Retailers hopeful after Q2 rebound

Matt Bowers' Southern United Auto Group had record results in June. And July was even better.

"We lit it up," said Bowers, president of the growing dealership group with six stores in Louisiana, Alabama and Tennessee.

Pent-up demand, expense cuts and Paycheck Protection Program money, plus automaker support and temporary relief from lenders and vendors, helped many dealers turn a profit in the second quarter — some even boasting earnings records.

It is a far cry from the financial bloodbath many feared in late March as the coronavirus pandemic stifled consumer demand and led to government stay-at-home orders and closed showrooms. Sonic Automotive Inc. CEO David Smith in April predicted the second quarter would be the worst in the dealership group's history.

Instead, the sixth-largest U.S. new-vehicle retailer saw sequentially stronger results over the three months. Higher new-vehicle margins aided by inventory shortages, increased used-vehicle sales and strong finance and insurance performance, along with big cost cuts, helped Sonic post higher net income than a year ago.

All six public dealership groups ended up profitable for the quarter, with Lithia Motors Inc. and AutoNation Inc. both posting adjusted earnings records.

Sonic's turnaround ignited as government shutdowns loosened, Smith said. David Hult, CEO of Asbury Automotive Group Inc., said closing nonessential businesses in many states and the subsequent decline in consumer spending on entertainment and travel may have contributed to the stronger-than-expected second quarter.

"People aren't spending money on vacations and plane tickets and bowling alleys. They're spending more money on vehicles; down payments are getting bigger," Hult said.

The public retailers, which weren't eligible for the forgivable PPP loans, furloughed thousands of employees and terminated more as the crisis unfolded. Like many private dealers, they also significantly reduced capital expenditures, halted facility projects and slashed advertising budgets. Some of the moves are permanent and are expected to help financial results going forward. But virus-related risks remain, and it's unclear just how strong the rest of the year will be financially.

"You've got to worry about the flare-ups or outbreaks in certain pockets of the country that cause people to go back inside and stop spending money," National Automobile Dealers Association Chief Economist Patrick Manzi said. "That's going to be one of the biggest issues, not just for auto retail but for the economy in general."

The average private dealership posted an operating loss of nearly $194,000 through May, down from a profit of more than $22,000 during the same months in 2019, according to NADA data. Net profit before taxes for the average store was $321,452, down 45 percent. NADA didn't yet have June or July data.

Manzi told Automotive News that he expects some dealerships may still be in the red for the second quarter, though many likely turned an operating profit. Several dealers told him June was a "surprisingly solid month," he said. Manzi predicted most dealerships will be profitable for the third quarter based on sales data he has seen.

Yet, dealers still face challenges. Some project the brisk pace of sales the past few months will decline. Many are short on key inventory for both used and new vehicles, the latter of which is expected to rebound in the fall as automaker production catches up. Dealerships that benefited from rising transaction prices and higher gross profit per new vehicle in the second quarter likely will see those grosses normalize as inventory hits dealership lots again.

Dealers are nervously watching spiking case counts in areas such as California and Texas, with some saying they already softened demand. Penske Automotive Group Inc. CEO Roger Penske told analysts last month that any kind of renewed shutdown — even regionally — could hamper financial results.

Another factor that could hurt some dealerships is the end of assistance from lenders and/or vendors. Some retail technology companies have halted free or discounted tools and services they began offering in April. But some have left open the possibility of revisiting discounts if needed later this year, depending on the virus and the recession.

"There are simply too many uncertainties — mainly resurgence of the virus, impacts on consumer confidence and the larger economy, along with the availability of inventory — to make a prediction on profitability" for dealerships in the third and fourth quarters of 2020, Thomas England, an Atlanta-based partner in the dealership practice at accounting firm Dixon Hughes Goodman, wrote in an email to Automotive News.

England said most of his clients made money in the second quarter after a tough April led to strong rebounds in May and June.

But some dealers are optimistic.

Sonic President Jeff Dyke told analysts July 30 that the retailer expects pretax income to rise 140 percent for July. He doesn't expect a slowdown for August and September.

"The new-car inventory is getting better, so new-car volume will improve as we move forward," Dyke said. "Margins are good across the board. So the third quarter should be a great quarter for us."

Some dealers and Jodi Kippe, managing partner of retail dealer services at accounting and consulting firm Crowe, said the area of parts and service has been the slowest to bounce back to normal levels.

AutoNation CEO Mike Jackson told analysts last month that he expects service-and-parts volume to run at normal levels.

"There's going to be a lot of pent-up demand ultimately for maintenance. No maintenance was done during this pandemic period," Jackson said. "We only did repairs that had to be done."

Westside Motors, a Chrysler-Dodge-Jeep-Ram store in Thief River Falls, Minn., saw business pick up in June and July after a tough few months during which it temporarily laid off half of its employees. Lack of inventory and a struggling service drive hurt by nearby road construction will challenge the second half of the year, said Tami Shaffer, the store's general manager.

"If we had the inventory here and we didn't have this road construction, I feel that we would be all right," Shaffer said.

The dealership is carefully watching how it spends its money, cutting back advertising and ceasing print-newspaper marketing, she said.

Group 1 Automotive Inc. also has more demand than inventory to meet it, said Daryl Kenningham, president of U.S. and Brazil operations for the fourth-largest U.S. new-vehicle retailer. He said last month that July results were shaping up to be a little stronger than June's. Kenningham expects new-vehicle inventory to remain tight through August before improving.

"What's happening is all of our hot-selling vehicles like RAV4s and CR-Vs and Civics and Toyota Tacomas, Ram trucks and Silverados and Sierras, we're very, very light for inventory in those," he said. "So as those start to fill through the rest of the year, I think we'll see some improvement."

Southern United's Bowers credits some of his group's success to betting big on inventory early in the crisis. In March, he bought $10 million in rental-car inventory, scooping up coveted vehicles such as Chevrolet Tahoes and Suburbans. He also focused on market share and said his company had a record month for service and parts in July, with customer-pay business up 10 percent.

"If you'd have told me in March and April that I would be talking about record months in every department in every store in every state in June and July, I'd have looked at you like you were crazy," Bowers said.

Many dealerships are operating leaner today vs. before the pandemic, something likely to aid profitability, experts say.

"There is an opportunity for there to be an overall lower expense structure post all of this," Crowe's Kippe said.

For example, online retailing, which has increased during the pandemic, can reduce the cost of sales, she said. Advertising spending will increasingly move online, which generally is less expensive, Kippe added.

AutoNation's Jackson credited the company's second-quarter success in part to efficiencies gained through digital capabilities such as a proprietary equity-mining tool and another tool that provides customer transaction history. Cost cuts and lower interest rates that aided customers and lowered floorplan interest expense also helped.

And Jackson, who is optimistic a COVID-19 vaccine is on its way, said he's bullish on auto retail headed into 2021.

"This demand for personal mobility will very much remain so for retail automotive, new and pre-owned. I think the outlook is quite positive, quite confident," Jackson told analysts. "You combine that with the fact that I believe we are going to have low interest rates for both ourselves and our customers for years, gives me a very positive outlook about auto retail sales."

Jackie Charniga and Lindsay VanHulle contributed to this report.