Used-vehicle shift pays off for public retailers

Pivoting to used-vehicle sales for profitability continues to be a safe and successful bet for some of the biggest U.S. auto retailers.

Used-vehicle sales surged for all but one of the publicly traded dealership groups that reported second-quarter earnings last week. Their new-vehicle sales, meanwhile, fell or stagnated. Leaders at Group 1 Automotive Inc. believe a used-vehicle focus is the new normal for the Houston retailer.

Group 1 CEO Earl Hesterberg said there has been "a fundamental shift towards the used-vehicle market in the U.S." He said it stems from a value equation for consumers that automakers will be hard-pressed to compensate for on the new-vehicle side, even with incentives.

"I don't see a massive shift back to the new-vehicle market at the expense of the used-vehicle market," he said on a conference call with investors.

The same factors cooling new-vehicle sales — higher interest rates and transaction prices — are heating up the used-vehicle market. Sales of new light vehicles fell 1.7 percent across the U.S. during the second quarter, according to the Automotive News Data Center. New-vehicle sales for most of the publics fell more than that, including an 11 percent tumble at the biggest U.S. dealership group, AutoNation Inc.

A slight decline in U.S. new-vehicle sales did not stop Group 1 from posting a revenue increase in the quarter, aided by parts and service, finance and insurance and, of course, used vehicles.

The group's retail used-vehicle sales in the U.S. grew 7 percent to 30,477, barely topping the 30,318 new vehicles that were sold.

Meanwhile, Sonic Automotive Inc. posted record used-vehicle sales for any quarter, driven primarily from strong sales at its used-only EchoPark stores.

Sonic's eight standalone EchoPark stores posted a second straight quarterly pretax profit, this time of $1.7 million, as revenue jumped 62 percent and vehicle sales climbed 69 percent to 12,587.

"There's just so much more we can get out of our existing footprint," Sonic CEO David Smith told Automotive News last week.

Smith said the company plans to open four more EchoPark stores by this time in 2020. Those are among as many as 20 additional EchoPark locations Sonic could open over the next five years, Smith said.

One of those slated to open by the end of 2019 is at Sonic's former Long Beach Mini store in Signal Hill, Calif. Sonic earlier this month relocated Mini into its nearby Long Beach BMW dealership.

Sonic President Jeff Dyke noted that EchoPark sells vehicles up to 5 years old and that the Los Angeles area is among the largest used-vehicle markets.

"We need to be there," Dyke told Automotive News. "And we're looking forward to having our first West Coast store."

Other potential locations for EchoPark are Phoenix; Las Vegas; Atlanta; Fort Lauderdale/Miami; Tampa/St. Petersburg, Fla.; Washington; Nashville; Philadelphia; and Orlando, according to Sonic.

Used-vehicle sales rose 16 percent from a year ago to 41,458. Same-store used-vehicle sales jumped 13 percent to 38,517, including sales from EchoPark locations. Same-store new-vehicle sales fell 2.4 percent to 28,134.

At Lithia Motors Inc., used-vehicle retail sales rose 12 percent in the quarter to 42,250 vehicles.

CEO Bryan DeBoer said Lithia's current ratio for used-to-new vehicles is 1-to-1; he expects that ratio to approach 2.3 used to 1 new.

"Our ability to retail a full age range of used vehicles is a hallmark of our growth," DeBoer said on an investor call last week. "Sourcing the right used vehicle drives this business line."

At Asbury Automotive Group Inc., meanwhile, used-vehicle sales slid alongside new on a same-store basis. The challenge: finding inventory. Asbury's same-store used-vehicle retail sales dipped 0.4 percent to 21,176.

On an earnings call, CEO David Hult said the trick isn't just acquiring as much inventory as possible; it's doing so profitably.

"We're not operating well in pre-owned," Hult said. "When we figure out pre-owned, and we will, we see a lot of opportunity to continue growing."

According to John Hartman, senior vice president of operations, 53 percent of the used vehicles Asbury sold in the second quarter came from customer trade-ins. Fifteen percent were sourced from the auction lane, and 11 percent came from off-lease vehicles, with the remainder either acquired from service lanes or purchased directly from consumers or other sources. Buying directly from customers is most lucrative, Hartman said. AutoNation

AutoNation saw its same-store used-vehicle sales grow 4.5 percent in the quarter to 61,665, aided by inventory mix, newly named CEO Cheryl Miller told analysts. Same-store new-vehicle sales fell 9.8 percent to 69,827.

Miller said the company's group of five AutoNation USA standalone used stores in the second quarter broke even for the first time and several were profitable.

She told analysts and investors on a call last week that the company is making "steady progress" on the portfolio of stores but doesn't plan to open any additional outlets this year.

AutoNation announced plans to launch the stores in late 2016 and paused expansion plans last year.

Executive Chairman Mike Jackson told analysts on the same call that the company has added to AutoNation USA the same one-price philosophy and customer experience it offers for its pre-owned business at franchised stores. It's now working to boost sales and profitability.

"We'll take a couple of pilot stores in the third quarter and see how we bring the volume to higher levels, which is right now about 100 a month through the stores," Jackson said.

Penske Automotive Group Inc. is slated to release its earnings on Tuesday, July 30.

Melissa Burden and David Muller contributed to this report.