Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“ MD&A”), should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the notes thereto, as well as our 2022 Form 10-K.
Overview
We are a leading operator in the automotive retail industry. Through our omni-channel platform, we sell new and used cars and light trucks; arrange related vehicle financing; sell service and insurance contracts; provide automotive maintenance and repair services; and sell vehicle parts. We operate in geographically diverse markets that extend across 17 states in the U.S. and 34 towns and cities in the U.K. As of March 31, 2023, our retail network consisted of 149 dealerships in the U.S. and 55 dealerships in the U.K.
Recent Events
Our manufacturers’ production continued at historically reduced levels in the quarter ended March 31, 2023 (“Current Quarter”), despite recent production improvements in the latter half of 2022 and the Current Quarter for some of those manufacturers. Production constraints and related inventory constraints are a result of sustained global semiconductor and other parts shortages as well as the ongoing conflict between Russia and Ukraine. Increased deliveries from certain manufacturers in the Current Quarter drove a higher volume of new units sold while also maintaining elevated new vehicle retail sales prices. Used vehicle gross margins declined in the Current Quarter, driven by volatility from new vehicle supplies affecting our ability to source used vehicles, increased interest rates and the inflationary pressures and macroeconomic factors described further below. Our new vehicle days’ supply of inventory was approximately 25 day s as of the Current Quarter, as compared to 11 days as of the quarter ended March 31, 2022 (“Prior Year Quarter”).
On April 12, 2023, the U.S. Environmental Protection Agency (“EPA”) proposed regulations establishing more stringent air emissions limits for light- and medium-duty vehicles, which include passenger cars, vans, pickups, sedans and SUVs for model years 2027 through 2032. The EPA proposes higher emissions stringency each year, beginning with model year 2027, new battery durability requirements and changes to certain existing air emissions credit programs. If finalized in their current form, these regulations could increase or accelerate the adoption of certain emissions reducing technologies, and further market penetration for hybrid, plug-in and battery-electric vehicles. For example, if the proposed regulations are enacted, the EPA projects that at least 60% of new light-duty passenger vehicles sold in the U.S. would be battery-electric by 2030. The EPA also estimates that the regulations, if finalized, would increase costs for auto manufacturers and reduce repair costs for covered vehicles. The EPA projects the regulations to become final by 2024. The regulations, if finalized in their current form, may have a significant impact on the future mix of vehicles provided by our manufacturers. Any future impact of these regulations on our operations cannot be predicted with certainty. The Company will continue to monitor the regulatory process and will further evaluate the regulations upon issuance by the EPA.
The global economy continues to experience inflation. In response to inflationary pressures and macroeconomic conditions, the U.S. Federal Reserve, along with other central banks, including in the U.K., increased interest rates throughout 2022 and the Current Quarter. Continued inflation reducing the disposable income of our customers, volatility in new vehicle availability and higher interest rates increasing the monthly cost of financing vehicles contributed to used vehicle prices declining in the latter part of 2022 and during the Current Quarter. Additionally, during the Current Quarter, Silicon Valley Bank (“SVB”) and Signature Bank were placed into receivership with the Federal Deposit Insurance Corporation (“FDIC”), indicating potential instability within the financial sector. Although we are not a party to any transactions with SVB, Signature Bank or any other financial institution currently in receivership, continued instability could impact our financial counterparties. Finally, one financial institution that participates in our Revolving Credit Facility announced plans to terminate its auto dealer services business offering floorplan lending. Although there is no current material impact on the Company, future impact, if any, of these macroeconomic developments on our operations cannot be predicted with certainty.
Critical Accounting Policies and Accounting Estimates
For discussion of our critical accounting policies and accounting estimates, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Form 10-K. There have been no material changes to our critical accounting policies or accounting estimates since December 31, 2022.
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Results of Operations
The “same store” amounts presented below include the results of dealerships and corporate headquarters for the identical months in each comparative period, commencing with the first full month in which we owned the dealership. Amounts related to divestitures are excluded from each comparative period, ending with the last full month in which we owned the dealership. Same store results provide a measurement of our ability to grow revenues and profitability of our existing stores and also provide a metric for peer group comparisons. For these reasons, same store results allow management to manage and monitor the performance of the business and is also useful to investors.
We evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our underlying business and results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our current period reported results for entities reporting in currencies other than USD using comparative period exchange rates rather than the actual exchange rates in effect during the respective periods. The constant currency performance measures should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S. GAAP. Additionally, we caution investors not to place undue reliance on non-GAAP measures, but also to consider them with the most directly comparable U.S. GAAP measures. Our management also uses constant currency and adjusted cash flows from operating, investing and financing activities in conjunction with U.S. GAAP financial measures to assess our business, including communication with our Board of Directors, investors and industry analysts concerning financial performance. We disclose these non-GAAP measures and the related reconciliations because we believe investors use these metrics in evaluating longer-term period-over-period performance. These metrics also allow investors to better understand and evaluate the information used by management to assess operating performance.
Certain amounts in the financial statements may not compute due to rounding. All computations have been calculated using unrounded amounts for all periods presented.
Retail new vehicle units sold for 2023 include new vehicle agency units. The agency units and related revenues are excluded from the calculation of the average sales price per unit sold for new vehicles due to their net presentation within revenues. The agency units and related net revenues are included in the calculation of gross profit per unit sold.
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The following tables summarize our operating results on a reported basis and on a same store basis:
Reported Operating Data — Consolidated
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/ (Decrease) % Change Currency Impact on Current Period Results Constant Currency % Change
Revenues:
New vehicle retail sales $ 1,955.7 $ 1,745.1 $ 210.6 12.1 % $ (33.9) 14.0 %
Used vehicle retail sales 1,348.9 1,359.9 (11.0) (0.8) % (33.2) 1.6 %
Used vehicle wholesale sales 112.0 93.5 18.5 19.8 % (3.1) 23.1 %
Total used 1,460.9 1,453.4 7.5 0.5 % (36.3) 3.0 %
Parts and service sales 548.3 472.9 75.5 16.0 % (7.7) 17.6 %
F&I, net 165.1 173.0 (7.9) (4.6) % (1.7) (3.5) %
Total revenues $ 4,130.0 $ 3,844.4 $ 285.7 7.4 % $ (79.8) 9.5 %
Gross profit:
New vehicle retail sales $ 186.7 $ 201.3 $ (14.5) (7.2) % $ (3.1) (5.7) %
Used vehicle retail sales 76.7 87.8 (11.1) (12.6) % (1.8) (10.6) %
Used vehicle wholesale sales 2.0 2.8 (0.8) (28.8) % — (29.5) %
Total used 78.8 90.7 (11.9) (13.1) % (1.8) (11.2) %
Parts and service sales 297.3 259.8 37.5 14.4 % (4.5) 16.2 %
F&I, net 165.1 173.0 (7.9) (4.6) % (1.7) (3.5) %
Total gross profit $ 727.9 $ 724.7 $ 3.2 0.4 % $ (11.1) 2.0 %
Gross margin:
New vehicle retail sales 9.5 % 11.5 % (2.0) %
Used vehicle retail sales 5.7 % 6.5 % (0.8) %
Used vehicle wholesale sales 1.8 % 3.0 % (1.2) %
Total used 5.4 % 6.2 % (0.8) %
Parts and service sales 54.2 % 54.9 % (0.7) %
Total gross margin 17.6 % 18.9 % (1.2) %
Units sold:
Retail new vehicles sold 39,649 36,733 2,916 7.9 %
Retail used vehicles sold 45,437 43,806 1,631 3.7 %
Wholesale used vehicles sold 10,374 9,099 1,275 14.0 %
Total used 55,811 52,905 2,906 5.5 %
Average sales price per unit sold:
New vehicle retail $ 49,651 $ 47,509 $ 2,142 4.5 % $ (529) 5.6 %
Used vehicle retail $ 29,687 $ 31,043 $ (1,356) (4.4) % $ (730) (2.0) %
Gross profit per unit sold:
New vehicle retail sales $ 4,710 $ 5,479 $ (769) (14.0) % $ (78) (12.6) %
Used vehicle retail sales $ 1,689 $ 2,005 $ (316) (15.8) % $ (39) (13.8) %
Used vehicle wholesale sales $ 194 $ 310 $ (116) (37.5) % $ 2 (38.1) %
Total used $ 1,411 $ 1,714 $ (303) (17.7) % $ (31) (15.8) %
F&I PRU $ 1,940 $ 2,148 $ (207) (9.7) % $ (21) (8.7) %
Other:
SG&A expenses $ 462.8 $ 418.5 $ 44.4 10.6 % $ (7.8) 12.5 %
SG&A as % gross profit 63.6 % 57.7 % 5.8 %
Floorplan expense:
Floorplan interest expense $ 12.6 $ 5.3 $ 7.4 139.4 % $ (0.2) 144.0 %
Less: floorplan assistance (1)
14.6 14.0 0.5 3.7 % — 3.8 %
Net floorplan expense $ (1.9) $ (8.8) $ 6.8 $ (0.2)
(1) Floorplan assistance is included within Gross profit — New vehicle retail sales above and Cost of sales — New vehicle retail sales in our Condensed Consolidated Statements of Operations.
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Same Store Operating Data — Consolidated
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/ (Decrease) % Change Currency Impact on Current Period Results Constant Currency % Change
Revenues:
New vehicle retail sales $ 1,854.4 $ 1,708.3 $ 146.0 8.5 % $ (33.1) 10.5 %
Used vehicle retail sales 1,277.3 1,335.0 (57.7) (4.3) % (32.2) (1.9) %
Used vehicle wholesale sales 103.1 91.7 11.4 12.5 % (3.0) 15.8 %
Total used 1,380.4 1,426.6 (46.3) (3.2) % (35.3) (0.8) %
Parts and service sales 521.8 462.1 59.7 12.9 % (7.1) 14.5 %
F&I, net 156.3 168.9 (12.5) (7.4) % (1.7) (6.4) %
Total revenues $ 3,912.8 $ 3,765.9 $ 146.9 3.9 % $ (77.3) 6.0 %
Gross profit:
New vehicle retail sales $ 175.5 $ 196.3 $ (20.8) (10.6) % $ (3.0) (9.1) %
Used vehicle retail sales 73.4 86.1 (12.7) (14.7) % (1.7) (12.7) %
Used vehicle wholesale sales 2.1 2.8 (0.8) (26.9) % — (27.6) %
Total used 75.5 89.0 (13.4) (15.1) % (1.7) (13.2) %
Parts and service sales 282.5 253.5 29.0 11.4 % (4.2) 13.1 %
F&I, net 156.3 168.9 (12.5) (7.4) % (1.7) (6.4) %
Total gross profit $ 689.9 $ 707.6 $ (17.8) (2.5) % $ (10.6) (1.0) %
Gross margin:
New vehicle retail sales 9.5 % 11.5 % (2.0) %
Used vehicle retail sales 5.7 % 6.5 % (0.7) %
Used vehicle wholesale sales 2.0 % 3.1 % (1.1) %
Total used 5.5 % 6.2 % (0.8) %
Parts and service sales 54.1 % 54.9 % (0.7) %
Total gross margin 17.6 % 18.8 % (1.2) %
Units sold:
Retail new vehicles sold 37,679 35,734 1,945 5.4 %
Retail used vehicles sold 43,177 42,830 347 0.8 %
Wholesale used vehicles sold 9,770 8,819 951 10.8 %
Total used 52,947 51,649 1,298 2.5 %
Average sales price per unit sold:
New vehicle retail $ 49,556 $ 47,807 $ 1,749 3.7 % $ (536) 4.8 %
Used vehicle retail $ 29,582 $ 31,169 $ (1,587) (5.1) % $ (746) (2.7) %
Gross profit per unit sold:
New vehicle retail sales $ 4,659 $ 5,493 $ (835) (15.2) % $ (79) (13.7) %
Used vehicle retail sales $ 1,701 $ 2,010 $ (310) (15.4) % $ (39) (13.4) %
Used vehicle wholesale sales $ 213 $ 323 $ (110) (34.0) % $ 2 (34.7) %
Total used $ 1,426 $ 1,722 $ (296) (17.2) % $ (32) (15.3) %
F&I PRU $ 1,933 $ 2,149 $ (216) (10.1) % $ (21) (9.1) %
Other:
SG&A expenses $ 439.7 $ 427.8 $ 11.9 2.8 % $ (7.3) 4.5 %
SG&A as % gross profit 63.7 % 60.5 % 3.3 %
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Reported Operating Data — U.S.
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/(Decrease) % Change
Revenues:
New vehicle retail sales $ 1,608.6 $ 1,433.1 $ 175.5 12.2 %
Used vehicle retail sales 1,030.1 1,037.9 (7.8) (0.8) %
Used vehicle wholesale sales 82.4 57.2 25.1 43.9 %
Total used 1,112.4 1,095.1 17.3 1.6 %
Parts and service sales 473.8 408.4 65.4 16.0 %
F&I, net 147.6 154.7 (7.1) (4.6) %
Total revenues $ 3,342.4 $ 3,091.3 $ 251.0 8.1 %
Gross profit:
New vehicle retail sales $ 154.1 $ 173.3 $ (19.2) (11.1) %
Used vehicle retail sales 59.8 68.7 (8.9) (12.9) %
Used vehicle wholesale sales 2.2 3.2 (1.0) (31.1) %
Total used 62.0 71.9 (9.9) (13.7) %
Parts and service sales 253.8 221.0 32.9 14.9 %
F&I, net 147.6 154.7 (7.1) (4.6) %
Total gross profit $ 617.6 $ 620.9 $ (3.3) (0.5) %
Gross margin:
New vehicle retail sales 9.6 % 12.1 % (2.5) %
Used vehicle retail sales 5.8 % 6.6 % (0.8) %
Used vehicle wholesale sales 2.7 % 5.7 % (3.0) %
Total used 5.6 % 6.6 % (1.0) %
Parts and service sales 53.6 % 54.1 % (0.5) %
Total gross margin 18.5 % 20.1 % (1.6) %
Units sold:
Retail new vehicles sold 30,883 29,498 1,385 4.7 %
Retail used vehicles sold 34,440 33,940 500 1.5 %
Wholesale used vehicles sold 7,480 6,001 1,479 24.6 %
Total used 41,920 39,941 1,979 5.0 %
Average sales price per unit sold:
New vehicle retail $ 52,086 $ 48,583 $ 3,503 7.2 %
Used vehicle retail $ 29,909 $ 30,580 $ (671) (2.2) %
Gross profit per unit sold:
New vehicle retail sales $ 4,991 $ 5,876 $ (885) (15.1) %
Used vehicle retail sales $ 1,736 $ 2,023 $ (287) (14.2) %
Used vehicle wholesale sales $ 299 $ 540 $ (241) (44.7) %
Total used $ 1,480 $ 1,800 $ (321) (17.8) %
F&I PRU $ 2,260 $ 2,439 $ (179) (7.4) %
Other:
SG&A expenses $ 388.7 $ 353.6 $ 35.1 9.9 %
SG&A as % gross profit 62.9 % 56.9 % 6.0 %
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Same Store Operating Data — U.S.
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/(Decrease) % Change
Revenues:
New vehicle retail sales $ 1,515.4 $ 1,396.9 $ 118.6 8.5 %
Used vehicle retail sales 967.6 1,014.7 (47.1) (4.6) %
Used vehicle wholesale sales 74.1 55.6 18.5 33.2 %
Total used 1,041.7 1,070.3 (28.6) (2.7) %
Parts and service sales 453.2 400.7 52.4 13.1 %
F&I, net 139.2 150.7 (11.5) (7.6) %
Total revenues $ 3,149.6 $ 3,018.6 $ 130.9 4.3 %
Gross profit:
New vehicle retail sales $ 144.0 $ 168.4 $ (24.4) (14.5) %
Used vehicle retail sales 57.1 67.0 (9.9) (14.8) %
Used vehicle wholesale sales 2.3 3.2 (0.9) (28.6) %
Total used 59.5 70.3 (10.8) (15.4) %
Parts and service sales 241.6 216.3 25.3 11.7 %
F&I, net 139.2 150.7 (11.5) (7.6) %
Total gross profit $ 584.2 $ 605.7 $ (21.5) (3.5) %
Gross margin:
New vehicle retail sales 9.5 % 12.1 % (2.6) %
Used vehicle retail sales 5.9 % 6.6 % (0.7) %
Used vehicle wholesale sales 3.1 % 5.8 % (2.7) %
Total used 5.7 % 6.6 % (0.9) %
Parts and service sales 53.3 % 54.0 % (0.7) %
Total gross margin 18.5 % 20.1 % (1.5) %
Units sold:
Retail new vehicles sold 29,102 28,522 580 2.0 %
Retail used vehicles sold 32,517 33,045 (528) (1.6) %
Wholesale used vehicles sold 6,914 5,751 1,163 20.2 %
Total used 39,431 38,796 635 1.6 %
Average sales price per unit sold:
New vehicle retail $ 52,074 $ 48,976 $ 3,098 6.3 %
Used vehicle retail $ 29,757 $ 30,706 $ (948) (3.1) %
Gross profit per unit sold:
New vehicle retail sales $ 4,947 $ 5,904 $ (958) (16.2) %
Used vehicle retail sales $ 1,757 $ 2,029 $ (271) (13.4) %
Used vehicle wholesale sales $ 335 $ 564 $ (229) (40.6) %
Total used $ 1,508 $ 1,812 $ (304) (16.8) %
F&I PRU $ 2,259 $ 2,449 $ (189) (7.7) %
Other:
SG&A expenses $ 368.8 $ 361.6 $ 7.2 2.0 %
SG&A as % gross profit 63.1 % 59.7 % 3.4 %
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U.S. Region — Three Months Ended March 31, 2023 Compared to 2022
The following discussion of our U.S. operating results is on an as reported and same store basis. The difference between as reported amounts and same store amounts is related to acquisition and disposition activity, as well as new add-point openings.
Revenues
Total revenues in the U.S. during the Current Quarter increased $251.0 million, or 8.1%, as compared to the Prior Year Quarter, primarily driven by higher same store revenues and the acquisition of stores.
Total same store revenues in the U.S. during the Current Quarter increased $130.9 million, or 4.3%, as compared to the Prior Year Quarter. This increase was primarily driven by higher revenues from new vehicle retail, parts and service and used vehicle wholesale sales, partially offset by lower used vehicle retail sales and F&I PRU.
New and used vehicle retail revenues benefited from the sale of approximately 12,600 units from our online digital platform, AcceleRide®, during the Current Quarter, a 116.8% increase as compared to the Prior Year Quarter.
New vehicle retail same store revenues outperformed the Prior Year Quarter, driven by strong new vehicle retail pricing coupled with more units sold. The prolonged shortage of new vehicle inventory, despite recent manufacturers’ production improvements, drove strong pricing. Certain manufacturer vehicle deliveries were higher in the Current Quarter and as a result, our inventory levels were higher than the Prior Year Quarter, providing for the increase in units sold. We ended the Current Quarter with a U.S. new vehicle inventory supply of 27 days, 18 days higher than the Prior Year Quarter.
Used vehicle retail same store revenues underperformed the Prior Year Quarter, primarily driven by lower used vehicle retail sales prices coupled with fewer units sold, due to the ongoing new vehicle supply shortage impacting the supply of used vehicles, as well as impacts from inflation reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles. Used vehicle wholesale same store revenues increased primarily due to more wholesale units sold.
Parts and service same store revenues outperformed the Prior Year Quarter, primarily driven by increases across all business lines, reflecting increased business activity and increased same store technician headcount through our technician recruiting and retention efforts, providing greater capacity to meet increased demand.
F&I, net same store revenues underperformed the Prior Year Quarter, primarily driven by lower penetration rates as a result of customers seeking alternative providers in this higher interest rate environment. The underperformance was partially offset by modestly higher same store new vehicle unit sales.
Gross Profit
Total gross profit in the U.S. during the Current Quarter decreased $3.3 million, or 0.5%, as compared to the Prior Year Quarter, primarily driven by lower same store results, partially offset by the acquisition of stores.
Total same store gross profit in the U.S. during the Current Quarter decreased $21.5 million, or 3.5%, as compared to the Prior Year Quarter, primarily driven by downward pressures on new and used vehicle margins and lower F&I PRU, partially offset by higher same store parts and service gross profit.
New vehicle retail same store gross profit underperformed the Prior Year Quarter, driven by a decrease in new vehicle retail same store gross profit per unit sold, partially offset by an increase in same store new vehicle retail units sold. The decrease in new vehicle retail same store gross profit per unit is due to modestly higher production and inventory levels as described above for new vehicles.
Used vehicle retail same store gross profit underperformed the Prior Year Quarter, driven by a decrease in used vehicle retail same store gross profit per unit sold, coupled with lower same store used vehicle retail units sold. The decrease in used vehicle retail same store gross profit per unit sold was driven by the ongoing new vehicle supply shortage impacting the supply of used vehicles, as well as impacts from inflation reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles, outpacing the decline in used vehicle acquisition costs over that similar period.
Our used vehicle wholesale same store gross profit underperformed the Prior Year Quarter, driven by a decrease in used vehicle wholesale same store gross profit per unit sold, partially offset by an increase in same store wholesale used vehicle units sold. The decrease in used vehicle wholesale same store gross profit per unit sold was driven by higher wholesale vehicle acquisition costs.
Parts and service same store gross profit outperformed the Prior Year Quarter, as described above for parts and service revenues.
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F&I, net same store gross profit underperformed the Prior Year Quarter, as described above for F&I, net same store revenues.
Total same store gross margin decreased 152 basis points, primarily driven by the reasons described above for same store gross profit per unit sold for new vehicle retail, used vehicle retail, used vehicle wholesale and F&I, net. In addition, same store parts and service gross margin declined slightly, largely due to increased labor costs.
SG&A Expenses
SG&A as a percentage of gross profit increased 598 basis points and 343 basis points on an as reported and same store basis, respectively, compared to the Prior Year Quarter. The increase in SG&A as a percentage of gross profit on an as reported and same store basis was driven by the decline in reported and same store gross profit as well as higher expenses.
Total SG&A expenses in the U.S. during the Current Quarter increased $35.1 million, or 9.9%, as compared to the Prior Year Quarter, primarily driven by the acquisition of stores and higher same store SG&A expenses. Total same store SG&A expenses in the U.S. during the Current Quarter, increased $7.2 million, or 2.0%, as compared to the Prior Year Quarter, primarily driven by increased activity related to outside services and professional fees, employee benefits and wages, facilities related expenses and advertising expenses compared to the Prior Year Quarter. In addition, the inflationary impacts described above contributed to the increase in same store SG&A expenses. These increases were partially offset by lower commission expenses.
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Reported Operating Data — U.K.
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/ (Decrease) % Change Currency Impact on Current Period Results Constant Currency % Change
Revenues:
New vehicle retail sales $ 347.1 $ 312.0 $ 35.1 11.2 % $ (33.9) 22.1 %
Used vehicle retail sales 318.8 322.0 (3.2) (1.0) % (33.2) 9.3 %
Used vehicle wholesale sales 29.6 36.3 (6.6) (18.3) % (3.1) (9.7) %
Total used 348.4 358.3 (9.8) (2.7) % (36.3) 7.4 %
Parts and service sales 74.6 64.5 10.1 15.7 % (7.7) 27.6 %
F&I, net 17.5 18.3 (0.8) (4.1) % (1.7) 5.4 %
Total revenues $ 787.7 $ 753.0 $ 34.6 4.6 % $ (79.8) 15.2 %
Gross profit:
New vehicle retail sales $ 32.6 $ 27.9 $ 4.7 16.7 % $ (3.1) 27.8 %
Used vehicle retail sales 17.0 19.2 (2.2) (11.6) % (1.8) (2.3) %
Used vehicle wholesale sales (0.2) (0.4) 0.2 46.5 % — 41.8 %
Total used 16.7 18.8 (2.0) (10.8) % (1.8) (1.5) %
Parts and service sales 43.5 38.8 4.7 12.0 % (4.5) 23.5 %
F&I, net 17.5 18.3 (0.8) (4.1) % (1.7) 5.4 %
Total gross profit $ 110.4 $ 103.8 $ 6.6 6.3 % $ (11.1) 17.0 %
Gross margin:
New vehicle retail sales 9.4 % 9.0 % 0.4 %
Used vehicle retail sales 5.3 % 6.0 % (0.6) %
Used vehicle wholesale sales (0.8) % (1.2) % 0.4 %
Total used 4.8 % 5.2 % (0.4) %
Parts and service sales 58.4 % 60.2 % (1.9) %
Total gross margin 14.0 % 13.8 % 0.2 %
Units sold:
Retail new vehicles sold 8,766 7,235 1,531 21.2 %
Retail used vehicles sold 10,997 9,866 1,131 11.5 %
Wholesale used vehicles sold 2,894 3,098 (204) (6.6) %
Total used 13,891 12,964 927 7.2 %
Average sales price per unit sold:
New vehicle retail $ 40,795 $ 43,129 $ (2,334) (5.4) % $ (3,983) 3.8 %
Used vehicle retail $ 28,991 $ 32,638 $ (3,647) (11.2) % $ (3,017) (1.9) %
Gross profit per unit sold:
New vehicle retail sales $ 3,719 $ 3,861 $ (142) (3.7) % $ (352) 5.5 %
Used vehicle retail sales $ 1,542 $ 1,944 $ (402) (20.7) % $ (161) (12.4) %
Used vehicle wholesale sales $ (77) $ (135) $ 58 42.8 % $ 7 37.7 %
Total used $ 1,205 $ 1,447 $ (243) (16.8) % $ (126) (8.0) %
F&I PRU $ 886 $ 1,068 $ (182) (17.0) % $ (88) (8.8) %
Other:
SG&A expenses $ 74.2 $ 64.9 $ 9.3 14.3 % $ (7.8) 26.3 %
SG&A as % gross profit 67.2 % 62.5 % 4.7 %
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Same Store Operating Data — U.K.
(In millions, except unit data)
Three Months Ended March 31,
2023 2022 Increase/ (Decrease) % Change Currency Impact on Current Period Results Constant Currency % Change
Revenues:
New vehicle retail sales $ 338.9 $ 311.5 $ 27.4 8.8 % $ (33.1) 19.4 %
Used vehicle retail sales 309.6 320.3 (10.7) (3.3) % (32.2) 6.7 %
Used vehicle wholesale sales 29.0 36.1 (7.1) (19.6) % (3.0) (11.2) %
Total used 338.6 356.4 (17.7) (5.0) % (35.3) 4.9 %
Parts and service sales 68.6 61.3 7.3 11.8 % (7.1) 23.4 %
F&I, net 17.1 18.1 (1.0) (5.6) % (1.7) 3.8 %
Total revenues $ 763.3 $ 747.3 $ 16.0 2.1 % $ (77.3) 12.5 %
Gross profit:
New vehicle retail sales $ 31.6 $ 27.9 $ 3.7 13.2 % $ (3.0) 23.9 %
Used vehicle retail sales 16.3 19.1 (2.8) (14.6) % (1.7) (5.7) %
Used vehicle wholesale sales (0.2) (0.4) 0.2 40.8 % — 35.6 %
Total used 16.0 18.7 (2.6) (14.0) % (1.7) (5.0) %
Parts and service sales 40.9 37.3 3.6 9.8 % (4.2) 21.0 %
F&I, net 17.1 18.1 (1.0) (5.6) % (1.7) 3.8 %
Total gross profit $ 105.6 $ 101.9 $ 3.7 3.6 % $ (10.6) 14.0 %
Gross margin:
New vehicle retail sales 9.3 % 9.0 % 0.4 %
Used vehicle retail sales 5.3 % 6.0 % (0.7) %
Used vehicle wholesale sales (0.8) % (1.1) % 0.3 %
Total used 4.7 % 5.2 % (0.5) %
Parts and service sales 59.6 % 60.7 % (1.1) %
Total gross margin 13.8 % 13.6 % 0.2 %
Units sold:
Retail new vehicles sold 8,577 7,212 1,365 18.9 %
Retail used vehicles sold 10,660 9,785 875 8.9 %
Wholesale used vehicles sold 2,856 3,068 (212) (6.9) %
Total used 13,516 12,853 663 5.2 %
Average sales price per unit sold:
New vehicle retail $ 40,732 $ 43,187 $ (2,455) (5.7) % $ (3,977) 3.5 %
Used vehicle retail $ 29,046 $ 32,733 $ (3,686) (11.3) % $ (3,023) (2.0) %
Gross profit per unit sold:
New vehicle retail sales $ 3,682 $ 3,867 $ (186) (4.8) % $ (349) 4.2 %
Used vehicle retail sales $ 1,527 $ 1,948 $ (421) (21.6) % $ (160) (13.4) %
Used vehicle wholesale sales $ (83) $ (130) $ 48 36.4 % $ 7 30.8 %
Total used $ 1,187 $ 1,452 $ (265) (18.2) % $ (124) (9.7) %
F&I PRU $ 889 $ 1,066 $ (177) (16.6) % $ (89) (8.3) %
Other:
SG&A expenses $ 70.9 $ 66.2 $ 4.7 7.0 % $ (7.3) 18.1 %
SG&A as % gross profit 67.1 % 64.9 % 2.1 %
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U.K. Region — Three Months Ended March 31, 2023 Compared to 2022
The following discussion of our U.K. operating results is on an as reported and same store basis. The difference between as reported amounts and same store amounts is related to acquisition and disposition activity, as well as new add-point openings. The GBP to USD foreign currency exchange rate has fluctuated from £1 to $1.31 at March 31, 2022, to £1 to $1.24 at March 31, 2023, or a decline of 5.8%. Although the exchange rate has shown recent improvement, it is still negatively impacting our U.K. results when translated from GBP to USD in the Current Quarter when compared to the Prior Year Quarter.
Revenues
Total revenues in the U.K. during the Current Quarter increased $34.6 million, or 4.6%, as compared to the Prior Year Quarter, driven by the acquisition of stores and higher same store results, partially offset by the negative impact of foreign currency exchange rates.
Total same store revenues in the U.K. during the Current Quarter increased $16.0 million, or 2.1%, as compared to the Prior Year Quarter. On a constant currency basis, total same store revenues increased 12.5%, driven by outperformances across all revenue streams except used vehicle wholesale sales.
New vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year Quarter, primarily driven by more units sold, coupled with modestly higher new vehicle retail pricing. The shortage of new vehicle inventory, despite recent manufacturers’ production improvements, drove strong pricing. Vehicle demand was and continues to be pent-up from past years due to Brexit and the COVID-19 pandemic. We ended the Current Quarter with a U.K. new vehicle inventory supply of 19 days, 2 days higher than the Prior Year Quarter.
Used vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year Quarter, primarily driven by an increase in units sold, partially offset by slightly lower retail sales prices on a constant currency basis, due to the impacts from inflation reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles, coupled with the ongoing new vehicle supply shortage impacting the supply of used vehicles.
Parts and service same store revenues, on a constant currency basis, outperformed the Prior Year Quarter, driven by increased business activity across all of our parts and service business lines.
F&I, net same store revenues, on a constant currency basis, outperformed the Prior Year Quarter, driven by an increase in retail units sold, partially offset by a decline in income per contract and penetration rates for finance fees .
Gross Profit
Total gross profit in the U.K. during the Current Quarter increased $6.6 million, or 6.3%, as compared to the Prior Year Quarter, primarily driven by the acquisition of stores and higher same store results, partially offset by the negative impact of foreign currency exchange rates.
Total same store gross profit in the U.K. during the Current Quarter increased $3.7 million, or 3.6%, as compared to the Prior Year Quarter. On a constant currency basis, total same store gross profit increased 14.0% driven by improvements in new vehicle retail sales, parts and service sales and F&I, net, partially offset by downward pressures on used vehicle margins.
New vehicle retail same store gross profit, on a constant currency basis, outperformed the Prior Year Quarter, due to an increase in new vehicle retail units sold, coupled with an increase in new vehicle retail same store gross profit per unit sold from increased prices as described above.
Used vehicle retail same store gross profit, on a constant currency basis, underperformed the Prior Year Quarter, due to a decrease in used vehicle retail same store gross profit per unit sold, partially offset by an increase in used vehicle retail units sold. This decrease was caused by declines in same store retail used vehicle sales prices outpacing the decline in used vehicle cost of sales. Used vehicle retail sales were negatively affected by inflationary impacts reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles, coupled with the ongoing new vehicle supply shortage impacting the supply of used vehicles.
Parts and service same store gross profit, on a constant currency basis, outperformed the Prior Year Quarter, driven by increases in parts and service same store revenues, as discussed above.
F&I, net same store gross profit, on a constant currency basis, outperformed the Prior Year Quarter as described above in F&I, net same store revenues.
Total same store gross margin in the U. K. increased 20 basis points, driven by improvements in new vehicle retail gross margin due to higher prices from increased customer demand and vehicle supply constraints, described above. The increase was partially offset by a decrease in same store used vehicle retail gross margin, resulting from inflationary impacts reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles as well as the ongoing new vehicle supply shortage, and a decrease in parts and service same store margins due to increased labor costs.
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SG&A Expenses
SG&A as a percentage of gross profit increased 471 and 215 basis points on an as reported and same store basis, respectively, compared to the Prior Year Quarter.
Total SG&A expenses in the U.K. during the Current Quarter increased $9.3 million, or 14.3%, as compared to the Prior Year Quarter, primarily driven by increases in same store SG&A and the acquisition of stores. Total same store SG&A expenses in the U.K. during the Current Quarter increased $4.7 million, or 7.0%, as compared to the Prior Year Quarter. On a constant currency basis, total same store SG&A expenses increased 18.1%. These increases were primarily driven by increased activity related to employee benefits and wages, commissions, facilities related expenses, outside services and professional fees compared to the Prior Year Quarter. In addition, the inflationary impacts described above contributed to the increase in same store SG&A expenses.
Consolidated Selected Comparisons — Three Months Ended March 31, 2023 Compared to 2022
The following table (in millions) and discussion of our results of operations are on a consolidated basis, unless otherwise noted.
Three Months Ended March 31,
2023 2022 Increase/ (Decrease) % Change
Depreciation and amortization expense $ 22.4 $ 21.2 $ 1.2 5.8 %
Floorplan interest expense $ 12.6 $ 5.3 $ 7.4 139.4 %
Other interest expense, net $ 19.7 $ 17.4 $ 2.2 12.9 %
Provision for income taxes $ 47.6 $ 61.2 $ (13.6) (22.2) %
Depreciation and Amortization Expense
Depreciation and amortization expense for the Current Quarter was higher compared to the Prior Year Quarter, primarily driven by acquired property and equipment in our U.S. region, as we continue to strategically add dealership related real estate and facilities to our investment portfolio and make improvements to our existing facilities intended to enhance the profitability of our dealerships and the overall customer experience.
Floorplan Interest Expense
Our floorplan interest expense fluctuates with changes in our outstanding borrowings and associated interest rates, which are based on SOFR, the U.S. prime rate or other benchmark rates. Outstanding borrowings largely fluctuate based on our levels of new and used vehicle inventory. To mitigate the impact of interest rate fluctuations, we employ an interest rate hedging strategy, whereby we swap variable interest rate exposure on a portion of our borrowings for a fixed interest rate.
Total floorplan interest expense during the Current Quarter, increased $7.4 million, or 139.4%, as compared to the Prior Year Qua rter, driven primarily by an increase in floorplan interest expense on new and used vehicles due to an increase in interest rates between periods and an increase to the outstanding floorplan balance driven by increases in inventories, partially offset by realized gains on our interest rate swap portfolio due to increases in corresponding interest rates.
Refer to Note 7. Financial Instruments and Fair Value Measurements within our Notes to Condensed Consolidated Financial Statements for additional discussion of interest rate swaps.
Other Interest Expense, Net
Other interest expense, net consists of interest charges primarily on our 4.00% Senior Notes, real estate related debt and other debt, partially offset by interest income.
Other interest expense, net during the Current Quarter, increased $2.2 million, or 12.9%, as compared to the Prior Year Quarter. The increase in other interest expense, net during the Current Quarter, was primarily attributable to the additional increase in borrowings used to acquire property in our U.S. region, partially offset by the gain on the de-designation of the mortgage interest rate swap of $4.0 million during the Current Quarter. Refer to Note 9. Debt within our Notes to Condensed Consolidated Financial Statements for additional discussion of our debt. Refer to Note 7. Financial Instruments and Fair Value Measurements within our Notes to Condensed Consolidated Financial Statements for additional discussion of the de-designation of the mortgage interest rate swap.
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Provision for Income Taxes
Provision for income taxes from continuing operations during the Current Quarter decreased by $13.6 million, or 22.2%, as compared to the Prior Year Quarter. During the Current Quarter, we recorded a tax provision from continuing operations of $47.6 million. The tax expense decrease in the Current Quarter, as compared to the Prior Year Quarter, was primarily due to lower pre-tax book income.
Our Current Quarter effective tax rate of 23.1% was lower than our Prior Year Quarter effective tax rate of 23.3%. The tax rate decrease was primarily due to higher excess tax deductions for stock-based compensation in the Current Quarter compared to the Prior Year Quarter.
We believe that it is more-likely-than-not that our deferred tax assets, net of valuation allowances provided, will be realized, based primarily on assumptions of our future taxable income, considering future reversals of existing taxable temporary differences.
Liquidity and Capital Resources
Our liquidity and capital resources are primarily derived from cash on hand, cash temporarily invested as a pay down of our U.S. Floorplan Line and FMCC Facility levels (refer to Note 10. Floorplan Notes Payable in our Notes to Condensed Consolidated Financial Statements for additional information), cash from operations, borrowings under our credit facilities, working capital, dealership and real estate acquisition financing and proceeds from debt and equity offerings. We anticipate we will generate sufficient cash flows from operations, coupled with cash on hand and available borrowing capacity under our credit facilities, to fund our working capital requirements, service our debt and meet any other recurring operating expenditures.
Available Liquidity Resources
We had the following sources of liquidity available (in millions):
March 31, 2023
Cash and cash equivalents $ 21.3
Floorplan offset accounts 122.8
Available capacity under Acquisition Line 528.2
Total liquidity $ 672.2
Cash Flows
We arrange our new and used vehicle inventory floorplan financing through lenders affiliated with our vehicle manufacturers and our Revolving Credit Facility (as defined in Note 10. Floorplan Notes Payable in the Notes to Condensed Consolidated Financial Statements). In accordance with U.S. GAAP, we report floorplan financed with lenders affiliated with our vehicle manufacturers (excluding the cash flows from or to manufacturer-affiliated lenders participating in our syndicated lending group) within Cash Flows from Operating Activities in the Condensed Consolidated Statements of Cash Flows. We report floorplan financed with the Revolving Credit Facility (including the cash flows from or to manufacturer-affiliated lenders participating in the facility) and other credit facilities in the U.K. unaffiliated with our manufacturer partners, within Cash Flows from Financing Activities in the Condensed Consolidated Statements of Cash Flows. Refer to Note 10. Floorplan Notes Payable within our Notes to Condensed Consolidated Financial Statements for additional discussion of our Revolving Credit Facility.
However, we believe that all floorplan financing of inventory purchases in the normal course of business should correspond with the related inventory activity and be classified as an operating activity. As a result, we use the non-GAAP measure “Adjusted net cash provided by/used in operating activities” and “Adjusted net cash provided by/used in financing activities” to further evaluate our cash flows. We believe that this classification eliminates excess volatility in our operating cash flows prepared in accordance with U.S. GAAP. In addition, floorplan financing associated with dealership acquisitions and dispositions are classified as investing activities on an adjusted basis to eliminate excess volatility in our operating cash flows prepared in accordance with U.S. GAAP.
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The following table reconciles cash flows on a U.S. GAAP basis to the corresponding adjusted amounts (in millions):
Three Months Ended March 31,
2023 2022 % Change
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities: $ 143.4 $ 226.8 (36.8) %
Change in Floorplan notes payable — credit facilities and other, excluding floorplan offset and net acquisitions and dispositions 44.6 92.6
Change in Floorplan notes payable — manufacturer affiliates associated with net acquisitions and dispositions and floorplan offset activity 2.7 (0.9)
Adjusted net cash provided by operating activities $ 190.8 $ 318.6 (40.1) %
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities: $ (104.6) $ (204.5) 48.9 %
Change in cash paid for acquisitions, associated with Floorplan notes payable 9.3 1.9
Change in proceeds from disposition of franchises, property and equipment, associated with Floorplan notes payable (2.4) (0.9)
Adjusted net cash used in investing activities $ (97.7) $ (203.6) 52.0 %
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities: $ (67.0) $ (9.7) (593.3) %
Change in Floorplan notes payable, excluding floorplan offset (54.2) (92.7)
Adjusted net cash used in financing activities $ (121.2) $ (102.3) (18.5) %
Sources and Uses of Liquidity from Operating Activities — Three Months Ended March 31, 2023 Compared to 2022
For the Current Quarter, net cash provided by operating activities decreased by $83.4 million, as compared to the Prior Year Quarter. On an adjusted basis for the same period, adjusted net cash provided by operating activities decreased by $127.8 million. The decrease on an adjusted basis was primarily driven by a $145.8 million increase in inventory levels and a $44.5 million decrease in net income, partially offset by a $43.2 million decrease in contracts-in-transit and vehicle receivables.
Sources and Uses of Liquidity from Investing Activities — Three Months Ended March 31, 2023 Compared to 2022
For the Current Quarter, net cash used in in vesting activities decreased by $99.9 million, as compared to the Prior Year Quarter. On an adjusted basis for the same period, adjusted net cash used in investing activities decreased by $105.9 million, primarily driven by a $178.3 million decrease in acquisition activity, partially offset by a $71.8 million decrease in proceeds from disposition of franchises and property and equipment.
Capital Expenditures
Our capital expenditures include costs to extend the useful lives of current dealership facilities, as well as to start or expand operations. In general, expenditures relating to the construction or expansion of dealership facilities are driven by dealership acquisition activity, new franchises being granted to us by a manufacturer, significant growth in sales at an existing facility, relocation opportunities or manufacturer imaging programs. We critically evaluate all planned future capital spending, working closely with our manufacturer partners to maximize the return on our investments.
For the Current Quarter , $35.8 million was used to purchase property and equipment.
Sources and Uses of Liquidity from Financing Activities — Three Months Ended March 31, 2023 Compared to 2022
For the Current Quarter, net cash used i n financing activities increased by $57.4 million, as compared to the Prior Year Quarter. On an adjusted basis for the same period, adjusted net cash used in financing activities increased by $18.9 million. The increase in net cash used in financing activities on an adjusted basis was primarily driven by net repayment of debt of $60.3 million and decreases in net borrowings on our Floorplan lines of $41.5 million (representing the net cash activity in our floorplan offset account), partially offset by decreases in share repurchases of $80.4 million.
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Credit Facilities, Debt Instruments and Other Financing Arrangements
Our various credit facilities, debt instruments and other financing arrangements are used to finance the purchase of inventory and real estate, provide acquisition funding and provide working capital for general corporate purposes.
The following table summarizes the commitment of our credit facilities as of March 31, 2023 (in millions):
Total
Commitment Outstanding Available
U.S. Floorplan Line (1)
$ 1,200.0 $ 772.4 $ 427.6
Acquisition Line (2)
790.4 262.2 528.2
Total revolving credit facility 1,990.4 1,034.6 955.8
FMCC Facility (3)
300.0 65.6 234.4
Total U.S. credit facilities (4)
$ 2,290.4 $ 1,100.2 $ 1,190.2
(1) The available balance at March 31, 2023, includ es $106.7 million of immediately available funds. The remaining available balance can be used for vehicle inventory financing.
(2) The outstanding balance of $262.2 million is related to outstanding letters of credit of $12.2 million and $250.0 million in borrowings. The borrowings outstanding under the Acquisition Line included $250.0 million USD borrowings. The available borrowings may be limited from time to time, based on certain debt covenants.
(3) The available balance at March 31, 2023, includes $16.1 million of immediately available funds. The remaining available balance can be used for Ford new vehicle inventory financing.
(4) The outstanding balance excludes $308.2 million of borrowings with manufacturer-affiliates and third-party financial institutions for foreign and rental vehicle financing not associated with any of our U.S. credit facilities.
We have other credit facilities in the U.S. and the U.K. with third-party financial institutions, most of which are affiliated with the automobile manufacturers that provide financing for portions of our new, used and rental vehicle inventories. In addition, we have outstanding debt instruments, including our 4.00% Senior Notes, as well as real estate related and other debt instruments. Refer to Note 9. Debt in our Notes to Condensed Consolidated Financial Statements for further information.
Covenants
Our Revolving Credit Facility, indentures governing our 4.00% Senior Notes and certain mortgage term loans contain customary financial and operating covenants that place restrictions on us, including our ability to incur additional indebtedness, create liens or to sell or otherwise dispose of assets and to merge or consolidate with other entities. Certain of our mortgage agreements contain cross-default provisions that, in the event of a default of certain mortgage agreements and of our Revolving Credit Facility, could trigger an uncured default.
As of March 31, 2023, we were in compliance with the requirements of the financial covenants under our debt agreements. We are required to maintain the ratios detailed in the following table:
As of March 31, 2023
Required Actual
Total adjusted leverage ratio < 5.75 1.87
Fixed charge coverage ratio > 1.20 5.29
Based on our position as of March 31, 2023, and our outlook as discussed within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, we believe we have sufficient liquidity and do not anticipate any material liquidity constraints or issues with our ability to remain in compliance with our debt covenants.
Refer to Note 9. Debt and Note 10. Floorplan Notes Payable in our Notes to Condensed Consolidated Financial Statements for further discussion of our debt instruments, credit facilities and other financing arrangements existing as of March 31, 2023.
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Share Repurchases and Dividends
From time to time, our Board of Directors authorizes the repurchase of shares of our common stock up to a certain monetary limit. During the three months ended March 31, 2023, 180,982 shares were repurchased at an average price of $191.85 per share, for a total of $34.7 million, excluding excise taxes of $0.2 million. As of March 31, 2023, we had $128.5 million available under our current stock repurchase authorization.
During the Current Quarter, our Board of Directors approved a quarterly cash dividend of $0.45 per share on all shares of our common stock, which resulted in $6.2 million paid to common shareholders and $0.2 million to unvested RSA holders.
Future share repurchases and the payment of any future dividends are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, changes in laws and regulations, current economic environment and other factors considered relevant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting us, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2022 Form 10-K. Our exposure to market risk has not changed materially since December 31, 2022.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.