Used-vehicle profitability tumbles for public dealership groups; Q3 declines range from 11% to 31%

As a once-hot used-car market slows down, each of the six major public dealership groups is taking in less gross profit per used vehicle, while a pair of them have seen used-vehicle sales volumes tumble, too.

The six major publics — AutoNation Inc., Lithia Motors Inc., Penske Automotive Group Inc., Group 1 Automotive Inc., Asbury Automotive Group Inc. and Sonic Automotive Inc. — all reported per-used-vehicle profitability declines for the third quarter, ranging from 11 percent to 31 percent. AutoNation and Penske reported declines in the number of used vehicles they retailed for that period.

Two of the public giants that operate stand alone used-vehicle stores — Penske and Sonic — said they're taking a pause on opening new locations for their used-only brands in the near term.

"We've really been moved out of our sweet spot because the cost of sale has moved up anywhere from $4,000 to $5,000," Penske CEO Roger Penske said about Penske's CarShop used-only unit Oct. 26.

Higher vehicle acquisition costs and softening consumer demand in the used-vehicle market are pushing down gross profit per used vehicle retailed for the public dealership groups, Stephens analyst Daniel Imbro told Automotive News. Dealers beyond the public groups also have seen the used market shift in ways that have become challenging.

While there is demand for used vehicles at a price point of $15,000 or less, Imbro said, there aren't many vehicles available in that range.

"The used market will continue to be competitive," Imbro said. "I think it's a more normalized market here. I still think that the larger groups are going to have a structural advantage, just being able to procure. I think the franchised dealers, specifically, have an advantage being able to procure some off-lease returns that the independents don't have. But I think the used market will be a weaker profit stream relative to the new-vehicle side. I definitely think that does continue in the near term."

Used-vehicle gross profit per vehicle for the six major public groups in the third quarter ranged from $1,588 to $2,478.

Penske's per-vehicle gross profit on the used side across its U.S. and U.K. operations plunged 27 percent to $2,004, and the company's retail used-vehicle volume dropped 7 percent.

Penske did not disclose whether its CarShop division, which now has 21 locations across the United States and United Kingdom, was profitable in the quarter. CarShop's sales volume declined 5 percent.

While the retailer has shifted to selling more lower-priced vehicles, those vehicles require more reconditioning work, Penske officials said.

The market trends mean Penske is holding off on opening two CarShop locations in the U.K. that are almost completed. "We've kind of tapped the brakes on those at the moment to see what happens here over the next few months," Roger Penske said.

Penske spokesman Anthony Pordon noted the opening of one new CarShop location in the U.S. has been put on hold, but he did not specify where.

Despite the pause, the retailer still intends to make the most of the used-only business.

"We have certainly not given up on the used-car business," Roger Penske said. "We'll do 80,000 [vehicle sales] at CarShop" this year.

Sonic also indicated it planned no new store openings for its used-only EchoPark business for the short term after opening two locations during the third quarter.

"We're not going to open any stores for the remainder of the fourth quarter [of 2022], first quarter, second quarter [of 2023]," Sonic President Jeff Dyke said Oct. 27.

Average gross profit per used vehicle at Sonic's franchised dealerships fell 11 percent to $1,704 in the third quarter. Used-vehicle sales were up, albeit slightly, just 1.4 percent. Sales at EchoPark, however, dropped 27 percent to15,422 vehicles.

Sonic executives also continue to plan for a robust used-only business, noting that the brand has reached half the U.S. population and saying they remain confident EchoPark can reach 90 percent population coverage by the end of 2025.

AutoNation in the third quarter opened its 12th stand alone used-vehicle AutoNation USA store, in Kennesaw, Ga., near Atlanta. The company said it has two dozen stores in development and it confirmed a long-term goal to have more than 130 AutoNation USA stores by the end of 2026.

AutoNation CEO Mike Manley noted that the retailer is seeing some delays in its AutoNation USA schedule "as a result of a challenging construction market."

Average gross profit per used vehicle at AutoNation tumbled 11 percent to $1,870 during the third quarter. The company retailed 75,355 used vehicles, down 2.8 percent.

Wholesale used-vehicle prices have dropped throughout the summer and into the fall. Retail prices for used vehicles also began to slip after holding on at high levels for longer than at wholesale.

Those price declines have meant retailers have had to carefully navigate their own pricing and marketing strategy.

The industry decline in used-vehicle prices "required quick action by our team to rapidly sell through our existing inventory so we could restock at latest market price levels," Group 1 CEO Earl Hesterberg said Oct. 26. "This action enabled us to slightly increase sales in a market which declined double digits."

In the U.S., Group 1 retailed 38,172 used vehicles in the third quarter. But gross profit per used vehicle retailed in the U.S. fell 31 percent to $1,588.

Lithia, which has continued its dealership acquisition spree in 2022, saw its average gross profit per retail used vehicle drop 19 percent to $2,478 in the third quarter. Lithia sold 81,215 used retail vehicles in the quarter, up 6.4 percent.

Asbury's gross profit per used vehicle retailed fell 13 percent to $2,160 in the third quarter. The group retailed 38,874 used vehicles, up 40 percent. Asbury's volume has been bolstered this year by the December 2021 addition of dozens of Larry H. Miller dealerships, including some exclusively devoted to used vehicles.

"We were backwards pretty good in PVR," CEO David Hult said last week.

Lack of inventory in the market has affected Asbury's profitability on the used side, he said.

"You only get them if you pay more than anybody else," Hult said. "So that certainly has been bringing down our margin."

Gail Kachadourian Howe, John Huetter and Lindsay VanHulle contributed to this report.