Penske Automotive Group had its best year in its history in 2018, said chairman Roger Penske, speaking with financial analysts in February to report the company’s fourth-quarter and full-year 2018 performance results. He noted that 2018 revenue from operations was up 6.5 percent to $22.8 billion, and fourth-quarter 2018 performance was driven by used-car and service and parts sales, and the company’s truck sales and leasing operations.
Lithia Motors reported similar 2018 highlights during its recent earnings call, and Bryan DeBoer, president and chief executive officer, noted full-year revenue was up 17 percent to a record $11.8 billion. He said fourth-quarter revenue increased by 10 percent to a record $3 billion.
This report is drawn from my participation in those companies’ earnings discussions and company earnings press releases. The audio or transcripts from these earnings calls are available on these companies’ corporate websites.
First, let’s take a look at 2018 same-store operating highlights, which can be found on the right side of this page in the digital edition of the April 1 Auto Remarketing.
Penske said its most significant growth was from its standalone SuperCenter used-car centers, and its commercial truck retail operations and Penske Truck Leasing investment. Penske auto dealerships are 70 percent premium brand stores; less than 2 percent of Penske retail locations are Big 3 brands.
Overall, Penske dealerships retailed 518,506 units in 2018, of which 282,542 were used vehicles. Same-store retail automotive revenue was up 3.4 percent for 2018.
For the fourth quarter of 2018, Penske reported a same-store new-car gross profit of $2,994 per unit sold, down $190 from the prior year. Used-vehicle retail gross profit was $1,306 per unit sold, up 0.5 percent. F&I was $1,250 per unit sold, up $37 for the quarter. Customer-pay revenue was up 4.3 percent, warranty sales up 5.5 percent and body shop down 4.3 percent.
Penske operates five standalone, no-haggle, used-car SuperCenter operations in the U.S. (the company operates nine others in the U.K.). In 2018, these U.S. operations retailed 14,940 units, generating $261 million in revenue. Penske said the company is developing two additional U.S.–based superstores, to open this year.
SuperCenter vehicles transact at about $15,000, with a variable gross margin per unit of just over $2,100.
“We expect to grow the standalone used business through a combination of e-commerce initiatives and new market introductions,” Penske said.
“We remain focused on our core strategy of purchasing strong assets,” DeBoer said. He said these assets have yet to “realize their full potential to achieve operational excellence through our network. Our history of running a hyper-growth company that is accelerating earnings is a unique differentiator for Lithia.”
Lithia’s full-year 2018 revenues increased 10 percent, and net earnings per diluted share were up 11 percent. Fourth quarter to fourth quarter same-store used vehicle retail sales rose 10 percent, but as noted in the chart linked here compiled from the company’s financial report, same-store new unit sales were down overall for 2018.
Lithia said it is focusing on expanding asset footprints.
“We acquired two large platforms in the Northeast, two smaller complementary acquisitions, added an open point in Texas and separated two locations into standalone stores. We also divested eight small or underperforming locations generating a $15 million gain, which has been excluded from adjusted operating results,” the press release said.
“Acquisition activity is heating up. We anticipate further expansion of our nationwide footprint in 2019 through our proven strategy of targeting high-quality assets that are underperforming their potential,” DeBoer said.
Innovation and technology
DeBoer spoke for several minutes about opportunities to gain market share, citing innovation and technology applications as critical drivers of this growth.
“The automotive retail business remained unconsolidated in 2018, and nationally we achieved over 1 percent of the new-car market share and approximately one half a percent of used-car market share, despite being one of the largest vehicle retailers in the country,” DeBoer said.
“I mean, about two-thirds of our stores are in rural markets. We have to be somewhat of size to be able to provide choices for our consumers there,” he said. “Despite that, we believe there’s inventory sharing that can go across like brands. We’re working on some real neat digital tools to be able to share like that to drive our dollars down on inventory.
“I would say there are also opportunities for cost savings through improving sales volumes. So, most of our stores are acutely focused on how to capture market share, and I think digital experiences and our ability to do things for customers wherever, whenever and however they choose is a really crucial part to our continued growth,” DeBoer said.
“Looking forward, we see that technology and innovation combined with a nationwide network can provide the advantages necessary to gain meaningful market share in the future. In 2018, we acquired $1.4 billion in annualized revenue (from all operations) and made investments in innovation to access consumers through new and alternative channels,” DeBoer said.
“We continue to monitor over 2,600 acquisition targets and other strategic opportunities that meet our strict return on equity hurdle. Our value-based investment strategy has an 80-percent success rate in achieving 15 to 20 percent after-tax returns on fees in stores, meaning within five years of acquisition,” DeBoer said.
“This is an exciting time for both retail and transportation, and we are well-positioned to lead the way as both continue to modernize. Our history of successful growth and operational excellence generates over $300 million in free cash flow annually that enables us to expand and diversify. We pursue innovation and diversification strategy in the following order:
• First, we drive improvement in our existing business.
• Second, we consider vertical and horizontal adjacencies to our core business to capture additional earnings opportunities.
• Third, we seek bold collaboration or strategic investments with emerging disruptors. This discipline will broaden our omnichannel capabilities and accelerate our ability to serve our customers. For example, in September, we partnered with Shift Technologies, a San Francisco-based digital retailer, with whom we invested $54 million to become its largest shareholder.
“Whether accelerating innovation in our existing network of service and delivery centers or through partnering with technology firms, we are positioning ourselves for a stronger future,” DeBoer said. “Together, these efforts are advancing our ability to create transportation solutions, wherever, whenever and however consumers desire.”
Tech’s role at Penske
Technology upgrades play into Penske’s future performance, too, Penske told analysts participating in the company’s recent financial report conference call.
He said he feels Penske Automotive is in “good shape” regarding its growth plans, but noted the businesses need continued upgrading to engage with consumers. “All of our websites are in mobile now, and almost half of our traffic is coming from smartphones. Today we have almost 62,000 vehicles online, ready to purchase, on a worldwide basis,” he told his financial analysts audience.
Penske cited the company’s success using online payment calculators, for instance, for engaging consumers. “This (application) certainly has been transparent to our customers … and we have the payment calculations, taxes and fees down to the penny for the consumer,” he said.
Other digital engagement apps Penske said help its stores engage both franchise and SuperCenter shoppers is online chat. As to end-to-end retail delivery, Penske noted some lenders and states still require “wet” signatures.
Referencing recent results from a Cox Automotive report, “Making Car Buying Cool Again,” which noted, “Eighty-nine percent of consumers still want to sign final paperwork at the dealership, but 83 percent want to take at least one step online during their purchase,” Penske said digital innovation is a must.
“I think we’re getting closer (to end-to-end retailing), but that’s going to take work with our parties during 2019,” he told analysts.
“So you know, at the end of the day, we are continuing from an e-commerce perspective to look at online, and if you look at the used-car business in the U.S., only 2 percent of the customers that we sold through our SuperCenters wanted at home or office delivery,” Penske said.
“Of the 300,000 cars that we sold in the U.S., only about 2000 of those buyers requested special delivery capability. We don’t see that having an impact negatively, but obviously, remember we have 900 locations associated with Penske Truck Leasing that could be very valuable and available to us if we want to have delivery locations in the future for some online business,” Penske said.