Halfords highlights impact of weaker pound as profits fall

LONDON (Reuters) - British bicycles to car parts retailer Halfords (HFD.L) said the fall in the pound following Britain's vote to leave the European Union would remain a major challenge after it reported a 12 percent drop in first-half profit.

Sterling has fallen about 20 percent versus the U.S. dollar since the Brexit vote in June. Halfords buys about 200 million pounds of goods a year in dollars, leaving it exposed to major exchange rate fluctuations.

"It is a significant headwind but I'm confident that over time we can mitigate," Halfords Chief Executive Jill McDonald told reporters on Thursday.

She said it was working hard with suppliers to limit the extent they passed their cost increases onto Halfords and was also seeking more savings and efficiencies in the business.

McDonald said raising prices for consumers would be "a last resort".

Halfords shares were down 4.5 percent at 1035 GMT. They are down 2 percent so far in 2016 and 42 percent below their record high of 563.5 hit in August last year.

The firm has hedged, or bought forward, nearly 100 percent of its 2016-17 currency requirements at $1.41 and about 25 percent of its 2017-18 requirements at $1.37.

While the weaker pound does increase Halfords' sourcing costs, the firm's motoring, cycling and camping products could benefit if it results in more Britons opting to take holidays at home, known as the "staycation" effect.

"We're very well placed to pick up a staycation trend. It's just a bit early to see that being reflected quite yet," said McDonald.

For the 26 weeks to Sept. 30 Halfords made an underlying pretax profit of 40.8 million pounds, down from 46.4 million pounds in the same period last year, despite a 6.3 percent rise in revenue to 567.3 million pounds and a 2.2 percent increase in sales at stores open more than a year.

The profit fall was due to a 275 basis points decline in its retail gross margin to 47.6 percent, which reflected a 6 million pound currency hit and bigger cycling promotions over the summer. Wage and investment costs also increased.

Halfords forecast full-year profit in line with market expectations, or about 74 million pounds compared with 81.5 million pounds in 2015-16.

The firm's interim dividend was raised 3 percent to 5.83 pence.

(Reporting by James Davey; editing by David Clarke)