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.”