M4 BARRON’S August 3, 2020
EUROPEAN TRADER
B
ritain’s leading bicycle retailer
Halfords Grouphas seen its
shares backpedal 22% in the
past 12 months, hurt recently by
poor sales from its higher-margin auto
repair and accessories business.
The retailer owns 371 Halfords Auto-
centres, but locked-down customers
have been using their vehicles less, re-
quiring fewer services and parts. How-
ever, Halfords (ticker: HFD.UK) can’t
blame coronavirus for all of its woes.
The shares have fallen 72% over five
years after a series of profit warnings
and a string of chief executive officers.
Like many retailers, Halfords has ex-
pensive rent for its more than 440 stores
at a time when consumers are shifting to
online purchases. But CEO Graham Sta-
pleton instituted a strategy two years ago
that focuses on services in which Hal-
fords provides engineers to fit the parts it
sells onto customers’ bikes and vehicles.
As shoppers slowly emerge from lock-
down they will be seeking alternatives to
public transport. Halfords is increasing
its margins with enhanced services that
include fitting inner tubes onto bicycles,
replacing car batteries, and replacing
headlight bulbs and wiper blades.
Adam Tomlinson, an analyst at Libe-
rum, has a Buy rating and estimates
a 69% rise in the stock to 250 pence
($3.24). Shares are down 12% this year
to 149 pence.
In a July note, he wrote that the share
price implies a long-term sales decline of
8% per year. “The market appears to be
giving very little credit for the progress
achieved by management to date under
the new strategy,” he said.
“We expect the recovery to be sup-
ported by an increasing focus on ser-
vices, particularly within motoring and
Autocentres, driving a greater mix of
more nondiscretionary category sales.”
Kate Calvert, an analyst at broker
Investec, also marked Halfords a Buy
priced at 195 pence.
Based in Worcestershire, the firm
fetches 16 times this year’s expected earn-
ings and is valued at a 10% premium to
its peers.
It employs 10,200 workers and has a
market value of 295 million pounds ster-
ling ($382 million). Earlier this month, it
posted pretax profit of £22.7 million for
the 52 weeks to April 3, down from £51
million due to one-off costs from closing
stores. Sales were flat at £1.1 billion.
“We responded quickly to the surge in
popularity of cycling during lockdown,
and we are now seeing demand for mo-
toring services and products increase as
people start using their cars more regu-
larly.” Stapleton toldBarron’s.
“The strong macro tailwinds within
our market-leading motoring and cycling
businesses give us confidence in the long-
term prospects for Halfords.”
The company wasstarted in1892 by
hardwares retailer and cyclist Frederick
Rushbrooke. He later moved the business
to Halford Street in Leicester, which
spawned the company’s name, and
started selling cycling goods.
Halfords has market share in its core
products categories of cycling, including
sales and service (33% of sales), and autos,
including parts and repairs (67% of sales).
Halfords has strong brand recognition and
geographical spread in the United King-
dom, which means it’s where customers
turn to for their bicycling and auto needs.
Cycling sales accelerated 60% over the
last quarter, but Investec’s Calvert warned
that the usual jump in summer cycling
sales may already be accounted for.
If Halfords can leverage the brand by
adding value with services for the me-
chanically challenged, the business has a
real point of difference. Consumers can
buy tires or car radios from Amazon-
.com, but the online giant can’t install it.
Halfords’ focus on full-service shopping
gives it an edge over online rivals.B
By Rupert Steiner
EMERGING MARKETS
Brazil’s Stock Market
StrugglestoRebound
B
razil is showing a pulse, eco-
nomically and politically, after a
calamitous collision with
Covid-19. But the beat looks too
faint to power much of a recovery in a
depressed stock market. The iShares Bra-
zil MSCI exchange-traded fund is off
30% this year, while global emerging
markets are nearly back to even.
The Latin American giant has re-
bounded better than expected over the
past two months, driven by consumer
spending. David Beker, chief Latin Amer-
ican economist at Bank of America, has
improved his 2020 gross domestic prod-
uct forecast to a 5.7% contraction, from
7.7%. “Job destruction is not as bad as we
thought,” he says.
Politicians are moving beyond fire-
hosing the population with cash to focus
on the next big reform challenge: ratio-
nalizing Brazil’s horrifically complex tax
system.
Finance minister Paulo Guedes, Presi-
dent Jair Bolsonaro’s economic major-
domo, unveiled a tax reform blueprint on
July 21, and each house of Congress has
its own pending. “It appears there is
some consensus on moving forward with
tax changes,” Beker says.
But these Band-Aids will hardly heal
an economy that has not grown more
than 1.5% annually since 2013. Much of
the consumer revival is driven by emer-
gency government largesse, the so-called
coronavouchers that are distributing 600
reals ($116) per month to about half the
population.
The state can’t keep these up for long,
though. Brasilia’s budget deficit will ap-
proach 20% of GDP this year, ballooning
public debt to nearly 100% of annual
output, figures Alberto Ramos, head of
Latin American economic research at
Goldman Sachs.
“That stands out as one of the weakest
fiscal positions across emerging mar-
kets,” he says.
Pandemic-driven spending, though
viewed as necessary, undercuts one of the
rationales for tax reform: to decrease the
net burden on Brazilian companies. Now
the government will have to raise reve-
nue, cut spending, or probably do both.
“Brazil’s tax take is already in the low
30s [as percentage of GDP], which is
high for EM,” says Aaron Hurd, senior
currency portfolio manager at State
Street Global Advisors. “Tax reform will
have a small impact over the next five
years compared to the fiscal consolida-
tion that will be required.”
Last year, Guedes broached a way to
fill state coffers and cut corporate levies:
through a financial transactions tax,
which would basically take a nibble any
time Brazilians exchanged money. That’s
scarcely a popular idea, though, and the
finance minister’s latest proposal point-
edly left it out.
The current system’s very unwieldi-
ness is a deterrent to fixing it. Champi-
ons need to find a new formula with
more winners than losers, then shep-
herd it through a legislature with nearly
600 members from some 30 different
parties.
No wonder the topic has been in the
air for decades without much result,
Ramos notes. His expectations are lim-
ited for this round, too. “It may come out
better than what we have, but I’m not
betting on a major reform,” he says.
Brazil’s disjointed response to Covid
also undermines confidence that it can
pull off technocratic heroics on taxes or
other structural reforms, says Monica de
Bolle, who monitors the country of 210
million for the Peterson Institute of Inter-
national Economics. Brazil is No. 2 in the
global pandemic death count, with
around 90,000, though only 10th per
capita.
“This is all shuffling deck chairs on
the Titanic,” she says. “Forget about the
whole reform effort.”B
By Craig Mellow
British Bike, Auto-Parts
Retailer Steps on the Gas