Early cuts, U.S. rebound lead Group 1 to profit in pandemic-hit Q2

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Early cost cuts and a relatively quick rebound for its U.S. operations helped lead Group 1 Automotive Inc. to a second-quarter profit despite a double-digit decline in revenue as the coronavirus pandemic restricted dealership business for weeks.

The Houston dealership group reported Thursday that net income slid 39 percent to $30.2 million in the second quarter. After adjusting for one-time charges, Group 1’s net income rose 32 percent to $69.6 million. Charges for the 2020 quarter totaled $39.4 million for noncash asset impairments, stock-based compensation expense, debt extinguishment and severance costs. Charges in the 2019 quarter totaled $3.5 million for catastrophic weather events and noncash asset impairments.

Revenue tumbled 29 percent to $2.13 billion. Gross profit fell 21 percent to $358.8 million.

“Rapid and deep cost cuts, combined with a quicker-than-expected U.S. auto market recovery, enabled us to achieve very strong operating results in the second quarter,” CEO Earl Hesterberg said in a statement.

Operations in all Group 1 markets — the U.S., U.K. and Brazil — were shut down or reduced in late March because of the pandemic. By early April, the company’s sales and service business in the U.S. had dropped by half, and the company was almost completely closed in the U.K.

“Due to this severe decline in customer traffic, we had no choice but to execute a comprehensive cost reduction plan across our entire company that touched all areas of the business,” Hesterberg said.

In late March, Group 1 announced it would furlough 3,000 U.S. employees for at least 30 days, slash executive salaries and close stores in the U.K. and Brazil. By mid-May, it had furloughed 4,800 employees in the U.S. and 2,800 in the U.K. and cut or furloughed more than 450 employees in Brazil.

U.S. operations steadily improved in May and June, led by used-vehicle sales and the service business. With the improvement, the company has since called back some furloughed employees and is operating at 70 percent of pre-pandemic employment levels in the U.S. and U.K., Hesterberg said.

“Our U.S. and U.K. businesses are operating at their highest efficiency levels ever, and we expect this to carry forward,” he added.

U.S. operations accounted for 86 percent of the company’s total revenue and 90 percent of its gross profit in the period. Total U.S. revenue fell 20 percent to $1.83 billion, while gross profit dropped 14 percent to $324.5 million.

Daryl Kenningham, president of U.S. and Brazil operations, said in Group 1’s statement that U.S. dealerships delivered an “exceptional quarter,” thanks to the cuts in March followed by strong profit margins on used vehicles in late May and June. And U.S. same-store new-vehicle gross profit was flat in an environment in which industry new-vehicle sales declined by a third, Kenningham said.

AcceleRide, Group 1’s omnichannel retailing platform in the U.S., was instrumental in the period, Kenningham said. Omnichannel refers to the customer’s ability to seamlessly shop for and buy vehicles across digital platforms and at physical stores. Sales via AcceleRide nearly tripled from the year-ago quarter. Group 1 retailed an average of almost 1,000 vehicles per month through the channel, Kenningham said.

The omnichannel effort is “allowing us to do business with our customers how and when they choose, and will allow us to stay at the technological forefront as consumer preferences continue to shift more towards online automotive retail,” Kenningham said.

Group 1 shares closed Thursday’s trading up nearly 1 percent to $89.87.

Sales: New-car sales fell 37 percent to 26,472 vehicles across the group’s dealerships in the U.S., U.K. and Brazil. Retail used-vehicle sales dropped 23 percent to 30,528.

In the U.S., new-vehicle sales decreased 28 percent to 21,937 units, while retail sales of used vehicles declined 14 percent to 26,132.

Same-store sales: U.S. new-vehicle sales fell 29 percent on a same-store basis to 21,583 in the first quarter. New light-vehicle sales across the U.S. declined 33 percent during the second quarter, according to the Automotive News Data Center. U.S. same-store retail sales of used vehicles dropped 15 percent to 25,616.

Group 1 ranks No. 4 on Automotive News‘ list of the top 150 dealership groups based in the U.S., with retail sales of 169,136 new vehicles in 2019.

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