Despite fears of car supply availability, auto dealers are yet to run into any speed constraints.
Both Lithia Motors LAD 5.70%
and AutoNation AN 2.78%
-Dealers selling new and used vehicles reported record revenue and profits last quarter. Lithia Motors said Wednesday morning that its second-quarter sales rose 118% compared to a year ago; AutoNation’s sales jumped 54% in the same period.
New vehicle shipments are taking hold: They were down just 6% last quarter compared to 2019 levels, AutoNation noted on its earnings call on Monday. However, the demand still far outweighs the supply. In AutoNation, only 14 days of inventory was available for new vehicles; Lithia had 23 days’ worth. Dealers usually have 50 days or more worth of new car inventory.
This mismatch between supply and demand comes with all kinds of perks for dealers: Not only are they commanding higher prices, but they’re also paying lower interest on floor-plan loans, which are typically lower than the floor plan. Used to finance inventory.
AutoNation said that with more cars sold immediately, it paid less than half of floor-plan interest expenses last quarter compared to a year ago. Thanks to those favorable economics, net income at Lithia nearly quadrupled last quarter compared to a year ago, while profit on AutoNation — excluding discontinued operations — tripled.
Investors believe dealers may be riding the wave for a bit longer: AutoNation and Lithia Motors were up 3.1% and 5.4%, respectively, as of Wednesday afternoon.
Today’s supply crunch does not seem to be a reason to bet on car dealers. Shares of AutoNation and Lithia Motors are already up 73% and 33% respectively from years ago. Directionally, favorable trends are already reversing: US auto production increased in April and May, while overall vehicle sales peaked in April and declined for two consecutive months, according to data from the Bureau of Economic Analysis. Pursuance.
However, consider how the industry may have been changed by the pandemic. AutoNation and Lithia Motors are both dealing with reduced operating overhead (they permanently reduced head count by 14% and 20%, respectively) as they began to rely more on digital tools to help consumers.
Additionally, AutoNation chief executive Mike Jackson said Monday that there are “very healthy discussions going on within the industry” to reevaluate a system that excluded too many cars on dealer lots because the carmakers themselves were facing low inventory. Start seeing better benefits together. . “I don’t think this is going back to the old ways of mass overproduction push systems,” he said.
Brian DeBoer, chief executive officer of Lithia Motors, was a bit more skeptical, noting that American consumers love the idea of having too many options on dealer lots.
A strong bull case for car sellers is not in today’s bumper profits, but in how last year’s odds have changed them.
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