Halfords – Sell

Our Halfords recommendation has not performed as we would have liked, with an initial innocent-looking warehouse distribution problem being followed by a series of profit warnings.

We are now recommending investors cut their losses following the tremendous 75% rise from the July low of 188p. This rally was driven principally by expectations of an Olympics boost, a better than anticipated Q2 update (retail sales benefitted from pent-up cycling demand caused by poor Q1 weather) and the positive appointment of new CEO Matt Davies, former Chief Executive of ‘Pets at Home’.

JPMorgan Cazenove believes that the appointment of Mr Davies is a strong positive, as his background is in large scale, service orientated retailing. They expect a strategic review of the business will include a substantial downsizing in the store portfolio and a pricing review, given the competitive nature of the online leisure industry. However, the initiatives that are necessary will obviously take time to implement and take effect.

In the meantime, expectations have moved higher and even flat gross margin guidance looks demanding. Fundamentally, the share price looks fully valued now trading on a forward P/E multiple of 12.5x and it has surpassed the price targets of most brokers (UBS=285p, HSBC=330p, Deutsche Bank=300p, Peel Hunt=280p etc).

Technically, the shares are overbought with the RSI above 80 level (an extremely overbought reading) and the shares are potentially at a ‘double-top’.

Given the stock’s outperformance in both relative (+50% vs. the sector over the last 3 months) and absolute terms (+75% since late July), the near term risk lies to the downside