Tom Webb's Blog (Manheim Consulting)

“Stop Sales” End Streak of Sales Gains

From the third quarter of 2009 through the first quarter of 2016, the seven publicly traded dealership groups strung together 27 consecutive quarters of increased same-store retail used unit sales.* That streak ended last quarter when the sales-weighted change was -0.9%.

Blame Takata. Asbury, for example, noted that 10% of its total inventory was tied up in “stop-sale” units.  At some individual stores the share was as high as 40%.  Sonic offered an even more telling story on its earnings call - after breaking down inventory into affected and unaffected buckets, they found an 8% increase in year-over-year sales for unaffected models, but a 48% decline for affected units.

On the positive side, the headwind from “stop sales” should become less severe as the third quarter progresses and will eventually become a positive as an ever-higher number of units become retail ready. Additionally, it is nice to note, that, in second quarter, the public dealer groups (in the aggregate) did a good job of maintaining gross.  The sales-weighted gross margin declined from its year-ago level, but it was level with the first quarter.  Typically margins are lower in the second quarter than in the first.

• The seven dealership groups are CarMax (KMX), AutoNation (AN), Penske Automotive (PAG), Sonic Automotive (SAH), Lithia (LAD, Group 1 Automotive (GPI), and Asbury (ABG). In this analysis, CarMax’s fiscal quarter reporting was shifted forwarded one month to more closely correspond with the calendar year reporting of the other six dealer groups.

Dealer Groups Post 25th Consecutive Quarterly Increase in Same Store Used Retail Unit Sales

With Penske’s release this morning, all seven publicly traded dealership groups (CarMax, AutoNation, Penske, Sonic, Group1, Asbury, and Lithia) have posted third quarter results.* 

As expected, same-store retail used unit volumes rose for the 25^th consecutive quarter.

But, also as expected, the average gross margin earned on those sales continued to narrow.

Increased operating efficiencies, higher throughput, and solid F&I income enabled dealers to continue to make record profits despite the lower margins.  View the narrower used vehicle margins as a sign of a competitive industry passing on some of its efficiency gains to consumers.

More troubling is the decline in new vehicle margins, which started at a lower level and have fallen even faster.  Remember, unsustainably low new vehicle margins are generally a precursor to increased manufacturer incentive activity, which, in turn, negatively impacts dealership used vehicle operations.    

* Note: CarMax’s fiscal year reporting is shifted forward one month for this analysis.

GDP Revisions Further Weaken the Relationship with New Vehicle Sales

Yesterday’s revision to GDP showed a weaker recovery since the Great Recession – and, as a result, emphasized further just how much autos have outperformed in recent years.

In the graph below each dot represents one of the 60 years between 1955 and 2014.  The x-axis shows the annual percent change in real GDP for that year and the y-axis is the percent change in new vehicle sales.  Naturally, there is a strong correlation.  And, naturally, there will be outliers since it is based on simple annual percent changes. 

For example, in 1966 new vehicle sales declined 2.1% even though real GDP grew by a very strong 6.6%.  Why’s that?  It’s because new vehicle sales had already increased dramatically in each of the prior four years.  (New vehicle sales first exceeded the ten million mark in 1965.)

As an opposite case, note that in 1982 new vehicle sales declined by only 1.9% even though real GDP dropped by 1.9%.  The disconnect is because new vehicle sale had already fallen significantly in 1979, 1980, and 1981, producing a peak to trough swing of 31%.

By just ignoring those two outliers, the R-square increases from .56 to .64 for the remaining 58 years plotted.  If we also ignore the past five years, the R-square rises to .74. 

So how strange (“new normal”) have the last five years been:  Consider this:

• Only three times in the past 60 years has a double-digit increase in new vehicle sales occurred when real GDP was growing less than 3.3%.  Those three years came consecutively:  2010, 2011, and 2012.
• Only once have new vehicles increased in a year in which GDP grew less than 1.5%.  That happened in 2013.
• 2014 was closer to the trend line (5.9% new vehicle sales growth and 2.4% GDP growth), but still it represented the fifth consecutive year above the regression line.

(This year will get us a little closer to the regression line, but we will still be above it.)

Dealer Groups Post Higher Used Sales on Narrower Margins

Highlights now that all seven groups have reported:

• The seven publicly-traded dealership groups posted their 24th consecutive quarterly increase in same-store retail used unit sales.
• On a sales-weighted basis the gain was 6.9% - the best since fourth quarter of 2013.

• On a sales-weighted basis, the average used retail selling price was flat relative to a year ago.
• Average gross margin fell to a new low.

 

Ford Credit: Lower off-lease volume and return rate in 2Q 2015

Slide deck for today's Ford Motor Company Fixed Income Conference Call. 

• Off-lease volume evenly split between 24-month term and longer terms.
• Strong pricing with good gap between 24-month and 36-month term
• Lower return rate

• Repos remain low

Gas, MPG, & Gold

Some familiar and not-so-familiar graphs:

Gas prices ticked up a couple cents in recent days, but January 2015 average was still 35% below January 2014 average.

Despite light trucks, sport utilities, and crossovers accounting for 54% of January new vehicle sales, average sales-weighted fuel economy rose to 25.4 mpg.

Combine graphs 1 & 2 and you find the cost to drive a new vehicle 1,000 miles the lowest since December 2008.

With gold prices recovering from November low, the number of gallons that an ounce of gold will buy jumped to 583 gallons in January.

Combine graphs 3 & 4 and you find the amount of gold to drive a new vehicle 1,000 miles hits a low of .067 ounces.

P.S. there's a reason to express gas prices in gold.  More on that later ......

 

 

Rental Industry Accounts for Less Than 10% of New Unit Sales in 2014

New vehicle sales into rental in 2014 (1.63 million) as a share of total new unit sales (16.53 million) fell to 9.8%.  It was the first time since 2001 that the share dipped below 10%.  (The recent cyclical peak was 12.4% of new unit sales in 2006.)

As we have noted often, sales into rental today are more evenly dispersed across manufacturers and models.  Likewise, there are constant shifts in share between manufacturers from year to year.  Thus, although the share of new unit sales into rental is at a more-than-decade low for the industry as a whole, the same can be said for only one manufacturer – Ford

To read about the rental industry, check out our 2015 Used Car Market Report now posted online at www.manheimconsulting.com

 

Ford Credit: 2014 Lease Returns Up 66%, Repos Flat

Two pictures from today's 2014 Fourth Quarter Fixed Income Presentation http://corporate.ford.com/investors/investor-events/event-details/ford-motor-company-4th-quarter-2014-fixed-income-conference-call.html

 

Broken Relationship or Non-existent Relationship?

Oil prices tumble, so too interest rates.  What’s not to like?  Well, it seems quite a bit as of late.  In fact, this week’s plunge in oil prices and swoon in interest rates were cited as the direct cause and consequence, respectively, of the collapse in equity prices.

As if falling oil prices should always be greeted as a good thing.  When did gas last go below $1.75 per gallon?  December 2008.  We weren’t exactly dancing in the streets then either.

 

 

Driving Less, Spending Less, Enjoying it More, in a Sweeter Ride

Driving by my local gas station last week, I snapped this pic.

 

Yes, in each of the past two years gas prices here in Virginia also dipped below $3 per gallon, but that happened between Thanksgiving and Christmas – not before Labor Day!  So, here’s my picture book of the underlying story.

 

We’re driving fewer miles:

 

In more efficient cars:

 

 

At a lower cost per gallon:

 

Which means we must be saving a lot of money.  What are we doing with it?  Buying new cars?