Group 1 Automotive Chooses Margin Over Volume in Q3
Margin over volume was the message coming out of Group 1 Automotive during its third-quarter earnings call. The dealer group reported that a sharp decline in unit sales offset improved new-vehicle margins, as well as gains in F&I and parts and service.
HOUSTON — Margin over volume was the message coming out of Group 1 Automotive last week, when the nation’s third largest dealer group reported its third-quarter performance.
The dealer group said improved new-vehicle margins, an expanded parts and service department, and higher F&I profits on a per retail-unit basis kept U.S. gross profits essentially flat despite a sharp decline in unit sales.
“It is a bit of a tradeoff, but there were certain brands that were continuing to give us sales targets that were significant year-over-year increases in markets that are way down. You just get to a point where you can’t chase every target every month or every quarter,” said Earl J. Hesterberg, Group 1’s president and CEO, during the group’s Oct. 20 earnings call. “And you just have to trade off some volume and avoid settling so many cars on losses, there are certainly a lot of vehicles sold at losses to hit these targets. And we’ve just been working hard to have more discipline on that.”
The dealer group’s U.S.-based F&I operations posted a $1,578 per-copy average for the period on a same-store basis, a 3.3% increase from a year ago. But as was the case with other segments, weak unit sales led to an overall decline for the segment. Overall, Group 1 posted total F&I gross profit of $96.8 million on a same-store basis, a 1.8% decline from the year prior.
“Our 1.8% F&I revenue decrease was driven by 5% decrease in total retail units, partially offset by a PRU increase of $51,” said John Rickel, senior vice president and CFO.
The group posted total gross profit of $341.7 million, a 0.2% year-over-year decline. Overall, deliveries of new vehicles during the quarter totaled 34,435, a 7.9% decline from the same time last year. Weak unit sales weren’t exclusive to the new-vehicle segment, as used-vehicle and wholesale used-vehicle sales, combined, fell 1.8% from a year ago to 37,802 units retailed.
New-vehicles gross profit declined 1.2% from a year ago to $60.9 million, while used-vehicle gross profit — used retail and used wholesale combined — fell 3.9% from the prior-year period to $37.2 million. Both segments, however, experienced increases on a per-unit basis, thanks to higher average retail prices.
The average retail price for a new vehicle during the quarter was $36,038, a 3.9% increase from the year prior. The average retail price for a used vehicle improved 1.3% from a year ago to $21,077. Additionally, every new vehicle sold generated $1,769 in gross profit on a per-unit basis, a 7.3% increase over last year.
Total same-store gross profit fell 0.2% due to a 3.9% drop in total same-store used-vehicle sales and a 1.2% decline in new-vehicle sale. Partially offsetting the gross profit decline was a 2.4% increase in parts and service. “As Earl previously mentioned, we displayed improved pricing discipline as our new-vehicle gross profit per unit increased $121 per unit to $1,769, which mostly offset the 7.9% decline in new vehicle retail unit volume,” Rickel said.
Hesterberg also shared that some of the sharpest declines in sales came from two energy-dependent states — Texas Oklahoma — that, combined, account for 56% of Group 1’s new-vehicle sales. Those two states posted new-vehicle sales declines of 10% and 18%, respectively, with Hesterberg saying he doesn’t expect the situation to improve in the foreseeable future.
“I don't really expect any improvement in Texas, and the impact on auto sales in Texas has played out quite slowly and steadily over this year — kind of settling down, decreasing a percentage point or two every month or so. I don't see certainly any uptick yet. By the same token, I don't see any step function change down,” Hesterberg said. “Oklahoma was probably the market that surprised us the most with the 18% decrease. But I think we always recognize that the Oklahoma economy is not nearly as diverse as Houston or many parts of Texas, so it's very heavily energy dependent. But I think there's a general feeling of getting closer to the bottom in Texas, but I don't think there's any declaration that we've hit the bottom yet.”
Originally posted on F&I and Showroom
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