Getting Into Gear 2016 has the following key elements for our Retail business:

1. Service Revolution – introducing a step change in customer service across Halfords stores.
2. The H Factor – reasserting our proposition authority to Support Drivers of Every Car, Inspire Cyclists of Every Age and Equip Families for their Leisure Time.
3. Stores Fit to Shop – investing to raise the Halfords store estate to a standard that is acceptable and operable.
4. 21st Century Infrastructure – systems and infrastructure to support service and sales.
5. Click with the Digital Future – creating a service-led digital proposition.

1. Service Revolution

Service is Halfords' key area of focus. Service is at the heart of our proposition as we estimate around two-thirds of our Retail products require some level of assistance. Increasingly we are making a merit of this and service is becoming a product in its own right.

The level of service we aspire to is something that supermarkets will never be able to deliver. It also gives us a competitive advantage over the online, pure-play retailers who have no stores or colleagues on the ground to support their sales. But we have to improve to deliver the promise.

Friendly, expertise-based service is fundamental to profitable and sustainable sales growth. When customers have a better experience at Halfords they will spend more with us and recommend us to their friends. The Service Revolution will ensure customers are served by colleagues who are enthusiastic about their role at Halfords and the products and services we offer.

Unfortunately, we have let other pressures and processes get in the way of service and our focus on recruitment, development and retention has not been what it should be; consequently colleague turnover is very high.

Our new programme makes our people a focus of our KPIs and our store-incentives programme will now be linked to service as well as sales. We are changing the way we recruit and develop, revising rotas and scheduling and amending contracted hours to make sure we always have colleagues available to serve customers.

We are opening new Halfords Academies to provide the training that colleagues need; we are also launching 3-Gears, a qualification programme that trains and rewards colleagues for gaining expertise.

Gear 1

Gear 1 applies to all colleagues and is completed over their first three-month period with Halfords. We use structured e-learning modules that cover retail skills, product knowledge and customer service. The outcome is that all store colleagues will be qualified to serve customers.

Gear 2

Gear 2 involves a nine-month training programme which leads to an expert level of product knowledge, with a specialism in either Auto & Leisure or Cycling. Tuition is both through e-learning and face-to-face training programmes. There are regular refresher courses for Gear 2 colleagues and a pay award for those who attain this level.

Gear 3

Gear 3 colleagues are our Gurus. They are product experts who are qualified to train others. They keep their skills and knowledge current and market leading - through workshops, attending product and trade shows and by linking with and visiting suppliers. Our Gurus also receive leadership development and a pay award. We anticipate having two Gurus per store.

The 3-Gears programme profoundly changes our expectations of our colleagues and sends a clear message on the focus of their role and the importance we place on helping them succeed.

This particular investment is one of the most important we will make as we commit a total of £7m Retail operating-cost investment in FY14 across the Service Revolution and the pay review. A further £7m of operating cost will be invested in Retail colleagues this year across Cycle Repair, Fitting and incentives, depending on volumes and performance.

To give customers better service we are also working on our basic retail disciplines. We have not been delivering to a high enough standard on many of these; that is now changing.

There is a lot of work underway to improve our retail disciplines. For instance we are removing unnecessary task from colleagues so they can focus more time on customers. Store-friendly deliveries will take place out of hours and won't interfere with service. Deliveries will also be organised in a way that takes less time to check in and unload. Finally we are moving to pick-friendly warehouses so colleagues can easily find and replenish stock.

We also know that availability has been a key area where our service has disappointed customers. To improve we have introduced efficient hand-held scanners in each store that support us counting stock and maintaining the overall integrity of our stock file.

The business is currently holding an historic low of stock as a result of some improved processes and old stock clear-outs; however, in some areas this has impacted store availability and overall trading capability. During FY14 we anticipate investing an incremental £15m–20m in Retail stock. Part of this is natural rebuild but the majority will support improved in-store availability and our ambitions in PACs.

2. The H Factor

Reasserting our proposition authority is a priority we are labelling the H Factor.

Halfords has some award-winning products in many areas of the business but our analysis concludes we need to do even better for our customers. This means better product development and design, stronger value and better space allocation to support growth opportunities in new or existing ranges.

By the end of the summer we plan to have rebalanced c.100 stores, moving child seats downstairs in stores with mezzanine floors, releasing space to cycling, better segmenting our Cycle offer and reallocating space away from the Car Enhancement category.

Our research also demonstrates the need to focus on our core areas and to rebuild our credentials as a specialist retailer across the Auto and Cycling ranges. We believe more authority is a route to competitive advantage and that specialism is something we should celebrate.

Innovation is key and we will work harder to delight our customers and colleagues. We plan more special buys and to use our third pillar to trade against. For instance we have just bought 1,000 inflatable kayaks that we will retail at £99.99 as an exciting addition for family holiday adventures this summer.

Our initiatives within our motoring pillar include a new partnership with battery supplier, Yuasa, to introduce electronic diagnostic terminals into every store. This allows us to reset a car's electronic system after work on the battery of a modern stop/start car, something no other retailer is doing on such a large scale.

The government is expected to commit to a digital radio switch-over later this year. We are preparing for this opportunity with new audio ranges built through excellent relations with the world's leading radio manufacturers.

To Inspire Cyclists of Every Age we are planning to make this The Year of the Cycle at Halfords, building on the momentum created around the Olympics last year. We have a series of range re-launches planned, including our exclusive Voodoo and Boardman ranges. We are adding several new models to the successful Pendleton range and later in the year we are re-launching a new range of Apollo bikes. We have also just been appointed by Sky as their technical partner for Sky Rides across the country. This will help promote our Cycle Repair offer to the 150,000 participating cyclists alongside the Sky brand.

Meanwhile the launch of 15,000 PACs lines is going live this month and we are advertising our Cycle Repair offer on the radio and in the press.

To Equip Families for their Leisure Time we have just launched our new camping range, incorporating Vango for the first time, a brand synonymous with camping, as well as a new range of camping accessories.

This momentum will continue, with greater innovation to create more excitement for our customers.

3. Stores Fit to Shop

We have reviewed our store estate and concluded there is no good reason to reduce our store numbers significantly, as c.99% of our 466 stores generate a cash profit.

Our focus on driving profitable sales growth will keep the number of loss-making stores to a minimum. Over the next three years we will resize where we get the opportunity and will close a few stores as part of business as usual. We plan to make the space we occupy work harder and utilise our estate to support our digital ambitions. Nearly 90% of online transactions are already picked up in-store; once in store, we have the advantage of offering extra service.

We do need more stores in Greater London where we are currently under-represented. Over the coming years we will focus on achieving a higher level of store-penetration inside the M25.

We intend to maximise lease flexibility so we can manage our estate efficiently from a trading perspective. This involves securing more break clauses on lease renewals with our landlords and leveraging our position to mitigate rent-increase pressures.

In summary we don't anticipate any significant change in overall store numbers.

In terms of the look and feel of our stores there's a lot of work to do. Much of our estate is no longer at an acceptable standard of presentation and significantly lags behind our customers' expectations, especially cyclists, where a fresh and modern store environment is so important.

Last year we began to design a store format for the future with a trial of a number of so-called 'laboratory stores'. We have reviewed the progress of these stores throughout the year. There are some very positive learnings but overall we don't believe the design is right for roll-out. We have initiated a project to define a format that combines a more coherent customer journey, a focus on one centralised desk to support sales and service, introduces more live displays, brings our Cycle Repair and wefit offer to the fore and supports us to trade the overall store environment harder.

Work is well underway and we expect to have three stores up and running in the new format (York, Coventry and Evesham) by the end of the summer; we anticipate c.10–15 stores in the new format by the end of FY14.

Over the next three years we expect to fully refurbish c.150 stores and modernise all our cycling departments. This will require an investment of c.£50m of capital expenditure.

4. 21st Century Infrastructure

The business has successfully completed the reorganisation of our distribution network around a central distribution centre in Coventry and a specialised cycle centre in Redditch. We are now focusing our supply-chain work on supporting our service in-store, consistent stock availability and digital ambitions. We have started a trial of air-lock deliveries where stock is delivered overnight, to be worked on before the store opens in the morning so that it doesn't detract from colleagues serving customers and doesn't incur the costs of a night shift.

We are also reviewing our multichannel infrastructure as well as the operations of our fleet. Like many other retailers, the Halfords IT system has much room for improvement. Our systems have been modified to reflect increasing demands but are no longer suitable for our current or future needs. In the short-term, we have a number of 'must do' core projects to complete, including a data-centre relocation, a SAP upgrade and a new store voice and data network. We are investing in our IT infrastructure and have recently recruited an IT Director to lead this work.

Together with our digital plans we will invest c.£38m of capital expenditure over the next three years in our IT and Digital plans.

5. Click with the Digital Future

Building our digital proposition is a key route to driving future top-line growth and maintaining our ongoing relevance.

Our ambition is to create a service-led digital proposition. Of all retailers Halfords has the opportunity to be truly multichannel – combining the best of the web with friendly expertise in-store. Our digital review, in conjunction with an external consultancy, shows that our current multichannel proposition doesn't provide a satisfactory customer experience. We are therefore putting in place a schedule of work that centres on a new website aligned around our three strategic pillars so that customers can shop in dedicated product zones. The site will be optimised for tablets and mobile devices, as these currently account for around 24% of online Retail sales; usage is expected to double over the next few years. We will also develop community features, live chats, integrated dynamic content, improved customer account management and help pages.

We are working to improve our online fulfilment, especially on Reserve & Collect, stock availability, our returns capabilities and staff training to improve service levels in-store. Our recent focus on stock in the second half of the year has already resulted in improvements in our Reserve & Collect net promoter scores.

Investment

Through our review we believe we now have the right key priorities and have detailed and clear action plans in place.

We have the opportunity to be a specialist retailer with real service and product authority in core categories. Our ranges will be more innovative and will be designed to excite and delight customers. Our stores will be more inspirational environments where customers want to shop and where they will be greeted by knowledgeable colleagues who offer friendly expertise.

Under Getting Into Gear 2016 we will be investing around £100m in Retail capital expenditure over three years which is an incremental £40m against previous run-rate guidance. Around £50m of the investment will be targeted directly at stores.

We also intend to invest around £21m in Retail operating costs in FY14 over and above our FY13 expenditure, of which c.£11m is volume and performance dependent. Key elements of this will be to support the Service Revolution and to support an uplift in LfL sales.

Milestones

We have set operational milestones for both internal and external use. These are not financial metrics but sustainable profitability will flow from the delivery of these milestones. The following are some of the milestones that will support our target of £1bn of Group revenues in FY16:

Milestones: Colleagues

		FY14	FY15	FY16
	All qualifying colleagues through Gear 1
3-Gears	50% colleagues through Gear 2
	80% colleagues through Gear 2
	Two Gear 3 colleagues per store
Reduce % of colleagues leaving within 3 months	<12.5%
	<10%
Colleague Engagement (Group)	>85%

Milestones: Operational

	FY14	FY15	FY16
Autocentres opened	20–30	20–30	20–30
Launch PACs
Annual PACs sales growth		20%	20%
Cycle Repair sales growth	25%	25%	25%
Cycle departments brought up to date	100	180	180
Full store refits	10–15	c.60	c.75
Launch new Retail website
Mobile & tablet optimised site launched

Milestones: Customers

		FY14	FY15	FY16
	>60%
Net Promoter Score	>65%
	>70%
Stores working stock outside peak trading hours	25%
	Majority of stores

Current Activity

Many of our strategic projects that will reposition Halfords Retail are already underway.

The results of this year's Colleague Engagement Survey shows that we have made significant progress from last year's results – taking our Group colleague engagement score from 64% to 77%.

We are already seeing a step change in retail standards across our business.

The new management team is taking shape. Rob Swyer was appointed as Retail Director, David Durie as Marketing Director, Anna Barsby as IT Director and, most recently, Emma Fox as Commercial Director.

The 3-Gears programme was launched to our store managers at our recent spring conference and the first training has taken place. Our new recruitment website is already in operation and our new store format plan is taking shape.

We have appointed a new advertising agency, Mother; they are currently working on our summer campaign.

We have begun trialling out-of-hours delivery to stores.

Thousands of new PACs lines are being launched online this month, which is the culmination of a long period of planning and preparation.

We have also started to improve our credentials within the communities in which we operate. We have run a series of Kids Bikes Workshops over the Easter period, teaching thousands of kids basic bike maintenance skills and hopefully enthusing the next generation of cyclists and Halfords customers.

Conclusion

Our review concludes that Halfords fulfils an important role for its customers. Their busy lives and leisure time rely on the products and services that we provide. We have a huge competitive advantage if we can deliver on our promise of friendly expert service and inspire and excite more people to shop with us.

The plans we are putting in place are essential to reposition Halfords to meet the challenges ahead. We are targeting delivering profitable revenue growth over the medium and long-term.

There is a lot of activity now underway at Halfords to execute this programme. At this stage we anticipate that profits in FY14 may reduce as we invest. It is anticipated that Group EBITDA may not exceed current levels until FY16.

The Board is acutely aware of the importance of Halfords' dividend to our shareholders. However, our need to invest whilst maintaining both an appropriate level of earnings cover and a robust balance sheet has led the Board to recommend a rebasing of the dividend. Taking this action will ensure Halfords has a robust foundation on which to build and to maximise longer-term shareholder returns.

On behalf of the Board, I would like to thank all of our colleagues for their immense contribution and commitment to the progress of our business and the implementation of our plan to reposition Halfords.