UPDATE 2-Halfords sales drop, mild winter hits car upkeep

Thu Jan 12, 2012 5:51am EST

* Sees FY gross margin down 130-150 basis points

* Previous margin guidance was for fall of at least 100 bps

* Analysts say margin guidance worse than expected

* Autocentres significantly outperform market

* Shares rise 1.7 pct

By Paul Hoskins

LONDON, Jan 12 (Reuters) - Bicycles to car parts retailer Halfords Group Plc reported a drop in sales in the run-up to Christmas, as mild weather made cost-conscious Britons even less inclined to spend money on maintaining their own vehicles.

The firm, which trades from 467 Halfords stores and 247 Autocentres in the UK and Ireland, also indicated in a trading update on Thursday that profitability could be eroded more than previously feared.

"Trading and gross margin guidance were worse than our expectations," analyst Freddie George at brokerage Seymour Pierce said in a note, cutting his full-year profit forecast and reducing his target price on Halfords shares to 300 pence from 350p.

Shares in Halfords veered between a 3 percent fall and a 2 percent rise and were up 1.7 percent at 298.3 pence by 0956 GMT. That compared with a 0.7 percent stronger FTSE 250 midcap index and a 14 percent slump for Britain's biggest retailer Tesco following a profit warning.

George said he was cutting his full-year pretax profit forecast to 93 million pounds ($143 million) from 99.6 million, while analysts at Credit Suisse predicted that the market consensus would drop by 5 percent from 98 million pounds.

"The update this morning is mixed," Credit Suisse wrote but said relatively undervalued Halfords shares should enjoy some support thanks to a near 7 percent dividend yield, the relatively defensive nature of its business and the fact that it does not face major competition from the big supermarket groups.

With British shoppers' disposable incomes squeezed by rising prices, muted wages growth and government austerity measures, store chains generally had a tough Christmas. They do not expect 2012 to be much better.

VERY SHARP DECLINE

Halfords said sales at stores open more than a year in Britain and Ireland fell by 4.8 percent in the 13 weeks to Dec. 30, deteriorating from a 1.9 percent drop in total retail sales reported for the six months to the end of September.

"That was overwhelmingly due to our car maintenance business where there was a very sharp decline in the third quarter, largely due to the weather," Chief Executive David Wild told reporters during a conference call. "The underlying performance of the business is encouraging."

In particular he noted sales of leisure goods such as bicycles in the final 13 weeks of 2011 rose 9.7 percent year-on-year. Sales at Halfords Autocentres, which provide repairs, fit tyres and service vehicles, rose 10.9 percent, outperforming an overall market decline that Wild put at about 10 percent.

Any gains were more than wiped out though by poor sales of car parts and accessories for customers to fit themselves.

Halfords said like-for-like revenue from car maintenance and car enhancement both fell by 12.8 percent versus declines of 3.1 percent and 9.8 percent respectively during its first half.

For the full year it predicted a gross margin decline of 130 to 150 basis points. The company described that as being in line with market expectations although it is worse than the forecast for a decline of at least 100 basis points given in November and analysts at both Seymour Pierce and Credit Suisse said it was worse than they had been factoring in.

"Halfords customers are feeling the pinch and are therefore deferring purchases, especially since its product range is not 'sexy'," Panmure Gordon analyst Philip Dorgan wrote.

Halfords too is counting its pennies, saying it expected to cap rises in operating costs for the year to the end of March at 3 percent versus the 4 percent rise previously indicated, thanks to savings in store occupancy and staff costs.

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