Chief Executive's Review

Introduction

The last year continued to be a challenging time for the UK and ROI consumer sector. People had less disposable income and managed their discretionary spend tightly. Motorists particularly were affected by higher fuel prices and insurance costs.

Halfords' response has been to help customers by creating value through the quality and price of our products and the expertise and service of our colleagues. Our significant growth areas of Cycling, Fitting Services and Autocentres have all performed strongly.

We also continued our store portfolio refresh programme, invested for the future in IT infrastructure, introduced new products and developed our team. We have done this whilst managing costs sensibly.

The progress in our growth areas both demonstrates how we are evolving Halfords from a traditional out-of-town retailer to a significant service provider and creating the route to strengthen our business further. We are planning to take advantage of these opportunities in the year ahead.

Review of Trading

In what has been a tough environment for customers the Group generated an underlying profit before tax of £92.2m and continued cash generation for shareholders through good cost management and margin control with free cash flow of £70.4m after taking into account taxation, capital expenditure and net finance costs.

Group revenues were £863.1m, down 0.8% overall (Retail £752.3m; Autocentres £110.8m).

Within Retail, revenues across the year on a like-for-like basis ("LfL") were down 2.7%.

Sales of Car Maintenance products at -4.5% LfL, suffered as motorists drove fewer miles and reduced their spending on vehicles where possible. The lack of a prolonged spell of winter weather, as in the preceding year, also reduced demand for cold weather products like de-icers, screen wash and batteries.

The demand for "Do It For Me" fitting continues to build and our wefit services have seen another year of strong growth. We now fit 26.2% of the bulbs, blades and batteries we sell, as we build on Halfords' unique customer offer and more customers look to us for expert help with basic Car Maintenance.

The decline in Car Enhancement sales continued as the markets for Sat Nav and audio products contract. We have also seen falls in sales of Performance Styling and Car Cleaning products reflecting the pressure on motorists spending and the changing nature of the auto accessory market.

In Leisure we saw strong growth throughout the year, up 5.0% LfL, driven by increases in our cycling revenues through our relaunched ranges.

Halfords.com business, representing c.9% of total Retail sales, had a less buoyant year. While we had significantly more visitors to our site, fewer of these converted to sales. Cycle Accessories and in-car entertainment products performed well, but the sales of Sat Navs and child seats declined. During the year we have invested in better technology, site information and deals.

Sales at our Autocentres grew strongly by c.6% LfL and c.13% overall, driven by the growing awareness of the Halfords brand in the garage servicing sector and recognition by motorists of the value we offer. This performance is especially strong when compared to the overall auto aftercare market.

Strategy

Vision

Our customers lead busy lives and each year they make thousands of essential journeys. They need to keep moving for work and family and they want to travel for their holidays and enjoy active leisure time.

Halfords' products and services are an essential part of the everyday life of millions of people; and we are evolving our offer in line with the changing nature of our customers' needs.

Our vision is to Help and Inspire Customers with their Life on the Move.

In the year ahead we plan to develop this vision to take advantage of the opportunities offered by our key growth areas and accelerate our transition from traditional retailer to a contemporary provider of products and services.

We have carried out detailed research to map our areas of strength against the requirements and aspirations of our customers. This work has identified, and confirmed, that we have a significant opportunity to grow in the medium to long term by building on and evolving our current offering and service capability. We have identified three areas where customers specifically want our help and which provide opportunities for growth and the development of our business.

These three strategic pillars are the Friend of the Motorist, the Best Cycle Shop in Town and the Starting Point for Great Getaways.

In each of these areas Halfords can create value for our customers through a unique blend of the quality, innovation and the price of our products and the expertise and service of our colleagues.

Strategic Pillars

The Friend of the Motorist

The last year has been a particularly challenging time for drivers who have faced higher costs. Halfords is uniquely placed to be the Friend of the Motorist by providing end-to-end solutions for their auto aftercare needs. Through the Car Maintenance parts in our Retail stores, in-store fitting services and Autocentres, we can provide real value through our products, services and the expertise required to take the hassle out of motoring and make driving more enjoyable. We can help motorists look after their cars, or we can take care of their cars for them.

We stock the widest selection of replacement car parts and accessories of any retailer. We can help the motorists who do their own maintenance find the right part for their make and model and offer alternative price points through our good, better and best ranging.

Halfords also helps motorists with motoring consumables like screen-wash, de-icers and car-washing products, plus we are the market-leading destination for Sat Navs, Car Audio and Performance Styling. While the market for these products is declining, we have extended our leadership position and these sales continue to contribute to our overall performance.

There is a strong trend towards "Do It For Me" in Car Maintenance and Halfords has seen a growing demand for our wefit services. The foundation of our fitting proposition is the fitting of car bulbs, windscreen blades and batteries ("3Bs"), by our trained in-store colleagues. During the year some 2 million wefit jobs were completed and 26.2% of all 3Bs sold were also fitted. This compares with 23.5% fitted in FY11.

The 3Bs market, selling both product and fitting, is estimated to be worth £950m and Halfords only has a small percentage share of the market while garages and dealerships have a 75% share. Our offer is unique, 7 days a week on-demand fitting at the most competitive prices, so there is good potential to win sales and grow revenues. Fitting is also a high margin revenue stream and an economically favourable one, as labour costs are based on retail wage rates as opposed to the mechanics' rates that garages and dealers charge.

Our strategy is to maintain our DIY parts proposition while driving awareness and sales of our fitting capability. We have set stretching targets to increase uptake and this year we are budgeting for extra marketing, new point-of-sale materials, extra colleague hours and training. We are confident that because of the historic strong performance in this area, and the extra resources we are committing, that fitting is a significant avenue of growth for our business.

The final element of being the Friend of the Motorist is delivered through our Autocentres. We provide MOTs, car servicing and repairs and this is a natural extension of Halfords' retail service offer.

This has been a year of significant progress for Halfords Autocentres. As at 30 March 2012, we have 260 autocentres and since rebranding we have actively developed our offer and promoted Halfords Autocentres through a national radio campaign, online marketing and national TV advertising.

The results have been extremely encouraging and we have seen strong sales growth throughout the year as we win new customers. Our progress during a period when motorists are cutting back is a clear sign that the Halfords brand is increasingly viewed as the destination for all auto aftercare needs and as the Friend of the Motorist.

In the year Bill Duffy was promoted to CEO of Halfords Autocentres, and Simon Benson recruited as Operations Director. We have also relocated our Autocentres Head Office from Olton to our Group Head Office site in Redditch; this is already bringing benefits in cross-functional working.

The long-term growth opportunity of this business remains compelling. There are 32m cars on the UK's roads and the auto aftercare market is large and worth £8bn – £10bn. Competition is fragmented; there are around 24,000 garage outlets in the UK but numbers are in long-term decline due to economic factors. Halfords Autocentres has a good opportunity to grow in this environment due to the strength of our proposition and the potential to leverage our brand.

We are developing and investing in our customer relationship management. Car MOTs and servicing are linked to the age and mileage of vehicles and this lends itself to advanced data management systems. A key way we can help customers is to anticipate their vehicle's needs and make the right marketing offer to take the stress out of vehicle maintenance and attract them to use our autocentres.

We intend to build on success through the roll-out of new autocentres. During the year we opened 20 new autocentres and we are targeting up to 30 more in FY13. Further growth opportunities exist from fleet customers and accelerating tyre sales. We will also continue to invest in growing awareness and developing our proposition through innovative products. For example our recently launched brakes-4-life offers customers free replacement brake parts once they have bought and had these parts fitted at Halfords.

Linking all the elements of our auto aftercare offer together means that we can provide all aspects of car maintenance for our customers. Our products, services and value, backed by our trusted brand, offer real help to drivers and underpin our ambition to be the Friend of the Motorist.

The Best Cycle Shop in Town

Our research shows that the cycle shop and its web offer are central to the enjoyment and experience of cycling. We recognise that although we are the biggest provider of cycles to the UK market, at a local level and online we are not necessarily always the best cycle shop in every town. This must be our aspiration.

The core of our strategy to be the Best Cycle Shop in Town is Halfords' own and exclusive ranges of cycles. We address the whole cycle market from entry level to high performance.

Our great value Trax range, that is sold boxed for self-assembly, gives Halfords a competitive offer against supermarkets and other non-specialist outlets.

Apollo is the UK's best-selling cycle brand and offers value, quality build and good components.

Carrera provides performance specification and contemporary design without the price tag associated with global brands.

Our exclusive Voodoo range is designed by Joe Murray, the award-winning American mountain biker, and is a premium product for the serious mountain biker.

Top of the Halfords' cycle range are Boardman cycles, designed exclusively in collaboration with Halfords by former Olympic champion Chris Boardman. This range has been widely acclaimed for its leading designs, construction and price competitiveness and is endorsed by world famous riders such as Alistair Brownlee, the reigning World Triathlon champion.

During the year we redesigned and relaunched many of our cycles, including the entire Carrera range of 22 cycles and the Voodoo range of 10 cycles. It meant that at Christmas 2011 broadly half of our cycles were newly designed.

We will continue to develop and improve our existing brands and introduce new ones that offer value and appeal to our customers. A good example of this is the Carrera Virago, a carbon-fibre road racer for under £1,000, a very competitive price for such a quality performance cycle. It has been extremely positively reviewed by both the mainstream media and specialised cycling press.

In addition, to take full advantage of the heightened interest in the Olympics, we have introduced limited edition, in British colours, Carrera cycles. We have also launched an exclusive range of ladies cycles under the Pendleton brand, designed by Olympic and World champion cyclist Victoria Pendleton. These are aimed at women who want to incorporate some cycling into their everyday routine.

Our innovative and competitively priced ranges mean that Halfords is uniquely positioned to compete strongly at all levels of the cycle market, providing customers with one of the best selections of designs and prices in any cycle shop.

In addition to cycles, we stock a wide range of cycle parts and accessories from locks and lights to high visibility jackets and cycling helmets. The Parts, Accessories and Clothing ("PACs") market is estimated to be worth £615m annually and we have a lower share of this market than our share of the cycle market. This offers Halfords a significant opportunity to grow in this higher margin area. A high proportion of PACs sales occur online so an important part of our strategy for growth will be to improve our range and order fulfilment for these products online. We are planning to develop this category to capture an increased share of this market.

We also support our cycle offer through the advice and service of our colleagues; c.95% of the cycles we sell we also build and we offer a free six-week first service. Our Bike Care Plan that provides repairs, free of labour charge, is another opportunity to develop a service based revenue stream.

In the last year we have grown cycling sales by c.10%, and gained share in a growing market. This demonstrates the strength of the Halfords brand and our cycling offer.

The cycle market is estimated to be currently worth £1.4bn. We now plan to take advantage of this opportunity to drive further growth in this category through the combination of great service, reliable maintenance and repair, the best value bike range in the UK and new ranges of PACs. Our ability to deliver our biggest ranges to our customers next day is a winning formula within our strategy to be the Best Cycle Shop in Town.

The Starting Point for Great Getaways

As well as essential travel, our customers also want to enjoy their active leisure time and use their cars to go on trips. Our range of products and services is designed to equip people for their journey and help them make the most of their time out of doors.

A great example is our exclusive ranges of Exodus roof boxes. These significantly increase the carrying capacity of a car. They create extra space for luggage and other holiday essentials and leave more room in the vehicle for the family. We also supply the roof bars and cycle carriers and have trained colleagues ready to fit everything for customers while they wait.

We stock all the products motorists need to reach their destination: tyre pumps, warning triangles and high visibility jackets. At our autocentres we can check and service cars before they set off on long journeys.

Halfords' offer extends beyond the journey. We also stock tents and a whole range of camping and outdoor equipment. These items provide the basis for the holiday itself. Halfords is helping with great value offers, like our 4-person family tent pack, which contains a tent, sleeping bags, airbeds and a pump for less than £100.

It is predicted that this year more families than ever will holiday in Britain or look for lower cost ways of spending their vacation time. Thousands will come to Halfords as the starting point for their great getaway and catering for this demand provides a clear avenue for future growth.

In summary, through a focus on our three strategic pillars we plan to deliver sustainable revenue growth over the medium term. In the year ahead we intend to invest an additional c.£6m of Retail operating expenditure to create growth in these strategic areas. Of the total, £3.5m will be spent in support of our ambitions in fitting, £1.0m to enhance our multi-channel offer to complement our range and product development plans and £1.5m on training, capability and customer relationship management. These drivers will be broadly profit neutral in FY13 and will contribute to growth in top line and profitability from FY14.

Enablers

To deliver our strategic pillars we are focused on five key areas of our business which are central to improving our customer proposition and hence the progress of our business.

Portfolio

Our stores and our autocentres are the key ingredient of our multi-channel customer proposition. Their location and layout are central to how we deliver our ambition and our promise.

We have 467 retail stores and 260 autocentres trading throughout the UK and Ireland. Approximately 90% of our customers live within a 20-minute journey of our stores.

Through our store refresh programme we refurbished and reconfigured over 80 stores during the year. The sales uplifts achieved at these stores represent a good return on the invested capital and ensures a short payback period. Over 100 stores across the estate have now been refreshed over the last two years.

In London our High Street format stores provide a potential route for further expansion in an area where there is a shortage of suitable superstore opportunities.

We have had considerable success during the year in our negotiations with landlords in reducing occupancy costs. Within our store portfolio our lease expiry profile means that we have c.130 leases expiring over the next five years, which provide the opportunity to accelerate our work on reducing occupancy costs.

The nature of the shopping trip is changing as customers combine online shopping, stock checking and research with more traditional store visits. At Halfords, our stores must also facilitate our fitting and cycle repair services. Stores in the future will need to combine all these elements to provide a seamless experience. To test ideas that could provide future solutions and an enhanced shopping experience for our customers we have opened three laboratory stores. These will be used to test concepts and, if successful, it may be appropriate to include some of these concepts in future store designs. In the meantime our store refresh programme is on hold pending the feedback from these laboratory stores.

Web

Our commitment is to be a true multi-channel retailer, so that we seamlessly integrate our web offer with our in-store experience. Our development work is aimed to join together all aspects of the shopping trip and to leverage within that the growing power and use of the web as part of it. Enhancing our online offer and further extending our multi-channel presence is an investment priority.

To drive our ambition we have appointed a dedicated Digital Director, Clive West, reporting to me. He is responsible for all aspects of our online offer from the online site to the delivery process for orders.

The launch of the mobile version of our site has been very successful. It enables our customers to research and purchase online while they are on the move. Mobile traffic and revenues experienced significant growth and almost a fifth of all visits and over 10% of our online sales are now through these devices.

The introduction of the Halfords App and offering quick response ("QR") codes at the point of sale are other mobile innovations that Halfords has introduced to enhance the shopping experience for our customers. Customers can scan barcodes and access rich content like videos and product information, or get help in finding the right part for their make and model of vehicle. We have experienced over 370,000 visits to our App last year and over 15,000 QR codes were scanned.

We have also made considerable progress in enhancing our IT infrastructure and improving our on-site experience. We continue to develop the site with additional functionality aimed at improving our customer journey. We are focused on the entire customer journey from accessing the site to order fulfilment.

Our product mix lends itself to a multi-channel offer as customers often want further advice, a demonstration or fitting. Online purchasing patterns reflect this, with 86% of sales on Halfords.com reserved and then collected from a store. We recently made a further improvement to this service. Customers who buy an item online before 6.00 pm from the vast majority of Halfords 16,000 online product range can now choose to collect it the next day from their local store for free, even if that store does not normally stock the product. Direct delivery to home represents 14% of our online sales and we also continue to focus on improving this proposition for our customers. We now offer free delivery on a wide range of products as well as Saturday delivery.

The Halfords Autocentres website has provided a significant route to grow our Autocentres business. In the fragmented garage sector the relaunched website, with improved functionality, has provided a point of difference and resonated with customers. The revenue derived from online bookings was up by c.40%. Online bookings now account for 25% of all Autocentres bookings with 7% of bookings coming from the Halfords.com Retail site. Further integration of the Retail and Autocentres websites is a focus. The Autocentres website has also successfully supported our ambition in tyre sales, with online tyre sales up 170% in the year.

Operations

While the sales performance has been challenging, the Group has made significant operational progress this year. We have focused on enhancing customer service, reducing costs and continuing to build a solid platform for future growth.

Our new Distribution Centre at Coventry, equipped with state-of-the-art logistics technology, has operated smoothly and is a major contributor to good availability in our stores. One innovation has been the commissioning of 24 new double-decker lorry trailers. These can carry extra product, which helps decrease road miles and saves fuel.

To reduce the costs of goods not-for-resale we have implemented new processes. Some contracts have been renegotiated with specifications and suppliers changed. We have also appointed a new Head of Procurement responsible for goods not-for-resale buying to continue our focus on driving down costs in this area. One innovation is a new process for the recovery of the 3,000 tonnes of waste cardboard from our stores to our distribution centres, where it is baled and sold for recycling.

To fulfil our ambitions in fitting we are actively recruiting and training new colleagues. We have also put in place new programmes for customer engagement to improve the in-store experience and the help we offer people when they visit a Halfords store.

Autocentres continued to develop and enhance the technical expertise of colleagues. This meant executing the tyre sales opportunity whilst developing compelling offers such as brakes-4-life. Additional investment in centre capability was complemented by trials of extended hours and Sunday openings.

Marketing

Our new marketing campaign "that's helpful, that's Halfords" has helped build awareness of the value we offer through great prices, quality and innovative products with the expert service of our colleagues. Our Christmas campaign was critically acclaimed and developed this theme highlighting the lasting value of Halfords' products like cycles which provide pleasure for years.

Our summer campaign demonstrates how Halfords has helped customers for many years make the most of their holidays. Using the strapline, The Best Trips Last a Lifetime, it focuses on how customers use our products to make the best of their summer holidays.

We also extended our national advertising of Autocentres from radio to TV with a series of idents around the motoring programmes on the Dave channel. These illustrate the delighted response of motorists who have been helped by Halfords colleagues.

People

Our colleagues, in all areas of our business, are of paramount importance to help our customers. Their passion and abilities are central to the delivery of our strategic objectives and I am extremely proud of their commitment and enthusiasm.

In addition, their expert knowledge, advice and service differentiate us from our competition, especially the online pure plays, and generate attractive levels of return. In the year we have invested in extra training for colleagues through our programmes to encourage higher levels of engagement with customers. We are also investing in extra training to increase the number of colleagues who carry out fitting and cycle repair services.

We track our success in customer service through Empathica customer surveys and our detailed quarterly customer research; these show that increasingly customers recommend our service to others.

Values are central to all successful organisations and this year we have more clearly defined the central tenets of the way we want to work together. We launched these at our first Company-wide managers' conference. The values are:

In the year ahead we are running an engagement survey for all our colleagues which will help us to understand how to support and offer the best training possible.

As well as the appointments already mentioned, my Executive team has been completed during the year with the promotion of Kevin Thomas as Retail Director and the appointment of Jonathan Crookall as Group HR Director.

I would like to thank all our colleagues for their hard work and their immense contribution to the progress of our business.

Summary and Outlook

Halfords continues to be highly profitable and strongly cash-generative, and is maximising its performance in a demanding retail environment.

While this is a challenging time, Halfords has delivered significant growth in Leisure, including cycles, fitting services and Autocentres throughout the past and prior years. This demonstrates how we are evolving our business from a traditional out-of-town product retailer to a significant service provider.

Some other areas of the business like Car Enhancement are shrinking while others like DIY Car Maintenance are mature and have been affected by the pressures on motorists and the reduction in mileages being driven.

The strong performance of Halfords' growth areas is proof of the relevance of our offer in the busy lives of our customers. By Helping and Inspiring our Customers with their Life on the Move we play a vital role for millions of people. Our three strategic pillars — the Friend of the Motorist, the Best Cycle Shop in Town, and the Starting Point for Great Getaways — give us an attractive route to evolve our business over the longer term.

We plan to take advantage of these opportunities and to accelerate the transition through strategic investments in the year ahead. We anticipate that this will contribute to growth in our sales and profits in the medium term.