Halfords Retail delivered a strong performance in the year as the business repositions to offer a significantly-enhanced customer experience. The work undertaken in areas such as stock availability, product ranges and marketing was accompanied by a material uplift in investment.
The Retail categories are in better shape and the Retail management team has been strengthened by several key appointments. Getting into Gear has got off to a busy start and the early signs are encouraging; there will be much work to do over the coming years. New leadership of Autocentres is aligned with the Group's service-based priorities so that, in the fullness of time, Halfords will offer an even better end-to-end customer experience.
Summary of group results
The Cycling category was the standout performer throughout the year, with LFL growth of 19.4% reflecting further market-share gains.
Halfords Retail produced a strong sales performance with like-for-like ("LFL") revenue growth of 7.6% and online growth of 17.7% reflecting a number of factors including improved stock availability, colleague engagement, stronger product ranges and a more-effective marketing approach. Average weather conditions were also more favourable for Cycling during the year. Despite improvements in the second half that delivered 2.0% LFL sales growth, the Autocentres performance did not reflect its market-share potential over the full year, with FY14 revenues increasing by 8.6%, accompanied by flat LFL sales; new leadership of Autocentres was appointed at the end of the year.
Sales of £939.7m were up 7.9% year-on-year and up 6.5% on a LFL basis. Group gross margin fell by 110 basis points to 53.7%. Total operating costs rose by 6.9% primarily as a result of the increase in store-colleague investment and incentives. Investment in the expansion of our Autocentres business continued as the business added 20 centres (net). Group earnings before finance costs, tax and non-recurring items ("EBIT") were £77.8m, which compares with £78.1m in the prior year.
Earnings before non-recurring items, finance costs, depreciation and amortisation ("EBITDA") were down 2.3% to £101.1m. Profit before tax and non-recurring items was £72.8m and earnings per share before non-recurring items were 28.8p, up 1.1% and 4.0% respectively.
Group inventory and capital expenditure continued to be managed tightly, although the planned levels of additional Retail stock to improve on-shelf availability led to a 12.8% increase in Group inventories on the prior period; Autocentres inventory was up £0.1m on the prior year. Against the backdrop of a significant uplift in investment and a one-off tax settlement of £21.0m, the cashflow performance was robust with free cashflow of £39.5m generated against £71.8m in the prior year. Net debt at the end of the year was down £11.0m at £99.6m, with a non-lease-adjusted 12-month net debt: EBITDA ratio of 1.0:1 versus 1.1:1 in the prior period.
The results illustrate how Halfords is beginning to build both its proposition and a significantly-enhanced Retail customer experience.
The Board has recommended a final dividend of 9.1 pence per share (FY13: 9.1 pence), taking the full-year dividend to 14.3 pence per share. If approved, the final dividend will be paid on 1 August 2014 to shareholders on the register at the close of business on 4 July 2014. In the light of the guidance given twelve months ago, the Board will now look to maintain a c.2× dividend cover over the medium term, growing full-year dividends broadly in line with earnings per share. Given the operating cash flow profile of the business the Board also now anticipates the ratio of future interim and final dividend payments to move toward 30:70.
Operational review: retail
Sales were £803.1m, up 7.7% on the previous year and 7.6% on an LFL basis.
In FY14 Cycling was the largest Retail category by sales and was the standout performer throughout the year. LFL growth of 19.4% reflected improved execution, a successful Christmas for children's bikes, more-conducive weather conditions and sustained interest in Cycling as a leisure activity. The cycle offer was enhanced during the year, with refreshes of the Apollo and Boardman ranges particularly engaging customers. Representing over one third of premium-cycle sales, Cycle-To-Work revenues grew by 14.8%. Halfords also implemented a major acceleration of its presence in the Cycling Parts, Accessories and Clothing market ("PACs"). This activity was combined with the appointment of additional Cycling capability, including the creation of a Head of PACs role and, with a more-effective marketing approach, every Cycling sub-category grew, including 15.8% growth in PACs, 28.6% growth in Cycle Repair and 29.9% growth in Premium Bike sales.
LFL sales of Car Maintenance products and services grew by 4.9%. Sales in the second half were hampered by mild winter conditions versus a cold and snowy prior year. However the sale and fitting of bulbs, blades and batteries ("3Bs") again represented the largest single element of the category and growing demand emanated from the building of awareness of the wefit service, this year via the TV and radio 'Cheaper than a Favour' campaign.
Car Enhancement LFL revenues decreased by 0.1%. Representing nearly a quarter of category sales, Car Cleaning revenues grew by 13.7%, boosted by the re-merchandising of the range to emphasise the strength of Halfords' branded offer. Key price points were also targeted to improve value perception. Sat Nav sales, down 8.1% in the year, continued to be impacted by the effects of a structurally-declining market, whilst Audio sales grew 1.1%.
Travel Solutions LFL revenues increased by 2.1%, with additional clearance and more-compelling offers driving improved sales of camping and travel-equipment products.
Online Retail revenues grew by 17.7% and represented 11.3% of total Retail sales (FY13: 10.3%). The growth was driven by the first phase of Halfords.com's relaunch in November 2013, leading to substantially-increased conversion rates. Whilst over half of online Retail sales were represented by the Cycling category, a consistent 88% of online orders were collected in store during the period.
In the year total in-store service income included within all of the above categories increased by 17.4% to £24.3m, with the majority of revenues flowing from 3Bs fitting and Cycle Repair.
Operational review: autocentres
Total Autocentres revenues were up 8.6% and, on a LFL basis, down 0.1%. Despite improvements in the second half, this performance reflected operational and market challenges the business faced. 23 new Autocentres were opened and three were closed in the year, taking the total number of Autocentre locations to 303. Halfords is committed to the continued investment in the Autocentres business to secure medium-term growth, though the business plans to refocus the centre-opening programme on fewer and larger new centres. Halfords will continue to close sub-optimal centres as a matter of course.
Operational review summary
The Halfords Retail performance was strong, driven by self-help actions and, although weather conditions were favourable for the Cycling category, they were adverse for Car Maintenance. The results illustrate how Halfords is beginning to build both its proposition and a significantly-enhanced Retail customer experience. With Autocentres focusing on the enhancement of its service proposition, underpinned by further investment, the business will deliver a more consistent and engaging experience for its Autocentre customers.
Further wefit growth.
Halfords business review
Halfords' mission is to Help and Inspire our Customers with their Life on the Move within the following categories: Supporting Drivers of Every Car, Inspiring Cyclists of Every Age and Equipping Families for their Leisure Time.
Equipping Families for their Leisure Time gives the flexibility to extend the range, introduce innovative products and leverage space. However the vast majority of management's focus is currently on Auto and Cycling as these markets are significant and, with strong execution, management anticipates sustainable opportunities for growth.
The Retail strategy, Getting into Gear, is based on the following five elements designed to significantly enhance the customer experience:
- Service Revolution — introducing a step change in customer service across Halfords stores
- The 'H' Factor — reasserting our proposition authority to Support Drivers of Every Car, Inspire Cyclists of Every Age and Equip Families for Their Leisure Time
- Stores Fit to Shop — investing to raise the Halfords store estate to a standard the business is proud of
- 21st Century Infrastructure — systems and infrastructure to support service and sales
- Click with the Digital Future — creating a service-led digital proposition
Halfords created a modern, engaging and friendlier store environment that encourages browsing and more interaction with colleagues.
Highlights include a new recruitment process that involves centralised online application, telephone screening, interviews in store with role play and an in-store audition before an appointment is made. Since launch nearly 55,000 applicants were screened for around 1,000 vacancies. This new approach significantly raised the quality of new colleagues.
The 3-Gears training programme was launched with virtually all eligible colleagues having completed Gear 1 by the end of the year. A number of colleagues began Gear 2 before the end of the year. 50% of colleagues are anticipated to complete Gear 2 by March 2015. Two colleagues per store will pass the Gear 3 guru level by the end of FY16.
Colleague engagement is central to the Getting Into Gear strategy, so it was particularly encouraging to see an increase in the latest Group colleague engagement survey score to 80% (FY13 77%). The result was underpinned by the good news that Halfords was recently voted as one of the 25 Best Big Companies to Work For in the UK (see The Sunday Times Best Companies To Work For 2014). These scores were reflected in a rise in the Retail net promoter score to 72% from a run rate of around 55% in the prior year.
The 'h' factor
A revitalisation of the Retail product range was enhanced by the appointment of a new Commercial Director in September 2013. Examples of the refresh in the period included upgraded ranges of Boardman and Apollo cycles, trials of cycle finance in-store, extended ranges online, the introduction of wearable fitness technology and a revised private-label hierarchy that included the new Halfords Essentials brand.
The business also focused on the balance between third-party and private-label brands. The third-party Tenn brand in Cycling clothing was introduced in the period, whilst the upweighted focus on Kärcher pressure washers compared against a reduced focus on the Halfords-branded offer in Car Cleaning. Global brands such as General Electric were also introduced within the Car Maintenance category. Attention has been paid to the execution of marketplace offers at the front of store, as well the introduction of interactive merchandising.
Stores fit to shop
Three refreshed stores were opened at the end of July 2013 wherein Halfords created a modern, engaging and friendlier store environment that encourages browsing and more interaction with colleagues. At the period end, 27 stores were trading in the new format, with a further c.50 stores planned for refresh in the new financial year. The stores refreshed so far are delivering results in line with management's plans and investment criteria. Halfords will continue improving its portfolio of Cycling departments by the end of FY16 after 100 were refreshed in the period.
21st century infrastructure
Award winning year
We were finalists in the Business Charity Awards in two categories:Charity Partnership – Retail and Leisure; and CSR Team.The Business Charity Awards are run by Third Sector magazine to recognise the outstanding contribution made by businesses in the UK to good causes.
We are also pleased to have been confirmed as an International CSR Excellence Award winner, in recognition of our commitment to community and corporate social responsibility.
A key focus within the Getting Into Gear programme is infrastructure, particularly across IT systems and capability. Examples of the progress made include the upgrade to SAP, the core Retail operating system, completed in May 2014. New chip & PIN pads in store saved customers an average of 19 seconds per transaction, and to help colleagues, the business installed laptop computers in stores to make it easier to progress through the 3-Gears training programme. New VOIP technology across the store estate also enabled colleagues to serve customers more effectively and at reduced cost.
The appointment of a new Supply Chain Director was followed by a trial to deliver more frequently to store, benefitting stock availability and potentially saving a significant element of courier cost related to the Click & Collect proposition.
Click with the Digital Future
The goal of Click with the Digital Future is to create a much-improved online and omnichannel Retail experience. Phase One of the website relaunch went live in November 2013, with a different tone of voice to make the website more emotionally engaging and inspiring. A new home page included more-intuitive navigation to help all customers find what they are looking for more easily and with far fewer clicks. The system of checkout was reshaped to help customers complete their transaction more simply; this was designed to reduce the risk of abandoned baskets. Customers also now pay for their entire Click & Collect transactions in store. Further enhancements will be completed in due course, including social-network interactions and upgraded 'my account' functionality.
The investment plan continued as new centres were opened and the business looks to improve the consistency of in-centre service. Expenditure was directed to improving the infrastructure, from new IT systems to more-efficient processing systems, enabling more effective centre management. As service is central to the Halfords strategy, colleague incentives were changed in the year to embed customer-service metrics, such as net promoter scores; colleague engagement continued to improve this year.
This customer-centric plan is vital as the business extends its differentiation from key competitors. Autocentres will also better leverage the relationship with the Retail stores. Andy Randall was appointed in March 2014 to lead the business and is focused on delivering a significantly-enhanced experience for Autocentre customers.
Improved customer experience from our Service Revolution.
This was the first year of a major step-up in activity designed to leverage Halfords' specialist credentials in local areas through community engagement.
In FY14 over 20,000 children and parents attended a Kids' Bike Workshops in store to learn the basics of how to look after their bike, with 97% of parents likely to recommend the summer workshop to others. In FY15, together with the Easter holiday, stores will run the workshop in the summer and during the October half-term week, promoted through schools and links with children's organisations such as UK Youth and Children's University. Halfords now partners with the Scouts Association and supports the Cub Cyclist Activity badge. Building on this success, Halfords will also offer a tailored workshop in schools, focused on year-six pupils as they progress through Bikeability (formerly called cycling proficiency), as well as teachers seeking additional life skills to support their pupils' transition to senior school.
The partnership with Re~Cycle (the charity that sends unwanted bikes to Africa) went from strength to strength. In FY14 Halfords helped Re~Cycle double the number of containers sent to Africa through the world's largest bike trade-in event, with over 10,000 unwanted bikes donated at Halfords stores, diverting over 150 tonnes of waste to a sustainable alternative and generating £1.5m in new bike sales. In addition to more trade-in events in FY15, Halfords will also trial accepting bike donations at over 75 stores and will continue fundraising to support the £10 it costs to send a bike to Africa, with over £90,000 raised so far. In FY15 stores will also receive 'community' hours to support additional local-community activity, helping them to build closer relationships with their local communities.
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. These free one-day events offer cyclists of all ages and abilities the chance to ride their bike on traffic-free streets or on cycle paths and parks in the heart of towns and cities across Britain. Halfords cycle mechanics will be a key part of the day, keeping cyclists on the move assisting with essential adjustments, cabling and tube replacements.
Halfords is also trialling a Cycle Repair Academy in Onley Prison, where a number of prisoners close to their release dates are being trained as bike mechanics with a view to being employed in Halfords stores, once released. This programme will provide Halfords with potentially very loyal, trained and motivated colleagues whilst at the same time supporting the broader goal of rehabilitation of offenders.
As Halfords becomes more of a Cycling business in the first half of the year, a Summer Of Cycling lies ahead, with major launches imminent within the Halfords cycle range. The fastest growing and second-largest volume brand in the range, Carrera, will undergo a complete refresh in the summer. I am particularly pleased to see Kona and Mongoose, two formidable global Cycling brands, added to our growing list of superb cycle options. The Pinarello brand of cycles will soon be available at 43 stores with around 50 models onlin today. These launches will coincide with a busy summer of Cycling events, with the recent Giro d'Italia Big Start in Belfast, the Tour de France's Le Grande Départ in Yorkshire in July and the Commonwealth Games in Glasgow in July and August.
Halfords Retail's auto business also has a busy period ahead, with the launch of Car Parts Direct by the end of summer 2014, wherein around 130,000 car-part SKUs will be available for prompt pick-up at Halfords stores or through home delivery. A number of smaller accretive opportunities will be progressed, including the sale of powersport and leisure batteries, the sale online of car registration plates as well as the ranging of scooter helmets.
On behalf of the Board, I would like to thank all colleagues for their immense contribution and commitment to the progress of Halfords and the implementation of the plan to reposition the business. It has been a pleasure to work with you over the past year.
21 May 2014
Training fuels our differentiated offer.