Auto Retail Earnings Season: Headlines Rarely Tell the True Story

The basic notion of 'find a need, fill a need' does not change. I am simply pointing out that the order of importance with questions every investor in one way or another already asks themselves now (more than ever) needs to begin with the need.

- Jerry Marks, April 19, 2007

Earnings season is upon us! What questions (priority bucket) we begin asking when making an investment becomes more important than ever.

Many of the auto retailers will start next week telling us how many cars, car parts, and repairs they did in January, February and March. For most of the companies that report, we call this period the first quarter.

Actually, Genuine Parts (GPC) kicked off the season today, and I'll have commentary soon.

Now you are probably going to see all sorts of headlines. Like...

Company XYZ earned a record amount as sales soar!

or...

Company 'in the dog house' missed analyst expectations (even though they also may have earned a record amount as sales soared).

These headlines (good and bad) at times can cause dramatic reactions (in the stock prices) by investors. And certainly can influence investor and industry participant (competitors, vendors, employees, customers, etc.), opinion about which companies are executing well, and which are not.

But I think the headlines rarely tell us about the long term investment merits of a company. And trying to react to news and supposed emerging trends just becomes silly (in my book).

If you ask me, the allocation of society's resources (we call it the economy), is determined by 3 groups: government, business, and the consumer (so you and me). It is the consumer that continues to become an increasing part of the pie, and this is what throws so many people off. Because consumers are the ones that determine the need versus previous economic orders where government or businesses were once more influential in determining need (a.k.a. push versus pull).

Now I need to be clear about something, "paradigms" are always in flux if you are talking about how society matches up its resources with the wants and needs of a given society. But you need to be very careful when someone tells you "the world is different now." It is one of the most common symptoms or statements you tend to hear in economic bubbles.

The basic notion of "find a need, fill a need" does not change. I am simply pointing out that the order of importance with questions every investor in one way or another already asks themselves now (more than ever) needs to begin with the need.

Think about it? Roughly $7 out of every $10 of economic output in the United States (measured by something called gross domestic product) is actually consumer expenditures (versus government or business). I won't complicate things by bringing up foreign trade.

So if it is increasingly becoming the consumer that determines need versus business or government, I think the order of what questions we must ask ourselves about how to allocate resources (investment dollars) has to be:

1) What is the need?
2) How is the need best being fulfilled?
3) What are the returns that can be generated from fulfilling the need?
4) And therefore what price should I be willing to pay in order to generate an attractive return on my investment?

Unfortunately, far too often (we on Wall Street) begin with #4 and then wonder why our forecasts come up short.

Filling the need: Am I good at selling the vehicle people want? And how good am I at selling it?
This is why during the "off earnings season" I try to spend a lot of time addressing this idea of what is the need, or market for these products or services.

But as we get into earnings season, I think the attention appropriately shifts to #2, how is the need being best fulfilled? And for that, we like to come up with all sorts of financial metrics to evaluate performance (versus peers). It is the best way we (as external observers) can tell who seems to be filling some need in society. And whoever fulfills that need best should generate the best returns.

I really like what I did with CarMax's earnings announcement (although I didn't like having to make some corrections to my initial data set). You and I are only capable of processing about seven things. So while I probably exceeded that limit today, I like the idea of focusing on 5 - 9 (so most likely ending up with 7) key metrics with which to assess (evaluate) performance. If you have any suggestions about what some of those key metrics should be as we head into earnings season I am all ears.

But for today, since my top five names in the autoretailstocks rankings are all franchised dealers (like I said, something I am not too comfortable with), it clearly makes sense to begin there.

So I am not going to give you a list of key metrics, those will come with earnings (and likely change over time). Instead, I just want to give you a tool to help you maybe sort through some of the noise as the results are announced.

As you know, over the last year or so there has been tremendous discussion (in this newsletter) about brands versus process. I have come to the conclusion that no matter how good of an operator you are, if you owned a brand of vehicles that folks didn't want (like Oldsmobile at the end), it did you little good.

Although I think you will find the metrics below pretty interesting. Particularly the inventory trends, which suggest the "struggling brands" are actually getting better, while there could be looming problems with today's "hot selling brands."

Importantly, just because you were smart and focused on brands of vehicles people did want to buy (so you were good at recognizing the need), does it mean you are the best at fulfilling the need? Are you the best operator? For that I think we need to understand how the brands at a dealership group own performed in the first quarter.

As a result, this afternoon, I simply wanted to provide you the top brands each of the public dealers had (as a % of new vehicle sales) in 2006. And then show you how those brands stacked up in terms of market share, year over year inventory changes, and units sold per store in the first quarter of 2007.

Hopefully you will find this a helpful tool you can even look back on as the companies report results over the next couple weeks.

I encourage you to read the first piece about Honda where I explain the metrics in a little more detail. I started with Honda and Toyota, because I noticed both are important brands at most of the dealer groups. And while sales at these brands appear good, pay close to the inventory levels at these dealerships. They are rising, and that is not good.

After that, I went alphabetically, and generally just provide the data. I have also added a few caveats (technical details about the figures) at the end and some info about Europe.

Comparing the crowd
Honda (HMC):

% of dealer sales: 26 out of every 100 dollars in sales (so 26%) Asbury made from new vehicles in 2006 came from Honda. Actually about 21 of those were Honda, the other 5 were Acura (owned by Honda).

8.4% of AutoNation's (AN) new vehicle sales were with Honda brands.

10.1% of Group 1's (GPI) new vehicle (unit) sales were with Honda brands (everyone else is in revenue dollars).

4.5% of Lithia's (LAD) sales were with Honda brands.

15.2% of Sonic's (SAH) sales were with Honda brands.

16% of United Auto Group's (UAG) sales were with Honda brands.

Brand market share: January - March of 2007, Honda accounted for more than 9 (technically 9.1) out of every 100 light (so none of the big rig trucks) sold in the United States.

Brand sales performance: Honda sold 6.1% more vehicles in the first three months of 2007 than in the first three months of 2006. In other words, if they sold 100 Honda cars and trucks in January, February and March of 2006, they sold more than 106 in January, February and March of 2007.

Brand average sales per dealership: In January, February and March of 2007, on average, Honda stores sold roughly 308 vehicles per store. And its Acura division sold 166.

Brand average inventory: On April 1, 2007, according to the Automotive News data, Honda dealerships had something like 11.5% more vehicles on their lots than what they had on April 1, 2006.

Keep in mind, while the other metrics you usually want to see the metric going up. Inventories (for the most part) you want to see going down.

Toyota (TM):

% of dealer sales:

14% of Asbury's (ABG) sales

17.6% of AutoNation's sales

36% of Group 1's sales

10.9% of Lithia's sales

19.8% of Sonic's sales

21% of UnitedAuto Group's sales

Brand market share: 15.6%

Brand sales performance: Up 11.2%.

Brand average sales per dealership: 437 average vehicles sold per Toyota/Scion store. 341 average sold per Lexus store.

Brand average inventory: Up 24.3% (that is concerning).

Audi/Volkswagen (VLKAY.PK):

% of dealer sales:

1.6% of Lithia's sales

1.4% of Sonic's sales

7% of UnitedAuto Group's sales

Brand market share: 1.8%

Brand sales performance: Up 0.3%.

Brand average sales per dealership: Audi had an average of 79 vehicles sold per store, Volkswagen had an average of 78.

Brand average inventory: Down 19%.

BMW:

% of dealer sales:

6% of Asbury's sales

5% of AutoNation's sales

4.1% of Lithia's sales

13.7% of Sonic's sales

18% of UnitedAuto Group's sales

Brand market share: 1.9%

Brand sales performance: Up 3.9%.

Brand average sales per dealership: 191 average vehicles sold per store. Mini averaged 103.

Brand average inventory: up 8.8%.

Chrysler Group (DCX):

% of dealer sales:

4% of Asbury's sales

41% of Lithia's sales

1% of Sonic's sales

7.6% of AutoNation's sales

Brand market share: 13.9%

Brand sales performance: Down 4.4%.

Brand average sales per dealership: 95 average vehicles sold per Dodge store. 48 for Chrysler stores, and 42 Jeep.

Brand average inventory: down 17.6%.

Mercedes:

% of dealer sales:

9% of Asbury's sales

1.3% of Lithia's sales

9.5% of Sonic's sales

11.8% of AutoNation's sales

Brand market share: 1.4%

Brand sales performance: Up 9.2%.

Brand average sales per dealership: 166 average vehicles sold per store.

Brand average inventory: down 5.5%.

DaimlerChrsyler (DCX) (combined only when available):

% of dealer sales:

12.8% of Group 1's sales

11% of UnitedAuto Group's sales

Brand market share: 15.3%

Brand sales performance: Down 3.3%.

Brand average inventory: down 16.8%.

Ford Motor Company (F):

% of dealer sales:

8% of Asbury's sales

15.1% of Group 1's sales

7.3% of Lithia's sales

10.2% of Sonic's sales

10% of UnitedAuto Group's sales

16.1% of AutoNation's sales.

Brand market share: 16.1%

Brand sales performance: Down 13.9%. Keep in mind, Ford had a 34% drop in sales to rental car companies, so the number of vehicles sold at Ford stores wasn't down quite as much.

Brand average sales per dealership: 133 at the average Ford store, 78 at Volvo, 29 at Lincoln, 24 at Jaguar, 22 at Mercury, and 10 at Aston Martin.

Brand average inventory: down 26.8%.

General Motors (GM):

% of dealer sales:

7% of Asbury's sales

14.3% of AutoNation's sales

8% of Group 1's sales

19.4% of Lithia's sales

16.8% of Sonic's sales

4% of United Auto Group's sales

Brand market share: 23.2%

Brand sales performance: Down 5.5%. Keep in mind, GM had a 32% drop in sales to rental car companies, so the number of vehicles sold at GM stores wasn't down quite as much.

Brand average sales per dealership: 133 average vehicles sold per Chevrolet store in the first quarter. 133 also per Saturn store. 74 per Hummer store. 51 per GMC store. 32 per Cadillac store. 30 per SAAB. 27 per Pontiac. 16 per Buick.

Brand average inventory: down 8%.

Heavy Trucks (Isuzu, Navistar, Peterbilt)

% of dealer sales: 10% of Asbury's sales

I don't know most of the details, but I can tell you that based on data from the Bureau of Economic Analysis, heavy truck sales were down 15% in January, February and March (combined) of this year versus those same months last year.

Hyundai:

% of dealer sales:

3% Lithia's sales

1.5% of Sonic's sales

Brand market share: 2.7%

Brand sales performance: Down 1.7%.

Brand average sales per dealership: 149.

Brand average inventory: down 0.4%.

Kia:

% of dealer sales:

1% Asbury's sales

Brand market share: 1.9%

Brand sales performance: Up 13.5%.

Brand average sales per dealership: 106.

Brand average inventory: down 23.4%.

Nissan (NSANY):

% of dealer sales:

15% of Asbury's sales (12% Nissan, 3% Infinity).

9.8% of AutoNation's sales were Nissan brands.

11.1% of Group 1's sales were Nissan.

2.9% of Lithia's sales were Nissan.

1.8% of Sonic's sales were Nissan.

3% of United Auto Group's sales were with Nissan.

Brand market share: 7.2%

Brand sales performance: Up 6%.

Brand average sales per dealership: 230 average vehicles sold per Nissan store. 190 at Infinity

Brand average inventory: Down 5.5%.

Porsche:

% of dealer sales:

4% of United Auto Group's sales

Brand market share: 0.2%

Brand sales performance: Down 9.7%.

Brand average sales per dealership: 41.

Brand average inventory: down 20.5%.

Subaru:

% of dealer sales:

2.7% of Lithia's sales

Brand market share: 1.1%

Brand sales performance: Down 4.6%.

Brand average sales per dealership: 81.

Brand average inventory: down 24.7%.

Caveats/Technical Details
First, these are aggregated brand results. So in all cases but DaimlerChrysler (where I show both Mercedes and Chrysler Group as separate and combined depending how the dealer group reported), the results include all of a company's divisions (i.e. Honda/Acura, Toyota/Lexus/Scion, etc.).

Group 1's brand sales are based on units whereas everyone else is based on new vehicle revenues.

All data has been compiled aggregated and in most cases then calculated by me (using the data) from: company reports, Bureau of Economic Analysis, Ward's, Auto News, and the European Auto Manufacturers Association. Errors are inevitable, and if you notice one, please feel free to point it out.

Also, almost one-third of UnitedAuto Group's sales are international (with the bulk in the United Kingdom). And the results I am giving you (since I don't know how many stores they own of each brand international versus in the United States) are therefore for the United States. So this brand data performance for the first quarter may not be as helpful with UnitedAuto Group.

So below (the last section for today) I provide the year over year registration data for the United Kingdom, as well as some brand performance for all of Europe. Only like I said, I don't know if (for example), the $2.10 out of every $10 in new vehicle sales UnitedAuto Group generated were at Toyota stores in the U.S. or Europe? I can guess that about $1.33 came from Toyota stores in the U.S. (assuming that the company's Toyota stores are similar to UnitedAuto Group's company-wide average). But it would be only that, a guess.

Finally, brand mix, market share and store throughput are only part of the story. I think the inventories help provide a somewhat better gauge in assessing overall budgets.

But keep in mind, I can produce all of the same-store sales I want if I lower my gross profit. The real trick becomes can you grow sales and share profitably? So keep these metrics in that context. They are only supposed to be a tool to help you see how each company's primary brands are performing in the market place.

United Kingdom, Europe and UAG
According to ACEA (European Auto Industry Association), total passenger car registrations in the United Kingdom were up 2.9% in January, February, and March of 2007 versus the number of vehicles that were registered in those same three months of 2006.

They don't provide the break out by brand, by country this early. But if you just take UnitedAuto Group's top 5 brands worldwide (once again assuming a similar regional versus worldwide split has its problems) here is how those brands performed in Europe in the quarter:

Toyota/Lexus (21% of UnitedAuto Group's Worldwide New Vehicle Sales)

Total Toyota Group had 11.4% more vehicles registered in Europe. Toyota vehicles themselves were up 11.7%. Lexus was up 7.1%.

BMW (18% of UnitedAuto Group's Worldwide New Vehicle Sales)

In total, BMW vehicles had 5.3% fewer registrations in Europe. Mini registrations were up 7.7%, while BMW brand sales were down 7.4%.

Honda (16% of UnitedAuto Group's Worldwide New Vehicle Sales)

Up 16.4% from last year's first quarter.

DaimlerChrysler (11% of UnitedAuto Group's Worldwide New Vehicle Sales)

Down 7.2%. Mercedes down 1.5%. Smart down 52.9%. And Chrysler down 0.2%.

Tony Pordon, Senior Vice President of UnitedAuto indicates the dramatic drop in Smart sales over in Europe is simply because the older model 450 stopped production last year, and the new model went on sale in the middle of March. I got to see the new model in Detroit a few months ago, and as I recall, it looked pretty cool. But then again, I initially thought the Aztec looked cool! Did I just admit that out loud?

Kidding aside, given the new product ramp, you might see a pretty big boost (after this big decline) in the coming months with Smart in Europe. So don't panic just yet.

Ford (10% of UnitedAuto Group's Worldwide New Vehicle Sales)

Up 1.4%. Ford itself up 0.7%, Volvo up 12.7%. Land Rover down 10.5%. Jaguar down 11.5%.