Things Are Looking Much Better — But I Want to See More

Halfords is the UK's leading retailer of motoring, cycling, and car servicing products and services. The company operates through two main segments:

• Retail (approximately 75% of revenue): Comprising Motoring (car parts, batteries, dashcams, in-car technology, child seats) and Cycling (bikes, e-bikes, accessories, repair). Halfords operates approximately 400 retail stores across the UK and Ireland, plus a significant online presence.
• Autocentres (approximately 25% of revenue): A network of approximately 370 car servicing and repair garages, offering MOTs, tyres, servicing, and repairs. This division has been the more challenging part of the business, with labour cost pressures and recruitment difficulties for skilled technicians.

The company's strategy is to become a consumer and business motoring services platform, moving from pure product retail towards higher-margin services. The dividend yield of approximately 6.6% is notably high for a UK retailer.

Shares jumped 11% on the open to 148p. The company says it is "pleased to provide a strong trading update," and for once, the numbers back that up.

Like-for-like sales performance

These figures are very encouraging and, frankly, surprising. Group like-for-like sales growth of 4.8% is strong. Cycling at +6.4% was the standout within retail, while Autocentres at +5.8% is particularly pleasing given the operational difficulties this division has had in recent years. Even Motoring at +2.9% is respectable.

The company expects FY 2026 underlying profit before tax to come in around the upper end of the consensus range of £36.0 million to £41.2 million, driven by gross margin expansion. I'm quite surprised they are saying this at this point in time — but it is encouraging.

Profit recovery

Very encouragingly, the company also says it is currently comfortable with consensus expectations for FY 2027 underlying profit before tax of £42.0 million to £48.6 million. I'm very surprised they would be coming out with that this early, especially given the Middle East crisis and Strait of Hormuz uncertainty. But they note that trading in March and April has been in line with expectations, and that the majority of FY 2027 energy costs and exchange rates are hedged, with freight rates largely contracted in advance.

FY 2027 outlook

A big question remains on the Autocentres side: have they managed to resolve the issue of labour costs squeezing margins? The difficulty in recruiting and retaining skilled technicians at affordable rates has been a persistent drag on Autocentres profitability. The 5.8% like-for-like growth is encouraging, but I want to see this translate into sustainable margin improvement, not just top-line growth.

Given all of the above, I'm using my profit before tax assumption of £43 million, implying profit after tax of approximately £30.2 million and earnings per share of approximately 13.9p. I've revised my growth rate upwards to 5% — from the 3% I initially considered — reflecting the stronger trading, the company's own confidence in FY 2027, and the hedging protections in place.

VALUATION SNAPSHOT

• Execution track record: Halfords have repeatedly disappointed on the execution of their general expansion strategy. One strong quarter doesn't erase that history.
• Autocentres labour costs: Recruiting and retaining skilled technicians remains expensive. If labour costs rise faster than revenue, margin improvement will stall.
• Consumer confidence: The Iranian crisis, potential for higher interest rates, and broader macro uncertainty could hit discretionary spending — particularly on cycling and car accessories.
• Cycling volatility: Cycling sales have been highly volatile in recent years (pandemic boom followed by bust). The 6.4% like-for-like growth is welcome, but the category is unpredictable.
• Hedging protection is temporary: The strong FY 2027 hedging position protects near-term costs, but beyond that, the company is exposed to whatever happens to energy, freight, and foreign exchange markets.

• Two consecutive quarters of 4%+ like-for-like growth: One quarter could be a blip. Sustained growth would demonstrate genuine momentum and warrant upgrading the growth rate.
• Autocentres margin expansion: Evidence that the 5.8% top-line growth is translating into higher margins — not just higher revenue — would be the single most important signal.
• Share price below 110p: At lower prices, the 6.6% dividend yield becomes even more compelling and the value opportunity would turn positive.
• FY 2027 profit before tax above £45 million: If the company delivers at the upper end of FY 2027 consensus, it would justify re-rating the growth rate higher and potentially moving to a Buy.
• Successful services transition: Clear evidence that the shift from product retail to motoring services is driving higher-margin, recurring revenue.