DETROIT -- Rising interest rates and swollen inventories of unsold vehicles are expected to hurt profit margins in 2005 at most U.S. auto dealership groups, even as fourth-quarter results came in strong, analysts said.
Disappointing U.S. auto sales this year have added to already inflated inventories of unsold vehicles. Overall U.S. sales fell to a seasonally adjusted annual rate of 16.3 million vehicles last month, down slightly from a 16.5 million rate a year earlier.
"A significant industrywide inventory reduction is crucial for dealers because it could alleviate the new-vehicle gross margin pressure they continue to experience," Prudential Equity Group analyst John Tomlinson said in a note to clients this week.
Ford Motor Co. sales fell 3 percent, and General Motors' sales fell 13 percent in February. Both automakers cut first- and second-quarter production schedules to reduce high inventories.
But analysts and auto dealers said more cuts were needed. Rising interest rates, they said, are likely to increase the cost for dealers of holding unsold cars and trucks.
Dealership groups with higher exposure to Ford and GM, like AutoNation Inc. and Lithia Motors Inc., are expected to have a more difficult year than dealersships that stock more foreign brands, Tomlinson said.
Most of the U.S. dealership groups posted strong profits for the fourth quarter on higher new-vehicle sales and parts and service business, but many gave outlooks that barely met or were lower than analyst estimates.
Headwinds for the auto retail industry this year include a more difficult operating environment, heavy inventories and the effect of higher interest rates, said Rick Nelson, retail analyst with Stephens Inc., in a research note.
AutoNation's quarterly earnings doubled, helped by pent-up demand in the wake of Florida hurricanes that cut into sales by the dealership group last summer.
The company, whose shares rose to a six-and-a-half-year high on the news, did not publicly set an earnings target in keeping with its new policy.
Rival UnitedAuto Group Inc. posted a 30 percent jump in quarterly profit but gave first-quarter and full-year earnings outlooks that fell below Wall Street estimates.
The Bloomfield Hills, Mich., group, which saw fourth-quarter earnings rise on higher service and parts operations, strong international business and a multiyear contract to promote satellite radios, said rising interest rates would offset revenue growth this year.
Asbury Automotive Group Inc. swung to a fourth-quarter profit on strong new- and used-vehicle sales, but said restructuring costs, severance and other one-time charges will reduce net earnings in 2005.
Sonic Automotive Inc. also said its fourth-quarter net earnings rose slightly due to stronger-than-expected car and truck sales, but it set a 2005 earnings target range that barely met Wall Street forecasts.
Lithia, on the other hand, posted a flat quarterly profit, while Group 1 Automotive Inc. was the only dealership that saw earnings fall during the fourth quarter as costs rose and margins fell.
Group 1's earnings and full-year 2005 profit forecast trailed Wall Street expectations.
Used-car retailer CarMax on Friday said its fiscal fourth-quarter sales rose 25 percent on a strengthening used-car market, and it raised its quarterly earnings outlook.
The Richmond, Va., company did not give an outlook for 2005. It will be releasing its quarterly earnings on March 30.