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Group 1: Earnings Hurt by 'Extreme Weakness' in Oil-Dependent States

Not even another strong performance in U.S. new-vehicle margins, a record quarter in the group's U.K. market, and a profitable quarter in Brazil were enough to offset "extreme weakness" in Group 1's energy price-impacted markets.

by Staff
May 3, 2017
Group 1: Earnings Hurt by 'Extreme Weakness' in Oil-Dependent States

 

4 min to read


HOUSTON — Group 1 Automotive’s first-quarter story wasn’t much different from the fourth quarter of 2016, as not even its F&I segment’s $1,637 per-copy average could offset the 11% sales decline in the group’s core Texas and Oklahoma markets.

In fact, not even another strong performance in U.S. new-vehicle margins, a record quarter in Group 1’s U.K. market, and a profitable quarter in Brazil were enough to offset “extreme weakness” in vehicle sales in the group’s energy price-impacted markets.

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“Sales were once again negatively impacted in the Texas and Oklahoma markets due to weakness in the oil industry, with decreases of 12% in Texas and 16% in Oklahoma,” said Group 1 President and CEO Earl Hesterberg during the company’s April 28 earnings call. “The magnitude of the industry sales declines in [those markets] were greater than we expected.”

The Fortune 500 dealer group reported earnings of $33.9 million, or $1.58 per share, for the first three months ending March 31. That’s down from a $34.3 million profit during the same period last year.

Combining its U.S., U.K. and Brazilian markets, Group 1 reported total revenue of $2.5 billion, a 3.4% decrease from a year ago. Total gross profit came in at $383.5 million, a 1.4% decrease from a year ago. New-vehicle revenues fell 5.2% to $1.34 million on 6.1% fewer unit sales, which totaled 38,290 units. New-vehicle gross profit fell 3.5% to $69.2 million, as improve new-vehicle margins partially offset the volume decline.

Retail used-vehicle revenue fell 4% on 3.7% fewer unit sales, which totaled 31,566 units. Retail used-vehicle gross profit fell 8.5% from a year ago to $45 million. Officials said the decrease reflected the impact of lower margins, which were down $74 per unit, and the volume decline.

“As was the case throughout 2016, the volume weakness was seen throughout the oil dependent markets in the United States and in Brazil,” Hesterberg said. “Our largest market, the U.S. energy capital, of Houston, had an industry new-vehicle sales decline of 16% for the quarter. Group 1 new-vehicle sales in Houston were down 13% for the quarter. So we outperformed the market, but still need to make further adjustments to our business.”

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Looking at Group 1’s U.S. market performance, total revenue declined 3.9% from a year ago to $1.97 million on a same-store basis. The decrease was driven by an 8.5% decline in new-vehicle unit sales, which totaled 27,498 units. U.S. same-store total gross profit declined 2.2% from a year ago to $320 million, as a $91 improvement in new-vehicle gross profit per unit — which averaged $1,862 for the quarter — and growth in fixed-ops sales and F&I per unit only partially offset the revenue decline.

Also impacting revenues was the 3.9% decline in used-vehicle revenues — with retail sales falling 5.4% to 24,929 unit sold. Total F&I revenue also fell 3.7% from a year ago to $85.4 million. Partially offsetting those decreases was the 4.2% increase in fixed-ops revenues, which totaled $271 million.

“We reiterate our guidance for mid-single-digit same-store revenue growth for 2017,” said Group 1 CFO John Rickel. “Our 3.7% F&I revenue decrease was driven by a 7.1% decrease in total retail units, partially offset by a [profit per revenue unit] increase of $58 to $1,629 per unit.”

On a consolidated basis, Group 1 posted penetration rates of 32% for service contracts, 29% for GAP, 11% for maintenance, and 23% for the group’s paint sealant product. It’s U.S. F&I operations registered penetration rates of 42% for service contracts, 30% for GAP, 15% for maintenance, and 23% for sealant.

Asked about his outlook over the next 12 to 18 months, Hesterberg said the biggest challenge remains in used-vehicle markets, mainly because of the segment’s link to new-vehicle incentive activity and oversupply. “So I think that’s where the risk is,” he added. “We’ve worked hard to get our new-vehicle margins better than they were a year or two years ago as we get under more volume pressure. We’ve been up five quarters in a row on our new-vehicle margins, so we’re going to do our best to kind of hold as close as we can to these levels.”

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But that won’t be easy, he added, especially with what’s happening in the group’s core Texas and Houston market. But he did offer some good news regarding those markets. “… Drilling activity has recently increased and we expect the energy industry to begin to recover and resume some degree of hiring,” he said. “We continue to adjust our business to the near-term lower level demand in these markets.”

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