Baker Tilly automotive dealership benchmark survey - Second quarter 2016

On a quarterly basis, Baker Tilly conducts a benchmarking study of auto dealerships. Respondents to the most recent study were primarily dealerships located in the Upper Midwest. This whitepaper summarizes key data as of and for the two quarters ended June 30, 2016 (Q2 2016), with comparisons to the same period in 2015 (Q2 2015) and to the quarter ended March 31, 2016 (Q1 2016). Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

Overall

Based on performance during the first half of the year, the automotive industry was on track for another record setting year. As a refresher, new unit sales of 17.47 million in 2015 broke the 2000 record of 17.41 million new units sold. Much of 2015’s success, however, was attained in the second half of the year. The industry will need to continue strong growth throughout Q3 and Q4 in order to attain new vehicle sales levels reached in 2015.

Used vehicle sales also continued to be strong through the first six months of the year compared to 2015. According to the National Automobile Dealers Association (NADA), year to date auction sales volumes for vehicles up to eight years in age grew approximately 5.0 percent compared to the six months ended June 30, 2015. Even more, sales of vehicles up to 3 years in age grew approximately 9.0 percent year over year.

Trucks continued to outsell cars, manufacturers were offering more incentives, and although gasoline prices were slowly climbing, consumers were not fazed. Vehicle sales were still healthy, but will vehicles sales growth continue for a seventh consecutive year?

The bottom line

Typical for the industry, dealership profitability improved from first quarter to second quarter. However, as shown in the graph below, year to date net income as a percentage of sales decreased from 2.03 percent as of Q2 2015 to 1.80 percent as of Q2 2016. Declines in bottom lines were mainly attributable to a combination of decreased new vehicle grosses and increased advertising expense.

Year to date net income as a percentage of sales

New vehicle sales

Across the nation, new vehicle deliveries year to date for Q2 2016 increased 1.3 percent over the same period in 2015. The increase was attributable to continued demand for trucks, where the automotive industry saw an increase in deliveries of 8.9 percent during the first six months of the year compared to the same period in 2015.  Growth in truck sales volumes was tempered by a 7.9 percent decrease in car deliveries. According to Stephens, truck deliveries accounted for 58.8 percent of all deliveries year to date for Q2 2016, compared to 54.7 percent year to date for Q2 2015.

Increased demand for trucks was attributable to continuing incentives offered by manufacturers and lower gasoline prices. According to NADA, incentive spending increased by double digits for the sixth straight month and increased 13.0 percent on a per unit basis year over year. Although gasoline prices slowly increased during recent months, prices were still lower than this time one year ago. Average gasoline prices per gallon were $0.44 lower (15.7 percent) compared to June 2015.

Although sales continue to increase, gross per new vehicle retailed plummeted this quarter compared to Q1 2016 and this time last year, in part due to dealers reducing prices in order to meet sales objectives. The following graph represents the average gross per new vehicle retailed over recent quarters:

Year to date gross per new vehicle retailed

For the majority of dealerships surveyed, used vehicle sales continued to outweigh new vehicle sales for the second consecutive quarter. The average ratio of new to used vehicles sold was 0.99 during the first half of 2016 compared to 1.04 during the same period in 2015. In general, domestic vehicle dealers were selling more used vehicles while import vehicle dealers were still experiencing more new vehicle sales. In addition, truck sales continue to outpace car sales as the demand for trucks continued to hold strong with low gasoline prices. The ratio of new cars retailed to new trucks retailed was 0.34 for the first half of 2016 compared to 0.42 for the first half of 2015.

Advertising expense per unit sold increased 23.3 percent from just under $184 per unit in Q2 2015 to over $226 per unit through Q2 2016.

Despite new vehicle sales being up compared to this time last year, inventories in terms of days’ supply increased 14 days, or 12.8 percent compared to June 30, 2015. The days’ supply in units for the most recent quarters is as follows:

Days' supply of new vehicles

Used vehicle sales

Unlike the trend in new vehicle grosses, the average gross per used vehicle retailed (PUVR) bounced back in Q2 2016 with an average of $1,331 PUVR, compared to $1,309 for Q1 2016. However, grosses PUVR are still slightly below levels one year ago ($1,350 through Q2 2015) and well below the $1,545 PUVR as of Q2 2014. Following is the trend of recent quarters:

Year to date gross per used vehicle retailed

The increase in recent quarters was due to the increased demand for used trucks. According to NADA, increases in auction sales volumes were attributable to large pickup sales where volumes increased 34.0 percent over Q2 2015.

Used vehicles in terms of days’ supply remained consistent at 87 days for each of the first two quarters of 2016, which is comparable to an 89 days’ supply noted one year ago.

Finance and insurance (F&I)

Increased vehicle sales volumes through the first half of 2016 provided F&I departments more opportunities. However, this did not translate into higher profits. F&I income retained for new vehicles through Q2 2016 was 91.3 percent, which is slightly decreased from 91.6 percent observed a year ago. Similarly, profitability for used F&I decreased. F&I income retained for used vehicles through Q2 2016 was 91.3 percent, compared to 92.6 percent last year. In both cases, increases in revenues were usurped by increases in F&I compensation. The following graph shows the trend of net F&I income before compensation per retail unit sold for the most recent quarters:

Year to date F&I income before compensation per retail unit sold

Service

Service gross profit as a percentage of sales was still at an acceptable level of 65.0 percent, but decreased from 66.1 percent through Q2 2015. The drop in the gross profit percentage was partially attributable to the size of repair orders (ROs). Total service labor sales per RO through Q2 2016 averaged $176, compared to $189 a year ago, a 6.5 percent decrease. Gross profit was also affected by an increase in lower grossing warranty work. The industry is currently going through one of the largest recalls in history, the Takata air bag recall, where more than 32 million vehicles have been affected. Warranty related labor sales as a percentage of total sales increased 3.4 percent year over year. The trend of warranty labor as a percentage of total service sales follows:

Service warranty labor sales as a percentage of total sales

Despite the reduction in the gross profit percentage, productivity measures improved. Total gross per technician per month increased 6.9 percent year over year ($9,174 through Q2 2015 to $9,806 through Q2 2016), due to increased customer labor sales per RO and increased shop rates. Customer labor sales per RO increased from $100 through Q2 2015 to $107 through Q2 2016, a 7.3 percent increase. The average customer pay shop rate increased $2 from $106 through Q2 2015 to $108 through Q2 2016.

Parts

Parts departments have experienced increases in sales, gross profit and profitability year over year. Parts sales on service ROs and body shop ROs increased 1.6 percent and 3.7 percent, respectively and there was a slight improvement in the gross profit percentage (32.3 percent through Q2 2016 compared to 32.2 percent through Q2 2015). Departmental profitability was positively impacted by a reduction in employee costs, as parts salaries and wages as a percentage of gross profit decreased to 28.5 percent compared to 31.5 percent a year ago.

Parts inventory levels have dropped considerably from Q2 2015 to Q2 2016, decreasing from a 60 days’ supply to 55 days, which is the lowest inventory level observed since March 2013. The days’ supply of parts inventories for the most recent quarters is as follows:

Days' supply of parts inventories

Body shop

Body shop gross margins decreased for the second consecutive quarter and remained below the levels observed the last two years, which ranged from 56.5 percent to 59.1 percent. Gross profit as a percentage of sales dropped to 56.0 percent as of Q2 2016 from 58.8 percent one year ago, a 4.8 percent decrease. The negative impact on gross margins was a result of the changing mix of labor sales. Customer labor sales as a percentage of total body shop sales decreased 5.7 percent compared to Q2 2015 while warranty labor sales as a percentage of total body shop sales decreased 13.7 percent for the same period. Conversely, internal labor sales as a percentage of total body shop sales increased 23.1 percent year over year. The following shows the trend of YTD body shop gross profit percentages for the most recent quarters:

Year to date body shop gross profit percentage

Conclusion

Overall, through Q2 2016:

  • New and used vehicle sales continued to increase despite economic uncertainty surrounding the upcoming presidential election and the unknown consequences of “Brexit”.
  • Trucks, in particular, continued to drive sales growth and customers appeared to be unfazed by slowly increasing gasoline prices.
  • Dealer profitability was down from this time last year, which was mainly attributable to decreases in new vehicle grosses and increases in advertising expense.

For more information on this topic, or to learn how Baker Tilly dealership specialists can help, contact our team.