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Halfords issues warning as promotions hit profits

Retailer Halfords has issued a profit warning after increased participation in price promotions negatively impacted its margins.

In an update to investors issued today (28 February), the retailer reported promotional participation across its major category of cycling goods has increased, along with more consumers purchasing on credit.

Given sales made under promotion are less profitable to retailers than those made at full price, Halfords reported this activity had led to “weaker gross margins than previously anticipated”.

Despite driving volume sales, overreliance on price promotion can have serious ramifications for brand equity and retaining customers, alongside impacting profitability. Price promotion activity can, therefore, be a difficult cycle for brands to get out of. Marketing Week columnist and Mini MBA professor Mark Ritson likens the cycle to an addiction.

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The retailer has downgraded its profit expectations for its financial year, which ends on 29 March 2024. At the end of January, Halfords forecast profit before tax for the year was likely to be between £48m and £53m. The company has now significantly downgraded that prediction, expecting profit to fall between £35m and £40m.

As well as making less profitable sales due to an uptick in promotions, Halfords has been struggling to drive volume sales in recent months. Volume sales in its cycling category fell year-on-year by 8.0 percentage points in January, while retail motoring volumes fell by 5.1 percentage points.

The business attributed these falling volumes to weakened consumer confidence, as well as rainy but mild weather conditions leading to less footfall and softened demand for winter products.

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Consumer confidence has fallen in February, according to GfK’s most recent survey, with the overall index score dropping by two points. However, in January the measure of consumer confidence reached a “surprise” two-year high.

Halfords said it is taking “decisive action” to adjust to these declining volumes and less profitable sales, including cutting cost from its business. However, the retailer indicated this will not be enough to offset the impact of “challenging market conditions”.

Looking forward to its next financial year, the company sounded a cautious note as it expects to be dealing with persistent “significant volatility” within its market. This does not, however, affect belief in the long-term strategy.

“When our core markets recover, the platform we have built leaves us exceptionally well-placed to succeed,” Halfords added.

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