Q1 2024 Earnings Summary
- LAD anticipates growth in aftersales due to the increasing complexity of vehicles, longer warranty periods, and their advantage in servicing with factory-trained technicians and specialty tools, leading to higher customer retention and future same-store sales growth.
- By focusing on 9+ year old used vehicles, which represent 63% of used vehicle sales, LAD can turn inventory faster and achieve higher returns, maintaining profitability in used vehicle sales despite supply constraints.
- Management is committed to improving market share, cost-cutting, maintaining margins, and enhancing customer experience to increase customer loyalty and achieve their target of $2 EPS per $1 billion of revenue, utilizing assets like Driveway and GreenCars.
- Accelerated decline in new vehicle gross profit per unit (GPU), falling faster than expected, which could impact profitability. Bryan DeBoer noted that GPUs fell "a little bit more than what we really expected at the $100 a month."
- Higher SG&A expenses due to the U.K. acquisition are impacting margins, with U.K. vehicle GPUs being 45% lower than North American operations, and SG&A as a percentage of gross profit increasing to the mid- to high 60% range in the near term.
- Higher wholesale losses due to inventory adjustments, with a $21 million gross profit loss in the first quarter, driven by efforts to clean up inventory, potentially pressuring margins further.
-
Gross Profit per Unit Decline
Q: Why did new GPUs decline more than expected?
A: New Gross Profit per Unit (GPU) declined around $150 per unit in the quarter, more than anticipated, partly due to a 9% increase in imports, which are typically lower-cost cars with lower margins. We believe GPUs are still about $1,000 higher, including Finance and Insurance (F&I), than where normalization will occur. -
Operating Margin Outlook with Pendragon
Q: How does Pendragon acquisition affect operating margins?
A: Operating margin expectations have been adjusted from over 7% to over 5%, with about half of the reduction due to the Pendragon acquisition diluting margins because of lower-margin UK operations. The rest is due to conservative estimates influenced by interest costs and potential share buybacks. -
Wholesale Losses in Q1
Q: What caused the high wholesale losses this quarter?
A: We incurred $21 million in wholesale gross profit losses in Q1, primarily due to an aggressive inventory clean-up in the U.S. during January to make room for fresher inventory. This action impacted profits but positions us better going forward. -
F&I Trends and Leasing Impact
Q: What's the outlook for F&I and impact of leasing?
A: F&I income was down $124 per unit, with new vehicle F&I down $180 per unit. Increased subvented leasing, which generates flat fees and fewer F&I opportunities, contributed to this decline. Finance incentives are still about half of normal levels, and cash buyer incentives are down 80%, affecting profitability. -
Used Vehicle Supply Challenges
Q: How are used vehicle sales affected by supply issues?
A: Despite fewer vehicles coming off lease, we're focusing on sourcing older vehicles over 9 years old, which constitute 63% of the used car market. These vehicles offer better returns due to faster turnover and lower investment. While supply challenges exist, our team's ability to source vehicles remains critical. -
Restructuring and Headcount Cuts in UK
Q: What's happening with UK headcount reductions?
A: We are conducting structured headcount reductions in the UK as part of our ongoing restructuring following the Pendragon acquisition. While specifics are still being determined, we're evaluating each location to improve performance and efficiency. -
Driveway Finance Profitability
Q: When will Driveway Finance become profitable?
A: Driveway Finance Company (DFC) is on track to achieve profitability even at a loan book size of $3.5 billion. In March, DFC made over $2 million, marking significant progress toward sustained profitability after a four-year journey. -
SG&A Targets Amid Pendragon Acquisition
Q: Can SG&A remain at mid-50% after Pendragon deal?
A: Yes, we aim to maintain SG&A as a percentage of gross profit in the mid-50% range, even with the Pendragon addition. While the UK operates with higher SG&A due to structural differences, improvements in the U.S. operations and adjacencies will help us achieve this target. -
Internet Sales and Online Strategy
Q: How is the online sales platform performing?
A: Online sales increased 8% sequentially to 41,000 units, with traffic reaching 12.3 million visitors. We've reduced our marketing spend by 40% and improved efficiency through automation, cutting the burn rate by 50% year-over-year. Our focus on omnichannel strategies is driving growth in online transactions. -
Parts and Service Growth Outlook
Q: Can Parts and Service growth accelerate?
A: Despite a 3.2% increase in Parts and Service being lower than expected, we see opportunities for growth. The aging vehicle fleet and increased vehicle complexity, including more electric and hybrid models, are expected to drive demand for our services. -
Impact of Interest Rates on Customers
Q: Do Fed rate cuts affect customer demand?
A: Small interest rate cuts, such as 25 or 50 basis points, are unlikely to significantly impact customer demand. Our customers have adapted to higher average rates, with financing rates around 10%, and their purchasing decisions are more influenced by overall economic confidence. -
Capital Allocation and Debt Management
Q: Will you pay down debt or focus on growth?
A: With leverage at just over 2x, well below our covenant limit of 5.75x, we have flexibility in our capital allocation. We plan to be strategic, balancing acquisitions, potential share buybacks given stock price levels, and debt repayment, depending on the best use of capital.