Virus puts stores in ‘survival mode'

In the best of times, Brian Bakhtiari's Subaru store in California's Bay Area sells as many as 250 cars each month.

This March, Stevens Creek Subaru had sold 90 new and 22 used vehicles. Nearly two weeks of sales for the month were effectively erased when the Bay Area was put under a local shelter-at-home order that closed physical sales departments.

Down the street, sales revenue at Bakhtiari's Nissan dealership was off roughly 60 percent before accounting for automaker incentive money. Service remains open, but business is slower there, too: Service revenue was $6,500 one day last week, compared with close to $10,000 on a typical day.

"Every aspect of our revenue stream has been just devastated," said Bakhtiari, vice president of Bakhtiari Auto Group, which has six dealerships in California.

Dealerships across the country are already absorbing the financial hit from the coronavirus pandemic as they close the books on March. Stores are recording significantly lower sales, revenue and profits for the month — the result of state mandates to close showrooms and, even where sales have continued, a significant dropoff in customer traffic as people heed guidelines to stay home to limit the spread of the COVID-19 illness.

Yet March is just the start. April likely will be more painful, according to dealers, accountants and economists who spoke to Automotive News last week, since the impact may be felt for an entire month rather than a few weeks. Additional states now are restricting nonessential activities, which could further repress auto sales.

"April is going to be far worse than March," said Jonathan Smoke, chief economist for Cox Automotive. "How bad it gets, I think, will vary still pretty dramatically in the month of April because there's very different responses that the state and local authorities are taking to vehicle sales."

The financial stress has spread to dealerships beyond the states with the highest number of confirmed COVID-19 cases or the tightest restrictions on business activity, such as California, New York and Pennsylvania.

In Florida, where Gov. Ron DeSantis last week joined dozens of other states with statewide stay-home mandates, dealer Earl Stewart said he expects March net profit at his Toyota store in Lake Park to plummet 76 percent compared with March 2019.

Stewart's early estimates are for $120,000 in net profit for the month, down from $508,299 a year ago. He told Automotive News he would be satisfied if Earl Stewart Toyota sells 100 new vehicles and 40 used cars in April — a fraction of the normal pace.

Florida dealerships are considered essential businesses, so sales should be allowed to continue under DeSantis' order. Yet "we don't think we're going to make any money in April," Stewart said.

Stewart said the store has enough cash on hand to last six months without selling a single car. It could go 12 months with layoffs, which Stewart aims to avoid.

"When you lay somebody off, it's hard to hire them back," he said. "Having someone leave and go on unemployment is a last resort."

In the immediate term, the landscape of state restrictions changes by the week. Some states are issuing new rules, while others revised initial mandates to add more businesses considered essential. Auto repair and maintenance generally is allowed, while sales rules vary.

Longer term, it's not clear when the pandemic will wane, nor how quickly people will return to the vehicle market. Millions of U.S. workers have filed unemployment benefits claims as businesses have closed or cut costs.

Data on declining vehicle sales and service appointments from March "absolutely implies a substantial decline in revenue," Smoke said, "and so preserving cash and being able to understand that this is not going to go away in just 30 days [are important]."

An impact of at least 90 days is more likely, he added.

AutoNation Inc. said Friday, April 3, that its vehicle sales had dropped by 50 percent the last two weeks of March compared with the same period a year ago. The country's largest dealership group said it was laying off 7,000 workers and taking a number of other steps to reduce costs. The announcement followed similar moves by dealership giants Penske Automotive Group Inc. and Group 1 Automotive Inc. Group 1 said its U.S. vehicle sales volume was down 50 to 70 percent compared with a typical March.

Dealership vendors have responded to the crisis by cutting fees, while some manufacturers are offering floorplan payment relief and guaranteeing incentive payments even if performance objectives aren't met. Automakers also have extended generous offers to consumers designed to entice them into showrooms.

Incentives are catching shoppers' attention, Smoke said, but many prospective buyers either can't visit a showroom or are afraid to do so. Consumer interest in vehicle shopping doesn't appear to have waned to the degree that sales have, he added.

The $2 trillion federal stimulus package will offer business loans and tax credits for retaining workers, which may help dealers with cash flow, Smoke said.

Some dealerships have drawn down credit lines to boost their cash cushion, said Greg Dougherty, a partner at dealership accounting firm Crowe. Dealers also are looking to minimize costs everywhere they can, he added, including personnel and advertising.

While many dealers had signaled before the outbreak that used vehicles were their best chance for profit growth in 2020, Dougherty said automaker incentives might steer more customers to new vehicles when the crisis ends.

"Dealers are still trying to focus on service, because right now, that may be their best opportunity to make some money" or break even, he said.

Maroone USA's five stores in Colorado have had to adapt to state orders that closed the physical showroom but enabled remote sales. The group's vehicle sales in March are anticipated to have dropped by about 35 percent overall, CEO Mike Maroone said.

Since the Colorado order took effect, sales likely declined at a steeper rate — in the neighborhood of 65 to 70 percent, Maroone said. The group also has one store in Florida, where sales have been allowed to continue, and sales volume there dropped by about half over the last several days of the month, Maroone said.

He declined to disclose specific figures but said his group will end the first quarter below 2019 for both sales volume and profit. Until the virus crisis, he said, his group had been pacing ahead of 2019.

About 30 percent of employees in Colorado and 20 percent in Florida are furloughed, though the company continues to pay its share of their health care expenses, Maroone said. The group also asked vendors to reduce costs and limited its purchase of used vehicles to focus on cash generation. He said his team is modeling several financial scenarios.

"We're a well-capitalized group," Maroone said. "The wild card is just how long this disruption is going to last."

Many dealers can still make money in 2020, even if results end up close to break-even, said Mark Johnson, president of buy-sell advisory firm MD Johnson Inc. That scenario, however, is contingent on federal stimulus aid covering their losses, vehicle production resuming and people spending money again.

"I don't see this turning good, profitable stores into losses for the year, but [for] stores that are marginal, [it] will be very difficult for them to be profitable this year," Johnson said.

Tyler Reed, a managing partner of Reed Auto Group, said last week that gross revenue across his Kansas City, Mo.-area group was expected to be down 35 percent in March vs. March 2019.

The first half of March at times paced ahead of forecasts, he said, "and then it turned off like a spigot. Leads stopped coming in. Website traffic [went] down tremendously. Lot traffic, obviously, and even the service departments … have slowed to about a 25 percent [of normal] pace."

Still, Reed said he has seen encouraging signs in the service lane. In the first couple of days after stay-at-home orders were issued locally, the group dropped from writing 30 repair orders a day to between 10 and 15, he said. That number then climbed into the 20s and returned to 30 last week.

Larry Winter, president of South Hills Chrysler-Dodge-Jeep-Ram and South Hills Kia in suburban Pittsburgh, said he anticipates zero sales business in April because of a statewide order banning vehicle sales. Winter said he was not conducting sales of any kind, including online.

Service business is running at about 60 percent of normal, he said. He estimated that total gross profit for his two stores in March will drop by 75 percent, roughly $500,000, compared with a year ago.

Winter said he laid off 75 of about 100 employees — even himself and his family members. Should Pennsylvania allow online and remote sales, the stores wouldn't recover all lost sales but would be better than zero, he said.

"We're in survival mode," Winter said. "It almost changes daily. It's tough to even put a plan to whenever this ends."

Jackie Charniga contributed to this report.