Editor's note: An earlier version of this story understated Group 1's new-vehicle inventory level.
Auto retailer Group 1 Automotive Inc. posted a third-quarter profit of $18.3 million, but said it expected new-vehicle margins to fall through the end of the year.
Group 1's new-vehicle margins last quarter improved 0.4 percentage points to 6.7 percent, as the U.S. cash-for-clunkers program sent August light-vehicle sales to their first year-over-year increase since October 2007 and pared nationwide inventories to a 30-day supply.
But inventories had reached a 53-day supply by the beginning of this month, and Group 1 predicts more vehicles on dealer lots will mean lower profits.
The dealership group predicted its new-vehicle margins will slump to 6 to 6.5 percent this quarter.
“It's just a function of there being more vehicle supply, not just at our dealerships, but at competitive dealerships,” CEO Earl Hesterberg said today in a conference call with analysts. “We're not struggling, but the independent dealerships across the country still are. And once they get inventory on their lots, they will take any deal.”
Shares reacted by falling 12 percent to $29.20 during an overall down day for automotive stocks. All seven U.S. publicly traded dealership groups declined in trading today.
Group 1's third-quarter profit got help from the $112.8 million in cost cuts it recorded this year. The third-quarter net income compares with a $21.8 million loss in the third quarter of 2008.
“The cost reductions and inventory controls we implemented in the first half of the year have positioned Group 1 to benefit from any improvement in new-vehicle volumes,” Hesterberg said in a statement released earlier today.
Revenue fell 13 percent to $1.25 billion.
Group 1's new vehicle sales slipped 11 percent to 25,057 units, including 4,874 sold under the government's cash-for-clunkers incentive. Hesterberg estimated the federal program boosted Group 1's profits by at least 15 cents for each of the group's 24.2 million shares.
Used-vehicle sales to individual customers fell 6 percent to 14,175 units, while wholesale used-vehicle sales slid 11 percent to 8,367.
Margins on used vehicles sold to individual customers slipped 0.3 percentage points to 10.3 percent, where Group 1 expects them to stay this quarter. Margins on wholesales rose to 3 percent from a 1.6 percent loss in the year-previous quarter, but Group 1 expects those margins to slip to break-even this quarter.
Last quarter, “we did have to go to auction and pay high prices for vehicles to supplement our low inventory,” Hesterberg said, predicting that trend will reverse through the end of the year. “The last few auctions our people have attended, quite a few vehicles have been no-sale.”
Group 1 is nearing readiness to purchase more dealerships, Hesterberg said.
“Generally speaking, pricing in the market hasn't come down enough to offset the reduced profit potential of many of these stores,” he said.
The company will target luxury and midline import stores, said Hesterberg, a former Ford Motor Co. executive. He said he “probably” saw a better business case for buying Ford stores at a good price.
The dealership group had $298.7 million in new-vehicle inventory at the end of September, down $75.7 million from the second quarter and $370.6 million from the third quarter of 2008. Hesterberg said that represented a 44-day supply.
Group 1 reduced its non-floorplan debt by $37.1 million last quarter to finish with $507.1 million. The dealership group has cut its non-floorplan debt by $112.4 million so far this year. It has $85.9 million in immediate funds and overall liquidity of $232.8 million.
So far this year, Group 1, the No. 3 U.S. dealership group, has added three franchises with combined annual revenues of about $46.7 million and dropped eight franchises with annual revenues of $126.2 million. The Houston-based group has 96 dealerships with 128 franchises in the United States and Great Britain and sold 110,705 new vehicles in 2008.