March Vehicle Sales Preview

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Includes: ABG, AN, CRMT, DDAIF, F, GM, GPI, KMX, LAD, PAG, SAH
by: Jerry Marks

The dealers will still be bringing in the final numbers to us after this weekend, but I can say with some confidence that we'll be down in the double digits . . . it's about comparison. The F-Series did much better last year.

- George Pipas, head of Ford's sales and analysis, quoted by Reuters on the sidelines of a product review

Usually at the beginning of every quarter I try to update you with my rankings. To be honest, I am still crunching through the numbers and hardly plan to sacrifice insight (understanding) in order to meet some arbitrary deadline I have set for myself.

But as I stated Sunday, there sure is a lot going on this week. So today, I just wanted to give you a few quick thoughts about the March and first quarter vehicle sales figures you will be hearing all about this afternoon and well into Wednesday morning.

As you saw (above) from Ford's head of sales analysis, domestic automakers may yet again show a tough month. And Reuters had another article saying analysts were looking General Motors to be down 3% to 5%. Although I would be careful about that figure as GM continues to ease off fleet sales (mostly those unprofitable or "less profitable" sales to the car rental companies). So GM's retail sales may very well show a lift (on a year over year basis).

All in Reuters says most analysts are looking for somewhere between 16.2 million to 16.6 million vehicles on a seasonally adjusted annual rate [SAAR] basis. What the heck is the SAAR? Let me explain that figure. The SAAR is simply what the government (bureau of economic analysis) has determined what the March sales would equate to on a full year (annual) "run rate."

Over the last 5 years, the month of March has accounted (on average) for 9 out of every 100 vehicles sold in a year. Now if you just divided 1 (month) by 12 (months in a year), you would come up with 8.3%. So, if we lived in an ideal world where there were no "seasons," and no fluctuations (from month to month) with sales, every month should account for roughly 8.3 out of every 100 vehicles sold in a given year.

Therefore we know that the month of March is a little more important than the average bear (to make a play with words on Yogi bear's "smarter than the average bear.") So the government "gurus" take the monthly figure and extrapolate it out to this annual figure (adjusted for the theoretical differences in months and seasons) and call it the SAAR.

For example, in the month of March, I am expecting nearly 500,000 passenger cars will be sold by the domestic players (Ford, GM and Chrysler). To arrive at an annual figure, you just multiply by 12 and come up with about 6 million. But hold on, you've got to "adjust" for the season, so the government gurus tell me to divide by a seasonal and trade day factor of 1.1475. So I come up with a SAAR (for domestic passenger vehicle sales) of 5.228 million. I do the same thing for domestic light trucks (although for some odd reason they give me different seasonal and trade day factors for each type of vehicle) and come up with 7.6 million units, foreign passenger cars (2.1 million units), and foreign light trucks (1.3 million units).

When I combine these figures, I come up with a grand total of 16.27 million (light) vehicles on a SAAR basis for the month of March. Kind of near the low end of where Reuters suggested most analysts are forecasting.

But I am not all that concerned with SAAR figures (although that seems to be the headline number everyone else focuses on). In total, I think there are going to be a little more than 1.537 million light vehicles (so not the big trucks) sold in March of 2007, which is around 1% (technically 0.7%) higher than the 1.525 million units sold in March of 2006.

For the first quarter (January/February/March) of 2007, this works out to around 3.872 million vehicles. Not bad considering there were about 3.922 million units sold in the first quarter of 2006. Down only about 1.3% in the quarter (year over year), despite folks like GM and Ford walking away from a lot of that unprofitable car rental business.

And as analysts interested in the auto retail sector, we are far more interested in trying to figure out if the dealers were "overly optimistic" about the quarter. For that, I like to look at inventories. If inventories are down, it tells me that dealers were more cautious than what actually materialized. And if they are up, it tells me they were probably "overly optimistic."

Think about it this way. If I were I dealer maybe I thought I would sell 100 vehicles this month. My budgeting therefore called for $300 per vehicle in advertising, $5 a day on floor plan interest expense on 200 vehicles in inventory (so I had a big enough selection), which based on 27 "selling days" in a month works out to $135 in inventory costs per vehicle per month. And I also planned on averaging 10 vehicles sales per sales person (and each sales person would make about $300 per "copy.") Only I have two new sales people that I will probably need to "carry" a bit, so those people I am just going to pay $1,500 for the month.

Now imagine, I sold only 80 vehicles in the month. I still get another 100 vehicles sent to me from the manufacturer (because I thought I was going to need to replace 100), and now I am sitting on 220 vehicles on my lot. Since I am paying $135 in inventory per vehicle, and I have an extra 20 units, and now all of a sudden my costs were $2,700 more in the month than I thought. And my advertising budget for the month of $30,000 that was based on 100 vehicles being sold, now all of a sudden turns into $375 in advertising costs per unit. My sales people only made about $2,400 this month (even though they were expecting to make $3,000), so I may even need to throw in some promotions or "spiffs" so they stick around next month, and I am carrying the two new people at the more fixed $1,500. Starting to get the point? If my inventories are up, chances are my budget is "out of whack." And the inverse (opposite) can be said if inventories are lower.

Sadly, you can not determine this by just looking at one store. Sure, so a dealer has their inventories in line. But if the dude down the street has too much inventory, they are probably discounting the vehicles too much, and your overall profitability is being hurt. Instead, I like to look at the industry-wide figures as a better barometer of the health of the industry. And when I look at that figure, it doesn't look so bad.

Remember how we talked about U.S. light vehicle sales being down about 1.3% in the first quarter of 2007? Well, according to the AutoNews Data Center figures, vehicle production in North America was down nearly 7% from the first quarter of 2006. So even though I only sold 99 out of every 100 vehicles I did last year in the first quarter, I only asked the manufacturer to send me 93 out of every 100 vehicles (based on the manufacturers' production plans).

Now this is kind of an imperfect science and so it does not completely work out that I've got 6 fewer vehicles in inventory on my lot. In part, it is because there are import and exports between Canada and Mexico that can skew this calculation. But based on the first two months of reported inventory data in AutoNews, and my calculations and forecasts for the month of March, I figure, on average, there were about 4 fewer vehicles on dealer lots in the first quarter of 2007 than in the first quarter of 2006. And even if you don't believe my forecasting, in February, according to the AutoNews data, there were actually about 4 fewer vehicles on dealer lots (ok, technically down 3.7%) versus February 2006.

Sure, you've got slightly higher interest expense (than a year ago). But the bottom line is that dealers seemed to be planning on a tough quarter. And if anything, the quarter itself came in a little better than they thought. Now there will be differences in brand mix, geographies and the what not. And I am hardly interested in "making a call on the quarter for a specific dealer group). However, if you are trying to assess the environment and not just depending on what management teams tell you about the industry environment (as they get on the call and whine about the California housing market), when I look at the industry environment from an inventory perspective, things just do not look so bad. I am not saying things are great. Don't forget, AutoNews in January said something like one out of every two dealers that month lost money (albeit that is a seasonally slow month).

But when I consider the environment in the first quarter versus the last couple of quarters, based on inventories, the industry just does not look as bad. Let me put this in perspective for you. In the third quarter of 2006, dealer inventories were up 9.3% (so 9 more vehicles per every 100 on the dealer lots) versus the third quarter of 2006. And even in the fourth quarter, where I think things proved to be a little better (well if we can ignore Lithia and AutoNation's results), dealer inventories were down an average (unweighted basis) of nearly 2%.

We won't have the actual March sales figures until 5 PM. And the actual inventory figures (versus my guesstimates) won't come out for another couple weeks. But I can only say, that from my vantage point, it sure looks like the industry environment/backdrop was more favorable for dealers in the first quarter of 2007 versus the third and even fourth quarters of 2006.

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