Here is what auto retailer executives had to say during the Q2 2024 earnings calls. The major themes from the Q2 2024 Public Auto Earnings Calls are outlined and discussed below:

Theme 1: CDK Outage Impacted Operations for All Public Dealers but Hurt Some More than Others

In June 2024, CDK Global, a major provider of IT and software services for auto dealers, experienced a significant outage starting on June 19. This disruption affected various systems used by auto dealerships for their daily operations, including inventory management, customer relationship management, arranging financing, and service scheduling. The outage caused considerable inconvenience, leading to delays in transactions, difficulties in accessing essential data, and disruptions in customer service. CDK Global worked to resolve the issue and restore services, but the incident highlighted the dependency of modern auto dealerships on integrated digital platforms and the impact of such outages on their business continuity. The range of outcomes was large depending on each dealer’s reliance on CDK; the outage deeply affected the operations of AutoNation and Asbury but had a negligible effect on Penske. Group 1, as was announced in real time, was one of the first large dealer groups to be brought back to fully operational.

• “As I mentioned in today’s press release, the CDK outage masked what was developing into a very positive quarter for AutoNation. […] Now to give you a sense of scope, virtually all of our business processes, including CRM deal processing, financial services, inventory management, after-sales systems, and accounting, I’ve hired in one form or another to the CDK backbone and, therefore, were all immediately impacted. And naturally, we worked with each of our business units to put in place interim solutions, some of which were off the shelf and some of which had to be developed. Now each solution based upon the discipline involved, returned our business to some level of functionality and productivity, but the workaround processes were in large part manual. For example, we manually processed close to 60,000 repair orders during the outage. And you can imagine this spoke things down tremendously.
  – Michael Manley, CEO, AutoNation
• “Overall, the Sonic Automotive team continued to execute at a high level despite operational challenges in the last 12 days of the second quarter as a result of the previously announced CDK software outage. […] However, we continued to experience operational disruptions throughout July related to functionality of certain CDK customer lead applications, inventory management applications, and related third-party applications integrations with CDK.”
  – David Smith, Chairman and CEO, Sonic Automotive
• “Due to the length of the disruption, the recovery process took approximately 12 days. To give you a sense of scale, just within our parts and service business, almost 100,000 repair orders [had to be] recreated into CDK. […] I’d like to give some color on our performance in some of the revenue buckets and how the CDK outage impacted our business. Within customer pay repair order revenue, we were pacing up 10% at the end of May, ending the quarter up 4%. In warranty, we were up 17% before ending the quarter up 7% in revenue. The CDK outage was particularly significant for our wholesale parts and services business. Wholesale parts was flat through May before ending down 7%. The month of June had an $8 million decrease year-over-year, or 21%.”
  – David Hult, CEO, Asbury Auto Group
• “This quarter brought a unique challenge when CDK faced a cyber-attack that impacted many of ours and others’ dealer management systems. I’m proud of the way our team responded quickly pivoting to create solutions and continuing operations across our network. […] Our aftersales business was down 1.4% in the quarter. This decline is primarily related to CDK, which drove after sales down almost 40% during the 12 days of the outage. We expect some of the work will be deferred into early July as our systems and processes return to normal.”
  – Bryan DeBoer, President and CEO, Lithia Motors
• “Our U.S. team persevered through extreme weather events and the CDK outage. We witnessed unprecedented teamwork focused on caring for our customers, communities, and our team members. The CDK outage was most significantly affected our U.S. operations from June 19 to June 26. […] We believe that we could have sold more vehicles and performed additional service and repair work in the June quarter, had we been operating at full capacity with our CDK dealer management systems. Once we were able to gain access to CDK on June 26, we mobilized our operations personnel to enter thousands of transactions performed during the outage into the CDK DMS, all of which were completed prior to June 30. […] We estimate the pre-tax income impact of the CDK incident to be approximately $17 million.
  – Daryl Kenningham, President and CEO, Group 1 Automotive
• “Lastly, our premier truck business was temporarily impacted by the CDK cyber-security incident in June of 2024. Our teams quickly implemented our incident response plan and alternative processes to keep operations open. Systems were restored in early July, and we resumed processing transactions through the CDK system. We do not believe the financial impact to be material in the quarter.
  – Rich Shearing, North American Operations, Penske

Theme 2: Inventory Management Has Been a Hot Topic, as Some OEMs Have Overproduced While Others Are Managing Well

A significant focus for public auto dealers has been on managing inventory levels to maintain profitability and adapt to market conditions. While inventory was scarce during the pandemic, a recent build-up in inventory for certain brands has created problems for dealers, like rising floor plan interest expenses and stale units on dealership lots. Executives from the public dealers discussed their strategies to balance inventory, optimize sales, and improve gross profit per vehicle.

• “Some of [the stability in front-end GPUs] is mix driven. Toyota margins are still good. They’ve got a 15-day supply of product on the ground and that brand is just on fire. But quite honestly, it’s a tale of two cities because you’ve got other brands [like] Stellantis [and] Nissan. Some of these brands are 100, 200 days’ supply of product out there that are just ridiculous. […] There’s more incentives right now. High line incentives are out there. I expect that to get even more aggressive in the third quarter, in the fourth quarter, especially as manufacturers are trying to balance out some of the electric vehicle inventory that they are trying to reduce days’ supply on. […] We’re waiting patiently because I’d like to see the average cost per unit to drop another $1,000 to $1,500, but that’s coming with the days’ supplies, and the manufacturer can’t help themselves. We didn’t learn a lesson in COVID, I wish we would have. It’s have been a lot better for the industry overall, but they didn’t, and you’ve got manufacturers out there that have just totally lost control of their days’ supply.”
  – Frank Dyke, President and Director, Sonic Automotive
• “The market performance back within sales to us had more to do with our brand mix. We have brands that are up year-over-year in sales. Stellantis is -we have 155 dealerships. It’s almost 15% of our rooftops. And it’s all brands are cyclical, but it’s very – it’s struggling right now. And when you look at our year-over-year decrease in unit sales in domestic, 100% of it is tied to Stellantis.”
  – David Hult, President and CEO, Asbury Automotive Group
• “We are not in a volume race – and I think depending on the mix of our business, we don’t have – we have very little of the big three. They could pull down – obviously, your grosses. But because our inventory is in such good shape, and we’re going to keep it there. […] And certainly, when we look at the premium side, we’re managing that quite well, still waiting for vehicles that are on stop sale […]”
  – Roger Penske, Chair and CEO, Penske
• “There’s been a lot of discussion and debate about different OEMs and their volumes in the marketplace and inventory build. The reality is the reality is inventory, there are many OEMs that recognize they are where they want to be and maybe a bit higher on their inventory, and they’re going to have to step into the marketplace to address that because dealers in and of themselves are not going to be able to get to the net transaction price that will create the volume momentum they need and they’re looking for as well.”
  – Michael Manley, CEO, AutoNation
• “We have tons of opportunity in terms of inventory and being able to control inventory and now that the ecosystem is fairly well built and our people are out there swinging, and they get this. We’re talking about almost $1 billion cut in total inventory between new and used by year-end while still maintaining our same growth rates, okay? And if nothing else, improving velocity of our turns to be able to improve that. But we’re talking that that’s almost $100 million in interest rate savings at today’s rate, compounded with the things that Tina just spoke to.”
  – Bryan DeBoer, President and CEO, Lithia Motors

Theme 3: Consumer Affordability Is Still Top of Mind for Public Auto Dealers in the Current Interest Rate Environment

Executives across public auto dealers emphasize the importance of managing vehicle affordability in response to high interest rates. Lower interest rates in the back half of 2024 are expected to boost used car sales and improve new car affordability, helping mitigate the financial pressure on consumers and dealership cost structures alike. As of the writing of this post, it is highly likely that the FOMC will reduce rates at their next meeting in September.

• “We obviously have several [holdings] of variable debt. So there is a tailwind that we can get as rates get cut from that perspective. Around consumer affordability, it’s impacted, and we’ve talked about that in the past around what that monthly payment is. And then I think that gives a good strength and tailwind for consumers going forward since they’re monthly payment shoppers.”
  – Tina Miller, Senior Vice President and CFO, Lithia Motors
• “There’s no doubt that affordability is top of mind for many of the consumers that come into this marketplace, whether it’s on new or used vehicles. […] We’re also beginning to see increases, I think, in delinquency rates that I think are manageable and not where they were a year ago. But I do think there are signs in the marketplace that consumers continue to feel the pressure from the current environment.”
  – Michael Manley, CEO, AutoNation
• “I think [lower interest rates] will help the used car buyer for sure. […] I think the used will continue to grow because of affordability, which has been a problem. On the new side, because of our leasing, the finance companies have been taking some of that interest rate hit by increasing residuals. So, I think that will balance out. But definitely, from a consumer perspective, I think it’s going to help us. So, we’ve lost some business, I think, on a temporary basis because of the cost of interest and the cost to do business. […]  And the monthly payment, if you look at the average, is really over $700. So that has to come down to make a big difference.”
  – Roger Penske, Chair and CEO, Penske
• “One of the things that we are fortunate to have is a terrific financial services company attached to the OEMs that have been able to sub-vent the rates. You look at our attachment rates now, up to 75% penetration on new F&I, so that’s a positive. And I think where we could also really pick up some business through lower rates on the used side because those penetration rates are 62%, 63%. [….] With lower rates, it’s going to certainly help our used car business and make the new car affordability, I think better for the consumer.”
  – Pete DeLongchamps, Senior Vice President, Group 1 Automotive
• “Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the return to normal seasonal trends in the used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volumes going forward.”
  – David Smith, Chairman and CEO, Sonic Automotive

Theme 4: Electric Vehicles Have Been Harder to Sell While Hybrid Demand Has Grown

Public retailers highlighted the importance of vehicle mix and its impact on profitability. This reflects broader trends in the auto industry toward balancing traditional and new energy vehicles while managing profitability and market demand.

• “I think our brand mix helps. Toyota is performing well. Their hybrid mix helps. Hybrid is, in total, our most profitable vehicle to sell. So, I think that certainly helps. But I do think there is some moderation across the board on the decline. And – so I believe we will see that. And we saw some improvement in things like EV gross margin. Even though it’s a very small part of our mix, we did see some strengthening in EV margins this quarter, and that was good to see because they were really tough in the first quarter.”
  – Daryl Kenningham, President and CEO, Group 1 Automotive
• “So, to me, the only thing that would be a negative, and I don’t think there’s hundreds of dollars up or down that we’re going to see over the next couple quarters. The only thing would be that the BEV vehicles [have] the highest discount right now, probably about $6,000 under MSRP. And if you look at a normal ICE vehicle, it’s somewhere between $2,500 and $3,000.”
  – Roger Penske, Chair and CEO, Penske
• “Our team continues to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving customer demand, which should benefit inventory days’ supply, floor plan interest costs, and new vehicle GPU.”
  – David Smith, Chairman and CEO, Sonic Automotive
• “We always have internal discussion on our PVRs. And I think you guys will recall on the call when I was asked this question coming into the year. I think many of you thought I was relatively pessimistic when I said our expectations are they’ll be fully normalized back to ’19 at the end of the year. I have to say I’m moderating that view on our experience over recent months. I still think that there will be some continued moderation for the year, but probably not at the pace that saw before. If you even look at the difference in mix, for example, of BEVs now compared to what it was expected to be, and I think, as you all know, the margin on full battery electric vehicles for the OEMs and for us is significantly lower than their combustion and their hybrid counterparts. So, you’re going to see a moderation on our outlook for BEVs, I think, in the year, which will also moderate our outlook on PVR. So, in summary, we’re still going to see some moderation in my view on those, but not to the level I’d anticipated early in the year.
  – Michael Manley, CEO, AutoNation

Conclusion

At Mercer Capital, we follow the auto industry closely to stay current with marketplace trends. These give insight into the market 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.