HOUSTON -

Contained within a wide-ranging discussion, Group 1 Automotive highlighted how a 27.9-percent jump in the number of used vehicles retailed made up for a 12.1-percent dip in the gross profit per used model sold during the second quarter, a span that included a new company record for adjusted net income.

Executives indicated during a conference call on Thursday that Group 1 turned 22,004 used vehicles during the second quarter that ended June 30, up from the 17,200 units the company retailed in the same quarter a year earlier.

However, the gross profit on those used units slid to $1,765, down from $2,009 during the 2011 second quarter. In explaining the figures, Group 1 senior vice president and chief financial officer John Rickel recommended that Wall Street observers look at the gross profit performance in a different way.

“New-vehicle and used-vehicle gross profit last year was inflated as a result of the severe industry wide inventory constraints as resulted from the natural disasters in Japan. Given that, we would suggest a sequential comparison is more appropriate,” Rickel said on the call.

“Compared with the first quarter, our new-vehicle and used-vehicle retail gross profit increased $48 and $11, respectively," he added. 

Group 1 enjoyed an even healthier jump in new-vehicle sales volume during the second quarter, turning 32,294 units as compared to 24,097 units in the year-ago quarter.

However, the new-vehicle gross profit ticked below the $2,000 mark, sliding 13.9 percent year-over-year to $1,939.

“I don’t have any great hope that it’s going to improve in the months ahead,” Group 1 president and chief executive officer Earl Hesterberg acknowledged.

“They’re lower than I would like to see them. But with the volume increases we’ve been able to generate, we’re getting a good amount of money to the bottom line," he continued. "But I don’t really like the grosses at this level. I don’t really see any factor that’s going to drive them much higher in the quarters ahead this year.”

Despite the margin pinch, Group 1’s average retail price for a new model ticked 2.3 percent lower during the second quarter to $32,824 from $33,609. Meanwhile, the company’s average used retail price actually moved a bit higher year-over-year, edging up 1 percent to $20,734 from $20,526.

Those movements prompted investment analysts to wonder if Group 1 is seeing buyers flip to a new vehicle instead of a late-model used car, a trend one conference call questioner indicated had been spotted by another publicly traded dealer group.

“I think that’s a valid observation,” Hesterberg said. “That very typically happens when new-car prices start to sit down a little bit. You can see by the pressure on gross margins on new vehicles this quarter across the industry. I think Kelley Blue Book stated new cars are selling by $500 less. I think that just has new-car prices sitting down a little bit on used cars.

"When they get a little closer together relatively with the good financing on new cars, it’s quite typical to see a little bit of movement from the used-car market to the new-car market. There’s always some overlap there. I would say we’ve seen that also," he added.

And for companies such as Group 1, moving a buyer to the new-vehicle side might take some pressure off of the dealership used-car manager to obtain quality late-model inventory as wholesale supply remains tight for that kind of vehicle.

“The difficulty is finding a supply of high-quality used cars. There are lots of used cars now on the market, but many of them are very high mileage,” Hesterberg told call participants, reiterating that Group 1 strives to keep days’ supply within its used division at 31 days.

“There’s a lot of pent-up demand and people are buying new and used vehicles now because they can’t drive their car any further so there’s a lot of poor quality trades in the market. Finding good quality used cars is still a challenge for our company as I suspect for most dealers. I suspect that’s also going to continue,” Hesterberg went on to say.

Overall Company Performance

Group 1 determined that its second-quarter  adjusted net income totaled $29.7 million, a 20.1-percent increase from the prior-year period, and record adjusted diluted earnings per common share of $1.25.

Rickel noted the company recognized a $1.1 million net after-tax adjustment for insurance deductibles associated with property damage from a major hailstorm, and a non-cash asset impairment charge, partially offset by a net gain on real estate transactions in the quarter.

Before adjusting for these items, Rickel calculated that reported net income was $28.6 million, and diluted earnings per common share were $1.20.

Year-to-date, Group 1 tabulated that its adjusted net income increased 31.3 percent to a record $52.9 million. Adjusted diluted earnings per common share were $2.23, making this the best first six-month results in the company’s history.

“Group 1’s record-setting second-quarter performance was driven by strong same-store revenue growth in our new and used retail segments and another record-setting quarter in finance and insurance,” Hesterberg insisted.

Other highlights of Group 1’s second-quarter performance included:

—Total revenues of $1.9 billion were a new any-quarter record high for the company — up 28.6 percent over prior year.

—Total gross margin was 15.1 percent, as gross profit grew 16.8 percent from the prior year to an all-time record of $285.3 million.

—Parts and service revenues increased 7.9 percent from the prior year, reflecting continued growth in customer-pay, wholesale parts and collision sales.

—Finance and insurance gross profit per retail unit increased $65 from the prior year to a record $1,191.

Regrouping in Oklahoma

As Rickel referenced, a late-May storm in Oklahoma wreaked havoc on seven Group 1 stores, damaging close to 2,200 new and used models. The company sustained damage to facilities and vehicle inventory in excess of $22 million.

“I want to thank our 436 team members in Oklahoma City,” Hesterberg declared. “Our team members pulled together and in conjunction with outstanding support from our OEM partners and our insurance company, we were able to clean up and get back in business by the end of the quarter.

“It wouldn’t have been possible without many long hours and tremendous hard work by the team so I want to recognize and thank them,” he added.

Other Conference Call Notes

Hesterberg touched on a couple of other noteworthy topics. The Group 1 boss was asked about the use of stair-step incentives — a subject Auto Remarketing reviewed in detail here. Hesterberg noted a couple of automakers by name when responding.

“It always has a negative impact on margins and a negative impact on customer satisfaction,” Hesterberg admitted. “Nissan has always been one of the worst in that regard, but Chrysler does it, too. There’s even a program on Honda Accord that volume related at the moment. It has spread more across the industry. It’s not healthy either for dealers or customers, but it’s just something we have to live with at the moment."

Call participants also inquired about Group 1’s potential acquisition activity during the second half of the year. During the second quarter, Group 1 acquired six Audi franchises in the United Kingdom and two Volkswagen and one Honda franchise in Florida. In total, these nine franchises are estimated to generate $361.0 million in annual revenues.

Year-to-date, Group 1 has acquired 12 franchises that are expected to generate $504.5 million in annual revenues.

“We are taking an unintentional pause,” Hesterberg shared. “From what we see in terms of brands and markets that we’re interested in there is a big gap between the prices being asked by the sellers and what would enable us to make a fair return on our investment.

“At the moment, it would seem we’re not going to run a significant acquisition level in the second half,” he continued. “We would continue to prefer to use our capital to grow the company but there don’t appear to be any substantial opportunities in the near term.”