Dealer Groups

Harvey numbers: 49 inches of rain, 366K new models potentially impacted

CARY, N.C. - 

With now Tropical Storm Harvey taking at aim at Louisiana and other locations inland after dumping 49 inches of rain near Houston, experts from Cox Automotive and Edmunds are looking to project how much this natural disaster is going to impact vehicle sales.

Meanwhile, the National Independent Automobile Dealers Association is organizing a fundraising effort to help people impacted.

Perhaps Edmunds executive director of industry analysis Jessica Caldwell summed up the entire situation when she stated, “Harvey is an unprecedented storm and it’s going to take time to fully comprehend exactly how much it will impact the automakers.

“Texas is the second largest auto market in the U.S. so an event of this magnitude is going to make a dent in sales,” Caldwell continued. “Edmunds estimates 2 percent fewer vehicles will be sold in August due to Harvey, with declines likely continuing into early September.

“In subsequent months we’ll likely see a slight localized bump in sales as the recovery takes hold and people are able to buy replacement vehicles,” she added.

Edmunds estimated there are approximately 366,000 new vehicles on dealer lots in Texas that could be affected by Harvey. Caldwell pointed out many of these vehicles are high-profit trucks and SUVs, “so the automakers will feel a slight pinch, at least in the immediate term.”

Edmunds projected there are between 150,000 and 200,000 units of new inventory that could be affected in the areas hardest hit by Harvey in the Texas cities of Austin, Beaumont, Port Arthur, Corpus Christi, Houston and San Antonio.

Edmunds added that Texas makes up 9 percent of U.S. retail sales and is the No. 1 truck market, accounting for 14 percent of all full-size truck sales so far this year.

To put that metric into perspective, analysts tabulated one out of every five vehicles sold in Texas so far in 2017 was a full-size truck.

Texas is the top sales market for Ford, RAM, GMC, Cadillac and Mitsubishi, according to Edmunds’ data.

Over at Cox Automotive, chief economist Jonathan Smoke uncovered information throughout the company’s portfolio of service providers, including Autotrader, Dealer.com, Dealertrack, Kelley Blue Book, Manheim, NextGear Capital, vAuto and Xtime.  As a result, Smoke indicated Cox Automotive revised its August new-model forecast of 16.6 SAAR to 16.3, based on the hurricane and its aftermath delaying the turns of 20,000 to 40,000 new vehicles.

“However, September will likely get a mild boost from delayed purchases and the beginning of the market’s recovery, driven by the need to replace damaged vehicles,” Smoke said. “That process will likely last months, pushing higher sales in the region in 4Q. We are looking at impact to full-year SAAR. Initial estimates indicate a potential net improvement on full-year sales once replacement sales pick up in earnest.”

Federal officials said on Tuesday that they obtained a reading of 49.32 inches of rain being recorded at a location southeast of Houston. Officials said Harvey is expected to produce additional rainfall accumulations of 6 to 12 inches through Friday over parts of the upper Texas coast into southwestern Louisiana as the storm is projected to move further inland into Tennessee, Kentucky and West Virginia this weekend.

“A Texas-sized storm requires a Texas-sized response, and that is exactly what the state will provide,” Texas Gov. Greg Abbott said. “While we have suffered a great deal, the resiliency and bravery of Texan’s spirits is something that can never be broken. As communities are coming together in the aftermath of this storm, I will do everything in my power to make sure they have what they need to rebuild.”

And NIADA is looking to help with the rebuilding effort.

The NIADA Foundation has established an emergency relief fund to provide a venue for members of the National Independent Automobile Dealers Association to assist fellow dealers and others in the automotive community devastated by the effects of Hurricane Harvey.

Steve Jordan, CEO of NIADA and president of the NIADA Foundation Board of Trustees, said 100 percent of all contributions received will be donated to provide relief from the effects of flooding, help repair property damage and assist with other disaster-related needs attributable to the catastrophic weather event that struck Houston and other areas along the Texas coast.

Jordan said the foundation's goal is to raise $100,000 for the fund.

Donations will be made in collaboration with the Texas IADA – NIADA’s state affiliate – and will be considered on a case-by-case basis as identified through the collaborative disbursement relationship.

“We are committed to helping our friends and colleagues in the automotive industry get through this trying time,” Jordan said. “Our thoughts and prayers go out to all those affected or displaced by this massive storm.”

The NIADA Foundation is a non-profit 501(c)(3) charitable organization that serves as the focal point of NIADA’s charitable efforts and coordinates the association’s charitable giving. Individuals can contribute by going to this page.

While region residents still are dealing with the storm, Smoke uncovered that they aren’t necessarily shopping for or taking delivery of vehicles.  

Since the storm came ashore this past weekend, Smoke noticed Dealer.com websites in the market have seen an almost 40-percent drop in vehicle shopping research compared to the previous weekends in August.

“This is a significant number as Dealer.com powers over 60 percent of dealer websites,” Smoke said.

Smoke noticed an even steeper drop in Dealertrack business within where Harvey dumped rain.

“Our Dealertrack credit application system has experienced a roughly 80-percent drop in activity in the affected area. Since most cars are financed, that’s an 80-percent drop in business since the storm came ashore Friday,” said Smoke, who also pointed out that 80 percent of U.S. franchised dealers use Dealertrack to submit credit applications electronically to finance companies.

Activity intensifies as more buyers, sellers enter market

FORT LAUDERDALE, Fla. - 

A day after Kerrigan Advisors shared its latest report about dealership buy/sell activity, Haig Partners released its own analysis on this topic on Tuesday, explaining how action ramped up in the second quarter after getting a bit of a slow start at the beginning of the year.

The Haig Report indicated the number of dealerships sold in the U.S. during the second quarter increased to 66 rooftops from 62 rooftops during the same timeframe last year.

Year to date, Haig Partners calculated the number of dealerships sold in the U.S. has declined 17 percent from the same period in 2016, from 175 to 146, due to a particularly weak period of dealership sales in Q1.

While the total number of rooftops trading hands declined during this period, the firm insisted the amount of money spent by the publicly traded retailers on dealerships in the U.S. has increased sharply in 2017.

Through June 30, the report noted the publicly traded retailers had spent $538 million on U.S. dealerships, an increase of 91 percent from the $282 million spent in the same period in 2016.  

Lithia Motors was the most active of the publicly traded companies and continues to target underperforming large platforms in different parts of the U.S.

The report also highlighted profits at privately owned dealerships for the 12-month span that ended June 30 softened by 2.1 percent versus a year earlier to rising costs. 

Values of privately owned dealerships also fell 2.1 percent during this period, according to the Haig Report. Haig Partners’ franchise blue sky multiples were unchanged in Q2 from Q1.

Continuing the trend from 2016, the firm mentioned demand for dealerships shifted from luxury brands to mainline import and domestic brands that are heavier in trucks and SUVs. Purchases of luxury dealerships comprised 13.7 percent of transactions in Q2, down from 16.6 percent in Q2 2016.

Other key findings from the latest Haig Report include:

—Macroeconomic indicators such as GDP, interest rates, employment, number of miles driven and consumer sentiment remain highly favorable for dealers.

—Other trends such as used-vehicle pricing, incentive spending by the OEMs and rising inventories are growing less favorable to dealers.

—Total sales, including fleet, fell by 2.9 percent through July, although recent months have been steady. Average retail SAAR is down 1 percent so far this year.

—Declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.

—Sales and gross profits continue to increase at dealerships, but expenses are rising faster.

—The average dealership pre-tax profit over the last 12 months was $1.436 million

—Average estimated blue sky value per dealership dipped 2.1 percent from the end of 2016 to $6.91 million.

—Public auto retailers are spending more of their capital on acquiring auto dealerships in the U.S. than last year.

—Private equity firms and family offices continue to make substantial investments in auto retail.

—Acquisitions of dealerships, even in declining periods, can still provide a better return on investment than other assets classes.

Haig Partners president Alan Haig said, “As we expected, the sharp drop in the first quarter of the year has been offset by a strong Q2 and we are expecting robust conditions for the rest of the year. There are many buyers and sellers in the market and deal financing remains readily available.

“These are good conditions for buy-sells, so long as sellers understand that their leverage is more limited than in the past,” Haig continued. “Buyers have many options and are increasingly concerned about future profits. They are less likely to chase deals or pay big premiums. 

“If dealers want to sell their dealerships they will likely need to accept today's offer since tomorrow’s offer could be lower,” he went on to say.

Haig Partners is seeing these conditions in its current engagements that include domestic, import and luxury dealerships that range from Florida to New York to California.  The firm has closed dealership transactions with a value of over $3.6B over the past 20 years.

The Haig Report is published each quarter and is based on data gathered from many public sources, as well as interviews with leading dealer groups, and bankers, lawyers and accountants who specialize in auto retail. Included in each edition are Haig Partners’ blue sky multiples that serve as a gauge for franchise values.

You can also download the full report. 

11 overall trends around dealer buy/sell activity

IRVINE, Calif. - 

Kerrigan Advisors’ newest Blue Sky Report highlighted a notable willingness by dealers to take on minority and majority equity partners along with eight other trends involving buy/sell activity through the first half of 2017, which the firm classified as high.

According the report released on Monday, Kerrigan Advisors also expects activity during the second half of the year to surpass the first half, resulting in the fourth year in a row of more than 200 transactions.

Erin Kerrigan, founder and managing director of Kerrigan Advisors said in a news release, “2017 is on pace to be a record year for equity partner investment structures.

“We think this shift in buy/sell activity is mostly due to the increasing size and complexity of the dealership groups coming to market,” Kerrigan continued. “In addition, dealers are attracted to the opportunity to remain involved in the business post-transaction, while also taking some chips off the table.”

The report noted key data and analysis from the first half of this year included:

• 101 dealership buy/sell transactions completed in the first half of 2017, compared to 106 transactions during the first half of 2016.

• Multi-dealership transactions represented 25 percent of completed transactions in the first half of 2017. Those transactions saw a 23-percent rise in the number of franchises represented per transaction.

• Public retailers increased spending 61 percent in the first half of 2017, compared to the first half of 2016.

• Domestics’ share of the buy/sell market remained at 44 percent, while non-luxury imports saw their share of the buy/sell market increase to 39 percent.

• Toyota, Honda and Subaru dealerships enjoy high buyer interest with consistently high profitability.

• Amongst the publics, Lithia Motors and Penske Automotive Group have acquired 21 U.S. dealerships.

• The private sector acquired 93 percent of the franchises sold.

• Dealership real estate prices and rents rose slightly as compared to 2016

“We see resilience in the buy/sell market,” Kerrigan said. “Even though SAAR is down, it remains within a historically high range. Auto sales in the first half of 2017 were actually 5 percent higher than the trailing five-year average, and dealerships remain highly profitable.”

The report also identified three other key trends moving forward into the third and fourth quarters of this year, including:

• Dealers take on majority and minority capital partners.

• Reinsurance profits increasingly factor into buy/sells.

• Retiring key operators prompt some dealers to sell.

“One of the more interesting trends we see moving into Q3 and Q4 of 2017 is retirement-driven transactions, but not necessarily in the way you think,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “When a key lieutenant retires, that’s prompting some older dealers to sell, versus finding a replacement.

“As a result, the retirement of key management, in combination with the aging of the dealer body, is increasingly prompting older dealers to sell,” Kerrigan went on to say.

Kerrigan Advisors is deeply involved in the buy/sell market having advised on the sale of 59 dealerships, including four of the Top 100 dealership groups in the U.S. Most recently, Kerrigan advised on the sale of Downtown LA Auto Group to Lithia Motors.

The Blue Sky Report, a Kerrigan Quarterly, is published four times a year and includes Kerrigan Advisor’s signature blue sky charts, multiples and analysis for each franchise in the luxury and non-luxury segments. The multiples are based on Kerrigan Advisors’ view of franchise values in the current buy/sell market and can be applied to adjusted pre-tax dealership earnings to estimate blue sky value.

To download the report, go to this website

Asbury announces next CEO

DULUTH, Ga.  - 

David Hult will be the next president and chief executive officer of Asbury Automotive Group.

The retailer announced Tuesday afternoon that Hult, who has been executive vice president and chief operating officer since November 2014, is set to succeed Craig Monaghan on Jan. 1.

Hult will also have a seat on Asbury’s board of directors. Monaghan will become vice chairman of the board on Jan. 1 and hold that position until the Asbury’s 2018 annual meeting of stockholders.

Additionally, Monaghan will be non-executive special advisor to the company until he retires on April 30, 2019.

“We are thankful to Craig for his dedication to Asbury since originally joining the company in 2008,” Asbury chairman of the board Thomas DeLoach Jr. said in a news release.

“Craig is responsible for significant growth and value creation at the Company, and we appreciate his willingness to continue to serve Asbury in a transitional role following his retirement as president and CEO,” DeLoach said. “David has already contributed greatly to the growth of the company, and the board is unanimous in its belief that David is the ideal next chief executive for Asbury.”

Hult’s three-plus decades in the car business includes senior positions with Asbury, RLJ McLarty Landers Automotive Holdings, Group 1 Automotive and Penske Automotive Group.

“I am excited to lead the company and our 8,000 associates and look forward to driving further growth for the company,” Hult said in the news release. “I want to thank the board of directors of the company for providing me this opportunity. Craig has served as a wonderful mentor since I joined the company. I look forward to his continued advice and counsel as we work to ensure a smooth and successful transition.”

Monaghan said in the release: “I am delighted that the board has promoted David to president and CEO of the company. I look forward to continuing to work with him to execute Asbury’s business strategy and deliver long-term value to stockholders and other stakeholders.”

Car-buying events effective sourcing strategy for AutoNation USA

FORT LAUDERDALE, Fla.  - 

When a dealership group opens up standalone used-car stores, one of the questions that ultimately comes up is, “Where will the inventory come from?”

At AutoNation, the retailer has found some initial success in hosting car-buying events at its AutoNation USA used-car store in Houston.

The dealer group — which also has an AutoNation USA store in Corpus Christi, Texas — had held two “We’ll Buy Your Car” events at the Houston store, chief operating officer Lance Iserman said during AutoNation’s Aug. 2 quarterly earnings call.

Iserman, who is also the group’s executive vice president of sales, said AutoNation was able to acquire high-quality vehicles during those events, calling it a “good source” for the retailer to obtain inventory going forward.

Within the AutoNation franchised stores, three-quarters of used-car inventory comes from trade-ins, with 15 percent coming from auctions and 10 percent generated via off-lease, Iserman said.

As far as how that will translate to AutoNation USA stores, he noted that, obviously, standalone used-car stores don’t have that capacity to acquire off-lease, but AutoNation hopes to ramp up its “We’ll Buy Your Car” strategy.

“Currently, our inventory is a mix of auction purchases, vehicles from our franchised stores and our ‘We’ll Buy Your Car’ events,” Iserman said of AutoNation USA. “And that will be less dependent on our franchised stores as we move forward.”

More details on AutoNation USA

Sharing some overall thoughts on AutoNation USA, AutoNation chief executive Mike Jackson said: “This is an overarching approach where it’s one brand, including the franchised business and the extension into the USA stores, all with a one-price system.

“(It’s) very challenging, complex to create, as we talked about, but I think it will be very compelling, once we successfully implement it …  AutoNation Parts and AutoNation Accessories are crucial to being able to do higher volume with better margins, with lower reconditioning costs and still put a frontline, outstanding vehicle (on the lot).

“Knowledge of the marketplace for our pricing system, including the auctions, needs to be there,” Jackson said. “So I think we have it pretty well thought through.”

Overall used-car results

Through six months of 2017, used-vehicle retail revenue for the dealer group is up 2 percent at $2.29 billion, while overall used revenue (which includes wholesale, as well) is down 2.4 percent at $2.44 billion. 

Retail used-car gross profit is down 17.5 percent at $148.9 million, with overall used gross profit down 13.4 percet at $151.5 million.

Used-car retail sales, however, are up 3.6 percent, with AutoNation having sold 118,874 used units in the first six months of 2017. 

In the company’s earnings press release, Jackson specifically addressed used-car margins. In the second quarter, gross profit per used vehicle retailed was $1,270, down from $1,531 a year ago.

For the first half, it fell from $1,572 to $1,253. 

“Our pre-owned margins declined due to implementation challenges with our centralized One Price strategy during the quarter,” Jackson said in the news release. “However, we’ve taken decisive action to resolve those issues by realigning our leadership and structure to fully realize the opportunity of our brand extension strategy.”

In general, Jackson said during the call he expects growth in the retailer’s overall used-car business in 2018 through acquiring, reconditioning and selling used cars — and doing so at right price.  AutoNation USA is still a relatively small piece of that overall used-car business, he said, so its operational impact reflects as much. 

Asked why he is confident that the performance of the core used-car business will improve next year, Jackson said: “We’re absolutely thrilled with the customer response to One Price. It’s attracted tremendous traffic — new buyers — and they really express how much they like the process. 

“We also see our ‘We’ll Buy Your Car’, which will be a very attractive source of vehicles, ramping up very nicely,” he said. “We know we’re going to have parts at a much more attractive price.

“So, I have good consumer response, building good sourcing to attract cars, good capability to recondition on a lower-cost basis. That gives me confidence we can grow the business profitably.”

 

 

Group 1 opens 13th Audi store

HOUSTON - 

Group 1 Automotive announced Tuesday that the company has acquired a new Audi dealership in Fort Worth, Texas.

The addition of the new Texas dealership brings Group 1‘s portfolio of Audi dealerships to 13.

Group 1 currently owns Audi dealerships in Florida, Massachusetts, South Carolina, Texas and the United Kingdom.

"We are delighted to expand our relationship with Audi in the United States and strengthen our luxury brand representation and overall retail portfolio in the greater Dallas-Fort Worth metropolitan area," Group 1 president and chief executive officer Earl Hesterberg said in a news release.

The company estimates that the new Audi store will generate $55 million in annual revenues.

Role of auctions in Penske’s standalone store strategy

BLOOMFIELD HILLS, Mich. - 

The method Penske Automotive Group plans to continue using to fill inventories at CarSense — its standalone used-vehicle retail locations primarily in the Northeast with intensions on expanding — should delight auction general managers who see buyers for this dealer group mingle in their lanes.

Chairman Roger Penske said during the company’s latest conference call that about 80 percent of the vehicles CarSense stocks comes from auctions.

Penske also pointed to expected lifts in off-lease volume coming in 2018, 2019 and 2020 to help these CarSense locations that depend on Penske buyers with specific instructions on how to procure inventory, which currently sits at about 45 days’ supply.

“Well, I think we have to say that auction prices on a daily basis demonstrate the real value of the vehicles,” Penske told conference call participants. “So, we have a number of buyers and they’re out there looking at the marketplace.

“They have metrics that they’re looking at certain models, certain colors and markets that have been selling. So they have a past history. So they’re prepared to pay a particular price for these vehicles, and I think that we only buy the car if we want to fill in certain types of cars,” he said.

“In fact, I looked at some metrics during the week and it showed certain models that they were long on and certain models they were short,” Penske continued.

“So, they actually just don’t buy just cars. They buy specific models, and obviously we have a mix of SUVs and trucks along with cars,” he said. “Our customer is looking for a vehicle that’s probably 1 to 4 years old. The average selling price in the U.S. is $20,000. So we have a pretty good mix of vehicles. To me, we’re in a position to purchase many of these off-lease vehicles that come in, and the auctions today are ones that they offer this opportunity.

“There are some closed auctions for dealerships, and then obviously after that, we have the open auction opportunity to buy those vehicles, and then this helps us as we go forward. We manage our variable costs associated with these purchases,” he added.

The company reported that CarSense locations and CarShop operations — a similar standalone concept in the United Kingdom — retailed 11,125 vehicles during the second quarter, generating $193 million in revenue and $33 million in gross profit for Penske.

“We believe these used-vehicle supercenters further diversify Penske Automotive Group’s business and provide an opportunity to capitalize on the highly fragmented used-vehicle market,” the chairman said.

“We also believe these businesses provide an unlimited white space for scalable expansion. We have plans to expand into several new markets and continue to expect to double the number of locations within 24 months,” Penske added.

Penske also addressed a question about whether the company would establish its own finance company to serve as a captive-like provider for CarSense and CarShop locations; similar to what CarMax has in place.

“Well, I think if you look at CarMax, bottom line, they have a big impact with their financing,” Penske said. “They’ve done a terrific job. Right now, we’re using third-party financing and third party for the products that we sell.

“I don't know that at the moment that we have the capital available to start a finance company,” he continued. “It’s something we can look at once we have a history and maybe we get a partner to do something like that. But the good news is it’s an opportunity because we’ve seen the success that CarMax has.

“We just have to assess the risk on that if we go into that area, but I wouldn’t say that’s top of the list right now,” Penske added.

Online sales activities

With consumer trends pointing to more potential buyers wanting to complete deliveries mostly or even completely online, Penske shared an update about the company’s platform designed to do that. For the past 12 months, Penske has developed what it has been dubbed Preferred Purchase.  

Penske highlighted Preferred Purchase is now available at all of the dealer group’s stores.

“We think that this is an opportunity to reduce the cycle time for customers to buy a vehicle,” he told conference call participants. “I think that the closing rate as we look at this probably is three times higher than a normal purchase.

“And you, as a customer, can pick the vehicle, you can also supply your trade information, we'll give you a purchase price on your trade, you can look at a lease, you can look at a finance transaction and then you can call us obviously to complete it,” Penske continued.

Penske also highlighted that the closing rate for group customers using Preferred Purchase hit 24 percent in June. The chairman assured investors that Preferred Purchase can give the company the tool to compete with new industry participants such as Carvana and Shift.

“So when we look at it overall, this is the same thing that people are talking about, and we have it in place for every one of our dealerships,” Penske said. “I think that this will give us the ability to do this across all of our businesses and there’s no question that we continue to enhance this to make it quicker and more transparent to the customer.”

Lithia purchases LA auto group

MEDFORD, Ore.  - 

After buying a Pittsburgh dealer group this spring, Lithia Motors turned its attention to the West Coast with its latest acquisition.

The retailer announced Tuesday it has purchased Downtown Los Angeles Auto Group.

The California group, also known as DTLA, includes Audi, Mercedes-Benz, Nissan, Porsche, Toyota and Volkswagen dealerships located in downtown Los Angeles plus a Nissan dealership in Carson, Calif.

Lithia projects DTLA can bring in $1 billion in revenue annually along with $0.55 per share in earnings. With the acquisition, Lithia has upped its earnings guidance for 2017 to $8.55 to $8.70 per share.

“We are pleased to continue our robust acquisition cadence of purchasing strong assets with considerable upside,” Lithia president and chief executive officer Bryan DeBoer said in a news release.

“These stores are located in the fast-growing downtown area, within close proximity to the Staples Center and L.A. Live, and are among the largest volume stores of their brands in the nation,” DeBoer said. “We are excited to partner with Elay Sung and the entire Downtown LA team to accelerate their growth.”

Lithia expanded its operations to Pennsylvania with the purchase of Baierl Auto Group in a deal announced in May.

Lithia bought DCH Auto Group in the summer of 2014 and then the Carbone Auto Group last September.

The company said in its news release that the addition of these groups helps to “further diversify Lithia and grow through sharing best practices, high-performing people and innovative technology.”

The retailer is aiming to boost its “omnichannel retail strategy focused on expanding its customer base from coast to coast,” it said.

 “This opportunity deploys approximately half of the $300 million raised in our recent senior notes offering,” said DeBoer. “The remaining funds from the notes offering, our free cash flow and a recently increased syndicated credit facility support our continued growth cadence. Improving performance to realize the full potential of our acquisitions achieves greenfield rates of return.”

 

How softening trade volume impacted Group 1 in Q2

HOUSTON - 

Group 1 Automotive leadership offered a bit more explanation as to why used-vehicle retail revenue and gross profit softened during the second quarter with part of the reason why the company saying it had to tap inventory availability at auctions to fulfill its needs.

Officials recapped that Q2 retail used-vehicle revenues decreased 4.2 percent on a 2.9-percent decrease in unit sales.

And Group 1 reported that retail used-vehicle gross profit decreased 6.9 percent during the second quarter to $44.9 million reflecting the impact of lower margins, down $62 per unit, in combination with the volume decline.

“This per-unit decline is primarily explained by overall weakness in used sedan industry pricing as well as lower trade-in volumes,” Group 1 president and chief executive officer Earl Hesterberg said during a conference call with the investment community.

“Trade-in units generate our highest used-vehicle retail margins,” continued Hesterberg, who mentioned Group 1 had 12,600 units in its U.S. used-vehicle inventory, which translated into a 32 days’ supply and “is consistent with our historical levels.”

Group 1 emphasized that the economic softening in Texas and Oklahoma stemming dipping energy prices is exacerbated because of the dealer group’s store footprint in those locations. A total of 43.1 percent of the new-vehicle retail sales Group 1 recorded in the second quarter — perhaps triggering a trade, as well — originated from those two states.

“As Earl previously mentioned, our used-vehicle business in the U.S. oil markets was negatively impacted by both demand softness and a lack of trade-in supply which forced our dealerships to purchase more expensive inventory at auction, negatively impacting our retail used vehicle gross profit and margin,” Group 1 senior vice president and chief financial officer John Rickel said during the call.

And there’s one more element impacting the used-vehicle performance at Group 1; a factor referenced by Daryl Kenningham, the company’s president of U.S. operations.

“Negative equity is getting to be a larger challenge,” Kenningham said.

Oil patch rebound

Call participants asked Hesterberg what needs to happen for Group 1’s prospects to improve since so much of its business is connected to economic activity in Texas and Oklahoma.

“I think for us, the key is when the energy companies start to hire people again. Actually, markets like Houston have replaced most of the lost jobs. That really is not a net job loss, but the new jobs tend to be in the restaurant, hotel and hospitality industry. The jobs we lost are energy and construction jobs, high paying jobs,” Hesterberg said.

“So not only are there fewer customers buying a car, there is a probably a mix issue there too,” he continued. “The new jobs are probably supporting lower mix and more used cars or low-end volume-brand cars and have probably been hit disproportionately in the midline imports and luxury brands. But I think it's just a function of hiring again in the energy industry.”

And with 63 of its 159 dealerships located within Texas or Oklahoma, Group 1 appears to be leaning toward diversification as evident by its latest acquisition — Jaguar Land Rover Albuquerque and Land Rover Santa Fe, are the only Jaguar and Land Rover dealerships in the state of New Mexico.

“I think most of our desires in terms of expansion would be outside the oil patch footprint. As you can tell, we have a heavy enough concentration there right now. I wouldn't say we would turn down a good business in Texas or Oklahoma, but our long-term performance will benefit from more geographic diversification in the U.S.,” Hesterberg said.

“I do think that there is some adjustment in the acquisition market. It's become clear I would say, for the best part of the year that both near-term sales and profit levels just are not going to be the same as they were from 2014 to 2016. And to make any kind of deal, things have to adjust. So I don't know that the multiples to adjust, but clearly, the price levels can’t be the same,” he continued.

Standalone used store reaction

While Asbury Automotive Group is eliminating its standalone used-car stores, Sonic Automotive is intensifying its plans to roll out for locations. As a result, investors wanted to know what Group 1 might do in light of those dealer groups’ actions as well as the ongoing success enjoyed by CarMax.

“So we’ve looked at it many times over the years and our impression has always been that the critical factors to success is to be the bank also,” Rickel said. “I think that's the important component in CarMax's success as being the retailer and the lender. And we haven't been interested in becoming a bank yet.

“There are lots of other ventures into the dedicated used-car retail business that we'll watch closely and if somebody else can crack that nut, then maybe we'll take a go at it as well,” Rickel continued. “But right now, those things we just discussed in terms of expansion opportunities within our current business model seem to make a lot more sense for us.”

Changing need for physical assets

With more evidence showing that shoppers are spending more time online and visiting fewer dealerships before making a purchase, Wall Street watchers also wondered if Group 1 might be overleveraged with the amount of brick-and-mortar resources it has to turn used and new vehicles.

“Well, you’re preaching to the choir on that one,” Rickel said in response to the question. “No, it doesn’t require much of the brick-and-mortar we have today. We actually had one of the top OEM executives with us last Saturday who toured all of our different brand dealerships in Houston and we made the point to him that the two most important things to us today, and I think OEM dealers, are a service bay and a parking space.

“Everything else is interesting, but we always need more parking spaces, which are very costly when you're in metro areas where the land is expensive,” Rickel continued. “And a service bay is valuable and generates gross profit. And showroom size and offices and all those things are interesting, but we can sort those out on our own. So we hope we’ll enter an era soon of more realism in that area, but I can’t say we’re there yet.”

Lithia extends record performance streak to 27 straight quarters

MEDFORD, Ore. - 

Fueled in part by its used-vehicle performance, Lithia Motors posted its 27th consecutive quarter of record results, including the highest second quarter revenue and earnings per share in company history.

Helping Lithia to those achievements were used-vehicle retail same-store sales increasing by 4 percent. All told, the dealer group retailed a total of 32,171 used vehicles, up from 27,716 units in Q2 of last year.

While Lithia moved much more used metal, its average gross profit per unit on those used-vehicle deliveries softened by $109 year-over-year as the Q2 figure settled at $2,316.

Also providing support to Lithia’s overall performance was how the dealer group’s F&I gross profit per unit nearly reached $1,300. A $27 lift from last year’s second quarter left the metric at $1,298.

The company’s Q2 net income per diluted share increased 5 percent to $2.12 from $2.01 in the year-ago span. Adjusted net income per diluted share increased 16 percent to $2.28 from $1.96 for the same period in 2016.

Second quarter net income increased 3 percent year-over-year to $53.2 million from $51.4 million. Adjusted net income rose 14 percent to $57.2 million, up from $50.2 million.

Lithia pointed out that the Q2 adjusted results exclude $0.16 per share in non-core charges related to acquisition expenses and a hail storm insurance reserve. The 2016 Q2 non-core adjustments exclude a $0.05 benefit associated with an equity investment.

The dealer group added that Q2 revenue increased 16 percent to $2.5 billion from $2.1 billion.

At the halfway point of the year, Lithia highlighted its revenues have increased 14 percent to $4.7 billion. Net income for the first six months of the year came in at $4.13 per diluted share, compared to $3.56 per diluted share for the similar period in 2016.

“We continue to execute our strategy of acquiring strong franchises that underperform their potential and improving earnings as they season,” Lithia president and chief executive officer Bryan DeBoer said when the company released its results on Friday. “We increased quarterly revenues 16 percent and adjusted earnings 14 percent over last year, driven by our significant acquisition cadence.

“On a same-store basis, we grew new-vehicle sales slightly, increased used-vehicle sales over 4 percent, and grew service and parts over 7 percent,” DeBoer continued. “We recently raised $300 million in senior notes and anticipate deploying the capital for acquisition growth in the future.

“As we integrate acquisitions and seek to improve their earnings, we increase future cash flow and produce greenfield-like returns,” he went on to say.

Looking ahead, Lithia is projecting full-year earnings of $8.35 to $8.50 per diluted share. This projection is based on the following annual assumptions:

—Total revenue of $9.6 billion to $9.9 billion

—New-vehicle same store sales increasing 1.0 percent

—New-vehicle gross margin of 5.6 percent to 5.8 percent

—Used-vehicle same store sales increasing 5.0 percent

—Used vehicle gross margin of 11.5 percent to 11.7 percent

—Service body and parts same store sales increasing 7.0 percent

—Service body and parts gross margin of 48.5 percent to 49.0 percent

—Finance and insurance same store gross profit of $1,325 to $1,350 per unit

—Tax rate of 39.5 percent

—Average diluted shares outstanding of 25.1 million