Q4 2022 Earnings Calls

Executives Anticipate a Return to Normal

Public Auto Dealers SAAR Supply Chain Used Vehicles

In 2022, fewer than 14 million light vehicles were sold, the lowest level since 2011. Supply constraints hampered production from automakers, which led to higher profits for auto dealers on each vehicle they were able to acquire and sell, both new and used. Vehicle production improved gradually throughout the year, which is anticipated to continue through 2023.

Reviewing earnings calls from executives of the six publicly traded auto dealers, the consensus is that volumes will increase approximately 10% to about 15 million in 2023, but gross profit per unit (“GPU”) will decline as supply constraints are alleviated. Nobody is anticipating that record-setting unit-level profitability will continue, though most expect, or are at least hopeful, that “normalized” levels will be higher than pre-pandemic.

With supply returning, analysts questioned whether sales volumes would be constrained by demand rather than supply. Most executives demurred, giving various reasons why demand concerns were not impacting their company. Asbury noted it was still pre-selling 35% of its inventory, suggesting that the supply/demand imbalance won’t be restored until this level approaches more historical levels of effectively 0%.

Improved new vehicle availability has negatively impacted used vehicle prices as consumers are no longer forced to substitute new for used. With the ratio of average selling prices of used to new vehicles returning to historical levels, dealers with larger levels of used inventory with heightened acquisition costs are seeing their profitability suffer. While this impacted the public dealers to varying degrees, some expressed optimism that used vehicles would get a boost in future periods as the constrained production years cycle through the vehicle life cycle. In other words, a low supply of new vehicles now means that there will be a low supply of used vehicles down the road.

Fixed operations have been a bright spot for dealers showing growth across the board. This is partly due to consumers returning to driving more; more driving means more collision work. Fewer new vehicles on the road also indicate the average age of vehicles has increased, which raises the demand for parts and service.

As a follow-up to our Q2 earnings call blog, we pondered how auto dealers would reinvest their profits from this past cycle and commented on an alternative growth opportunity for auto dealers in the powersports industry. It seems Sonic Automotive was listening as they announced their foray into the space last month. Management highlighted the following benefits of investing in the industry:

  • Expand into an adjacent retail sector with similar operating models
  • Significant opportunity for consolidation due to fragmentation
  • Higher margins than auto dealers
  • Lower acquisition multiples

Here are some other major themes from the Q4 2022 Public Auto Earnings Calls:

Theme 1: SAAR Expectations

Auto retail executives weighed in with their SAAR expectations as 2022 volumes were the lowest in a decade. While everyone is calling for an increase, expectations are for a more moderate recovery rather than a bounce back to 2014-2019 levels.

  • “We are planning our business for a SAAR in the mid 14 million range. We believe with our disciplined cost management and agile expense structure heading into 2023, we can adapt to changing conditions, including one with a recovering if uneven day supply for the industry. […] the last few years have been difficult to navigate it from a prediction standpoint between COVID and supply chain issues and so on. But I’ll tell you, all the conversations the last few quarters have been when does it get back to ‘19 levels, I just don’t see that. ‘19 have a 17 million SAAR, we’re forecasting less than a 15 million SAAR.”
    – David Hult, CEO, Asbury Automotive Group
  • “After experiencing the lowest new vehicle SAAR since 2012, we anticipate SAAR in 2023 to be between 14.5 million and 15 million units. As perspective, the industry averaged 17 million vehicles SAAR between 2015 to 2019, implying a future lift of 17% in addition to conquesting market share.”
    – Bryan DeBoer, President and CEO, Lithia Motors
  • “[SAAR is] Probably a 10% increase over this year, somewhere between 14.5 and 15.1, 15.2, 15.3 is what we’re projecting in our numbers. Margins is the big — is going to be the big question. Certainly, they’re not going to stay where we saw them north of $6,300 in the fourth quarter. In the first quarter, we’re seeing that number in the high-5s.”
    – Jeff Dyke, President, Sonic Automotive

Theme 2: Long-Term Days’ Supply and GPUs

Due to constrained supply in the last three years, gross profit per unit increased as demand outstripped supply. As production improves, volumes are expected to increase and gross product per unit is anticipated to decrease. The question for dealers is whether volume improvements will compensate for unit profitability declines, but the general consensus is that GPUs will remain above pre-COVID levels. Roger Penske appeared to suggest GPUs might decline by $2,000 in 2023. Executives also emphasized the importance of considering days’ supply rather than absolute levels of inventories.

  • “You can look back over history; when SAAR’s are below 16 million, margins hold up pretty well. We think a lot of the OEMs have learned from their days supply, but that doesn’t mean you won’t have spikes at certain moments in time. I think they’ve been real comfortable with not bringing large incentives to the market. If inventory goes back up on a day supply, I assume they’ll come forward with incentives. And again, because the average age of the car is over 12 years, while we think it’s not going to be a gangbuster year, we anticipate margins to hold pretty well. It will certainly vary by OEM depending upon the day supply. But as we look at Asbury as a whole, we think it’ll be a pretty good year for new car margins for us. […] In the fourth quarter, one of our domestic brands, the day supply, I would say, got back to close to normal levels. And the gross margins with that brand were significantly higher than what they were in 2019. So we have confidence that our margins will be significantly higher in ‘23 than they were in ‘19. But certainly, you can tell it’s fallen off from prior year results.”
    – David Hult, CEO, Asbury Automotive Group
  • “I think the key for us is not absolute numbers of inventory, but how that translates into day’s supply as we go through the year. And that obviously brings you on to one of the key questions and that’s what we think is going to happen with new vehicle volume. I think there’s strong potential for new vehicle volume under the right circumstances to be above 15 million, and I think we’ll end the year with continued low – very relatively low, frankly, when you look back at some of the previous year’s inventory levels on a days’ supply basis. I think there will be some continued mitigation on new vehicle margin. But frankly, if you look at what happened over the period of 2022, really, I just see a continuation of that, but somewhat compensated by volume increases. […] I think the reality is that new GPUs [were] never going to be sustained at [that] level. And we’ve been talking about it for a long period of time that as new inventory levels begin to restore in the franchise network that you’re going to see a better balance. And I say better because it brings some volume back here in GPU’s drop, but ultimately what you’re trying to do is maintain the overall level of profitability.”
    – Michael Manley, CEO, AutoNation
  • “We expect a gradual decline in new vehicle margins over the course of 2023 as inventory continues to recover. We do, however, expect normalized new vehicle margins to eventually settle above our pre-pandemic levels. I can’t tell you with any specificity when we think it will normalize, other than what we’ve seen is a real steady glide path really since middle of last year, the gross profits decline, and we expect we’ll see something similar through this year. And in some brands, our grosses are holding up quite well because they’re still very tight. […] In a couple of brands, we saw the gross has increased during the quarter. And then, we got quite a bit of inventory in a couple of brands. In our domestics, we saw the most erosion.”
    – Daryl Kenningham, President, U.S. and Brazilian Operations, Group 1 Automotive
  • “We believe earnings will be impacted by declining GPUs and are assuming the following: same-store unit growth for new in the mid-to-low single digits and used in the high-single digits, as we navigate this transitory environment with supply and demand normalizing, new vehicle GPUs will continue to moderate, assuming a decline of about $200 per unit each month throughout 2023, this would average to a GPU of $3,800 and end the year a little above pre-pandemic levels.”
    – Tina Miller, SVP and CFO, Lithia Motors
  • “Incentives are going to come back as inventory comes back. And as that starts rising and they’ve got to turn out of inventory, that’s going to happen, and margins are going to fall. We’re working with our manufacturer partners to make sure they understand keeping that they supply at a reasonable level, call that 25 to 35 days instead of pre-pandemic 60 to 80 days is the right way to run this business. And I think they all agree with that. […] The manufacturers recognize that, and they’ll do a good job of trying to keep incentives down which will keep pricing somewhere in the MSRP range as we move forward.”
    – Jeff Dyke, President, Sonic Automotive

Theme 3: Used Vehicle Prices, Affordability, and Availability in the Coming Years

When new vehicle production declined, consumers were forced to turn to used vehicles, causing used vehicle prices to appreciate faster than new vehicles. The unwinding of this unsustainable price difference between new and used vehicles is the primary reason for the decline in used vehicle prices. While used vehicle prices have been volatile over the past few quarters, public auto retailers are generally seeing a stabilization in the market. A couple of executives went the extra step to indicate that constrained new vehicle supply over the past few years will lead to lower availability of used vehicles in the coming years, which should support used vehicle prices in the future.

  • “Used retail revenue was down 5% from the per year quarter as the expected choppiness to the market persisted. Used retail gross profit per vehicle was $1,842 for the quarter, a decrease of $840 from the per year quarter. Our used vehicle inventory [had] a 26 day supply. Our used to new ratio for the quarter was 101%, down from 108% from the prior year quarter. […] We are seeing the use car valuation and pricing stabilizing. We also go to keep in mind we are approaching our selling season for a lack of a better term, and also what comes with the tax credit. So, we feel that the big valuations that we saw Q3 into Q4 will definitely stabilize.”
    –Daniel Clara, SVP of Operations, Asbury Automotive Group
  • “We are entering a period of tight supply on two and three and four-year old vehicles, which make up the majority of these car sales. And that’s going to impact wholesale prices and ultimately retail prices, margins I think are going to be fine.”
    – Joe Lower, CFO, AutoNation
  • “One of the continued challenges we faced in the quarter was a decline in industry used vehicle pricing, which results in a used vehicle sequential margin decline of $235 to roughly $1,350. Partially offsetting this was an 8% increase in same store used vehicle unit sales. […] Well, the trade off on volume in GPUs, we want to err on the side of volume. Not that it’s volume at all costs. That’s never something we want to do. […] We want to be at the market or better all the time. And then we want the volume because of the F&I attachment, which is a real strength for us. Also, that puts more units in operation out there for our stores and another opportunity for us to do parts and service business with those customers. So, philosophically, we like that volume versus GPU trade-off for that reason. Moving forward, if you look at it on a macro basis over the next couple of years, what firms like Cox are saying, which I tend to agree with them, is I believe we’re going to see somewhat of a shortage on used cars because of the pandemic-related SAAR declines that we saw for three years. And that will take some used cars out of the market for the coming three or four – couple of years anyway. And I believe that could support [GPU]s over the next couple of years.”
    – Daryl Kenningham, President, U.S. and Brazilian Operations, Group 1 Automotive
  • “We remain aggressive on retaining trades we are offered, as well as the continued procurement of inventory from all external channels even as pricing pressure on use continues with the rising interest rate environment and recovering new vehicle inventory supply. Transitory issues and pricing pressure on used vehicles should have a minimal impact on 2023, as we carry less than a 60-day supply and the shortage of late-model used vehicles from the abnormally depressed new vehicle SAAR environment takes years to normalize.”
    – Chris Holzshu, EVP & COO and CEO, Lithia Motors
  • “New car inventory is coming back, the supplies are increasing. Domestic supplies are increasing. We’re going to see that across the board. And as that happens, you just can’t help but have a drop in used vehicle valuations. […] But that’s also why you run a really tight day supply. If you’re caught up with a 40, 50, 60 day supply right now, you’ve got problems coming your way. And we just don’t have that.”
    – Jeff Dyke, President, Sonic Automotive
  • “Used vehicle average selling prices have begun to decline, but still remain well above levels required to return to a monthly payment that is affordable for the average buyer at current interest rates. Used vehicle gross profit was down 29%, driven by a 33% decrease in used retail GPU to $1,405 per unit, offset partially by a 6% increase in retail unit volume. Given ongoing new vehicle inventory constraints, recent declines in wholesale market pricing and our current outlook, we continue to be disciplined in managing our used vehicle inventory, volume and pricing in order to optimize gross profit levels as we go through 2023.”
    – David Smith, CEO, Sonic Automotive

Theme 4: Fixed Operations Growing as Vehicles Age

Companies reported broad-based growth in all segments of fixed operations, which is anticipated to continue into 2023—in part due to aging vehicles.

  • “I assume, most like us, we never have enough techs, and we can always use more. I think what you’re seeing with the dollars increasing has more to do with the aging of the car. As the cars age, they need more work and certainly parts costs go up every year. So, as we look at ‘23 from a growth standpoint, at least at this point, we don’t think it’s going to look very similar to what our results were in ‘22 as far as growth. We don’t see it slowing down or leveling off. People are holding onto their cars longer. And if the jobless rate increases over time that will certainly have an impact on parts and service, but we believe that’ll be a positive impact.”
    –David Hult, CEO, Asbury Automotive Group
  • “Our customer pay business generated 13% same-store growth. Collision increased 14%, warranty 8% and wholesale parts 3%. Through our technician recruiting and retention efforts, we increased our same-store technician headcount by 16% in 2022. We foresee after sales continuing to be a strength over the course of 2023 for Group 1.”
    –Daryl Kenningham, President, U.S. and Brazilian Operations, Group 1 Automotive
  • “Our aftersales business remains strong across all business lines, up 8.4% in the quarter. With the record units in operation and an average age of vehicle over 13 years, we anticipate continued growth throughout 2023.” – 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 insights 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.