Five of the six largest public auto retailers posted lower net earnings in the first quarter of 2003.
Sonic Automotive Inc., in Charlotte, N.C., the nation's third largest dealership group, even cut 784 jobs, or 7.5 percent of its work force, and began a hiring freeze. Sonic reported net income of $17.8 million in the first quarter, down 23.3 percent from $23.2 million in the first quarter of 2002.
Only AutoNation Inc., of Fort Lauderdale, Fla., the nation's largest auto retailer, managed to reduce its expenses and increase its net profit to $211.9 million in the first quarter. The company shaved expenses by 5 percent and intends to continue to cut costs.
AutoNation would have shown a decline in net earnings without a $127.5 million tax benefit from a settlement with the Internal Revenue Service. The company's net income otherwise would have been $84.4 million, down 8.0 percent from $91.7 million for the same quarter in 2002.
The results hurt the case that public dealerships often make to investors that the retail side of the auto business is not cyclical because of its diversified income. Income from finance and insurance, service and parts, and used-vehicle sales failed to offset growing expenses.
"They talk about service and parts more than making up for a downturn, but we haven't seen that happen," says Sheldon Sandler, who heads Bel Air Partners, an automotive investment firm in Princeton, N.J. "These companies are nothing but shadows of the overall car market."
Analysts say the biggest factors in the declines were the slumping economy, unseasonably cold weather, intense competition from new-vehicle sales and uncertainty over the war in Iraq.
"The cold weather causes people to stay indoors" instead of shop for vehicles, says Paul Taylor, chief economist for the National Automobile Dealers Association.
According to NADA's most recent figures, dealerships nationwide saw an almost 20 percent decline in profits before taxes in the first two months of the year.
Though its net income was down, UnitedAuto Group of Detroit was the top performer among the public retailers. Its first-quarter net earnings would have increased 7 percent to $16.8 million had it not been for a $3.1 million charge associated with a change in accounting on floorplan and advertising credits from manufacturers. UnitedAuto instead posted income of $13.7 million, down 12.7 percent from the $15.7 million reported for the same quarter in 2002.
AutoNation CEO Mike Jackson told analysts: "We believe that the automotive retail environment will continue to be challenging."