With Group 1 (NYSE:GPI), I felt there were more changes to the presentation than Asbury, so forgive me for spending a little more time on this company. I think the reason I noticed more changes to Group 1’s slides (aside from the fact that I haven’t seen one of their presentations since the Spring) is because management is still relatively new (less than 24 months on the job). And so last year you started to see management’s plan come together (both in the articulated strategy as well as the earnings results). This year’s presentation looks to even more clearly articulate where they are heading.
For example, management added a part that discussed a strategic shift toward owning more of their real estate (versus leasing). Something that didn’t come up until the company’s third quarter conference call. Management also showed a pie chart of the company’s geographic “mix.” About 47% central region (Texas/Oklahoma), 22% Northeast, 17% West Coast, and 14% southeast. At first you say, ok, not all that new, not all that big of a deal. But as Mr. Hesterberg was presenting, he indicated that future acquisitions would likely be outside of the central region as they look to get a better geographical diversification. If he has said this before, I must have been asleep in the back of the room. It certainly makes sense, and something I guess I would expect them to do.
But you have to understand that Group 1’s previous management focused on buying good dealer groups, period. And that is how the company ended up with their Boston group of dealerships. It was a good group. It did not matter if it was no where near any of Group 1’s other stores. On the flipside, you can also start to understand why the company got so concentrated in the Central region. Because “flow begets flow,” and being in the market so heavy, the company’s dealers in that market knew what were the best groups to buy, so they could achieve an attractive return on investment.
Now what you are beginning to see with the new management team is that they are not only still trying to buy good dealerships that meet their 15% - 20% return on investment target (without “penciling up” a whole bunch of synergies), but taking a strategic approach in both the markets and brands they purchase. And speaking of brands, management commented that they hope to end 2007 with a 75%/25% (foreign and luxury versus domestic) split. They ended the third quarter with a 71%/29% split. And they plan to get to their brand mix target with acquisitions that add about $600 million in annualized revenues in 2007 as well as an undisclosed amount of dispositions (mostly domestic stores).
Something else I should add (related to dispositions) was management’s mention of potentially $5 to $10 million in disposition charges. These seem extraordinarily high. So I checked with management, and was able to confirm that this includes potential lease termination charges. Apparently, getting out of the company’s leases slows the company’s ability to dispose of stores that do not fit in their brand/geography strategy. So I think they wanted to caution investors about these potential charges as it certainly does not make sense the company continue operating dealerships that are not a strategic fit (even if they do have to terminate the lease).
Mr. Hesterberg (and the company’s CFO John Rickel) also addressed some of management’s efforts to centralize and standardize processes to leverage their scale while once again “retaining the entrepreneurial spirit.” In this regard, 90% of the company’s stores are now on a common dealer management system [DMS] powered by ADP, and by year end, all of the companies stores will be on the same DMS. They also hired a director of purchasing, and are centralizing a lot of their purchasing. On the used vehicle front, now all of their dealerships in Texas are sharing inventory and data, and the gentleman who spearheaded the effort in Texas has just been moved to do the same thing in Oklahoma.
And maybe a final aside, I thought it was interesting to hear Group 1’s management mention that they are doing more marketing for parts and services via the email. In summarizing their marketing strategy (and it varies a lot by brand and region), Mr. Hesterberg said they are doing a little more marketing via the radio, a little less in print, and significantly more via the internet.
GPI 1-yr chart: