purchase of shares through our EBT to satisfy employee share schemes that mature this year. Excluding this, net debt was slightly high year-on-year.

During the year, we spent GBP 46 million on CapEx, as shown on this slide. Around 50% of the expenditure was on maintenance of our physical estate 1,026 stores and garages and our digital platform. The remainder was spent on tactical and strategic projects that are expected to deliver attractive returns in the mid and longer term. These included expenditures to continue to develop Avayler and enhancing our digital platforms including the website and motoring loyalty club and enhancing our data capabilities.

All capital expenditure on returning projects is subject to rigorous investment appraisal, we spend prioritized based on returns that exceed the cost of capital, and drive delivery of our mid-term ROCE target, which exceeds 15%, which we shared at the Capital Markets Day last year.

Net debt, including leases, reduced GBP 33 million year-on-year due to lower lease debt. Our average retail lease length has reduced and is now 2.9 years. Leverage excluding lease debt ended the year at 0.1x and including lease debt was 1.7x, just below our guided range of 1.8x to 2.3x post M&A. And just after the year-end, we also agreed an extension to our GBP 180 million revolving credit facility, which now matures in April 2028, with a further 1 year extension option.

Slide 22 serves as a reminder of our capital allocation policy, which remains unchanged, in line with our dividend policy, which states that the dividend will be covered 1.5x to 2.5x by profit after tax. We're proposing a final dividend of 5p per share, bringing the full year dividend to 8p per share. This results in a cover of 1.6x.

So to summarize, FY '24 was another challenging year, where we faced into significant inflationary and consumer headwinds. Against this backdrop, we've continued to focus on what is within our control. We've delivered share gains in all 4 markets and strong revenue growth. We've seen very strong profit growth in our strategically important Autocentres business as we continued to optimize the platform we've built. We've over-delivered on our cost saving targets and made structural changes such as the outsourcing of our tyre supply chain that will set us up well for the future. And as a result, our underlying profit before tax for the year was GBP 36.1 million on a total operations basis.

Finally, we've managed our cash and stock levels well, retaining a very strong balance sheet. The year ahead will continue to bring consumer and inflationary challenges, forecasting certainly isn't getting any easier, but I'm confident that the actions we've taken and continue to take to leverage and optimize the platform we've created will set us up very well for success. And with that, I'll pass you over to Graham, who will cover our strategic progress and the outlook for FY '25 in more detail.

[Graham Stapleton, executive]

Thanks, Jo. So as you can see from Jo's summary, despite a year of significant headwinds, we've continued to control the controllables and delivered a solid set of results. I'm going to spend some time now focusing on the strategic progress we made across the year. I'll start with a reminder of our purpose and our long-term strategy. Our purpose to inspire and support a lifetime of motoring and cycling remains unchanged and as relevant as ever. And the progress we've made this year is delivering against our long-term strategic intent, which is to evolve into a consumer and B2B services-focused business with a greater emphasis on motoring, generating higher and more sustainable financial returns in the future.

And in the midterm, our plan is centered around driving improved financial returns by fully leveraging the unique digital and data-enabled omnichannel platform we've created.

By following our strategic plan, we are seeing a significant shift in the shape and scale of our group revenue. On this slide, you can see that shift clearly. To pick out just a few of the highlights, total group revenue has grown from GBP 1.1 billion in FY '19 to GBP 1.7 billion today. Our services business has grown from 24% to now more than 50% of total revenue. And we've increased the resilience of the business by growing sales across the needs-based categories from 49% in FY '19 to almost 2/3 of the business today. This strategic shift has resulted in a larger and more resilient business.

Notwithstanding this, FY '24 was impacted by a number of consumer and inflationary headwinds, which have suppressed returns. On this slide is a reminder of the profit bridge we set out at the CMD, outlining our intent to deliver GBP 1.9 billion of revenue, GBP 90 million to GBP 110 million of PBT and a 5.5% operating margin over the midterm.

We said that the majority of our profit growth will be delivered by a combination of market recovery and increased market share with cost and efficiency more than offsetting the significant inflation forecast at that time. Across the top of the chart, we have indicated how each of the key building blocks performed in FY '24 versus our CMD expectations. As you can see, we overdelivered against our market share and cost savings targets last year, highlighted by the green arrows. However, inflation, as Jo said, was GBP 7 million higher than anticipated. And the cycling and consumer tyre markets, which together represent around 1/3 of group revenue, were much worse than independent forecast anticipated a year ago.

Jo has already covered both inflation and cost and efficiency. So I will move on now to step through the 3 other big bars on this chart, which are market recovery, market share and acquisition synergy growth. Starting with how our markets have performed. On the top line of this slide, you can see the expectations we laid out at the prelims last June, detailing how the markets were forecasted to perform in year 1 of the CMD plan. These forecasts were established using independent industry data sources such as GfK and the Bicycle Association.

The second line shows the market volume movement we've actually seen as reported by the same industry bodies. This shows very clearly the underperformance in the tyre and cycling markets. Tyre market volume is fell by 1.3% year-on-year, well behind expectations of 2.6% growth as drivers continue to delay essential maintenance for longer than we and the industry anticipated. The cycling market performed significantly worse than the industry expected, with volumes declining by 4% in the year, far behind the forecasted 1 percentage point drop.

Low customer confidence through the ongoing cost of living crisis has further impacted demand for big ticket discretionary items such as bikes, and another year of decline left bike market volumes circa 30% below pre-COVID levels. So overall, these markets remain particularly challenging.

Moving now to the second building block on the bridge, which is our market share performance. On the top line here, you can see the targets for FY '24 share growth that we set at the CMD. We indicated that we expected to deliver growth across all our major markets, and I'm pleased to say that is exactly what we have done. In fact, we have exceeded our original targets with a particularly strong performance in Retail Motoring and Cycling, where we broadly doubled what we expected to deliver, up 1.3 percentage points year-on-year.

So what were the key drivers of this market share growth last year? I'll start with our Autocentres business and the drivers for share growth across tyres and motoring services. As you can see on this slide, there's been a lot of activity here across the year. I won't cover all of these now, but instead, I'll pick out just a couple of highlights.

Firstly, the work undertaken this year on our tyre proposition. Here, we've continued to focus on both value and convenience with the introduction of more affordable own brand ranges now accounting for over 30% of tyre sales and an enhanced same-day fitting proposition. In addition, our selling journeys are now focused on ensuring that no customer drives away with illegal or dangerous tyres. To support that, we've mounted a customer campaign across our website, CRM, digital and social channels to drive awareness. In fact, this industry-leading work has led to Halfords being awarded the Tyre Safe Retailer of the Year. That gives you a sense of just some of the highlights across the year. However, the main area of activity I want to pick out on this slide is the success of our unique and growing motoring club.

This year, the club has gone from strength to strength. In fact, membership doubled in FY '24, to GBP 3.4 million as the benefits continue to resonate strongly with customers in a cost of living crisis. The club offers our members a variety of exclusive discounts to help them with all their motoring needs. This includes savings on MOTs and servicing, discounts on product and for premium members, free next-day delivery. In addition to providing customers with attractive benefits, the club also creates significant value for Halfords. 45% of members joining the club in FY '24 were new to the Halfords Group. Members visit twice as frequently as nonmembers and spend more per visit. 8% of members select our premium membership, generating subscription revenue of nearly GBP 14 million on an annualized basis. These customers shop 3x more often than nonmembers and spend circa GBP 20 more per visit.

And crucially, the club is an acquisition tool, driving demand from our retail stores across to our garages. 40% of MOTs in our Autocentres last year came through the club. And as such, we expect our marketing spend on MOTs to reduce by 35% in FY '25.

So some good progress for our motoring club this year. And with the data we collect affording as a significant monetization opportunity, we expect to see further growth in the year ahead.

I've covered the key drivers behind Autocentres' market share growth. I'll now move on to the activity driving retail market share. In retail, we introduced a number of innovative new products this year, as you can see here, such as the Nextbase iQ Smart 4G dashcam and new brands across 3 Bs and consumables. Alongside that, we offer customers unrivaled choice and convenience with our new car parts extended range. Our entry into this GBP 1 billion market earlier this year has seen revenue double and customers responded positively to initiatives, which included our new Click & Collect in 60 minutes offer and adding the 4th B, brakes, to our 3Bs proposition.

But what I really want to focus on today is our performance cycling business trends, which delivered some great results. Here, in a very weak and heavily promotional cycling market, like-for-like revenue grew 11.1%, significantly increasing our market share and growing profit. In a rapidly consolidating market, we were well placed to support customers impacted by the closure of Wiggle, amongst many others. The strong growth in Tredz was in part driven by the launch of a new website, which improved both customer journeys and our online conversion rate. Brand awareness increased by 3 percentage points, driving a 19% increase in the customer base. Customers responded positively as well, and we ended the year with a market-leading Trustpilot score of 4.7.

So that gives you a sense of the key initiatives and proposition developments, which drove the share gains across all 4 of our core markets. I'll move on now to the final building block on the PBT bridge, our acquisition synergies. Here, I'm pleased to say that Lodge continues to perform ahead of business case with synergies tracking better than expectations. As a reminder, the acquisition of Lodge in October 2022 secured our position as the U.K.'s largest provider of commercial fleet tyre services giving us national scale. This year, that scale enables us to win 2 significant fleet contracts. Firstly, a 5-year contract with Yodel, who operate one of the largest commercial vehicle fleets in the U.K. with over 1,700 vehicles; and secondly, a new contract with AW Jenkinson, who are a leading provider of forest products and transport services in the U.K. Adding these to our existing contracts, including DHL, DPD and Evri, this drove strong revenue growth in the commercial fleet services business, up 47% overall and 5.3% on a like-for-like basis.

In National, the actions to deliver the synergy benefits are on track, in part demonstrated by the GBP 3 million increase in EBIT year-on-year. One particular highlight this year is the growth in revenue from service maintenance and repair work. SMR revenue was up 37% year-on-year, increasing the overall sales mix in National to 33%. This reduces our reliance on consumer tyres and provides a significant opportunity for profitable growth.

A large percentage of synergies arising from the acquisition are realized in other parts of the Autocentres group. Autocentres EBIT, excluding Avayler increased GBP 12 million year-on-year, in part driven by the delivery of buying synergies that are enabled by combining the volumes of National and the Halfords Autocentres Group.

Notwithstanding the delivery of synergies and the increase in EBIT year-on-year, the lack of recovery in the consumer tyres market, which is now 14% below pre-COVID levels means that the overall financial performance of the business is currently behind plan. We are confident, however, that the delivery of synergies leaves the business very well placed to grow profitably as this market recovers.

That concludes our review of the progress we've made against the key building blocks we set out in the CMD plan. In parallel, we've continued to invest for the longer term, and I now want to update you on a couple of those areas. Firstly, as Jo explained earlier, we've completed a restructuring of our tyre supply chain, resulting in the closure of our wholesale operation, Viking, outsourcing the majority of this operation to Bond International. This restructure has enabled us to significantly improve the customer proposition, increasing online same-day tyres for customers from 10% to over 80% of garages and significantly increasing our presence in the distressed purchased tyre replacement market.

Alongside this enhancement to our customer proposition, we've unlocked substantial financial benefits and operational efficiencies going forward with the rationalization of the number of deliveries that garage has received, increased efficiency in garages and a reduction in tyre distribution costs of GBP 5 million per year.

Lastly, for FY '24, I'll cover the progress of Avayler, our SaaS business. Avayler has developed rapidly over the last 2 years. In November, we secured a landmark deal with Bridgestone. This 15-year commercial agreement will see the rollout of the Avayler Mobile and Hub Pro products across their U.S. market. starting with their 2,000 garages and mobile vans. In addition to the contract win, Bridgestone has taken a 5% equity stake in return for a $3 million investment. This is a significant endorsement for the Avayler's software platform and demonstrates its considerable growth opportunity.

Alongside this in Q4, we signed agreements with 3 new U.S. customers, including a partnership with AAA, the equivalent of the AA in the U.S. It's been an exciting year for Avayler, building momentum and a strong pipeline for further growth in FY '25.

So to summarize, FY '24 was a year in which we faced exceptionally challenging market and consumer headwinds, which turned out to be worse than we anticipated. Against that backdrop, we've delivered on the areas within our control, and we made solid operational and strategic progress. Whilst we're, of course, disappointed not to have delivered in line with the profit expectations we set out at the start of the year, I am pleased with the strategic progress we have made and the more resilient business we've created.

Let's move on now to the focus for the year ahead and the outlook. We remain in a period of significant uncertainty against unprecedented market headwinds. Consumer confidence is low and spending patterns are volatile. Customers remain very cautious around big-ticket discretionary purchases, which despite a small uptick in June, is reflected in GfK's major purchases index. At the same time, the weather continues to have a material impact on retail sales across the board. We've just experienced the wettest spring since the 1980s, which impacts footfall and is particularly unhelpful for the peak cycling and staycation season. Against that backdrop, we continue to see a decline in some of our core markets.

We also know that we will see further cost inflation this year, driven mainly by national minimum wage increases, but with additional increases now expected from freight costs due to much higher market rates.

As a consequence, our focus in FY '25 is to mitigate these headwinds whilst further optimizing our platform. This year is about improving our existing assets, building on the progress we've already made with proportionately more resources allocated to optimization than to strategic transformation.

With that context in mind, let's look at the FY '25 plan in more detail. I'll start by returning once again to the key building blocks of the profit bridge, which we set out at the CMD. FY '25 represents the second year of the CMD plan. As you can see on this slide, we expect to see continued headwinds from market volume reduction and inflation. Our focus is on mitigating those through our cost and efficiency program and increasing share. I'll now go into more detail starting with the markets.

When we revised our FY '24 profit guidance in February, we indicated that we expected to see marginal year-on-year growth in our core markets. However, our latest forecast suggests that the markets will be more difficult than that. As you can see from the top line on this slide, we don't expect to see any recovery across our markets this year, with 2 of our core markets forecast to decline. We plan to offset that in part, while delivering further share gains in 3 of our 4 core markets with retail motoring share expected to hold flat or reduced, reflecting a greater focus on optimizing profit. We expect the largest gains in consumer tyres where we have invested most significantly and cycling where we have considerable momentum, growing share in a rapidly consolidated market.

To give you just one example to bring this to life. On premium cycling, the commuter enthusiast cyclist is more resilient in this market, as we've seen reflected in the Tredz performance. Targeting these customers, one of our core retail initiatives launching next quarter, is a new range of our own brand premium bikes, including our award-winning Boardman brand, which you can see here on the slide. This will help us take incremental group share by offering unbeatable value for the specification combined with the ultimate performance.

At the same time, cost inflation remains high, in particular, freight rates are rising with spot rates almost doubling, fueled by global disruption across the freight supply chain. We continue to buy below the spot rate. However, we do expect freight cost to increase by between GBP 4 million and GBP 7 million, more than previously anticipated. Overall, we expect over GBP 35 million of incremental cost in FY '25, mainly from colleague cost, including the 10% rise in the national minimum wage. This would mean that inflation over the last 2 years would have significantly exceeded the midterm projection we set out at the CMD.

To mitigate that inflation, we plan to build on the cost and efficiency savings already delivered in FY '24, targeting over GBP 30 million of incremental year-on-year savings in cost of goods and operating costs. The majority of this will be generated by the ongoing success of our Better Buying program, which is delivering a material reduction in product costs. We will do this by a combination of strategic supplier partnerships, value engineering, tendering about our core ranges and leveraging our increased scale.

So, we have covered the markets, inflation and cost savings, the key moving elements of the midterm profit bridge. I'll move on now to the strategic elements of the FY '25 plan, starting with our Fusion program. You'll remember that at the CMD, we set out our longer-term plans to bring the Fusion experience to more towns across the U.K. In FY '23 and '24, we saw compelling results across our 2 Fusion trial towns, Colchester and Halifax, where the biggest shift in performance was in motoring services.

This included both our garages and the service areas of our retail car parts where we fit 3Bs and refer customers to a local Halfords garage. This year, we are investing nearly GBP 5 million of CapEx to replicate the motoring services elements of Fusion in another 25 locations in half 1 and up to 50 sites in total across the full year. This rollout includes the motoring services hub in the retail car park, upgraded garages with welcoming reception areas, improved branding to drive awareness and increase garage capacity with additional ramps and more of our highly skilled technicians to service demand.

To bring that to life and to give you a sense of what's coming, we've prepared a short video.

[Presentation]

[Graham Stapleton, executive]

So as you can see, quite a transformation to the way in which customers will experience our motoring services in these towns. And we're excited to see these changes take effect over the first half of this year.

Underpinning the Halfords Group strategy and plan for FY '25 is, of course, our continued investment in colleagues. Our colleagues are critical to our success. Their skills and capability are a key enabler across the group. To that end, we'll be making a significant investment in people this year, with a particular focus on leadership in our garages.

As I said earlier, our Autocentres business has increased dramatically in both scale and complexity over the last 5 years. As such, the skill set required by our garage managers has evolved. We see a clear correlation between our best garage managers and our best results, and we therefore feel confident that investing in capability will enable us to deliver good returns. Lastly, we'll be reinstating performance-related variable financial rewards which will now be even more focused on operating profit delivery.

Finally, on the strategic plan for FY '25 is further growth for our Avayler business. Having secured a significant partnership with Bridgestone in FY '24, alongside 3 other clients, our primary focus in FY '25 is to ensure we successfully deliver for our existing customers, fully operationalizing the Bridgestone contract in the U.S. At the same time, we will continue to target new clients within our core markets of the U.S., Europe and Australia.

That concludes our review of the FY '25 plan. So in summary, FY '24 has been a challenging year with market headwinds worse than anticipated. Against that backdrop, we have taken share in all our core markets, and we have made good strategic and operational progress. In FY '25, we are planning for these headwinds to continue with our focus being to mitigate them through share gains and further cost efficiencies whilst further optimizing the platform.

Beyond FY '25, we remain confident that the profit targets laid out at the CMD last year are achievable, assuming our markets eventually recover as we had forecast, albeit that is now expected to take longer than we envisaged last year. We remain very confident in the group's strategy as we build a stronger and more resilient Halfords for the future. Thanks for listening. Jo and I will now be happy to take your questions.

[Jonathan Pritchard, analyst]

It's Jonathan Pritchard at Peel Hunt. Just a couple. Perhaps -- on the tyre awareness campaigns and that market, can you just help us a little bit, just another sort of level of granularity perhaps -- it is difficult to understand just how it has been so bad for so long in many respects and that people go through an MOT, and they've got to pass the tyres to get through that. Just what did you find when you were sort of digging into the market [indiscernible]?

[Graham Stapleton, executive]

So I think there were a number of things that we can point to. I think the first thing to say is, during COVID, I think the U.K. public got used to checking tyres much less and actually change them much less because, obviously, it was less driving. So I think basically, the public got used to a different rhythm, if you like, for changing tyres.

Once people started to drive more frequently, we also entered then a cost of living crisis. And in a cost of living crisis, obviously, customers are looking at all forms of expenditure that they can defer. And whilst we don't believe tyres are particularly discretionary that some customers are deferring that spend as their incomes get squeezed.

We're also seeing some of that in our own business because the number of customers that are buying more than 1 tyre has reduced and the number of customers not changing tyres when they get an amber warning has also reduced. So there's a lot of facts pointing to the cost of living crisis being a significant impact to this. And that's what we think the major influence is. What does that mean? In our view, what that means is as interest rates start to come down, customer confidence starts to improve, inflation starts to stabilize; we see this market coming back, perhaps more quickly than other big-ticket discretionary items because of the safety angle.

We actually put out today a nonfinancial story in the press around tyre safety, just highlighting how dangerous driving with tyres that are illegal, bald or damaged is and the number of death and serious injury that we think is happening on the U.K. roads and it's a pretty scary number. I know some of the press have picked that up this morning, and there will be some stories run about that. And we'll keep beating that drum regardless of which government comes in because we think that road safety and tyre safety is a really important thing that we all need to focus more on. And we think with that, hopefully, that will get people back into the rhythm of changing tyres as it really isn't optional or discretionary when it's safety.

[Jonathan Pritchard, analyst]

Then the other one is just on staff turnover and staff retention. I presume that's fairly solid at the moment. You're obviously recruiting a lot of people, training them up. There is longevity to their stay with you?

[Graham Stapleton, executive]

Yes. I mean, yes, our turnover overall has actually improved slightly year-on-year. It's certainly more stable than it was, which is good, and that includes our Autocentres business and technicians. Is it exactly where we would like it to be, no. We could always do with more technicians and less turnover. And part of the reason we're putting the colleague investment that we're talking about this year in and making a point of it in this presentation, is that we want to do all we can there to keep colleagues engaged and keep the very best technicians and experienced colleagues with us.

[Manjari Dhar, analyst]

It's Manjari Dhar, RBC. If I could just -- maybe for my first question, start with Avayler. I wonder if you could give a bit more color into the opportunity from that where you could see it getting in terms of number of contracts, revenue profitability in the next couple of years?

[Graham Stapleton, executive]

Yes. I mean, with Avayler, we got some pretty clear indications at the CMD on our profit expectations in the mid-to-long term. I think at this stage, we're on track to deliver those. So they're clearly outlined in the CMD presentation we gave last year. In terms of number of contracts, we don't tend to talk about that. It's fairly commercially sensitive, but we delivered 6 new contracts in total last year. And it's the scale of the contracts that I think that's the most important thing to focus on.

The Bridgestone contract that we agreed last year was the biggest contract as far as we were concerned that we could get globally. So the most significant contract for that SaaS platform. So we are focusing much more on scaled significant businesses that we can grow with and develop our technology out in the number of clients.

[Manjari Dhar, analyst]

Makes sense. And then my second one, maybe I could ask on sort of the motoring loyalty scheme. What are your thoughts now on sort of premium versus non-premium membership? Because I think -- correct me if I'm wrong, was it 10% of the original target. So you're not far off, but is there an ambition to scale people up from nonpremium to premium?

[Graham Stapleton, executive]

Yes. I mean, look, both free and premium members are important to us, absolutely, because as we've said earlier, 45% of those customers are new to the Halfords Group, that's an extraordinary number and incredibly valuable. Yes, we would like to encourage more subscribers into premium, very similarly to a lot of loyalty programs. We set a target of between 8% and 10%. So you're right, we're at the bottom end of that. But what we saw, through last financial year, is that gradually improving. So I'm more confident that we will get towards the top end of that range this year with the investment and changes that we made during the year.

I think the GBP 14 million of annualized revenue that we gained from just 8% of those members is quite an important fact alongside the increased spend that we see of GBP 20 and the increased frequency. So a very important part of the plan, and we'll be focusing a lot more on premium membership in the year ahead.

[Caroline Gulliver, analyst]

Caroline Gulliver from Equity Development. I was intrigued that Tredz is obviously doing really well. And you mentioned you wanted to roll out benefit from those more resilient customers and roll out your own label. How will your own label fit alongside the premium brands you've got and sort of how are you going to raise awareness, given it's mostly online?

[Graham Stapleton, executive]

Yes. The premium brand offer is predominantly for our Halfords Retail business. It will also be offered within the Tredz business, and we're quite used to having to match our own premium brand, Boardman, with other brands in that business. We've been doing that now for a number of years. But the exciting thing for me is taking that premium offer into the Halfords Retail stores and offering that to the similar types of customers with a fantastic brand like Boardman. So yes, we're really excited, hence why we talked about it today, but also excited about Tredz and its ability to take a lot of new customers in a fast consolidated market.

[Caroline Gulliver, analyst]

And just one more, if I may. Fusion obviously looks really good. I'm quite new to this. And it has obviously had some fantastic results and you are going to roll it out. Where do you think you're gaining market share from in those towns, like who's losing? And is that still that potential in 25, 50 new locations potentially even 150?

[Graham Stapleton, executive]

Yes. I think in those towns, we're likely to be gaining shares, my guess would be, from some of the other big national players like ATS potentially Kwik Fit, maybe some independents as well. And that's predominantly because we're able to get to those customers before they know they need anything. So when you're coming into a car park getting a wiper blade and somebody finds that actually your tyre are illegal and bald, we then contact right there and then our garage in the town and book that customer in. So that, in effect, we've managed to get them before they know there's a problem and before they've run Kwik Fit or ATS. And that's one of the very significant advantages in the future. We've got about 25% to 30% of the garage volume in those towns is coming from the retail car park.

[Kate Calvert, analyst]

I'm Kate Calvert from Investec. Two for me. Just carrying on with Fusion. Can you talk about the phasing of the rollout of the next 25 towns, will it be one each weighted? And is there any sort of increase in terms of disruption from that above and beyond the sort of normal refit program you've been doing?

[Graham Stapleton, executive]

Yes. Yes, sure. So there's no more additional disruption that you would normally get from any format change. In fact, arguably less because we're not really disrupting too much of the retail store itself. It's very much the car park outside the retail store and then the refurbishment of the garage. So it's less disruptive than the existing Fusion concept, which is the entire infrastructure of the town that has changed.

In terms of -- sorry, your second part of the question -- the phasing. The phasing, yes, the first 25 towns and garages we are looking to do in the first half. That is the aim. Hence, why we put the towns on the map because we're very clear where they'll be and what we've got to do. It's quite a stretch to do 25. So will a few of those spill over into half 2, maybe. And then as we see the results of those garages and towns come through, we will then decide what we do in the second half. And that's why we said it could be up to 50 in the full year because if we see the benefits coming through like we have in Halifax and Colchester and perhaps quicker than those 2 towns did, then we will come back and ask them more investment.

[Kate Calvert, analyst]

Okay. Great. And my second question is just on the opportunity for inventory and working capital in the current year. Obviously, you brought inventory down quite a bit in the retail business. Is there quite a bit more to go after in the current year do you think?

[Jo Hartley, executive]

Yes. So it's getting around working capital in general. I do think there's a sort of low double-digit million opportunity on working capital in the year ahead, both through supplier payment terms and through stock and supply payments, particularly in the Autocentres side of the business. So I think you should expect to see working capital improvement looking forward.

[Unknown Executive]

Just one question from the webcast, and I think that will be the final one. How much do the overall tyre and cycling markets need to grow from current levels to hit the market sizes that were implicit in the CMD guidance that drove the GBP 90 million plus midterm PBT target?

[Graham Stapleton, executive]

Yes. Well, the markets that are -- let's start with the markets that are declining more rapid than we expected, which is cycling and tyres. So the cycling market at the CMD to hit the midterm target needed to come back to 10% less than FY '19 pre-COVID. So you can see then that there is a reasonable way to go, so we said 30% below at the moment. We're estimating 10% to get to the target, but we're not suggesting that it needs to come back to where it was pre-COVID. We're saying it needs to be 10% below.

And then the tyre market is 14% below pre-COVID at the moment. And in the midterm targets we set at the CMD, we said it needed to come back to 3%. So that needs to move another 11%. But again, not back to where it was interest in the pre-COVID, even though miles traveled and the number of cars are very similar.

Okay. I think that's it. Thank you very much, everybody, for joining today.