Halfords: fickle trends can lead down a bumpy road

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National sporting triumphs often kick-start copycat trends. But those sales boosts can prove shortlived unless there are other reasons to believe there will be a longer-term shift in a market.

The fickleness of investment themes is worth keeping in mind as a series of sporting events, including the Tour de France and the Rugby World Cup, will no doubt deliver sales surges in several sectors.

When Sir Bradley Wiggins became the first British winner of the Tour de France in 2012, the consequent increase in bike sales soon became known as the “Wiggo effect”.

His, and subsequent Tour victories from other British riders, triggered a rush of investor enthusiasm for the UK cycling market. But it was not long before the mood deflated.

Take Evans Cycles, the retailer acquired by private equity firm ECI Partners for £80mn in 2015. Three years later it was offloaded to Frasers Group in a prepack administration deal after it overextended itself with its store expansion plan and cycling sales fizzled.

Full-year results from Halfords this week showed cycling retailers are now navigating another steep descent. The Covid-19 pandemic gave cycling retailers a second wind as more people took up the activity during lockdowns and to avoid public transport.

But again, the effect has faded. Halfords’ cycling revenues dropped 11 per cent on a like-for-like basis last year versus the previous 12 months as consumers cut back on non-essential purchases. The cycling market as a whole is down 24 per cent on pre-pandemic levels by volume, Halfords warned.

Others have reported a similarly bumpy picture. New York-listed Signa Sports United, owner of online cycling retailers Wiggle and Chain Reaction, reported in March that depressed consumer sentiment and inflationary pressures continued to “significantly impact” its bike business.

Halfords currently trades on a forward price earnings multiple of 10.5 times. While this is slightly above its five-year average and above Frasers Group on 9.5 times, the latter has other strings to its bow. 

Halfords has diversity on its side, though. Since 2018 it has expanded its share of another market which should, in theory, be less exposed to fads: car servicing. 

The current garage industry is fragmented. Halfords can fit the car parts it sells — something online competitors cannot offer. It hopes its garages business will also be future-proof as it will be able to service electric vehicles, e-scooters and e-bikes. 

Revenues at Halford’s autocentres have increased from £191.8mn in 2020 to £613mn last year as it acquired competitors, including the £37mn takeover of Lodge Tyre in October.

It has yet to see a corresponding jump in the division’s underlying ebitda, a rough measure of cash earnings. This fell 10 per cent year-on-year to £186mn as Halfords suppressed price increases to customers. It had also anticipated some margin dilution after acquiring the tyre businesses.

Overall, group revenue rose 15 per cent last year to £1.59bn but underlying pre-tax profit came in towards the bottom of a previously guided range at £51.5mn. Halfords also faced cost inflation of £68mn last year. Drivers put off changing their car tyres due to cost of living pressures.

There is some hope that the road ahead will be smoother. Halfords expects cost inflation to ease to £30mn this year as freight rates in particular improve. It also expects to offset those remaining increases through cost savings, which should be repeated in subsequent years. Before Wednesday’s full-year results, analysts were expecting underlying pre-tax profits of £53.3mn this year. Singer Capital Markets expects a stronger recovery to £69.4mn in 2025. 

Tour de France-inspired sales boosts will come and go, but Halfords should benefit from a general push towards more sustainable forms of mobility. Its focus on car servicing should meanwhile help it to cycle around any major obstacles.

Flying taxis: take-off on hold

Another transport trend generating investor buzz, particularly in the US, is flying taxis.

Two important hurdles stand in the way before they can take off in cities such as San Francisco, where driverless cars are already a reality.

First, regulators have not yet approved the vehicles. Second, they have nowhere to land.

A frenzy in 2021 in the US that allowed revenue-less electric plane companies such as Joby, Archer Aviation, Lilium and Vertical Aerospace to join public markets via special purpose acquisition companies (Spacs) has died away.

Despite raising hundreds of millions of dollars, commercial operations have not yet been launched. A prediction by Morgan Stanley that autonomous aircraft could have a total addressable market of $1.5tn by 2040 looks increasingly outlandish.

Valuations have plummeted. Spacs — blank-cheque companies that are a backdoor way for a private company to list on a stock exchange without going through the expense and uncertainty of an initial public offering — are typically priced at $10 a unit. Joby now trades at less than $8, Archer at $4.45, Vertical at $1.77 and Lilium at $1.35.

Yet investments are still being made. After United Airlines ordered 100 vehicles from Archer it signed a deal for 200 from Eve Air Mobility. Boeing is backing autonomous air taxi start-up Wisk. The US Federal Aviation Administration expects high demand for air taxis at the 2028 Los Angeles Olympics. Billy Nolen, the FAA official who made that forecast, has since joined Archer. News of his appointment lifted Archer’s share price by a fifth.

Even if vehicles receive regulatory approval, infrastructure remains a problem. Air taxis, or eVTOLs (electric vertical take-off and landing), need large, flat, obstacle-free surfaces to land safely. If they are too noisy, city dwellers will complain.

Lacuna Technologies, which creates software for transportation networks, points out that electric planes will also need charging points. Companies plan to use existing heliports.

But to create useful services they need multiple, convenient, city centre spots. Without a network of landing and take-off points, flying taxi services will be grounded.

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