4 of 6 publics see Q2 F&I gross profit drop; more decline possible

Four of the six major publicly traded franchised auto dealership groups saw same-store finance and insurance gross profit per vehicle decline year over year in second-quarter earnings, with two of them pointing to higher interest rates as challenges.

Meanwhile, gainers AutoNation Inc. and Sonic Automotive Inc. reported greater success selling F&I products during the quarter.

F&I gross profit will continue to decline because of consumer affordability issues and the return of leasing, two analysts said.

"I think F&I is going to be pressured," Jefferies analyst Bret Jordan said following the second-quarter earnings season for Lithia Motors Inc., AutoNation, Penske Automotive Group Inc., Group 1 Automotive Inc., Asbury Automotive Group Inc. and Sonic. "I would expect that the general trend in F&I content is probably lower."

Customers struggling to afford vehicles are less likely to include F&I product coverage and its associated cost into the deal, both Jordan and Stephens analyst Daniel Imbro said. Lessees can be less likely to buy F&I coverage on their short-term new models, a challenge mitigated for auto retailers by leasing's collapse from 30 percent of retail sales in pre-pandemic 2019 to less than 20 percent in 2022, according to Cox Automotive.

Vehicle prices and interest rates aren't likely to plummet and free up more consumer buying power in the near term. Meanwhile, leasing is slowly rebounding as automakers restore incentives they slashed during an inventory shortage; Experian's second-quarter data saw leasing reach 21 percent of the new-vehicle market, up from 20 percent during the second quarter of 2022 but still below 28 percent in the second quarter of 2021.

"We have it down modestly into the next year," Imbro said of F&I gross profit per vehicle. But both Imbro and Jordan said they thought F&I gross profit would stay higher than it had been before the disruption of the COVID-19 pandemic.

Higher vehicle costs cut into F&I product attachment, but they also increase revenue from what Imbro called the "F side of F&I" — the commission a dealer received from a financial institution for bringing the lender and the consumer together on an indirect auto loan.

Retailers also "got better at selling" F&I products, Imbro said, which should have a lasting impact on gross profits. Online F&I sales would also provide a permanent lift, he said, mentioning Asbury's Clicklane and Group 1's AcceleRide digital retail platforms.

Clicklane generated $2,408 per vehicle in F&I gross profit for Asbury during the second quarter, up 11 percent from a year earlier and slightly higher than both Asbury's overall ($2,363) and same-store ($2,369) quarterly F&I gross profit. AcceleRide produced $2,616 in F&I gross profit per online sale, virtually the same as a year earlier and more than $200 higher than Group 1's overall or same-store F&I operations in the U.S.

Jordan also said he thought the industry had improved its F&I acumen, though a ceiling in gross profit was inevitable.

"I think there's a limit to what you can sell from a product standpoint," he said.

Sonic said same-store F&I gross profit at its franchised dealerships grew to $2,522 per vehicle in the second quarter, up 4.1 percent from a year earlier. Its overall franchised store F&I gross profit set a record at $2,516, up 1.8 percent.

"Our warranty penetration is just getting better and better every month," Sonic President Jeff Dyke said on the company's July 27 earnings call.

Sonic CFO Heath Byrd said on the call the auto retailer's new-vehicle finance penetration rate was up 2.5 percentage points and service contract penetration up 2 percentage points. Byrd said Sonic improved its used-vehicle service contract attachment rate another 0.5 points.

AutoNation's same-store F&I gross profit per vehicle grew 3.7 percent during the second quarter to $2,824, and the company's overall F&I gross profit reached a record $2,815 during the quarter, up 3.3 percent.

AutoNation in a government filing said its growth in same-store F&I profit largely stemmed from improved product penetration but was partly offset by a decline on the revenue AutoNation earned for arranging financing.

CFO Joe Lower said on a July 21 earnings call that AutoNation averages more than two products per deal, which has led to more than 70 percent of its F&I profits coming from products.

"I have been very encouraged with the continued performance the teams have delivered," CEO Mike Manley said of AutoNation's F&I on the earnings call.

AutoNation is one of two major publicly traded franchised dealership groups with a captive finance company, a relatively new trend among the six major competitors. Lower said AutoNation has been pleased with AutoNation Finance's progress and will keep growing it in a "measured manner." He said the captive finance company, which AutoNation purchased in late 2022, in June accounted for more than 20 percent of loans financing AutoNation USA's used vehicles.

Lithia also expressed pleasure with its captive finance company during its second-quarter earnings call.

"Driveway Finance Corp., our captive finance division, continues to make steady inroads as our top finance partner," CEO Bryan DeBoer said on the June 26 call. "Despite the initial headwinds of starting [Driveway Finance], our investment will realize its potential and contribute massively to future profitability."

DeBoer added that the average loan Lithia originates at Driveway Finance is three times more profitable over its lifetime relative to the commissions the auto retailer receives for arranging third-party financing for its customers. Driveway Finance was involved in 12 percent of the Lithia new and used vehicles financed in the second quarter, up from 10 percent a year earlier. The average credit score was 730, up from 718 a year earlier.

"Early last year, we pivoted toward underwriting higher-quality paper to mitigate stress in the general economy and potential volatility in the used-vehicle market," Driveway Finance Vice President Chuck Lietz said on the call.

Lithia's global same-store F&I gross profit per vehicle declined 2.4 percent to $2,154 per vehicle in the second quarter. DeBoer called F&I margins stable.

Excluding Penske's U.K. agency sales, worldwide same-store retail automotive F&I gross profit per vehicle retailed was $1,834. That was down 4.4 percent from $1,918 in the second quarter a year earlier. Penske only reports precise per-vehicle figures on a global basis, but it did share in a government filing its overall U.S. F&I profit per vehicle fell 5.8 percent.

Penske said it felt the aggregate decline in same-store F&I profit was "primarily due to rising interest rates impacting overall customer affordability."

The company continues to see large numbers of consumers purchasing rather than returning their leased vehicles, CEO Roger Penske said on a July 26 earnings call. It's also encountering a large number of shoppers opting to buy vehicles outright instead of financing them; Penske said on the call his group's cash deal rate ran 22 percent.

"The consumer remains very healthy," CFO Shelley Hulgrave said on the call. "They're obviously trying to avert some of these higher finance costs."

She said Penske's 22 percent cash deal proportion was up from what had been a "historic high" last year.

Group 1's same-store F&I gross profit for the U.S. declined 4.1 percent from a year earlier to $2,379 during the second quarter.

The Houston company was seeing some F&I pressure but has also tracked solid evidence of "a pretty strong consumer," CEO Daryl Kenningham said during a July 26 earnings call.

That doesn't mean, however, that everything will be rosy in the months ahead.

"We expect pressure on finance penetration rates, driven by existing interest rates and slightly tighter lending requirements for some buyers," Kenningham said.

Asbury reported $2,369 in same-store F&I gross profit per vehicle during the second quarter, down 1.7 percent from a year earlier. The company said in a government filing this factor and a decline in sales contributed to Asbury's 14 percent decline in same-store F&I revenue.

However, Asbury saw growth at its F&I products provider Total Care Auto, where F&I revenue was up 14 percent from a year earlier to $32.2 million, and F&I gross profit rose 140 percent to $31 million. Asbury bought the company as part of its December 2021 Larry H. Miller Dealerships acquisition, and it has been rolling out Total Care Auto products to its legacy stores since.

Jack Walsworth, Mark Hollmer and Gail Kachadourian Howe contributed to this report.