Q1 2022 Earnings Calls

Large Dealer Groups Continue to Invest in the Franchise Dealer Model, Managing Their Dealerships as Portfolios

Public Auto Dealers Supply Chain Used Vehicles

There continues to be no end in sight for new vehicle supply constraints. So much so that it’s taken as a given, and there was less direct mention of inventory shortages in 2022’s first quarter public auto dealer earnings calls. Despite this shift, scarce inventory remains the key theme underpinning the operating environment for auto dealers.

Demand continues to exceed supply across all OEMs. For example, Lithia Motors noted it started a month with 13,000 vehicles and ended with 12,000 vehicles but was still able to sell over 24,000 vehicles. We’ve seen this with our auto dealer clients, and it really brings into focus what Days’ Supply consistently under 30 looks like. When dealers are selling nearly double the inventory on their lots, it will take a long time before inventories can build back to pre-COVID levels. And with higher profits for dealers and OEMs, we may not ever reapproach those levels.

Even more so than last quarter, there are a couple of interesting nuggets that don’t quite fall into themes that were noteworthy. For example, much has been made about the future of electric vehicles and the impact on auto dealers. There have been concerns about a shift towards an agency model and conventional wisdom has been that EVs would generate less service work for dealers. Asbury’s VP, Dan Clara, challenged that notion this quarter with the following:

“My belief is the propensity or the frequency of [EVs] coming to the shop will be less. But the time in dollars will be greater, not just what they spend, but what we end up charging because of sophistication to work at it. And putting electric aside and not talking about autonomous, there are some technology features in cars today, braking where your car can break with someone in front of you, lane changing, the shifting and learning you. That’s all technology that could have bugs in them. So while the cars really get heavy content with technology, not just the battery piece, it allows for more opportunity for things to go wrong. And when you talk about driving a 5,000-pound vehicle at 60 miles an hour down the road, there’s a lot of liability in touching those cars. So you’ve really got to be thoughtful and think about what you’re going to do over the [airwaves] that are nice to have and what you’re going to do that may have a real liability issue in driving the vehicle.”

So, while he acknowledges there may be fewer ROs, dealers stand to potentially increase their pricing power for more complex work while also taking market share from less sophisticated body shops. As we’ve noted before, a significant amount of repair work is not performed by auto dealers at present, which provides an opportunity if the shift in powertrain steers more consumers back to the dealership. Fixed operations have generally improved as vehicle miles traveled increase and people continue to return to the roads. However, a depressed SAAR since 2020 has held back warranty work for many public auto dealers.

While the themes presented below touch on M&A and large auto groups seeking to manage their investment in dealerships as a portfolio, Roger Penske discussed the benefits of open point locations, which are amplified in this low inventory environment:

“On an open point, they have a plan that says this is the planning potential for a point, let’s say, it’s 1,500. And what they will do is preload you with those cars when you– before you open and you get those for about, I think, probably about 90 to maybe 180 days, but then you’re on a run rate based on your history. So it works out well. And I think — after spending $15 million or $20 million on a facility, you certainly need the cars to start the business. I think it’s certainly good for future allocation because you continue to meet the requirements of the planning potential and to give you the cars or trucks to be able to meet that early on. So it’s up to you to drive it, and then maintain it.”

Here are the major themes from the Q1 2022 Public Auto Earnings Calls:

Theme 1: CarMax kicked off earnings season by attributing a decline in its used car volumes to affordability issues. Affordability became a common question of the franchised dealerships due to this statement, particularly as interest rates rise. While Penske acknowledged that affordability likely had some impact, other companies tended to downplay any concerns.

  • “Inflation is never good for the consumer, but clearly, it’s going to hit the lower demographic sectors of the market first. And there is such a massive gap and has been such a massive gap for the last 18 months between supply and demand. But first of all, demand would have to come down on new vehicles a long way before it got anywhere close to supply. […] And our core customers, while it may be not ideal, we just don’t have data that shows that that we’re seeing less activity in our stores yet.”
    – Earl Hesterberg, President and CEO, Group 1 Automotive
  • “What we’re seeing from a macro perspective is there’s not any material impact to the prime and near prime consumers. Are you starting to see a little bit of degradation in credit and portal in the lower income brackets, which is a very small part of both our franchise as well as our EchoPark consumers? So, that you’re starting to see a little bit on the lower income, but on the upper tier that we’re not seeing anything material.”
    – Heath Byrd, CFO, Sonic Automotive
  • “And then, there is some affordability issues there which are going to have some impact on margin. But from an overall standpoint, the demand is strong, we’re selling into our pipeline from the standpoint of our new car business, and sequentially in our units are up from 101,000 to 114,000. If you look at Q4 to Q1, so we’re not seeing it at the moment that we’re having any impact negatively at this point.
    – Roger Penske, Chairman & CEO, Penske Automotive Group
  • “The demand is there. I’d disagree with the comment made a few weeks ago. I don’t think that’s accurate. There’s still plenty of demand. There’ll be 37 million to 40 million cars sold in America this year in terms of pre-owned. So, the demand is there. The problem is, is that we’re pushing $500 a month payments, and we used to pay $400 a month payments, and it’s too close to the new car pricing. […] You really want your average used vehicle selling price to be one half that of your new vehicle selling price. And in my whole career, it’s always run 50% to 55%, somewhere in there. It’s at 70%. It’s too close to the new vehicle pricing and prices are too high, $500 whatever, $525 a month payment. That’s just not — that’s out of the norm and that’s what’s causing someone to maybe think that there’s not a demand there.
    – Jeff Dyke, President, Sonic Automotive

Theme 2: With the backdrop of framework agreements, large public auto groups are managing their stores as a portfolio, seeking to optimize by brand and geography. When certain OEMs only allow a certain number of stores per auto group, they are more selective about the markets in which they choose to operate their finite number of dealerships.

  • “We’ll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio. […] We have the ability through relationships today to go out and purchase another $5 billion if we wanted to today. Our goal is not to grow quickly. Our goal is to grow thoughtfully and be great capital allocators for our shareholders. So I think that the timing, cadence and pace is important. I think the states where you’ve seen us grow in our thought process of balancing the brands with the right states, you won’t see us differ from that and acquisitions going forward will be accretive for us. The one thing I don’t think our space gets a lot of look at is portfolio management. What do they buy? What do they sell? What did that do from an accretion standpoint? Not from a top line revenue, but what did that really do to them as a whole? And so I think you’ll see us really manage the portfolio well. You’ll see more divestitures over time, probably at some point in the future. And you’ll certainly see more acquisitions as well. But that’s just really maximizing the portfolio to generate the highest returns and create the most stable company for our employees and our shareholders.”
    – David Hult, CEO, Asbury Automotive Group
  • “I think most importantly, we always optimize our network to make sure that it’s clean. We bought stores over the years that, that were in groups typically that weren’t right for Lithia and it’s a matter of divesting those. I believe it was annual run rate of about $90 million were sold in the quarter. And a number of those were assets that we just don’t believe were to some extent salable okay and in this environment, everything is kind of salable. So we took advantage of that and divest of those stores. And you’ll see, you’ll probably see more of that in the next few quarters. You probably have a half a dozen stores that are typically smaller stores may be located in an area where it’s not helping our network at all, meaning, it’s a duplicate store, secondary store or it’s into smaller market where you’re utilizing a General Manager talent and you can reposition them in a better and bigger store.”
    – Bryan DeBoer, President and CEO, Lithia Motors
  • “We signed up for framework agreements probably, what, 10 year sago, there were some with some like Honda, Lexus had it, and we’ve lived with those over time. Now they are getting more active now when you look at BMW and other of these manufacturers are coming in now with probably not as much to try to curtail the growth but more to be sure that the dealerships that you already have are meeting the CSI requirements, and the CI and the market performance. And that’s what they’re looking at before they would allow you to grow. […] I don’t think they’re saying no. In fact, if you’re a good dealer, and you’ve got a good track record, they [only] limit you to [a] number in a particular market, so you’re not the only dealer in the marketplace. I think other than that, they’re very appreciative when we come to them with an opportunity because they know we’ve got the capital, we’ve got a track record. We’ve got a management team that many of them know. And I’ve seen you’ve seen the growth just in the public, and they’ve been approved with big acquisitions. Now in some cases, you might have a market where you have to sell something off. But I think that is easy. I mean we made a move from Lexus in New Jersey to buying the two Lexus stores in Austin, and we had to divest the two to get two more. But obviously, I looked at the Jersey market versus the Austin market, and feel, on a longer-term basis, it would be a better opportunity for the Company.”
    – Roger Penske, Chairman & CEO, Penske Automotive Group
  • “We’re in a cyclical business, right? So obviously for me I like the blend that we have in terms of brands. I think it’s a really good blend particularly when I think through the plan for the individual OEMs are put in place, because ultimately the product that they are working on today really is going to dictate the success on the new car side of the business going forward. Firstly, I am encouraged by the level of investment has been made. And secondly, it doesn’t really change my view on the balance that we have in our portfolio today. I think it just reinforces we have a good balance.
    – Michael Manley, CEO, AutoNation
  • “It’s a timing situation. We were competing to buy LHM. We didn’t know who we’re competing against and didn’t know we were getting the deal. The Stevinson deal […] came together quick. We didn’t want to pass on that opportunity not knowing if we’re going to get the Miller organization. Then fast forward, we signed Stevinson and then we got the Miller one. So we knew we had an issue because the manufacturer has a limit to how many stores you can own and reach in. So we knew that we would have to sell some stores.”
    – David Hult, CEO, Asbury Automotive Group

Theme 3: The franchise dealer model is alive and well. Multiple companies emphasized vehicle acquisition as the key to performance in used vehicles, and a primary driver is trade-ins when customers purchase new vehicles.

  • “We continue to focus on the acquisition of the inventory. We all know that is in used cars, where the return is generated. Close to 85%, 86% of our acquisition is coming through the consumer, whether it is in the form of our leased earnings, trades or buying cars through — directly from the consumers.”
    – Daniel Clara, SVP and CFO, Asbury Automotive Group
  • “As we all know, success in the used car market is dictated by your ability to manufacture great quality, well priced desirable used cars and this clearly covers key elements of the business, including efficient and effective reconditioning for example, but it all starts fundamentally with your ability to competitively acquire used inventory and with strong consumer demand we continue to focus on our self-sourcing capabilities for used vehicles, which I think further strengthened both our franchise dealerships but also our AutoNation USA businesses.”
    – Michael Manley, CEO, AutoNation
  • “We’re a different business than CarMax or Carvana and some of these used car retailers. Because, number one, we’ve got a large parts and service business, which covers 60% to 70% of our fixed costs. We also have OEMs that we’re tied to would give us an area of market that we operate in. And they provide us with all the umbrella advertising to drive customers, both new and used to our stores, and then we have the relationship with the captive finance companies. And then, the lease returns that are coming in give us in the future when the cars are available for additional use. So looking at that, taking that as really a base to work from, we’ve got a short supply of new cars, which is driving used car prices up. And certainly, our acquisitions have been very tough at the moment when you think of about just looking at CarShop in the U.S., in the UK and the U.S. are our cost of sales up $8,500 [per unit] and the UK is up [$4,400 per unit]. And when you add that on to the existing number, it’s really pricing us on the U.S. side, up into almost new car numbers.”
    – Roger Penske, Chairman & CEO, Penske Automotive Group
  • “As a top of funnel, new car dealer that gets to used vehicles coming in on-trade. We’re making about $1,900 more on vehicles that come in from consumers than that we buy at auctions or from other dealers and we turn that much faster. So it’s a huge advantage that we have […] a pipeline of inventory coming in quickly on the used car side.”
    – Chris Holzshu, EVP & COO and CEO, Lithia Motors


At Mercer Capital, we follow the auto industry closely in order to stay current with trends in the marketplace. These give insight into the market that may exist for a private dealership which informs our valuation engagements. To understand how the above themes may or may not impact your business, contact a professional at Mercer Capital to discuss your needs in confidence.