5
North America
Equity
Research
09 July 2019
Rajat Gupta
(1-212) 622-6382
rajat.gupta@jpmorgan.com
Table 4: Historical & Forecast Used Vehicle Same-store F&I Gross Profit Growth
%
2018 1Q19 2Q19E 3Q19E 4Q19E 2019E 2020E
ABG 4% 1% 0% 0% 0% 0% 0%
AN 6% -1% 0% 3% 1% 1% 1%
GPI* 5% 0% 0% -3% -3% -1% 0%
LAD 5% 9% 8% 3% 6% 6% 4%
PAG 6% 0% 3% 6% 7% 4% 5%
SAH 8% 14% 12% 12% 6% 11% 5%
Group 6% 4% 4% 3% 3% 3% 3%
Source: J.P. Morgan estimates; Company data.
Note: GPI data shown is for the United States only
1Q19 results showed solid discipline on SG&A; continued progress key to
profitability growth. SG&A discipline was solid from most dealers in 1Q19,
below normal seasonal trends, with SG&A/GP declining y/y for all, a key driver
of the strong earnings beats last quarter. Note that every 100bps of improvement
in SG&A/GP impacts EPS by ~5%. While a number of companies are
undergoing different stages of investments related to used expansion,
digital/omni-channel initiatives, back office streamlining, longer-term there
remains the opportunity to increase employee productivity (higher gross
profit/employee) and rationalize advertising expenses, both of which contribute
to ~70% of SG&A mix. Personnel costs represent ~62% of SG&A costs and the
sector has seen a strong increase in productivity since the last cycle, with the
ratio of gross profit per employee up meaningfully over the last 10 years,
although this has moderated more recently as gross margins have remained flat
and SG&A as a % of sales has increased slightly. Looking across our coverage
universe, SAH seems to have the highest productivity metrics on a per employee
basis and GPI & LAD the lowest, implying the most room for improvement.
While GPI’s improvement is somewhat restricted by regional dynamics in the
UK and Brazil, where productivity is inherently lower, LAD clearly has room
for improvement, reinforcing opportunity to grow EBITDA by $250 mn from
acquired dealerships over the last few years.
Figure 3: Gross Profit / Employee Across Our Coverage (Last 4 years Average)
thousands of dollars per employee
Source: Company reports and J.P. Morgan estimates.
$118
$122
$128
$130
$131
$136
$147
$100
$110
$120
$130
$140
$150
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