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Group 1's U.S. F&I Operations Delivers Record Q1 Performance

April 28, 2016

HOUSTON — Group 1 Automotive reported first quarter gross profit of $389 million on a consolidated basis, a 6.9% improvement over 2015. The bulk of that profit came from the group’s U.S. operations, which increased its gross profit total by 5.8% from the year-ago period to $333 million.

Much of that improvement can be attributed to the performance of the dealer group’s F&I, parts and services, and used-vehicle retail segments, noted John Rickel, Group 1 CFO. “Total same-store gross profit improved 4.1%, driven by increases of 8.6% in parts and services and 4.5% in used retail,” he said.

Including the company’s operations in the United States, United Kingdom and Brazil, the group’s average F&I profit per retail unit increased 0.7% to $1,385. In the United States, the group’s per-copy average rose by $26 to a record $1,564.

New-vehicle gross profit per unit for Group 1’s U.S. operations was $1,758, a 2.9% improvement over the same-year period last year. Total gross profit for that segment improved 0.9% to $54 million.

Total gross profit for used vehicles in the United States rose 3.8% from a year ago to $44 million, while gross profit per unit retailed decreased 0.6% from a year ago to $1,189.

Group 1 reported a record net income of $37.1 million during the first quarter. That total does not account for $2.8 million of net after tax adjustments comprising primarily of $1.7 million in insurance deductibles related to damage some of its vehicles suffered from hailstorms in the United States and about $800,000 related to the company’s decision to divest four of its Barzilian stores.

After these adjustments, the company’s net income comes out to $34 million, a 4.3% decrease from the prior-year period.

“I would also point out we have incurred additional losses thus far in the second quarter in the recent flooding in Houston and a large hailstorm in San Antonio that have combined to cause approximately $3 million in inventory damage,” Rickel said. “These additional pre-tax losses will be reflected in our second quarter GAAP results.”

The company did increase its store count in its international markets. In February, it acquired 15 franchises in its U.K. market. Dealer group officials said the acquisitions, along with two franchises the company acquired in Brazil earlier this month, should generate $595 million in estimated annual revenues.

"We are pleased with this quarter's consolidated top-line revenue growth of 9.7% on a local currency basis, which was driven by strong performance from our U.K. team and impressive used-vehicle and service growth in our U.S. operations," said Earl J. Hesterberg, Group 1's president and CEO. "The revenue growth, coupled with stability in U.S. vehicle margins, allowed us to grow adjusted net income and earnings for the quarter.

"The Brazilian auto market dropped another 28% in Q1 due to massive political turmoil, yet our Brazilian operations held same-store revenue flat on a local currency basis — an amazing performance,” Hesterberg added. “Additionally, we implemented a significant set of portfolio enhancement actions this quarter, which include the divesture of four underperforming stores and the addition of four growth franchises. These actions should largely conclude our store restructuring program and better position us to maintain profitability in Brazil this year."

Turning back to F&I, the group’s U.K. operation raised its F&I PRU average by $47 to $725, while the Brazilian market’s average dropped $105 from a year ago to $337.

Overall product acceptance rates on a year-to-date basis were up compared to the same period last year. Consolidated acceptance rates for GAP was 29%, 10% for maintenance and 21% for sealant — respective improvements of 2%, 1% and 2% over 2015.  

Vehicle service contracts were the only product to show a decrease in acceptance rate compared to the first quarter of 2015. The consolidated acceptance rate for the product on a year-to-date basis was 32%, a 3% decrease from the same period last year.

Hesterberg noted that weakness in the oil industry hurt the group’s U.S. sales in the Texas, Gulf Coast and Oklahoma markets. New-vehicle sales in Texas market, where 49% of the group’s stores operate, were down 3.1% from the same period last year. The Gulf Coast and Oklahoma markets suffered 5% and 2% decreases in new-vehicle unit sales, respectively. The damage was mitigated, however, thanks to the improved new-vehicle gross profit.

Additionally, an abundance of volume continues to plague the dealer group. The group’s inventory of 31,400 units equated to an 85-day supply, up from the 69-day supply it reported in the year-ago period. Although luxury brand inventories drove much of that year-over-year increase, pretty much anything that wasn’t Honda or Toyota also contributed to that surplus.

“We basically have too much inventory on everything except Toyota and Honda,” Hesterberg said.  

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