Halfords doubles profits and British Land faces challenges with offices and shops

“The FTSE 100 started Wednesday a bit lower as inflation made a fairly modest return. Expectations a Brexit deal could be forged were lifted again amid signs the rather smelly issue of fishing rights was on its way to being expunged,” says AJ Bell Investment Director Russ Mould.

“This acted as drag on the UK’s flagship index for a second day as sterling rose against other major currencies, hitting the relative value of the FTSE’s dominant overseas earnings.

“There are no guarantees a Brexit agreement will be reached but if one can be secured it would likely be a positive catalyst for UK stocks in the long run – removing a key source of uncertainty which has weighed heavily for more than four years.

“Elsewhere in Europe, markets were pretty much flat with relatively little for traders to get their teeth into after all the vaccine excitement seen in the last week or so.

“The US political situation still remains in limbo – and nervousness may grow the longer incumbent Donald Trump refuses to accept the results of the election and concede to the projected winner Joe Biden.

“Gold prices continue to sit just below $1,900 an ounce but there may be clamour for the precious metal once again if tensions across the Atlantic move from simmering to boiling point.”

Halfords

“It’s been quite a year for Halfords with a sudden surge in demand for bikes and motoring accessories as the Government encouraged people to cycle or drive to work rather than use public transport.

“Halfords has done a good job at adapting its stores to the world of social distancing, but demand exceeded supply for cycling, meaning its shelves were bare for all things two-wheeled. That meant it couldn’t capture all the customer interest in-store, instead telling people to go home and order online which was a risky move for a retailer as it is hard to imagine converting all those physical enquiries into web-based sales.

“Queues to get bikes fixed raised expectations that Halfords’ sales would be particularly strong this year as it wasn’t only about shifting new units. Unfortunately, servicing bikes is also more labour intensive and so profit margins weren’t as strong as many people expected in this area.

“Its half-year results are still impressive, with a doubling in pre-tax profit which is quite something given that Halfords has lacked strong earnings growth for quite a while. On a full-year basis, Halfords hasn’t seen double-digit profit growth since 2015.

“Despite several sales tailwinds, Halfords has refused to give earnings guidance for 2021 amid caution about the second half and it outlined plans to spend money on the business.

“Investors typically prefer cost savings than spending, even though Halfords’ investment plans make perfect sense and could help it stay competitive in the future. Hiring more workers for service roles and improving training for existing staff is exactly what Halfords needs to do.

“Having more electric vehicle technicians is paramount if Halfords is to capitalise on the Government’s decision to bring forward the ban on new diesel and petrol cars to 2030. Halfords needs to establish itself as an expert in this field now, not simply when that deadline arrives.

“The same applies for electric bikes – the direction of travel is clearly up for sales of these products and being proactive rather than reactive with having skilled staff is essential for Halfords to prosper in the future.”

British Land

“There may be a temptation not to look too far past the resumption of the dividend at diversified UK property investor British Land but that would be a mistake given what its results reveal about its own prospects and British real estate more widely.

“That the company has been able to sell assets above their book value in the period in question is a demonstration that there is still an appetite for the right properties. However, the company’s retail and, to a lesser extent, office assets face material structural challenges.

“With many shops forced to close by new coronavirus crisis, we are heading for an online Christmas for retail.

“This will be a big test of the capacity of retailers to meet a surge in internet-based demand. Should this test be passed, more companies may look to reduce their physical footprint with negative implications for the already bombed-out valuations in British Land’s retail estate.

“The company is also experiencing a fall in office leasing volumes thanks to the pandemic and Brexit uncertainty and, given a post-covid future may involve more working from home, the impact on its portfolio of offices could be lasting.

“This raises the question of whether the sort of pick and mix approach pursued by British Land – owning a mixture of offices, shops, perhaps a bit of residential and some industrial and alternative assets – is a viable one for the long term.”