Put off by high prices for dealerships and unacceptable returns, Group 1 Automotive Inc. will slow its acquisition pace in the near term, CEO Earl Hesterberg said today.
“I don’t see those opportunities at the moment," Hesterberg said during a conference call with analysts after the third-largest U.S. dealership group released its third-quarter results. "Prices have gotten very, very high. I don’t see that type of pace in the U.S. in the near term.”
In the first nine months of this year, Group 1 completed 12 dealership acquisitions that are expected to add an estimated $680 million in annual revenues.
“We had some opportunities earlier in the year and they were large opportunities and I believe those will work well for our shareholders,” Hesterberg said
The company also disposed of seven franchises that generated trailing-twelve-month revenues of roughly $390 million.
Prices 'very, very high'
When seeking to add a franchise, Group 1 looks for a 15 to 20 percent return on investment on a pretax basis, said CFO John Rickel.
Said Hesterberg: “I have seen more deals on the market in the last couple of months, but the prices wouldn’t work for an investment.”
But, he added, “That could all change tomorrow. Almost every deal starts with an asking price that’s too high. So there is potential for more acquisitions because there are so many deals out there and the price does get negotiated.”
Group 1 ended the quarter with $365.5 million in total cash. About $252.3 million of that is in its acquisition line, but can be used for general purposes as well.
The Houston retailer said its third-quarter net income fell due to several one-time charges, particularly one related to the repurchase of convertible notes.
Net income dropped 20 percent from the year-earlier quarter to $26.2 million, while revenue rose 12 percent to $2.63 billion, a record for any quarter.
Earnings adjusted for one-time charges increased 21 percent to $40 million.
Hesterberg said in his prepared statements that the results were “driven by strong expense leverage and significant revenue increases across all of our business sectors. Our international businesses were major factors in our success, with our United Kingdom operations delivering all-time record earnings for the quarter and our Brazilian operations returning to profitability following a significant restructuring.”
Group 1’s U.S. revenues rose 15 percent to $2.18 billion. The revenue growth was driven by across-the-board gains, with revenue increases of between 14 percent and 18 percent for new and used sales, parts and service and finance and insurance.
Sales outpace industry
U.S. new-vehicle retail sales grew 12 percent to 36,649 units in the third quarter, outpacing the 8 percent gain for U.S. industrywide new light-vehicle sales in the quarter.
Group 1’s used-car retail sales in the quarter rose 12 percent to 24,917.
U.K. operations accounted for about 10 percent of total revenues, while Brazil accounted for 8 percent.
On a consolidated, global basis, Group 1 sold 44,494 new retail units, up 5 percent from a year-earlier. Retail used units sold rose 10 percent to 28,776.
The third-quarter results benefited from a strong turnaround in Brazil, after Group 1’s second-quarter net tumbled 55 percent largely due to problems there.
The return to profitability was driven by an organizational restructuring, which eliminated 150 positions, or 10 percent of total headcount in Brazil. Additional headcount reductions will occur with the disposal of three Renault dealerships in the fourth quarter, the company said.
Special charges, gains
Among the special, aftertax items in the quarter were:
- Charges of $17.9 million related to the repurchase of convertible notes;
- Charges of $6.6 million for asset impairments primarily associated with the pending disposition of vacated U.S. dealership real estate and three Renault franchises in Brazil;
- A net $8.6 million gain on the sale of U.S. dealerships and associated real estate; and
- A $3.4 million income tax benefit related to deductible goodwill in Brazil.
Last month, Group 1 sold the last of its remaining stores in Long Island and exited the New York market. Hesterberg said the decision was based on dollars and cents.
“Each market is so different,” Hesterberg said. “In the case of exiting Long Island, it was just a very high-cost place to do business.”
He said there were some factory demands for more capital expenditures in those Long Island stores that would have made staying there even more expensive.
“We just didn’t have a consistent track record that generated the profits we needed. But each market is so different, we’re constantly evaluating that,” Hesterberg said.
Group 1 ranks No. 3 on the Automotive News list of the top 125 dealership groups based in the U.S., with retail sales of 155,866 new vehicles in 2013.