In May 2013 we set out the Getting Into Gear strategy for our Retail business that we would pursue and the growth plans for our autocentre business.
Our mission is to Help and Inspire our Customers with their Life on the Move. Each element of our strategy, which has the customer at the forefront, has been pursued with vigour in both our Retail and Autocentres businesses.
In May 2013 we set out the Getting into Gear strategy for our Retail business that we would pursue and the growth plans for our Autocentre business. We are now a year into the journey and progress has been very encouraging across a broad front. The ride so far has been exciting, the pace high and the year has been very busy, touching all parts of Halfords. The response of our colleagues has been enthusiastic and heartening. Their engagement with the many initiatives that Matt Davies and his executive team have introduced has been infectious and this has begun to have the desired effect: increasingly engaged, well trained and committed colleagues serve our customers better. There is still a way to go but I would like to commence this letter by thanking all of our c.12,000 colleagues for a job well done.
Our mission is to Help and Inspire our Customers with their Life on the Move. Each element of our strategy, which has the customer at the forefront, has been pursued with vigour in both our Retail and Autocentres businesses. In essence, the thrust of our strategy is: to bring about a step change in the quality of our service offer to our customers by investing in colleague training, staffing and capability; reasserting our authority in our key product and services categories; investing in our store and Autocentres standards and estates and in our systems; and creating a more contemporary and competitive omnichannel offer. The report that follows sets out the progress we are making and what still needs to be done.
Transparent measurement of our progress is critical, as is linking this to our remuneration and incentive structures throughout the organisation. In the report we have also set out in detail our Shareholder, Retail and Autocentre KPIs and our performance this year. Progress has been encouraging. However, most heartening has been the improvement in our service delivery with customer response, as measured by our Net Promoter Scores (NPS), showing a significant and sustained improvement across both businesses. Given where we were a year ago this is particularly pleasing. Once again, there is still some way to go.
The financial performance of Retail was better than we had expected at the commencement of the year. Retail sales of £803m were up 7.6% on a like-for-like (LFL) basis with a stellar performance in the Cycling category with LFL sales rising 19.4%. Car Maintenance was up 4.9% and online sales, primarily Click & Collect, rose a healthy 17.7%. Retail gross margin was down as we cleared inventory, as planned, and due to the strong growth of the lower-margin Cycling category. Retail operating costs rose, commensurate with the significant investment we made, and are making, in the training and development of our colleagues, better colleague store and centre coverage, higher activity levels and increased incentives as most operational and strategic milestones were reached. This resulted in Retail operating profit of £75.2m for the year, up 2.2%.
Enthusiasts increasingly attracted to Halfords.
Driving the progress and performance of the Retail business is largely a new management team that Matt brought together during the year. Andrew Findlay (Finance & IT) and Jonathan Crookall (People), who have been with the Company for over three years, were joined by Rob Swyer (Retail/ Stores), Emma Fox (Commercial/Marketing/Digital) and Jason Keegan (Supply Chain). The impact of the new team has been immediate and effective.
The financial performance of Autocentres was disappointing. Sales increased by 8.6%, boosted by an increase of 23 to 303 centres during the year, with LFL sales down 0.1%. Despite an increase in gross margin, operating profit decreased £2.0m to £4.3m. Midway through the year there was a change in leadership and Andrew Findlay temporarily took over the reins and successfully began a process of gradual improvement. He has now handed over the baton to Andy Randall who joined us in March 2014. The business is now travelling better than this time last year and Andy will be given the time and resource to get 'under the bonnet' of the business. In November we will present a fresh view of the way forward for Autocentres.
Investment in our stores, infrastructure and colleagues of some £100m over the three years in our Getting into Gear plan remains on track. In the year, £30.4m of spend on stores, IT infrastructure and on new Autocentres was outlaid, some £12.0m more than the previous year. In addition, an incremental investment of £17.0m in Retail inventory to achieve the right levels and product ranges was made. Despite these outlays and a one-off tax payment of £21.0m, cash flow was once again robust and net debt decreased to £99.6m with gearing at a comfortable 1.0 times net debt:EBITDA.
Group underlying profit before tax of £72.8m is marginally up on last year but exceeded our expectations set out over a year ago. Earnings per share (before non-recurring items) of 28.8p were up 4% and the Board is recommending a final dividend of 9.1p, taking the total for the year to 14.3p. It is our intention to maintain a c.2x dividend cover over the medium term, growing full-year dividends broadly in line with earnings per share.
One of the most truly inspiring aspects of the year has been the involvement by colleagues at all levels in a large number of community initiatives. For example, a partnership was forged with Re~Cycle, a charity that collects and ships second-hand bicycles to community networks in Africa. There the bicycles are repaired, thereby providing employment, and are then made available to disadvantaged communities. Through two events, customers responded generously by donating over 10,000 of their old bikes to this cause. Kids' Holiday Bike Club events were held in-store where children were taught how to maintain their bikes and road safety; the response was fantastic and over 20,000 children and parents attended. Halfords has also been confirmed as the Official Mechanics Partner for the 2014 Sky Ride Big Bike series, spanning 14 events nationwide and supporting over 100,000 cyclists this summer. There were also many other local events and the buzz that these community activities produce throughout Halfords is tangible; it is no doubt that it was one of the key factors that saw our colleagues vote Halfords as one of the Top 25 Best Big UK Companies to Work For.
Investment in our stores, infrastructure and colleagues of some £100m over the next three years remains on track.
It is a joy and a privilege to chair the Halfords Board and to work with Matt and his team. It is therefore with sadness that we say goodbye to Bill Ronald and Keith Harris who leave the Board at the end of May 2014 after 10 years' service. Both joined at the initial listing of Halfords in 2004 and have been a source of much sound advice and support to me and fellow Board members, for which I thank them. It gives me pleasure to welcome Helen Jones who joined the Board in March 2014. Helen is currently a senior executive at Caffé Nero and, prior to that, was CEO of the Zizzi Restaurants group and was also responsible for successfully launching the Ben & Jerry's brand in the UK and Europe. She will provide valuable brand positioning and marketing and experience in managing multiple-outlet networks.
The new financial year has started positively and the progress being made with all aspects of our strategy continues apace. The ambitious targets we set at the outset of the Getting into Gear Retail strategy remain both valid and achievable.
21 May 2014
Improved layout in refreshed store.