2017 Haig Report: Declining Gross Profits at Dealerships Offset by Fixed Operations
Aug. 29, 2017—Although profits at privately owned dealerships for the twelve months ended June 30, 2017 were 2.1 percent lower than year end 2016 due to rising costs, declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.
As published in the Q2 2017 edition of The Haig Report released by Haig Partners, in Q2 2017 the number of auto dealerships sold in the US increased 6.5 percent from 62 rooftops in Q2 2016 to 66 rooftops in Q2 2017.
Year to date 2017, the number of auto dealerships sold in the US has declined 17 percent from the same period in 2016, from 175 to 146, due to a particularly weak period of dealership sales in Q1. While the total number of rooftops trading hands declined during this period, the amount of money spent by the publicly traded auto retailers on dealerships in the US has increased sharply in 2017.
For the year to date ended June 30, 2017, the publicly traded retailers had spent $538 million on auto dealerships in the US, an increase of 91 percent from the $282 million spent in the same period in 2016. Lithia was the most active of the publicly traded companies and continues to target underperforming large platforms in different parts of the US.
Continuing the trend from 2016, demand for dealerships shifted from luxury brands to mainline import and domestic brands that are heavier in trucks and SUVs. Purchases of luxury dealerships were 13.7 percent in Q2, down from 16.6 percent in Q2 2016.
The Haig Report tracks developments in auto retail and how they impact dealership values. It includes data and analysis on the performance of auto dealerships, identifies noteworthy events to the industry, discusses trends in the M&A market for dealerships, gives guidance on estimated range of values for different franchises, and provides an outlook for the M&A market in 2017. The Haig Report is based on data gathered from many public sources, as well as interviews with leading dealer groups, and bankers, lawyers and accountants who specialize in auto retail.
Other key findings from the Q2 2017 Haig Report include:
- Macroeconomic indicators such as GDP, interest rates, employment, number of miles driven and consumer sentiment remain highly favorable for dealers.
- Other trends such as used car pricing, incentive spending by the OEMs, and rising inventories are growing less favorable to dealers.
- Total sales, including fleet, have fallen fell by 2.9 percent through July, although recent months have been steady. Average retail SAAR is down 1 percent so far this year.
- Declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.
- Sales and gross profits continue to increase at dealerships, but expenses are rising faster.
- The average dealership pre-tax profit over the last 12 months was $1.436M.
- Average estimated blue sky value per dealership dipped 2.1 percent from the end of 2016 to $6.91M.
- Public auto retailers are spending more of their capital on acquiring auto dealerships in the US than last year.
- Private equity firms and family offices continue to make substantial investments in auto retail.
- Acquisitions of dealerships, even in declining periods, can still provide a better return on investment than other assets classes.
Alan Haig, president of Haig Partners, said, "As we expected, the sharp drop in the first quarter of the year has been offset by a strong Q2 and we are expecting robust conditions for the rest of the year. There are many buyers and sellers in the market and deal financing remains readily available. These are good conditions for buy-sells, so long as sellers understand that their leverage is more limited than in the past. Buyers have many options and are increasingly concerned about future profits. They are less likely to chase deals or pay big premiums. If dealers want to sell their dealerships they will likely need to accept today's offer since tomorrow's offer could be lower."