Baker Tilly automotive dealership benchmark survey - Third quarter 2016

By Mike Krueger

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 three quarters ended Sept. 30, 2016 (Q3 2016), with comparisons to the same period in 2015 (Q3 2015), unless noted otherwise. Amounts and percentages noted herein are representative of the average dealership in our survey, unless noted otherwise.

The bottom line

Dealership profitability continued to increase through Q3 2016 and exceeds the level at this time last year.  Net income year to date as a percentage of sales was 1.94 percent, which is the second highest figure noted in the last ten quarters. Improved profitability was the result of improved vehicle grosses and fixed operations gross profits.

Year to date net income as a percentage of sales

New vehicle sales

Industry wide, the volume of new vehicle sales through the first three quarters of the year slightly surpassed volumes one year ago. In a survey by Stephens, year to date new vehicle sales through September 2016 were 13.04 million units, an increase of 0.4 percent over the first three quarters of 2015. While the low interest rate environment continued to be favorable for consumers, manufacturers have increased their incentive spending over 2015 to spur sales. Truck sales continue to outpace car sales, primarily due to lower fuel prices. Truck sales represented 59.7 percent of new vehicle sales through Q3 2016, compared to 55.7 percent one year ago and 52.5 percent two years ago. New import vehicles continue to outsell domestic vehicles and the gap continues to widen. New import brands accounted for 55.1 percent of new vehicle sales, compared to 54.8 percent one year ago.

After a precipitous drop in Q2, new vehicle grosses rebounded during the third quarter. As of Sept. 30, 2016 the year-to-date average gross profit per new vehicle retailed (PNVR) was $957. The following graph represents the average PNVR over recent quarters:

Year to date gross per new vehicle retailed

The downward trend in new vehicle grosses is primarily a function of dealers willing to cut grosses to meet manufacturer sales objectives.

The days’ supply of new vehicle inventories followed its cyclical pattern with a decrease as of the end of Q3 compared to Q2. The days’ supply in units for the most recent quarters is as follows:

Days' supply of new vehicles

Used vehicle sales

Used vehicle sales continued to outweigh new vehicle sales for the third consecutive quarter. The average ratio of new to used vehicles sold was 0.99 through the first three quarters of 2016 compared to 1.08 during the same period in 2015. In general, domestic vehicle dealers were selling more used vehicles than new vehicles while import vehicle dealers were still experiencing more new vehicle sales. Similar to what is occurring with new vehicles, used truck sales continue to outpace used car sales. The ratio of used cars retailed to used trucks retailed was 0.69 through Q3 2016 compared to 0.78 through Q3 2015.

Grosses per used vehicle retailed (PUVR) have shown steady improvement during 2016 after appearing to have bottomed out at the end of 2015. The average gross PUVR through September 2016 was $1,342, which is $100 per unit higher than what was observed one year ago. Following is the trend of recent quarters:

Year to date gross per used vehicle retailed

Although there has been increased demand for used vehicles, the days’ supply in units exceeded 90 for the first time since Dec. 31, 2014. The average days’ supply as of Sept. 30, 2016 increased to 91.6 days compared to 86.7 as of June 30, 2016. In comparison, the days’ supply in units as of Sept. 30, 2015 was 82.4.

Finance and insurance (F&I)

Net F&I income (before compensation) per retail unit continued to be strong through Q3 2016, measuring $936 for new vehicles and $740 for used vehicles through Sept. 30, 2016, compared with $875 for new and $684 for used vehicles during the same period last year. The following graph shows the trend of net F&I income before compensation for the most recent quarters:

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

The improvement in new F&I income has virtually offset the decline in new vehicle grosses. The front and back ends of new vehicle deals on a combined basis were $1,893 through Q3 2016 compared to $1,896 through Q3 2015.  Increases in used F&I income, along with improved used vehicle grosses, has resulted in $156 more per used retail unit through Q3 2016 compared to one year ago.

Service

Service department gross profit increased from 65.0 percent as of June 30, 2016 to 65.2 percent as of Sept. 30, 2016, yet still lags the 65.5 percent noted one year ago. The decrease in the gross profit percentage between the first three quarters of 2016 and 2015 is primarily attributable to a change in the mix of work being performed. Customer-pay labor through Q3 2016 accounted for 47.0 percent of department sales, compared to 49.6 percent through Q3 2015, while warranty and internal labor increased to 41.5 percent from 39.6 percent of department sales one year ago.

The trend of customer pay labor as a percentage of total service sales follows:

Year to date customer labor as a percentage of service sales

Parts

The part department is continuing to have a good year. Parts productivity, measured as total parts gross per counterperson per month, increased 14.9 percent through Q3 2016 over the same period in 2015, in part due to a 4.8 percent increase in parts sales per customer service RO. Department gross profit through Q3 2016 was 32.9 percent of sales, which is the highest amount achieved in the past few years.

Parts inventory levels increased in Q3 after a considerable drop during Q2. A 59 days’ supply was on hand as of Sept. 30, 2016, which is more in line with historical amounts than the 55 days’ supply noted as of June 30, 2016. The days’ supply of parts inventories for the most recent quarters is as follows:

Days' supply of parts inventory

Body shop

Body shop gross margins rebounded after declining two consecutive quarters to a low of 56.0 percent through Q2 2016. Gross profit as a percentage of sales was 57.5 percent as of Q3 2016, which is slightly better than the 57.1 percent one year ago.  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 Q3 2016:

  • Dealership profitability is higher than it was one year ago due to improved used vehicle grosses and stronger F&I gross profits on a per-vehicle retailed basis.
  • Vehicle sales volumes were up industry-wide for both new and used vehicles compared to one year ago. Used vehicle sales continue to outnumber new vehicle sales in 2016.
  • New vehicle grosses rebounded from Q2 to an average of $957, which is $64 lower than a year ago. However, net F&I income for new vehicles on a per-retailed unit basis is $61 higher than a year ago.
  • Customer pay service work decreased from Q2 to Q3 and accounts for 47.0 percent of Service sales.
  • Parts gross profit through Q3 2016 was 32.9 percent of sales, which is the highest amount achieved in the past few years.
  • Body shop gross profit margins rebounded to 57.5 percent after declining two consecutive quarters.

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