Financial Results

* EBIT denotes earnings before net finance costs, tax and non-recurring items
** EBITDA denotes earnings before net finance costs, tax, depreciation, amortisation and non-recurring items

The FY15 accounting period represents trading for the 53 weeks to 3 April 2015 ("the financial year"). The comparative period FY14 represents trading for the 52 weeks to 28 March 2014 ("the prior year"). We believe that the proforma 52 week results for FY15 better reflect the underlying performance of the business when compared to FY14. On this basis all commentary included in this report is based on the 52 week period to 27 March 2015 ("the year") unless otherwise stated.

Reportable Segments

Halfords Group Plc ("the Group" or "Group") operates through two reportable business segments:

• Halfords Retail, operating in both the UK and Republic of Ireland; and
• Halfords Autocentres, operating solely in the UK.

All references to Group represent the consolidation of the Halfords ("Halfords Retail"/"Retail") and Halfords Autocentres ("Halfords Autocentres"/"Autocentres") trading entities. The Group acquired 100% of the ordinary shares of Boardman Bikes Limited and Boardman International Limited ("Boardman Bikes") on 4 June 2014. Since its acquisition Boardman Bikes has operated as part of the Retail business segment.

financial results

Group revenue in FY15, at £1,004.9m, was up 6.9% and comprised Retail revenue of £857.9m and Autocentres revenue of £147.0m. This compared to FY14 Group revenue of £939.7m, which comprised Retail revenue of £803.1m and Autocentres revenue of £136.6m. Group gross profit at £535.1m (FY14: £504.2m) represented 53.2% of Group revenue (FY14: 53.7%), reflecting a decrease in the Retail gross margin of 30 basis points ("bps") to 51.5% and a decrease in the Autocentres gross margin of 109 bps to 63.3%.

Total Operating Costs before non-recurring items increased to £450.5m (FY14: £426.4m), of which Retail represented £359.3m (FY14: £341.0m), Autocentres £89.3m (FY14: £83.7m) and unallocated costs £1.9m (FY14: £1.7m). Unallocated costs represent amortisation charges in respect of intangible assets acquired through business combinations, namely the acquisition of Nationwide Autocentres Limited in February 2010 and Boardman Bikes in June 2014, which arise on consolidation of the Group.

Group EBITDA before non-recurring items increased by 8.7% to £109.9m (FY14: £101.1m), whilst net finance costs were £3.5m (FY14: £5.0m).

Group Profit Before Tax and non-recurring items for the period was up 11.4% at £81.1m (FY14: £72.8m).

Net non-recurring costs of £0.3m (FY14: £0.2m) during the year represented the net effect of: a £0.7m charge in relation to impairment costs to support the Stores Fit to Shop initiative; £0.2m income from the release of the final balance held in relation to the Focus lease guarantee provision; and £0.2m income from the release of an excess onerous lease provision following the finalisation of the exit agreement for the Wembley store. The provisions had all been previously charged as non-recurring items.

Group Profit Before Tax in the period after non-recurring items was £80.8m (FY14: £72.6m).

The 53rd week contributed £20.5m to Group Revenue and £3.0m to Group Profit Before Tax. The week is a significant trading period for the Group, representing pre-Easter in Retail and a key week of the MOT season in Autocentres.

Halfords Retail

Revenue for the Retail business of £857.9m reflected, on a constant-currency basis, a like-for-like ("LFL") sales increase of 7.0%. Non-LFL stores, including three brand new Cycle Republic store openings¹, contributed £0.5m revenue in the year and third-party non-LFL sales from Boardman Bikes contributed £2.4m.

Cycling LFL revenues were up 11.4% in the year. Premium Bike sales were up 24.9%, reflecting the strength of our brands and products, but also helped by favourable weather during the summer. An improved range and successful Christmas marketing campaign combined to drive sales of older children's bikes up 40.5% in the year, with Children's Bikes overall up 13.3%. Cycle Repair sales increased by 17.8%, with the level of growth improving through the year as the new operating model was rolled out.

Car Maintenance LFL revenues increased by 8.5%. Parts sales were up 8.2%; the fitting and sale of bulbs, blades and batteries ("3Bs") continued to grow strongly. Workshop sales were up 15.2%, supported by a reinvigorated customer offer, including a new 200-piece tool set and the relaunch of the Lifetime Guarantee on the Halfords Advanced range. Halfords' authority in Auto was further strengthened by the launch of Car Parts Direct in the year.

Car Enhancement LFL revenues decreased by 0.5%. Audio and Sat Nav sales continued to be impacted by structurally-declining markets, with sales down 5.4% and 4.0% respectively. This was almost wholly offset by Car Cleaning sales, which were up 12.6% due to an enhanced range, including successful gift packs, and a focus on brands of choice, such as Kärcher.

Travel Solutions LFL revenues increased 5.4%, with improved merchandising and more compelling offers, such as bundle deals on roof bars and boxes, driving sales of Travel Equipment and Child Car Seats.

Revenues for the Retail business (including Boardman Bikes) are split by category below:

¹ Of the four Cycle Republic shops opened in the year, three were brand new premises and one was a conversion from an existing Halfords Retail store.

Gross profit for the Retail business at £442.0m (FY14: £416.2m) represented 51.5% of sales, 30bps down on the prior year (FY14: 51.8%). The reduction in margin was predominantly due to the mix impact of higher sales in Cycling, particularly lower-margin Premium Bikes, along with growth in third-party branded products in Cycling Parts, Accessories and Clothing ("PACs") and Car Cleaning.

Management anticipates a further 25-75 bps decrease in Retail gross margin in FY16, reflecting a continuation of the mix effect and growth in third-party branded products. This decline also factors in an assumption of continued US Dollar strength against Sterling, relative to the prior year.

Operating Costs before non-recurring items were £359.3m (FY14: £341.0m). The breakdown is set out below:

Store Staffing costs increased by 7.9%, principally due to strong trading volumes leading to incremental investment in store hours, along with the uplift in the national minimum wage. The impact of the 3-Gears training programme accelerated through the year as more colleagues progressed through Gear 2 and qualified for wage uplifts.

Store Occupancy costs decreased by 0.3%. Increased depreciation expense and non-capitalisable store refresh costs, "space swaps" and Cycle Republic openings were offset by lower net rental charges and other savings, including benefits from re-gears and relocations.

Warehouse & Distribution costs increased by 29.1%. The cube volume handled through the logistics network increased by 18% in the year, reflecting the particularly strong growth in sales of bulky items. In addition, the number of parcels being delivered to stores by courier, rather than by fleet, increased by 39% in the first half of the year. A more-frequent fleet delivery project was launched in October 2014 to mitigate cost increases in future years and reduce inventory. Initially this project comprised the in-housing of the fleet network and a 5-day-a-week delivery schedule. Under new logistics management we are reviewing the optimal long-term transport solution and in the near term are implementing an out-sourced 3-day-a-week delivery programme, which will go live in the summer.

Support Costs rose by 2.1% and include the one-off transaction costs and on-going operating costs associated with Boardman Bikes, which together amounted to £1.1m. Increased depreciation from IT investments and annual pay increases also contributed to the uplift.

Management anticipates an increase in Retail operating costs in FY16 of circa 4 to 5%. This comprises: c.1% depreciation; c.1% pay increases, including the 3-Gears pay increments; c.1% volume-related cost growth, offset by targeted savings and; c.1-2% space growth and store refurbishment costs, the implementation of which is dependent upon continual review and evaluation of payback.

Halfords Autocentres

There were no non-recurring items related to the Autocentres business in either year presented.

Autocentres generated total revenues of £147.0m (FY14: £136.6m), an increase of 7.6% on the prior year with a LFL revenue increase of 5.3%. LFL tyre revenues increased 15.0% and represented 17.5% of total LFL revenues (FY14: 16.0%). Online-booking revenues grew 19.9% in the year and represented 16.3% of sales.

Gross profit at £93.1m (FY14: £88.0m) represented a gross margin of 63.3%; a decline of 109 bps on the prior year, driven by higher mix of lower margin tyres. The gross margin of Service, Maintenance and Repair work marginally improved.

Autocentres' EBITDA of £7.6m was 1.3% higher than FY14 (FY14: £7.5m), with the upside in gross profit being offset by continued cost investments as part of the on-going growth strategy. EBIT was down 11.6% at £3.8m (FY14: £4.3m), reflecting the increased depreciation expense from recent capital investments.

Management anticipates Autocentres' EBITDA to increase by a low double-digit % in FY16.

Portfolio Management

The Retail store portfolio at 3 April 2015 comprised 467 stores (end of FY14: 465). The following table outlines the changes in the Retail store portfolio over the 53 week period:

In addition to the above changes, a 'space swap' was implemented in 41 stores during the year.

Nine new Autocentres were opened and seven (Bedford, Southport, Moseley, Coventry, Telford, Burntwood, Wrexham) were closed in the period, taking the total number of Autocentre locations to 305 as at 3 April 2015 (end of FY14: 303).

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 five to 15 year term at inception and with an average lease length of c.seven years.

Management anticipates opening around 11 Cycle Republic stores and 10-15 Autocentres in FY16, as well as closing a small number of sub-optimal centres.

Net Non-Recurring expenses

The following table outlines the components of the non-recurring expenses recognised in the period:

All non-recurring items arose within the 52 week period to 27 March 2015.

As part of the Stores Fit To Shop initiative £0.7m (FY14: £0.4m) of assets from certain stores were impaired in the year.

In FY13 an onerous lease provision of £1.2m was created for two Retail stores, reflecting the challenging property market for vacant properties and the high cost to exit lease agreements. This provision had previously been charged as a non-recurring item. A final exit agreement in relation to the Wembley store was reached in the year, resulting in a provision release of £0.2m.

Finance Expense

The net finance expense for the year was £3.5m (FY14: £5.0m). The prior year expense included one-off charges in relation to accelerated amortisation of debt issue costs and the crystallisation of a number of prior period tax computations amounting to £1.0m. Lower drawdowns and favourable interest rates, following the debt facility refinancing in September 2013 and the subsequent amendment and extension agreed in November 2014, also contributed to the reduced charge.

Management anticipates the net finance expense to be around £3.0m in FY16.

Taxation

The taxation charge on profit for the financial year was £18.0m (FY14: £17.1m), including a £0.1m charge (FY14: £0.1m) in respect of tax on non-recurring items. The full year effective tax rate of 21.5% (FY14: 23.5%) was higher than the UK corporation tax rate (21.0%) principally due to the non-deductibility of depreciation charged on capital expenditure and other permanent differences arising in the year.

Management anticipates an effective tax rate of circa 20% in FY16.

Earnings Per Share ("EPS")

Basic EPS before non-recurring items, for the 52 week period to 27 March 2015, was 32.7 pence (FY14: 28.8 pence), a 13.8% increase on the prior year. Basic EPS before non-recurring items, for the 53 week period to 3 April 2015, was 34.1 pence (FY14: 28.8 pence), an 18.4% increase on the prior year. Basic EPS after non-recurring items was 32.5 pence (FY14: 28.6 pence) for the 52 week period ending 27 March 2015 and 33.8p for the 53 week period ending 3 April 2015.

Dividend ("DPS")

The Board has recommended a final dividend of 11.0 pence per share (FY14: 9.1 pence), taking the full year dividend to 16.5 pence per share. If approved, the final dividend will be paid on 28 August 2015 to shareholders on the register at the close of business on 7 August 2015.

The interim:final dividend ratio has moved to 33:67 (FY14: 36:64). As previously guided, in order to better match dividend payments with the operating cash flow profile of the business, this ratio will transition to 30:70 over time.

The Board continues to target broadly 2x dividend cover (EPS/DPS).

Capital Expenditure

Capital investment in the 53 week period totalled £37.5m (FY14: £30.4m) comprising £30.7m in Retail and £6.8m in Autocentres. Consistent with prior years, management has adopted a prudent approach with regard to capital investment and focused on investments generating material returns in line with the Getting Into Gear Retail strategy and the recently launched Autocentres strategy.

Within Retail, £18.5m (FY14: £13.9m) was invested in stores, including 45 store refreshes, 11 of which were also store relocations or right-sizes, as well as general capital spend relating to roofing, flooring and security. By the end of FY15, 72 stores were trading in a refreshed format in line with the Stores Fit To Shop initiative. Retail also launched the Cycle Republic brand, converting one existing store and opening three dedicated stores in the year. Additional investments in Retail infrastructure included an £8.7m investment in IT systems, such as continual development of the online Retail proposition, the new parts database trading as Car Parts Direct, the launch of a Halfords eBay shop, the relocation of data centres and a significant upgrade of the core SAP operating system.

The £6.8m (FY14: £6.0m) investment in Autocentres comprised the opening of nine centres in the year (FY14: 23) along with a substantial investment in upgraded Autocentre diagnostic equipment. We are trialling a new concept Autocentre, which opened in Croydon in October 2014, and elements of this will begin to be rolled out during FY16.

On a cash basis, total capital expenditure in the 53 week period was £39.6m (FY14: £26.7m).

Management continues to anticipate a capital investment of around £100m in Retail and £20m in Autocentres in the three-year period ending FY16, which indicates c.£45m and c.£8m respectively in FY16.

Inventories

Group inventory held as at 3 April 2015 was £149.3m (FY14: £150.2m). Retail inventory decreased to £147.8m (FY14: £148.8m) and includes £1.1m held by Boardman Bikes. Autocentres' inventory was £1.5m (FY14: £1.4m). The Autocentres business model is such that only modest levels of inventory are held within the centres, with most parts being acquired on an as-needed basis.

Cash flow and Borrowings

Cash generated from operating activities in both the 53 week and 52-week periods was £142.2m (FY14: £67.5m). After taxation, capital expenditure and net finance costs, free cash flow of £66.4m (FY14: £39.5m) was generated in both the 53 week and 52 week periods; with the increased capital investment and the acquisition of Boardman Bikes being offset by improved EBITDA and working capital improvements.

As at both 27 March 2015 and 3 April 2015, Group net debt was £61.8m (FY14: £99.6m), with the non-lease-adjusted 12-month net debt: EBITDA ratio at 0.6:1.

Principal Risks and Uncertainties

The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving Halfords' strategic corporate objectives. In the Annual Report & 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 note 20 of the Annual Report & Accounts.

These include:

• Economic risk
• Business strategy risks
• Competitive risks
• Compliance
• Changing customer preferences
• Reliance on foreign manufacturers
• Product and service quality
• Information technology systems and infrastructure
• Dependence on key management personnel

Specific risks associated with performance include Christmas trading as well as weather-sensitive sales, particularly within the Car Maintenance and Cycling categories in the Retail business.