Key points:
- Halfords shares are up 12% this morning on a trading update
- Even when we correct for inflation HFD is managing to keep pace
- The key is that most of the sales volume is not discretionary spend
Halfords (LON: HFD) shares are up 12% this morning on their 20 week trading statement. The essential message of which is that they're just about holding their own against inflation. That's not quite and not exactly what they say of course, but once we do a little mental mathematics that's what we're actually seeing in like for like numbers. There's also a neat circularity to this, as Halfords shares dropped some 11% on inflation worries a few weeks back. So, the market was worried about inflationary effects, Halfords announces that they're at least keeping step and so those worries are alleviated.
The grand worry for consumer oriented firms currently is how will they deal with inflation? Or more importantly perhaps, how will their customer base deal with inflation? For prices are indeed going up – especially energy of course – faster and harder than incomes are. So, there's going to be some curtailment of spending, somewhere, on something. We have varied theories about what happens here – the Lippy Effect for example, where women trade down those little excitements of life from clothes to just a new lipstick. Or, another theory, inflation basically is the rise in the prices of fast moving consumer goods. So, FMCG firms should be able to at least stand still with respect to inflation.
Like all economic theories there's always the possibility that this time is different. So, we're looking for evidence one way or the other for all those participants in the consumer and retail economy. Whose products are going to get it in the neck from changes – retreats – in consumer spending?
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Which leads to today's announcement from Halfords. The Like For Like numbers are the ones we want to talk about inflation. So, we've got automotive “Strong LFL performance of +28.2% vs FY20 and +19.4% vs FY22”, retail “Trading in-line with expectations, with LFL performance of +8.9% vs FY20 and -7.1% vs FY22” cycling “Revenue +9.5% LFL vs FY20 and -12.7% LFL vs FY22”. Now we've got to adjust for inflation – these are nominal numbers recall. Say, about, 10% YonY. That means automotive is up perhaps 10%, retail down 17% and cycling down 22% (just very rough eyeball calculations) on that real and inflation adjusted basis.
That's not, we might think, quite enough to explain a 12% jump in the HFD share price – unless we combine that with the 11% fall we had over inflation worries. For there's one more thing to add here: “Over 70% of our sales now come from motoring products and services, and the fact that this area of spend tends to be more needs-based rather than discretionary is leading to a very resilient Group performance, despite the wider macroeconomic uncertainty.”
That is, the bit of Halfords we see, the retail side, is indeed suffering from inflation. Money is being spent elsewhere. But the bit of Halfords we don't see every day, that automotive, is keeping up with inflation as it's not really a discretionary spend. Further, the group is still expanding so total numbers, not like for like, are still going up.
Halfords seems to be, so far at least, weathering the inflation. Perhaps the biggest lesson is that some of those old theories about inflation are correct then. Some will be able to survive it as people don't substitute away from the company's products in the face of falling incomes.