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We knew “free money would inevitably end. Affordability would become an issue – particularly around new vehicles.”


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2018 Nov 4, 6:28am   3,455 views  30 comments

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“Double Whammy of Rising Rates for Us and Our Consumers”: AutoNation
by Wolf Richter • Oct 31, 2018 • 70 Comments
We knew “free money would inevitably end. Affordability would become an issue – particularly around new vehicles.”

t has been a tad rough in the stock market for AutoNation, the largest auto retailer in the US, with 242 new-vehicle dealerships, selling 33 brands, including Toyota, Lexus, Honda, Acura, Ford, GM’s brands, Fiat-Chrysler, Mercedes-Benz, Nissan, Infiniti, BMW, Volkswagen, Audi, Porsche, etc. After the company reported earnings on Tuesday, shares [AN] dropped 4%, and this morning, they’re down another 3% (despite the overall market which has been up sharply on both days). Shares have now plunged 37% from their 52-week high in January.

The problem is in new-vehicles sales.

Many customers are strung out by high vehicle prices and rising interest rates, and they’re switching to used vehicles, which AutoNation also sells – and that part of the business is good. But the new-vehicle business was lousy in the third quarter, compared to the same period last year:

New-vehicle sales fell 5.6%, to $2.93 billion.
The number of new vehicles retailed fell 6% to 78,300 vehicles (overall industry sales fell 4%).
Due to rising prices from manufacturers and a consumer shift from cars to more expensive SUVs and trucks, average revenue per new vehicle retailed rose by nearly $1,000 to $37,017.
New-vehicle gross profit (revenue minus what manufacturers charge after incentives) plunged 13.4% to $125 million.
Per new vehicle retailed, gross profit dropped 7% to $1,571.
During the conference call, the company cited “pressure on new vehicle margins” – meaning the dealer is getting caught between rising prices charged by manufacturers and consumers unwilling to accept them.

“We anticipated headwinds coming in the new vehicle business,” said CEO Mike Jackson in the conference call. And preparing for it entailed a “shift from new towards pre-owned” vehicles. This shift to used vehicles took several forms, including a $50-million investment for a 7% stake in online used-vehicle-sales startup Vroom Inc., which was announced before the conference call. In a subsequent interview, Jackson added some color:

“We concluded several years ago that free money would inevitably end. Affordability would become an issue – particularly around new vehicles – and we better have created new capabilities for the company to deal with the double whammy of rising rates, both for us and for our consumers.”

“They’re looking at more affordable alternatives,” he said.

The double whammy are rising costs for highly leveraged companies, such as auto dealers, and consumers facing rising prices of vehicles to be financed at higher rates. Something has to give.

Hence the shift to used vehicles.

For AutoNation, every metric on used vehicles was up.

Sales rose 4.3% to $1.28 billion.
Revenue per used-vehicle retailed rose 3.3% to $20,044.
The number of used vehicles retailed rose 3% to 58,700.
Used-vehicle gross profit rose 6% to $88 million.
Used-vehicle gross profit per vehicle retailed rose 2% to $1,456.
For consumers this makes sense: the average amount they paid for a used vehicle at AutoNation of $20,044 is just over half of the average they paid for a new vehicle ($37,017).

These new and used vehicle numbers do not include Finance and Insurance (F&I), which in the industry is treated as a separate profit center for new and used vehicles combined. This is where the dealer makes money off arranging auto loans with lenders and sells additional warranties, dubious insurance products, and miscellaneous fluff & buff. At AutoNation, F&I gross profit rose 4% to $244 million; on a per-vehicle-retail basis, it rose 6% to $1,781.

In other words, as is industry norm, the dealer makes more money in F&I off each vehicle than by actually selling the vehicle.

Parts and service sales rose 2.7% to $864 million, generating a gross profit of $473 million. In every department except new vehicles, sales and gross profit rose. But due to the dominance of new vehicles (55% of total sales), whose sales slumped, total revenues fell 1.5%. And total gross profit, also weighed down by new vehicles, inched up only 1.1%.

Operating income swoons

Selling, general, and administrative expenses rose, and depreciation and amortization also rose, while “other income” made up for some of it, and total operating income fell 3.6% to $204 million.

Borrowing costs surge, due to higher interest rates

The interest expense of floorplan financing (to finance new and used vehicle inventories) jumped by 30% year-over-year to $32.7 million.

The company’s floorplan facility is based on one-month dollar LIBOR, which tracks slightly higher than the US Treasury one-month yield, which has been pushed up by the Fed’s rate hikes. The one-month Treasury yield is at 2.21%, and one-month dollar LIBOR is 2.28% — both of them up from near-0% three years ago (data by YCharts):

This is how the normalization of borrowing costs – and that’s all this really is as the era of “free money” has ended – is beginning to bite.

Non-vehicle interest expense fell slightly to $28.4 million, “primarily due to lower average debt balances and lower average interest rates as we refinanced higher cost debt with lower rate senior notes and commercial paper towards the end of last year.” And total interest expense jumped by 11% to $61 million.

But the corporate tax cuts saved the day

With operating profit down 3.6% (at $204 million), and total interest expense up 11% (at $61 million), pretax income fell 8.1%, or by $12.8 million, to $145 million.

But thank you, thank you, thank you for the corporate tax cuts. Income tax provisions plunged by 46% from $60.3 million in Q3 a year ago to $32.8 million: “We have not completed our accounting for the tax effects of enactment of the Act; however, we made a reasonable estimate of the effects,” the company said.

And due to this $27.5 million reduction in income taxes, after-tax net income actually rose 15% to $112 million.

So that tax cut came in the nick of time, to temporarily overcome the growing “double whammy” as Jackson put it, generated by what is still just the normalization of interest rates, layered on top of rising prices, and consumers having to juggle it all.

https://wolfstreet.com/2018/10/31/autonation-hit-by-double-whammy-of-rising-rates-for-us-and-our-consumers/

Comments 1 - 30 of 30        Search these comments

1   Tenpoundbass   2018 Nov 4, 7:13am  

Commies desperately needed a whole generation of 27 ++ yr olds walking.
Hailing Uber service with their Snap Cards.

Trump really really Really Fucked Obama's Shit up didn't he?

That Floor crawling Asshole sniffer and his tyranny Husband, got so close but was DENIED!
2   BayArea   2018 Nov 4, 10:14am  

Auto loans, the bubble of today - I’m excited to see how it plays out.

Every time I step into my 2001 Lexus, I feel like a million bucks. I get on the 101 Freeway and immediately become immersed in the massive depreciation around me... new Benz, BMW, Infiniti, Audi, at every head turn.

$50k cars that will be worth $20k in 4yrs... and the poor bastard that paid full sales tax on $50k... depreciation boxes acquired to please wives and impress friends, sad.
3   Ceffer   2018 Nov 4, 10:18am  

From Hummer to spackled, rust gouged beater. How the mighty fall!
4   BayArea   2018 Nov 4, 10:19am  

APOCALYPSEFUCKisShostikovitch says
Have to put a rear passenger-side door on it one of these days.


Hehehehe
5   Ceffer   2018 Nov 4, 10:21am  

APOCALYPSEFUCKisShostikovitch says
Have to put a rear passenger-side door on it one of these days.

Nahhhh. You need an access port to release the Gatling Drones.
6   RWSGFY   2018 Nov 4, 10:26am  

Repeat after me, kids: a car is not a fucking asset - it's a fucking LIABILITY!
7   BayArea   2018 Nov 4, 10:31am  

MbS says
Repeat after me, kids: a car is not a fucking asset - it's a fucking LIABILITY!


Classic cars appreciate, they are assets

New and late model used cars are liabilities
8   RWSGFY   2018 Nov 4, 10:34am  

BayArea says
Classic cars appreciate


... until their value crashes. Happened to pre-WWII classics once, about to happen with 60-70 muscle cars bubble... Besides, it's not like you're going to take your pristine resto to 101 in rush hour and then park it for a day on SF street. Therefore it's not really a car, more like rolling sculpture kind of thing.
9   Ceffer   2018 Nov 4, 10:39am  

Fast food, roach, and cigarette butt debris chaff, choking black smoke, no muffler, and loud, Krakatoan backfirings! Ah, the joys of a true beater! Yeah, and the bumper lashed with string and duct tape.
10   BayArea   2018 Nov 4, 10:50am  

MbS says
BayArea says
Classic cars appreciate


about to happen with 60-70 muscle cars bubble...


Unless everything crashes and we go into recession, 60-70 muscle cars will absolutely not crash. There’s nothing to drive something like that. Supply is only decreasing as well.

Also, I’m not suggesting driving classic restos daily. My point is that it’s smarter to acquire used cars that have had most of their new car price depreciated. You can follow that rule and still have most of the usable life of the car ahead of you with less than half the total depreciation to worry about.
11   RWSGFY   2018 Nov 4, 10:57am  

BayArea says
MbS says
BayArea says
Classic cars appreciate


about to happen with 60-70 muscle cars bubble...


Unless everything crashes and we go into recession, 60-70 muscle cars will absolutely not crash. There’s nothing to drive something like that.


The same force which is killing HD is going to kill the muscle bubble: boomers getting too old and senile to care about shit like that. The generations coming after them drool on ITR and E30 M3 they couldn't afford when they were in HS, and don't give a fuck about GTO which was just "some old 'murikan boat of a car" then. Simple, really.
12   RWSGFY   2018 Nov 4, 11:03am  

BayArea says
My point is that it’s smarter to acquire used cars that have had most of their new car price depreciated. You can follow that rule and still have most of the usable life of the car ahead of you with less than half the total depreciation to worry about.


True. With the exception of German cars, especially the ones with the 3-letter name.
13   Ceffer   2018 Nov 4, 11:04am  

In a beater, you always have to keep your six pack glass empties to nail road rage antagonists.
14   RWSGFY   2018 Nov 4, 11:16am  

Ceffer says
In a beater, you always have to keep your six pack glass empties to nail road rage antagonists.


Empty? Fucking amateurs! You first pee into the bottles and then use them for the above mentioned purpose.
15   Onvacation   2018 Nov 4, 11:22am  

APOCALYPSEFUCKisShostikovitch says
The 2001 Subaru covered in rust and spray painted PRAY! FOR! CANNIBAL! ANARCHY! is the height of efficiency and economy.

Upgrade.


The minigun necessitated the supercharger.
16   GNL   2018 Nov 4, 11:34am  

Ceffer says
Fast food, roach, and cigarette butt debris chaff, choking black smoke, no muffler, and loud, Krakatoan backfirings! Ah, the joys of a true beater! Yeah, and the bumper lashed with string and duct tape.

Tell me the last time you saw what you just described on the road.
17   GNL   2018 Nov 4, 11:37am  

MbS says
BayArea says
MbS says
BayArea says
Classic cars appreciate


about to happen with 60-70 muscle cars bubble...


Unless everything crashes and we go into recession, 60-70 muscle cars will absolutely not crash. There’s nothing to drive something like that.


The same force which is killing HD is going to kill the muscle bubble: boomers getting too old and senile to care about shit like that. The generations coming after them drool on ITR and E30 M3 they couldn't afford when they were in HS, and don't give a fuck about GTO which was just "some old 'murikan boat of a car" then. Simple, really.

I've been thinking the same thing. The prices sure out out of site though. The fringe muscle cars will crash one day, I believe but not the 1 of 5 types.
18   Ceffer   2018 Nov 4, 11:49am  

MbS says
You first pee into the bottles

That's what the rust hole in the floor of the driver's seat is for. If you do choose to fill the bottles for combat, you also don't have to worry about drippage.
19   joshuatrio   2018 Nov 4, 1:22pm  

I have wanted to replace my wife's 10 year old SUV for a couple years now. But when replacement run $40k, I'll hold out.

We've looked at used as well, but the price difference is only a couple Grand.

With rates rising, hopefully dealers will start coming down on prices, and hopefully this sub prime auto lending nonsense will stop.
20   RC2006   2018 Nov 4, 1:43pm  

APOCALYPSEFUCKisShostikovitch says
A car that so terrifies other drivers that they keep a quarter mile distance from you at all times is an asset.


Aw that brings back fond memories of my 77 Plymouth Fury my first car. Cop pulled me over once and said "boy this car doesn't have one panel that isn't dented" lol, even the front bumper was crooked from me bumping it into a telephone pole to try to straighten it out, only the high beam worked left and low on the right. A little on purpose weave always good for clearing a good 30 feet around me on the freeway and people were always extra courteous to me when polling into traffic.
21   BayArea   2018 Nov 4, 2:04pm  

MbS says
BayArea says
MbS says
BayArea says
Classic cars appreciate


about to happen with 60-70 muscle cars bubble...


Unless everything crashes and we go into recession, 60-70 muscle cars will absolutely not crash. There’s nothing to drive something like that.


The same force which is killing HD is going to kill the muscle bubble: boomers getting too old and senile to care about shit like that. The generations coming after them drool on ITR and E30 M3 they couldn't afford when they were in HS, and don't give a fuck about GTO which was just "some old 'murikan boat of a car" then. Simple, really.


I just don’t buy it. All ages love muscle cars. Classic muscle car prices will not go down unless everything goes down (recession)
22   BayArea   2018 Nov 4, 9:06pm  

TrumpingTits says
I don't plan on replacing them for at least another 6 years.


Why so soon? After that 6yrs you’ll only be hitting the half life of the cars.
23   MisdemeanorRebel   2018 Nov 5, 12:13am  

One way to create some better pricing is to do away with the mandatory franchise laws, so the manufacturer can sell direct and/or dealers can sell multiple brands without restriction.

Will never happen because Dealers are rich, and the dying TV/Print media would also fight it because it's like their last reliable large group of wealthy advertisers whose product is only sold locally.
24   HeadSet   2018 Nov 5, 12:07pm  

One way to create some better pricing is to do away with the mandatory franchise laws, so the manufacturer can sell direct and/or dealers can sell multiple brands without restriction.

Already exists. Called a Used Car Dealer. Some like Carmax ave huge inventories.
25   everything   2018 Nov 5, 2:15pm  

I'm driving a 30 year old vehicle which is apparently indestructible, easy to work on, parts available, and cheap to repair. (Toyota hilux), so that my 10 year old vehicle might last 20 years.

RISING RATES, oh LOL, give it a few years, the long term trend for interest rates is DOWN, hikes have not lasted in decades, the projection is 3.4% by 2021, they won't make it past 3% before the economy flops, 4% is history.

More are leasing these days.
26   RWSGFY   2018 Nov 5, 2:18pm  

everything says
I'm driving a 30 year old vehicle which is apparently indestructible, easy to work on, parts available, and cheap to repair. (Toyota hilux),


Does in have a DShK mounted in the bed?
27   komputodo   2018 Nov 5, 2:23pm  

APOCALYPSEFUCKisShostikovitch says
I had to take a bus a mile to a gas station to flash charge the battery


Get that acid all hot and gassy and bubbly. Hell, batteries were cheap back then.
28   MisdemeanorRebel   2018 Nov 5, 2:54pm  

HeadSet says
Already exists. Called a Used Car Dealer. Some like Carmax ave huge inventories.


New cars, not just old.

It's pretty much illegal to sell new cars in every state unless through a dealer. Let's let those who manufacture in the USA sell direct, with factory to driveway delivery, which will help both corporate profits and costs to the consumer.

Or some dealers could only carry the top 5 most popular make and model new cars of any company willing to work with them. Imagine going to a dealership and finding they have Rogues as well as RAV4s and F Series.

I don't know why you can buy the same make and model TV from multiple outlets, but you're limited to one dealership in your area.
29   RWSGFY   2018 Nov 5, 2:56pm  

TwoScoopsOfSpaceForce says
It's pretty much illegal to sell new cars in every state unless through a dealer.


How does Tesla sell their cars outside of CA? They don't have any dealers by choice.
30   MisdemeanorRebel   2018 Nov 5, 2:58pm  

MbS says
How does Tesla sell their cars outside of CA? They don't have any dealers by choice.



Yep, I remember Elon Musk trying to get around the artificial government created Dealer monopoly a few years back:

Tesla, Inc. has faced dealership disputes in several U.S. states as a result of local laws. In the United States, direct manufacturer auto sales are prohibited in many states by franchise laws requiring that new cars be sold only by independent dealers. The electric car manufacturer Tesla maintains that in order to properly explain to their customers the advantages their cars have over traditional vehicles with an internal combustion engine, they cannot rely on third party dealerships to handle their sales.[1][2]


https://en.wikipedia.org/wiki/Tesla_US_dealership_disputes

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