PHOENIX - Although its mascot is a homely little cartoon duck, Ugly Duckling Corp. has quietly and efficiently moved to the head of the auto retailing pack.
The Phoenix-based company does not operate superstores, and is not charging into cyberspace. But Ugly Duckling Chairman and CEO Ernest Garcia II is leading his own little brigade in the retail revolution.
Ugly Duckling has two primary businesses: It runs a chain of used-car dealerships that sells cars to people with credit problems, and it provides financing to independent dealerships that sell used cars to people who need basic transportation.
As of last week, Ugly Duckling had grown to 24 'buy-here, pay-here' stores in five states. A year ago the company operated seven stores, all in Arizona. The company reported net earnings of $5.8 million on sales of $75.6 million in 1996.
Ugly Duckling is aggressively expanding its used-car store network.
In 1996, its used-car sales amounted to $53.7 million. Interest income from loans was $15.8 million.
While other publicly traded auto retailing stocks have faltered recently, Ugly Duckling's stock price has remained relatively steady.
'In my mind, of all the public dealerships, he's the hidden jewel,' said Jordan Hymowitz, an analyst for Montgomery Securities in San Francisco. 'Of all the business models that are out there, his has less risk than others.'
What CarMax and AutoNation USA are doing with more expensive used cars for people with good credit, Ugly Duckling is doing for older used cars, Hymowitz said.
However, Sheldon Sandler of Ladenburg, Thalmann & Co. in New York, said Ugly Duckling would be vulnerable to a recession, like most dealers.
'At the moment, it (Ugly Duckling) is a curiosity more than a mainstream concept as far as the public markets are concerned. What they do is sort of at the riskier end of the business. However, they seem to be doing quite well.'
Ugly Duckling competes with new-car dealers selling used cars to people with credit difficulties and with independent used-car dealers. Just about the only other company trying to establish a national brand selling and financing older used-cars to people with credit difficulties is J.D. Byrider Systems Inc. of Indianapolis.
SELLING AND FINANCING
Ugly Duckling is divided into three business units: Ugly Duckling Car Sales, Champion Acceptance Corp. and Cygnet Finance. Champion administers the company's loan portfolios, while Cygnet provides subprime financing to non-Ugly Duckling used-car dealers.
In May, Ugly Duckling obtained a commitment from GE Capital to increase its revolving credit facility from $50 million to $100 million, the company said. In addition, Ugly Duckling plans to roll out a Golden Wing program in the third quarter this year, one of several incentive programs designed to help win customer loyalty and improve the customers' credit standing.
Under the program, all customers receive a warranty, credit life insurance, unemployment insurance and collision.
Ugly Duckling has been running other incentive programs for several years.
The company coordinates with a professional tax preparation service to help its customers with their income taxes. If the customer is due a refund, the money is applied toward a down payment.
Customers who make their first six payments on time receive a $250 secured VISA card, and customers who make all their payments on time receive their initial down payment back at the end of the contract.
The well-publicized problems of several third-party subprime finance companies such as Mercury Finance and Jayhawk Acceptance Corp. have helped, Garcia said.
'The greatest thing that could happen to Ugly Duckling is what has happened' with the subprime companies, Garcia said.
With $175 million in equity investment and very little debt, Ugly Duckling is positioned to 'take advantage of just about most opportunities that might exist in the subprime sector,' Garcia said.
With the flight of investors from this segment, traditional new-car dealers are also fleeing the subprime business, which many pursued aggressively the last five years. Their departure leaves Ugly Duckling a pretty clear field.