Q2 new-car gross profits drop for 6 public auto dealers

Asbury Automotive Group was the only public to not have a new-vehicle sales bump.

Five of the six major publicly traded franchised dealership groups reported double-digit percentage declines on new-vehicle gross profits during the second quarter, as inventories grew and rising interest rates cut into shoppers’ buying power. That came as all of the publics except Asbury Automotive Group Inc. posted new-vehicle sales gains in the quarter.

The six publics — Penske Automotive Group Inc., Sonic Automotive Inc., Asbury, Group 1 Automotive Inc., Lithia Motors Inc. and AutoNation Inc. — collectively averaged about $5,000 in profit on each new vehicle sold during the second quarter, compared with about $2,000 in the second quarter of 2019, before COVID-19 disrupted the industry in 2020.

All of the publics except Sonic also experienced year-over-year drops in second-quarter gross profit per used vehicle, but the group’s combined average profit of about $2,000 was about $500 higher than the average in the second quarter of 2019.

Today’s new-vehicle profits are likely to fall further, analysts expect, though auto retailer CEOs predict the “new normal” gross on each new vehicle is likely to remain above pre-pandemic levels.

“It will be inversely related with inventory,” Stephens analyst Daniel Imbro said of the rate that gross profit would fall on new vehicles. Stephens projects gross profit per new vehicle at the end of 2024 will remain a few hundred dollars higher than pre-pandemic amounts.

“At least for the near term, it feels like the backdrop is much better than feared,” he said.

Jefferies analyst Bret Jordan said he expects a decline in new-vehicle gross profits will accelerate at the end of 2023, with profits dipping below $3,000 by the end of 2024. Rebounding supply and affordability issues posed by higher interest rates and the economy will continue to push figures down, he said.

Penske, which sells a majority of luxury vehicles, generated $6,259 in gross profit per new vehicle during the second quarter, down 8.8 percent from a year earlier, but leading the publics for the metric this quarter. Penske’s figure includes sales outside the U.S. and for the second quarter this year excludes agency sales in the United Kingdom.

And compared with the first quarter, Penske’s drop in new-vehicle gross profit per unit was just $56.

“When you look at it sequentially, and you look at us, and you look at the peer group, you’re going to find that the decline that is taking place is very, very reasonable,” Penske spokesman Anthony Pordon told Automotive News.

Sonic said its new-vehicle gross profit dropped 27 percent year over year to $5,003 in the second quarter.

“This decline in new-vehicle GPUs should continue as we progress through the second half of 2023 and into 2024,” Sonic CEO David Smith told analysts in a call last week. “But we continue to believe that the new normal level of new-vehicle GPU will remain structurally higher than it was pre-pandemic.”

Four years ago, in the second quarter of 2019, Sonic produced $2,000 in gross profit on each new vehicle.

Asbury recorded $4,835 in gross profit on every new vehicle sold during the second quarter, down 15 percent from a year earlier.

“We’re not going to go back to ’19 levels” of gross profit, Asbury CEO David Hult told analysts in a call last week. “And we certainly don’t see that any time in our near future. We think our folks in the stores are doing a really great job at ordering the right inventory and maximizing the gross profit per transaction.”

Asbury had an overall 32 days’ supply of vehicles at the end of June. And even Asbury’s brands with larger new-vehicle supplies are still yielding strong gross profits, Hult said.

While not providing specifics, Hult said Asbury was at or “pretty close” to a normal days’ supply for the Detroit 3 manufacturers and Asbury was still generating more than $4,600 a vehicle in profit for domestic brands.

Asbury had a larger days’ supply of Stellantis vehicles than other Detroit 3 brands, yet gross profit per Stellantis vehicle hadn’t fallen significantly behind Ford or General Motors vehicle margins, Hult said.

“We’re really pleasantly surprised,” he said. “All three manufacturers are very similar.”

Group 1 reported $4,651 in gross profit per new vehicle in the U.S. during the second quarter, down 20 percent from a year earlier, just ahead of Lithia’s gross profit per new retail vehicle of $4,635, down 22 percent year over year. Lithia’s results in 2023 include sales in Canada and the United Kingdom.

AutoNation’s gross profit per new vehicle dropped 25 percent in the second quarter to $4,607. That was partially offset by an 8 percent jump in new-vehicle sales, the company said.

Margins will continue to moderate because of higher interest rates, rising inventory levels and fewer vehicles being sold at sticker as incentives return, CEO Mike Manley told analysts in a July 21 call. Second-quarter incentives averaged about $1,700, up from $700 a year earlier, but Manley said they’re still well below the $4,000 pre-pandemic average.

Lithia CEO Bryan DeBoer told Automotive News last week that Lithia has seen a monthly gross profit decline of around $100 per new vehicle for most of the year and noted the trend will probably continue.

“I think the big thing is when seasonality is upon us in October, November, we’ll have to see what happens there,” he said. “And to be fair, we’re in a cycle where interest rates are a little bit volatile. And let’s hope that the economy holds together. That could change the equation a little bit as well. But right now, it looks like we’ve got another three, four months, I’d say, [of] $100 declines. And whether we get back to $200 [declines] is probably going to be more economic and macro based.”

He also pointed to the contract talks between the UAW and the Detroit 3 as something that could impact gross profits on new vehicles. About a quarter of Lithia’s revenue comes from domestic brands.

“Those negotiations could change our supply, which could help stabilize GPUs even further,” DeBoer said, adding that Lithia has a fair amount of inventory from the domestic brands, without offering specifics.

And Lithia is prepared for the possibility of a strike, should one occur.

“I think we’re positioned well in the event that something gets disconnected,” DeBoer said. “I hope it doesn’t. I hope they can resolve things, but we’ll have to see on that.”

Jack Walsworth, Mark Hollmer and Gail Kachadourian Howe contributed to this report.