Halfords Group plc
Annual Report and Accounts for period ended 1 April 2022
including the Notice of Annual General Meeting ("AGM") - convened for 7 September 2022
The Company announces that the Annual Report and Accounts for the period ended 1 April 2022 and Notice of Annual General meeting of the Company, have been posted or otherwise made available to shareholders and published on its website www.halfordscompany.com.
The Company's 2022 AGM will be held at Halfords Group plc, Support Centre, Icknield Street Drive, Washford West, Redditch, B98 0DE on Wednesday 7 September 2022 commencing at 3:00pm.
As detailed in the Notice of AGM, we strongly encourage shareholders to vote on all resolutions by casting their votes through the use of a proxy (details of how to do this can be found in the Notice of AGM). This remains important notwithstanding the removal of the UK Government’s coronavirus restrictions.
The Board is committed to ensuring that shareholders can exercise their right to ask questions, and as per last year, shareholders will be able to submit questions to the Directors in advance of the AGM via email to the Company Secretary (tim.ogorman@halfords.co.uk) Written answers to all questions received will be sent directly to shareholders by email and answers to frequently asked questions will, to the fullest extent practicable, be published on the Company’s website ahead of the meeting or, to the extent that has not been possible, will be addressed at the meeting itself.
In accordance with Listing Rule 9.6.1, a copy of the Annual Report and Accounts and the Notice of Annual General Meeting of the Company have been uploaded to the National Storage Mechanism and will be available for viewing shortly at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Tim O’Gorman
Company Secretary
Halfords Group plc
The Appendix to this announcement is a supplement to our preliminary statement of Financial Results made on 16 June 2022 (the "Final Results Announcement"). It contains the information required pursuant to Disclosure Guidance and Transparency Rule 6.3.5 that is in addition to the information communicated in the Final Results Announcement and should be read together with the Final Results Announcement. This information is not a substitute for reading the full Annual Report and Accounts for the year ended 1 April 2022.
Appendix
The Chief Financial Officer’s Report in the preliminary statement of the Final Results Announcement issued on 16 June 2022 includes a commentary on the principal commercial and financial risks and uncertainties to achieving the Group’s objectives.
Further details of other principal risks and uncertainties relating to the Halfords Group are set out on pages 72 to 77 of the 2022 Annual Report and Accounts. Specific financial risks (e.g. credit risk, foreign currency) are detailed in note 22 to the Financial Statements on pages 193 to 198 of the 2022 Annual Report and Accounts.
The following is extracted in full and unedited form from the 2022 Annual Report and Accounts.
Our Principal Risks and Uncertainties
Capability and Capacity to Effect Change
Failure to build sufficient capacity and capability (in terms of our people, processes, and systems) to successfully implement the transformation required across the business may result in the expected benefits of our strategy not being delivered, thereby risking the future sustainability of the business.
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Current Mitigation
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Focus in 2023
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• A dedicated Transformation and Change team led by the Chief Transformation Officer and supported by experienced Programme and Project Managers has enabled progress to be made during a period of increased capital investment and focus on delivery of significant strategic initiatives.
• The continued advancement of our change programme is managed through a Transformation Board, providing the necessary governance for delivery of the strategy. The Transformation Board ensures there is a robust approval process for each project, allocates resource and monitors progress. Programme and Project Managers are in place within the business to whom projects can be assigned and this has been supplemented by specialist resource to boost capability. In affecting change, Halfords is requiring all contributing colleagues to
observe the principles of Responsible, Accountable, Consulted, and Informed (“RACI”)
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• Continue to align our Transformation plan with the key objectives of our corporate strategy.
• Closely monitor progress on individual programmes, realigning requirements and resources where relevant.
• Embedding a new organisational design to strengthen with even greater focus on best practice change management and adoption, delivery of benefits and standardisation of process
• Delivery of a new operating model, specifically
in technology and digital teams, will drive more agile, effective and efficient delivery of changes,
with a greater emphasis on the unlocking of value
to stakeholders
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Stakeholder Support
Failure to secure and maintain our stakeholders’ (investors, suppliers, colleagues) support for our strategy will mean they may lose confidence in the business and withdraw their resources.
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Current Mitigation
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Focus in 2023
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• Throughout the year, we demonstrated progress in the execution of our strategy, building confidence in external and internal stakeholders.
• Our equity placing in FY22 received exceptional support from our investors, and we continue to see strong progress in both customer NPS and colleague engagement
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• Maintain progress on the delivery of our strategic
objectives.
• Address colleague engagement challenges through a regular cycle of survey and review.
• Proactive investor relations programme of events
and communication with a planned Capital Markets day for the second half of the year.
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Value Proposition
If investment in our motoring product value proposition and Group value perception is insufficient to retain existing customers and/or attract new ones, and/or we continue to lose market share to online retailers and discounters, the impact could be a loss of sale volume. Balancing price investment will be important in the current environment and there is a risk that investing in price without a corresponding increase in volume leads to a diminution of financial returns, but equally, increasing prices outside of market movements could create further damage to our value perception.
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Current Mitigation
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Focus in 2023
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• To differentiate ourselves in a competitive retail market, our vision is to consolidate Halfords as a super-specialist in motoring and cycling. Our strategy emphasises the importance of creating value for the customer by delivering services alongside the sale of a product. Progress continued through a refreshed financial services campaign and ongoing Cycle to Work proposition supporting greater accessibility for our customers, further enhanced by the launch of our pre-pedalled bikes offering.
• Launch of the Halfords motoring club loyalty programme, designed to reward loyal customers and inspire a greater proportion to shop across the Group.
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• Introduction of a new halo message to support a
change in perception over the medium to long term.
• Establishment of the motoring club help club
customers enjoy greater savings and benefits and
ensure we help customers motor for less across the UK.
• Further investment in pricing motoring products to deliver greater value for customers.
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Brand Appeal and Market Share
Investment in awareness of our brand and our services is insufficient to increase our brand relevance, in which case we will be unable to maintain and grow our customer base or improve our customer shopping frequency and spend and correspondingly build market share.
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Current Mitigation
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Focus in 2023
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• Building on a positive response to our status as an essential retailer we have grown awareness of our Halfords Mobile Experts and garage services. Customer NPS and satisfaction has achieved record levels for Trust Pilot and Google scores for the Group
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• Improvement of our cycling proposition, allied with better than market availability and support for the cycle to work voucher scheme, has strengthened market share
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• Integration of National will support greater brand
awareness of garages and mobile vans.
• Promotion of the motoring club offering free and
premium plans.
• Investment in the growth in electric mobility to
strengthen our market-leading proposition
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Climate Change and Electrification
The climate crisis is already having a profound effect through extreme weather events – floods, drought and rising sea levels – all of which have the ability to disrupt our supply chains and impact our ability to operate our business effectively. These risks have been assessed in detail and whilst flooding is likely to impact select Halfords stores and garages across the UK, our most material climaterelated risks and opportunities are in response to the evolving regulatory landscape; in particular, the ban on new internal combustion engine (“ICE”) vehicles being sold in the UK from 2030 as part of the UK Government’s net zero ambitions. More sustainable mobility options, including electric vehicles, E-bikes and E-scooters are therefore going to be crucial over the next decade as the country prepares for the shift away from conventional fuel sources and transition to a lower-carbon economy. This transition will impact our motoring and cycling business in the short, medium and long-term.
Failure to respond adequately to the demand for sustainable mobility options through our products and servicing offers could lead to a loss in confidence, market position and revenue.
Our service proposition does not match customer demand for electrification solutions in motoring and cycling, leading to profound
disruption in our core markets.
Failure to deliver against our climate strategy and net zero targets, leading to a loss in confidence from our stakeholders and potential reputational damage.
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Current Mitigation
• Robust Electrification strategy – discussed at the Transformation Board regularly. Challenges, performance and successes are analysed, and strategy regularly adjusted as appropriate.
• Regular monitoring of legislative changes, climate-related due diligence and reporting requirements as well as monitoring of the regulatory environment for changes to policies around e.g., sale of ICE vehicles,
tax breaks for e-mobility or infrastructure evelopments
• Regular landscape monitoring for electric vehicles (“EVs”) both from a manufacturing side and consumer uptake side so that we canappropriately respond to the rise of e-mobility.
• Task Force on Climate-related Financial Disclosure (“TCFD”) roadmap developed and being actioned to support ongoing reporting and risk management requirements.
• Science-based carbon targets developed to tackle the immediate carbon emissions reductions required across our business and supply chain. These will form the foundations for our net zero pathway and will be monitored to ensure we hit our longer-term net zero target.
• Investment in systems approved that will enable the collection of supply chain emissions, to measure, monitor and reduce our Scope 3 emissions – which make up a significant proportion of our overall carbon footprint.
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Focus in 2023
• Continue to work with Government to support the
path to legality for private E-scooters.
• Continue to train and equip our colleagues to work safely and confidently on hybrid and battery EVs and continue to meet all appropriate regulatory standards.
• Focus on growing the penetration of hybrid and
battery electric vehicles in our fleet.
• Further Board training on climate change and the
Board’s due diligence requirements, including
specialist training for those directly responsible for
climate-related issues.
• Develop a process whereby climate-related risks and opportunities can be updated on an annual basis.
• Integrate climate risk relating to weather (floods, etc) into risk management process for our estate.
• Begin collecting supply chain data on Scope
3 carbon emissions and climate management,
particularly for areas of supply that may be
disrupted due to severe weather.
• Develop and report on Halfords Net Zero plan;
headline information on how we will transition to
a lower-carbon economy
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Sustainable Business Model
Alongside pre-existing changes in customer habits and expectations, the recent spike in UK supply chain and consumer inflation is creating challenging economic conditions. Unless we can continue to mitigate the significant levels of cost inflation (through cost mitigation and savings, growth in new business areas, and increasing selling prices), we will be unable to maintain a sustainable business model.
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Current Mitigation
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Focus in 2023
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• An ongoing strategic focus on the growth of services will build more stable revenue streams, lessening the Group’s relative exposure to discretionary expenditure.
• Selling solutions and cross-shop initiatives will maximise the revenue from existing transactions.
• Detailed price/elasticity analysis alongside price trials will optimise consumer pricing decisions.
• Long-standing supplier relationships will be optimised to extract value from supplier contributions/support.
• A new Cost Transformation framework programme has been established to target cost reduction during FY23/FY24.
• US dollar hedging programme in place.
• Recent three-year refinancing extended for a fourth year.
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• Strategic programme focused on selling more
full solutions to customers, supported by digital
technology.
• Cross-shop sales opportunities boosted by launch of the new Motoring Loyalty Club programme.
• Customer referral encouraged from Retail to
Autocentres/Halfords Mobile Experts via new
services roles in Retail.
• Cost Transformation programme established to focus on short-, medium- and long-term cost reduction opportunities.
• Ongoing ‘goods for resale’ supplier discussions
targeting mutual value opportunities.
• Fixed cost contracts entered into for inflationary cost categories – e.g. Freight and Utilities.
• Rental costs reduced through property renegotiations; underperforming stores/garages closed at lease renewal.
• Productivity analysis ongoing through digital
technology.
• New Group Data Platform identifying sales, cost and productivity opportunities.
• FX hedging programme.
• Continuing to focus on margin improvement,
eliminating unnecessary cost through targeted
efficiencies and scale benefits.
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Regulatory and Compliance
A failure to adhere to our legal and/or regulatory obligations for some or all of the Group’s activities leads to an inability to meet our responsibilities to stakeholders and/or the imposition of financial penalties, placing a strain on the business.
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Current Mitigation
• There is continual monitoring of legal and regulatory developments for all regions where the Group operates. A suite of policies sets out the Group’s commitment to conduct its business with honesty and integrity. The senior leadership team communicates tone from the top to provide guidance to colleagues on all policy commitments.
• Compliance training is provided to new colleagues as required with refresher courses thereafter. Regular horizon scanning is undertaken to capture new regulations and requirements.
• We have a code of conduct with our suppliers whom we monitor for compliance across ethics: nvironmental management; labour practices; and human rights.
• Health and safety, data protection and Financial Conduct Authority compliance are managed by experts reporting to dedicated committees with representatives across the business to assess our regulatory rigour.
• An established whistleblowing process enables colleagues to report suspected or actual wrongdoing in confidence
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Focus in 2023
• Continued monitoring of legal and regulatory
developments for all regions where the Group
operates.
• Increased headcount within the Health and Safety function to support the growth of the Group.
• Review and improvement of policies supported
by training programmes for colleagues.
• Regular training and information provided through user-friendly channels.
• Establishment of a new Finance Risk Committee to focus on all aspects of financial risk and compliance.
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Service Quality
The services we provide fall below the quality standards to which we are committed, placing customers at risk of harm.
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Current Mitigation
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Focus in 2023
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• All colleagues are provided with dedicated training and adhere to established quality control and safety procedures, with compliance audits by management. We also have a dedicated compliance team monitoring our regulated activities.
• In Autocentres our digital operating platform PACE enables increased workflow, productivity, and quality assurance. PACE drives service quality by requiring quality controls to be completed on all workshop
colleagues as determined by the Technician Quality Rating. All our Quality Controllers follow an approved training pathway and receive refresher training annually.
• We have a Retail Contact Centre that provides a level of call answer rates that ensures we can provide a quality service to our customers whatever channel they choose.
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• Stores and Service calls to be migrated to self service or digital channels for ease and optionality for customers to access support in channel of choice.
• Our Retail Plan will remain unchanged into FY23
to ensure we drive consistency across the estate
and continue the focus on embedding the Retail
Operating Model.
• An annual skills plan ensures we are able to maintain our skill level as we drive down our labour turnover.
• Integration of National garages to include the
adoption of the Halfords Quality procedures and roll out of PACE.
• Our Operational Excellence team will continue to
review our inventory of tools to do the job.
• Fusion will be our focus on our next ‘go to’ operating model as we roll out Core and Enhanced formats.
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Cyber Security
If we fail to sufficiently prevent, detect, and respond to cyber incidents and attacks they may result in disruption of service, compromise of sensitive data, financial penalties from regulatory authorities, financial loss, and reputational damage.
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Current Mitigation
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Focus in 2023
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• Our security partner, TCS, provides first line assurance security operations capabilities including vulnerability management, email filtering, and website security.
• Within our Risk Management Framework our information Security team provides the second line assurance role identifying and managing cyber-related risk, and developing and implementing our internal control framework.
• Third line assurance is provided by Internal Audit.
• A perpetual education and awareness campaign is provided to all colleagues. Regular briefings promote an understanding of the risks to our data and the benefits of good security practices.
• The Audit Committee is regularly briefed by senior Technology management on the business’ cyber security framework
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• Consolidate technical cyber security solutions across the Group, including acquisitions.
• Mature processes for internal control assessments to improve identification and ongoing management of cyber risk. Conduct gap analysis against the CIS Critical Security Controls for critical systems. Remediate findings to ensure critical systems are protected.
• Mature cyber resilience of critical systems, including both proactive and reactive incident response capabilities.
• Mature processes and documentation relating to
security of data focusing first on regulated personal data of both customers and colleagues.
• Conduct a network security review including
segmentation and firewall positioning, legacy and
end-of-life devices, and regular security testing
(vulnerability scanning and penetration testing)
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Colleague Engagement/Culture
Our employment model may not be sufficiently attractive to recruit and retain the talent that we need. We do not maintain a sufficiently positive culture, failing to support a diverse and inclusive community.
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Current Mitigation
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Focus in 2023
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A five-year People Strategy that develops the colleague journey across the areas of ‘Find me, Train me, Grow me, Keep me’ and that creates the opportunity for a career at Halfords with an employee brand ‘Your Journey, Our Journey – make it your own’.
• The continued development of our colleague engagement programme and survey, and further focus on our colleague network groups.
• Through the provision of wellbeing facilities and regular updates using huddles and blogs we keep our colleagues informed and supported.
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• Implementation of Year 1 of our People Strategy with activities focused on delivering improvements to the colleague journey of ‘Find me, Train me, Grow me, Keep me’.
• Benchmark our pay and benefits to ensure we are competitive in the market.
• Move to an engagement model that inspires ongoing engagement, listening and action.
• Develop our colleague network groups to support change in areas of diversity that develops our attraction and engagement with our colleagues.
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Skills Shortage
We may be unable to recruit, retain and develop enough people to have the different mix of skills that we need at all levels across the business, in the near and longer term.
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Current Mitigation
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Focus in 2023
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• We have reduced our reliance on external recruitment and as part of our colleague strategy developed our internal pipeline for technical and leadership capability. We have also further developed crossgroup career pathways and succession planning as well as continued investment in our training and development.
• Training and development are a fundamental part of our business and
a great attraction for new applicants. We apply a targeted approach to
further enhance skill levels for centres as we do with stores, by mapping
against the optimal skills mix.
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• Launch our employee brand and integrate through our attraction and recruitment materials. Broaden our attraction resources and develop simpler and quicker recruitment processes.
• Develop and expand our apprenticeship strategy and the Halfords Academy to grow our own technical skill base.
• Expand our ‘Tyre fitter to Tech’ programme and
change hiring approach to recruit on behaviour as
we will train the skill.
• Develop a cross-group approach to talent and
succession.
• Investment in our selling skills across Group
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IT Infrastructure Failure
Failure in our IT system(s) may cause significant disruption to, or prevention of, normal business-as-usual activities
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Current Mitigation
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Focus in 2023
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• Extensive controls are in place to maintain the integrity of our systems and to ensure that systems changes are implemented in a controlled manner. We have resilient infrastructure in place for remote working colleagues to access Halfords hosted applications, such as SAP.
• Halfords’ key trading systems are hosted securely within data centres operated by a specialist company and in specialist cloud services operated by Microsoft. These systems are supported by disaster recovery arrangements, including comprehensive backup and patching strategies. IT recovery processes are tested regularly.
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• Continue progression towards a fully cloud-based
hosting structure with a transfer of risk to cloudbased service providers who can maintain higher levels of contracted availability.
• Reduce dependencies on legacy and end-of-life
systems for key business-as-usual activities.
• Deep-dive analysis into targeted areas of
infrastructure, managed through the Risk Committee.
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Disruption to end to end supply chain
The Halfords end to end (“E2E”) supply chain is an integration of the process from sourcing of products (including the raw material procurement and product design by our supply partners) through to scheduling and delivery of goods to our customers (through our distribution centre (“DC”) network and via stores or direct to consumer).
Disruption to the E2E process creates a major impact to customer fulfilment and/or customer-facing price increases due to supply shortages, increased demand for raw materials impacting availability and input price, production delays that lead to an extension in supply lead times, logistics delays in the form of shipping of goods, or the potential closure of one of our distribution centres, all of which challenges our ability to meet sales and profit projections.
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Current Mitigation
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Focus in 2023
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• The need to respond to the pandemic in FY21 has tested our business continuity plans and given us confidence in alternative supply chain solutions and resilience.
• Our Commercial and Financial processes support continued active demand forecasting through regular weekly reviews, a transparent Open to Buy process, a stock policy that increases cover for important and
volatile lines and a currency hedge policy that smooths out variability.
• Our sourcing capability and supplier relationships are delivered through dedicated UK, Asian and Near sourcing teams. These teams maintain both strategic and upstream supplier relationships, operate multiple sources, dual sourcing, product engineering and are engaged in the ESG agenda.
• Our in-house expertise delivers the high global trading standards from Authorised Economic Operator accreditation, import/export expertise
and dedicated security at each of our DC sites.
• Our 3PL relationships give expertise and options. We contract with multiple shipping lines for flexibility and leverage, we have access to large organisational support from Yusen Logistics, Wincanton and Clipper
logistics and PwC provide external trading and compliance expertise.
• Our transformation plans reduce risk through scheduled work on the replacement of our warehouse Management System, a UK distribution centre physical network review, the replacement of our Forecasting and replenishment tools and our Customs and Duty platform.
• We have invested in a multi-sea freight carrier solution to balance costs and flexibility to move our direct import cargo in an unprecedented inflationary market.
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• Development of a replacement Warehouse Management System.
• Development of an enhanced Customs and Duty
platform.
• Investment in a more senior dedicated Customs and Trade compliance team to reduce the risks associated with international sourcing activity.
• Investment in additional storage space in a fifth DC to hold overstocks and protect availability rather than cut intake too hard and damage both customer availability and supplier relationships.
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Directors’ responsibilities
The directors are responsible for preparing the annual report and the financial statements in accordance with UK adopted international accounting standards and applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with UK adopted international accounting standards and have elected to prepare the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss for the group for that period.
In preparing these financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with UK adopted international accounting standards, subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business;
• prepare a directors’ report, a strategic report and directors’ remuneration report which comply with the requirements of the Companies Act 2006.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy.
Website Publication
The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company’s website is the responsibility of the directors. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein.
Directors’ Responsibilities Pursuant to DTR
The directors confirm to the best of their knowledge:
• The financial statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit and loss of the group.
• The annual report includes a fair review of the development and performance of the business and the financial position of the group and company, together with a description of the principal risks and uncertainties that they face.
Approved by order of the Board.
Keith Williams
Chair
15 June 2022
