Group Financial Results

* This report includes Alternative Performance Measures ("APMs") which we believe provide readers with important additional information on the Group. A glossary of terms and reconciliation to IFRS amounts is shown in the Glossary of Alternative Performance Measures.

The speed with which COVID-19 hit, and the subsequent implications, have been the most significant test for every business in living memory. Almost overnight, demand and customer shopping behaviour changed, cash flows and supply chains were interrupted, and the resulting operational challenges tested everyone and everything. Although I believe the financial strength of Halfords, and our diverse portfolio of essential products and services, positioned us well going into the pandemic, I am pleased that the work in the preceding 12 months was designed for exactly this purpose - to strengthen the resilience and profitability of the business in an ever-changing retail environment. The FY21 financial results therefore reflect our operational agility in year but also the positive impact of longer-term initiatives to improve the efficiency and profitability of our business. We saw revenues and profits grow, gross margins improve in our core categories and businesses, operational costs fall as a proportion of sales, and a closing net cash of £58.1m.

The customary financial metrics undoubtedly demonstrate our strong performance but, over and above this, we also undertook further activity in year to safeguard the Group. This included securing £25m of CLBILS funding and covenant waivers on our existing RCF at the peak of the pandemic and, more notably, the subsequent refinancing of the Group's debt facility for the next 3 years, securing a competitive rate of borrowing on a reduced facility size overall.

Group revenue in FY21, at £1,292.3m, was up 13.1%, comprised of Retail revenues of £1,039.8m and Autocentres revenue of £252.5m. This compared to FY20 Group revenue of £1,142.4m, which saw Retail revenue of £950.6m and Autocentres revenue of £191.8m. Group gross profit at £656.3m (FY20: £584.0m) represented 50.8% of Group revenue (FY20: 51.1%), comprising an increase in the Retail gross margin of 10 basis points ("bps") to 48.3% and a decrease in the Autocentres gross margin of 440bps to 61.1%, reflecting the recent acquisition of lower gross margin businesses. Although the headline Group gross margin rate declined, -34bps, this was a strong result given the dynamics and volatility of the last 12 months and the outcome reflects our focus on creating a more profitable business. To context this result, it is worth highlighting three key components within the final overall Group gross margin %. Within Retail, we saw a significant, and adverse, change in mix, out of higher margin motoring products and into lower margin cycling. Motoring revenues were impacted by the almost continuous rhythm of lockdowns and resultant fewer journeys. On the contrary, our cycling performance was very strong as we worked hard to capitalise on any opportunity within this market and offset the lost motoring revenue. Offsetting the significant mix impact, we saw a particularly strong margin rate improvement, reflecting almost 18 months of work to improve the profitability of our cycling business. The overall improvement in cycling gross margin was particularly pleasing, up almost 680bps on FY20 and, alongside a smaller, but favourable, improvement in motoring this completely mitigated the adverse mix effect within Retail.

The final margin impact was seen within our Autocentre Business. The overall performance was -440bps vs FY20 but was expected as we reported the first full year of Tyres on the Drive and McConechy's Tyre Service Limited ("McConechy's"). As we highlighted last year, these businesses generate a lower gross margin due to a higher participation of tyre sales. The operating model is different, but we see an opportunity in the medium term as we increase the participation of higher-margin services, maintenance, and repair within the product mix. Encouragingly, all three Autocentre businesses saw their gross margins improve vs FY20 as we continue to optimise and take the first steps on this journey.

Total underlying costs, pre-IFRS 16, increased to £554.5m (FY20: £525.3m) of which Retail comprised £410.6m (FY20: £404.3m), Autocentres £141.6m (FY20: £118.9m) and unallocated costs £2.3m (FY20: £2.1m). Unallocated costs represent amortisation charges in respect of intangible assets acquired through business combinations, namely the acquisition of Autocentres in February 2010, Boardman Bikes in June 2014, Tredz and Wheelies in May 2016, McConechy's in November 2020 and The Universal Tyre Company (Deptford) Limited ("Universal") in March 2021, which arise on consolidation of the Group. Group Underlying EBITDA pre-IFRS 16 increased 46.7% to £139.8m (FY20: £95.3m), whilst net finance costs pre-IFRS 16 were £5.5m (FY20: £2.8m).

Group operating costs before non-underlying items and pre-IFRS 16 saw an increase of 5.6% but decreased as a proportion of sales by -3.1ppts to 42.9%, demonstrating our increased efficiency. As with revenue and gross margin, there are several movements within this result that give context to the performance. The Group saw over £33m of costs as a result of operating under COVID-19 restrictions, driven by additional payroll to manage colleague and customer safety, personal protective equipment ('PPE') and safety equipment, and higher fulfilment cost as customers temporarily changed shopping behaviour. During Q1, whilst the Groups stores and centres were partially closed, over 50% of colleagues were furloughed. At this point we utilised government furlough schemes, receiving £10.5m of support, which was later paid back in full during Q4. We also recognised the difficult environment through which our colleagues have worked and, as a result, invested in supporting them financially through initiatives including the Front-Line Bonus Scheme and a Hardship Fund totalling £4m, whilst also adjusting holiday rules to allow colleagues to take more time off during FY22. These costs were offset by the business rates relief of £39m across the Group, of which the majority arose within the Retail business.

We continued to drive our ongoing efficiency programmes, delivering £7m of Goods Not For Resale ("GNFR") cost savings, alongside those associated with the closure of Cycle Republic, worth a further £9m. We also achieved rental savings within our Retail estate on 19 lease renewals of circa -30% worth £0.6m in FY21 and continued to convert most of stores and garages to LED lighting saving a further £0.4m. These underlying savings were offset by the inevitable cost increases associated with the growth of our business. The annualisation of our acquisitions - Tyres on the Drive and McConechy's - added £18m, strategic investments totalled £8m and the significantly skewed mix into bikes, and their increased volumes during FY21, added a further £22m of additional cost.

Underlying Profit Before Tax pre-IFRS 16 for the year increased 72.3% at £96.3m (FY20: £55.9m). Non-underlying items of £37.3m in the year (FY20: £32.1m) related predominantly to the closure of a number of stores and garages following a strategic review, as well as costs relating to a significant organisational restructure. After non-underlying items, Group Profit Before Tax was £59.0m (FY20: £23.8m).

After non-underlying items and including IFRS 16, Group Profit Before Tax was £64.5m (FY20: £22.7m). The impact on the Group of IFRS 16 in the period was a £5.5m net increase to Group Profit Before Tax.

Retail

* This report includes Alternative Performance Measures ("APMs") which we believe provide readers with important additional information on the Group. A glossary of terms and reconciliation to IFRS amounts is shown in the Glossary of Alternative Performance Measures.

Revenue for the Retail business of £1,039.8m reflected, on a constant-currency basis, a like-for-like ("LFL") sales increase of +14.6%. Total revenue in the year increased 9.4% after adjusting for the impact of closed stores. The volatility of the trading environment discussed earlier was most evident in our Retail business, which made forecasting particularly difficult. Demand for our motoring products suffered from a suppressed market throughout FY21 as lockdowns markedly reduced the number of journeys, with customers opting to work from the safety of their homes. Motoring like-for-like declined 12.1%, better than transport data would suggest, but still saw weekly LFLs ranging from -75% to +20%. There were a number of positive performances within motoring, such as our touring products and car cleaning, but many product areas saw LFL declines through much of the year.

Our cycling performance was much stronger, with like-for-like growth of 54.1%, as we worked hard to source stock from new and existing suppliers and serve the increased demand within the market. Cycling was equally hard to predict, and although performed very well across H1, with LFL peaks of over +100%, H2 saw more volatility from week-to-week with LFL declines late in Q3 and early Q4.

The differing category fortunes resulted in the mix of motoring within Retail decline by almost -12ppts vs. Cycling against last year. The Retail Operational Review in the Chief Executive's Statement contains further commentary on the trading performance in the year.

Like-for-like revenues and total sales revenue mix for the Retail business are split by category below:

Gross profit for the Retail business, at £502.0m (FY20: £458.4m) represented 48.3% of sales, an increase of +10bps on the prior year (FY20: 48.2%). Underlying gross margins of Cycling and Motoring improved more significantly than the headline number, which was diluted by product mix into lower margin cycling and a currency impact within the broader gross margin due to fluctuations on the year end spot rate. The gross margin improvement within the categories reflected the significant work carried out over the last 18 months on our sourcing strategy for both bikes and motoring products, as well as our work to optimise promotional activity throughout the year. Over the year, Cycling gross margins improved by +680bps and Motoring by +40bps vs. FY20.

Retail operating costs before non-underlying items and IFRS 16 were £410.6m (FY20: £404.3m), an increase of 1.6% on FY20. The focus on operational efficiency and procurement continued in FY21, offsetting the impact of volume and mix, whilst simultaneously allowing the business to invest, albeit at a reduced level, in our strategic initiatives. Some of the highlights included centralising all customer contact and further development of our digital platform to enhance our customer experience including bookable bike slots and our WeCheck app. We saw almost £7m of GNFR costs removed from the Retail business through continued review of services and tendering processes. We saw 19 lease renewals, saving on average -30% on annual rents, and we continued to convert more stores to LED lighting and building management systems, saving over 40% on annual converted stores utilities consumption.

Naturally, due to the size of the Retail business, a greater proportion of the costs associated with COVID-19 were within its costs. Of the £33m mentioned above, £25m arose in Retail, offset by £33m of business rates relief.

Autocentres

* This report includes Alternative Performance Measures ("APMs") which we believe provide readers with important additional information on the Group. A glossary of terms and reconciliation to IFRS amounts is shown in the Glossary of Alternative Performance Measures.

Autocentres generated total revenues of £252.5m (FY20: £191.8m), an increase of 31.6% on the prior year, with a LFL increase of 9.8%. Non-LFL revenue in the year included benefits from the acquisitions of both Tyres on the Drive and McConechy's in November 2020, alongside existing Autocentres that have been open less than 12 months.

Gross profit, at £154.3m (FY20: £125.6m), represented a gross margin of 61.1%, a decrease of 440bps on the prior year. As stated earlier, the decrease in gross margin % was solely a result of annualisation of the FY20 acquisitions, which have a dilutive effect as the operating model is quite different. These businesses tend to be lower gross margin but also lower cost. There is an opportunity for us to grow margin, over time, through a greater mix into service and repair, but the gross margin will remain lower than that of a core garage.

All businesses saw their respective gross margins improve during FY21, with the continued development of our PACE Digital Operating Platform supporting buying efficiency across garages, boosted further by a slightly lower mix into tyres, which tend to be lower margin.

Operating costs were £141.6m, +£22.7m above last year, of which £18m was a result of the annualisation and growth of our acquisitions from FY20. COVID-19 costs within Autocentres totalled £5.3m, offset by £6.0m of relief through the Retail, Hospitality and Leisure Grant Fund. The remaining cost increase was the result of growth in the underlying business.

Autocentres' Underlying EBIT was £12.7m before IFRS 16 (FY20: £6.7m), a strong performance, reflecting the continued growth and optimisation of our LFL business alongside the annualisation and expansion of FY20 acquisitions. Underlying EBITDA before IFRS 16 of £19.3m (FY20: £12.6m) was 53.2% higher than FY20.

Portfolio Management

The last 12-18 months have seen some of the most significant changes in the Group's portfolio since the acquisition of Autocentres over a decade ago. Within Q3 FY20, we saw the acquisition of McConechy's Garages and Tyres on the Drive, followed shortly by the closure of our Cycle Republic business, including 22 stores, at the close FY20. Within FY21, we have continued to grow our services business, increasing the number of HME vans and acquiring Universal Tyres at the end of the financial year. We also, however, took steps to further improve the profitability and efficiency of our business through the closure of 59 lower return stores and garages.

The total number of fixed stores or centres within the Group stood at 781, with a further 143 HME vans and a further 192 commercial vans supporting mobile tyre fitting within McConechys and Universal as at 2 April 2021. The portfolio comprised 404 stores (end of FY20: 472) and 374 Autocentres (end of FY20: 371). Mobile locations grew by 156 vans, increasing coverage of the most in-demand regions within the UK.

The following table outlines the changes in the portfolio over the year:

Within Retail, 42 low-return stores closed during the year, largely in Q4. It was considered more profitable to the Group, on analysing the anticipated sales transfer to other channels and neighbouring stores, to close these stores and reduce the overall cost base. Where there was term remaining on any leases at the point of closure, provision has been made in the balance sheet to cover occupancy costs to the point of lease expiry. A further 22 Cycle Republic stores, along with the Boardman Performance Centre, are also no longer part of the trading portfolio.

The number of lease expiries, or breaks under option, increases significantly within the next five years. Retail will see two-thirds of stores experience optionality within five years, allowing for a high degree of flexibility within the estate.

Within Autocentres, no new centres were opened, but 20 locations were acquired in the year. Seventeen were closed, taking the total number of Autocentre locations to 374 as at 2 April 2021 (end of FY20: 371). No Autocentres were refreshed in the year (FY20:14).

With the exception of eight long leasehold, and two freehold properties within Autocentres, the Group's operating sites are occupied under operating leases, the majority of which are on standard lease terms, typically with a 5- to 15-year term at inception and with an average lease length of under six years. The acquisition of Universal resulted in the purchase of 6 freehold properties but all have been sold and leased back within the first two periods of FY22.

Net Non-Underlying Items

The following table outlines the components of the non-underlying items recognised in the 52 weeks ended 2 April 2021:

1. In the current and prior period, separate and unrelated organisational restructuring activities were undertaken.
   Current period costs comprised:
   • During the year, a strategic redesign of the in-store operating model undertaken to better meet our customers' expectations and deliver a consistent shopping experience across our estate. Redundancy costs of £5.9m were incurred to transition to the new operating model. These costs have materially been spent during the year.
   Prior period costs comprised:
   • Redundancy and transition costs relating to roles which have been outsourced or otherwise will not be replaced (FY20: £1.4m); and
   • Asset write-offs, principally resulting from the strategic decision to re-platform the Retail and Autocentres websites (FY20: £1.4m).
2. In the prior period, costs were incurred in preparing and implementing the new Group strategy. This included £0.4m of external consultant cost and £0.6m of store labour costs, point-of-sale equipment and other associated costs in completing the cycling space re-lay across the store estate.
3. In the current and prior periods, costs were incurred in relation to the investments in Universal, McConechy's and Tyres on the Drive.
   • £0.6m (FY21) relating to professional fees in respect of the acquisition of Universal;
   • Tyres on the Drive acquisition costs comprised £1.0m (FY20) principally relating to the costs of dual running Halfords Mobile Expert and Tyres on the Drive, as well as the write-off of the receivables balance due from Tyres on the Drive related to Halfords Mobile Expert prior to acquisition; and
   • £0.9m (FY20) relating to professional fees in respect of the acquisition of McConechy's.
4. During the prior year, the Group incurred £0.2m in settling a court case. In addition, a provision of £0.6m was recognised in relation to the HMRC audit relating to the national minimum wage. The Group has continued to work with HMRC and external advisors during FY21 and a full data validation exercise is underway to determine the required Notice of Underpayment. The exercise is in progress and based on information available to date and the Group's assessment of a range of potential outcomes, management has increased the provision to £3.4m which represents management's best estimate of the value of underpayments and the associated penalty charge.
5. Of the closure costs £28.5m represents costs associated with the closure of a number of stores and garages following a strategic review of the profitability of the physical estate. The costs mostly relate to the impairment of right-of-use assets (£12.2m) and tangible assets and ongoing onerous commitments under the lease agreements and other costs associated with the property exits.

   In the prior period, they related to costs associated with the closure of the operations of Cycle Republic and the Boardman Performance Centre ("Cycle Republic") following a strategic review of the Group's cycling businesses. The costs mostly relate to the impairment of right-of-use assets, as well as the impairment of intangible and tangible assets and inventories. £2.5m of these costs have been reversed during the year as the Group continues to negotiate lease disposals and was able to release stock provisions previously in place (£1.8m).

6. In light of the ongoing COVID-19 pandemic, the Group has revised future cash flow projections for stores and garages. As a result, in the prior period, £0.9m incremental impairment was recognised in relation to garages where the current and anticipated future performance did not support the carrying value of the right-of-use asset and associated tangible assets. This charge is directly attributable to impairment due to COVID-19 and relates primarily to the right-of-use asset value. During the year, £0.4m of this impairment has been reversed as the stores and garages have returned to a profitable position.

Finance Expense

The net finance expense (before non-underlying items and IFRS 16) for the 52 weeks ended 2 April 2021 was £5.5m (FY20: £2.8m), reflecting the drawdown of the Revolving Credit Facility ("RCF") early in the pandemic, alongside increased amortisation and commitment fees relating to the new RCF, which was renegotiated in the period.

Taxation

The taxation charge on profit for the 52 weeks ended 2 April 2021 (before IFRS 16) was £10.3m (FY20: £2.8m), including a £5.8m credit (FY20: £4.7m credit) in respect of non-underlying items. The effective tax rate of 17.5% (FY20: 13.9%) differs from the UK corporation tax rate (19%) principally due to the impact of deferred tax on accounting for share options and adjustments in respect of provisions held in respect of prior periods.

Earnings Per Share ("EPS")

Underlying Basic EPS before IFRS 16 was 40.7 pence and after non-underlying items 24.7 pence (FY20: 22.9 pence and 8.9 pence after non-underlying items), a 77.7% and 177.5% increase on the prior year. Basic weighted-average shares in issue during the year were 197.1m (FY20: 197.0m).

Dividend ("DPS")

In light of the COVID-19 pandemic and the impact on short-term profitability, the Board has taken a series of measures to preserve cash, one of which was a suspension of the dividend. After the strong close in the final quarter of FY21, the Board has recommended to shareholders that a final dividend of 5.0p per share (FY20: nil) should be paid.

IFRS 16

IFRS 16 has had the effect of increasing profit by £5.5m. The two main drivers for this being the increase in held over leases which have decreased the depreciation charge in comparison to the rental payments, and the increased aging of the lease portfolio which has led to a lower interest charge in comparison to the rental payments.

Capital Expenditure

Capital investment in the 52 weeks ended 2 April 2021 totalled £32.5m (FY20: £35.8m) comprising £23.2m in Retail and £9.3m in Autocentres. Within Retail, £6.0m (FY20: £15.9m) was invested in stores. Additional investments in Retail infrastructure included a £13.1m investment in IT systems, including the continued development of the Group website.

The £9.3m (FY20: £4.8m) capital expenditure in Autocentres principally related to the replacement of garage equipment and replacement of fixtures and fittings, rebranding of McConechy's garages and further development of PACE, our Garage Workflow System.

Inventories

Group inventory held as at the year-end was £143.9m (FY20: £173.0m). Retail inventory decreased to £134.3m (FY20: £168.0m), reflecting reduced stock levels and working capital efficiencies. The stock levels within our cycling business were, however, sub-optimal for much of the year and, as such, the inventory reduction is flattered. Inventory levels are likely to revert to more normal levels in FY22.

Autocentres' inventory was £9.6m (FY20: £5.0m). The existing Autocentres business model is such that only modest levels of inventory are held, with most parts acquired on an as-needed basis. The increase in inventory related to the acquisition of tyre stock within Universal.

Cash Flow and Borrowings

Adjusted Operating Cash Flow was £186.6m (FY20: £109.9m). After acquisitions, taxation, capital expenditure and net finance costs, Free Cash Flow of £145.3m (FY20: £54.6m) was generated in the year. Group Net Cash/(Debt) was £58.1m (FY20: (£73.2m)). All these numbers are pre-IFRS 16.

Within the cash flow is a working capital inflow of approximately £42m. Within this was approximately £20m of planned and sustainable inventory reductions in Retail and £36m which we anticipate will reverse in FY22. The £36m is a result of Retail inventories at year end which were £14m lower than optimal due to the high cycling demand, and year end creditors worth £22m which saw our normal timing differences alongside a VAT creditor that was deferred from earlier in the year and paid early in FY22.

Group net debt after IFRS 16 was £277.3m (FY20: £479.8m).

Principal Risks and Uncertainties

The Board considers the assessment of risk assessment and the identification of mitigating actions and internal control to be fundamental to achieving Halfords' strategic corporate objectives. In the Annual Report and Accounts, the Board sets out what it considers to be the principal commercial and financial risks to achieving the Group's objectives. The main areas of potential risk and uncertainty in the balance of the financial year are described in the Strategic Report of the 2021 Annual Report and Accounts. These include:

• Business Strategy
  • Capability and capacity to effect change
  • Stakeholder support
  • Value proposition
  • Brand appeal and market share

• Financial
  • Sustainable business model

• Compliance
  • Regulatory and compliance
  • Service quality
  • Cyber security

• Operational
  • Colleague engagement/culture
  • Skills shortage
  • IT infrastructure failure
  • Critical physical infrastructure failure (including supply chain disruption)

Specific risks associated with performance include the success, or otherwise, of peak trading periods (e.g. Christmas), as well as weather-sensitive sales, particularly within the Car Maintenance and Cycling categories in the Retail business.