Group 1's Q4 net income, revenue rise despite challenges

Hesterberg: "We continued to deliver sector leading results."
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DETROIT -- Group 1 Automotive Inc. said today its fourth quarter and 2013 net income and revenue grew despite challenges to new- and used-vehicle profits in the United States.

The auto retailer saw profit gains from its parts and service business and finance and insurance sales.

But its gross profit on 2013 and fourth-quarter U.S. new- and used-vehicle sales softened from year-earlier levels. Company executives said that was largely due to a comparison against an atypical fourth quarter of 2012.

"It should be noted that the year-over-year comparison includes a period when Hurricane Sandy hit the Northeast," Group 1 CFO John Rickel said in a conference call with analysts and reporters. "That generated a demand for more new- and used-vehicle sales, creating a tough comparison to this year."

Group 1 has several dealerships in Massachusetts, New York, New Hampshire and New Jersey -- states which were hit hard by the storm.

Despite that unfavorable year-over-year comparison, Group 1 said its fourth-quarter net income grew 27 percent to $21.7 million, helped by the addition of overseas dealerships and global double-digit revenue gains across all its business lines.

Revenue during the quarter rose 18 percent to $2.28 billion. The company's newly acquired dealerships in Brazil chipped in about 10 percent of the company's revenue during the quarter, or $221.6 million.

For the year, Group 1 said net income grew 14 percent to $114 million while total revenue surged 19 percent to $8.92 billion.

"We continued to deliver sector leading results in our parts and service and F&I operations and added approximately $1 billion in net acquisition revenue during the year," CEO Earl Hesterberg said in a statement. "The combination of all these actions has Group 1 well positioned for another strong year in 2014."

In 2013, Group 1's U.S. new retail vehicle sales rose 4 percent to 125,069 units, lagging the U.S. industrywide light-vehicle sales increase of 8 percent.

Pricing pressure

In the fourth quarter in the United States, Group 1's retail sales of new units slipped 1 percent from the year-earlier period to 30,836, while gross profit per new retail unit sold fell 2 percent to $1,827.

U.S. used-vehicle retail sales for the quarter rose 6 percent to 20,115, but gross profit per used retail unit dropped 8 percent to $1,499.

Hesterberg said there was pressure on volume Asian-brand compact cars' profit margins last year. "I think it's stabilized now, because it can't get much lower," Hesterberg said in the conference call.

For the year, U.S. retail new unit sales rose 4 percent to 125,069 and used unit sales rose 6 percent to 85,365. But gross profits per unit declined for both. On new cars, the gross profit per retail unit fell 6 percent to $1,762. On used vehicles, it fell 2 percent to $1,664.

Hesterberg blamed some of the used-car profit margin erosion on inventory levels.

"I believe our margins were below average on used cars," he said. "Part of that was inventory. We had to liquidate them by cutting margins and wholesaling at a loss especially in the East where they didn't match last year's Hurricane Sandy sales."

He said he foresees continued growth in used-car sales this year.

"Not sure of double-digit growth, but it will be good business because we're starting to get into the off-lease cycle. I think it will certainly be at least as strong as the new vehicle business this year," Hesterberg said. "There'll be more lower-mileage vehicles available across the market giving customers more of a selection than in previous years."

F&I and parts

In the fourth quarter, revenue from F&I rose 16 percent to $78.9 million. On a same store basis, it rose 7 percent to $1,388 per unit.

For the year, F&I revenue rose 20 percent to $311.4 million. Per unit same-store F&I revenue rose 9 percent to $1,345.

Hesterberg credited an increased focus on the F&I sales process.

Group 1 saw double-digit percentage gains in global service and parts revenues for both the year and the quarter. Hesterberg credited manufacturer recalls for the biggest boost.

"There has been some pretty strong recall activity across a variety of brands and the warranty growth is pretty robust across the industry," Hesterberg said. "We can't count on that to be there every quarter. Collision work has been strong and customer pay has been strong, but recall has led the growth."

Acquisitions

During the fourth quarter, Group 1 purchased nine franchises that are expected to generate $350 million in estimated annual revenues.

For the year, Group 1 acquired 38 dealerships that should generate $1.3 billion in estimated annual revenues. The retail group disposed of seven dealerships that generated $318.9 million of annual revenues in 2013.

On Jan. 21, Group 1 acquired a Ford and a Hyundai store in Escondido, Calif. They are expected to generate $135 million in estimated annual revenues.

This year, Group 1 will not make acquisitions to match last year's, Hesterberg said. He added that what stores they do buy will most likely be in the United States.

"I think the opportunities are more in the U.S. at the moment," Hesterberg said. "We'll look to expand in the U.K. because more scale would benefit us there. We'll also be very careful about expanding in Brazil until we get the core platform where we want it."

Hesterberg's biggest concern this year is that rising inventory levels might further erode profit margins if manufacturers resort to heavy incentives or if dealers have to discount the cars to move them. Companywide, Group 1 has a 72-day supply of new vehicles and a 35 day supply of used vehicles. But certain brands far exceed the industry standard of a 60 day supply, he said.

"We have experienced what you've read in the press and, in particular, the reports relating to the Detroit 3," Hesterberg said. "We have over a 100 day supply in those three brands and there's no way you can have dealerships with that level of inventory without it impacting margins."

Group 1, based in Houston, ranks No. 4 on the Automotive News list of the top 125 U.S. dealership groups, with sales of 128,550 new vehicles in 2012.

You can reach Jamie LaReau at jlareau@crain.com. -- Follow Jamie on Twitter


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