Penske Automotive Group (NYSE: PAG) has a diverse sales profile that includes new and used cars, commercial truck leasing, and vehicle maintenance. That broad mix has allowed revenue to climb in recent quarters even as the new-car business struggled with weakening demand. But in the most recent quarter, accelerating declines in new car volumes more than offset gains in other areas of the business to send overall revenue lower.
Here's how the headline results in the first quarter of 2019 compared with the prior-year period :
Year-Over-Year Growth (Decline)
Data source: Penske financial filings.
What happened this quarter?
Penske's sales volume dropped further into negative territory as used-vehicle sales held flat and new-vehicle sales declined sharply. Robust servicing and parts revenue, plus a booming commercial trucking segment, offset some of those declines.
Image source: Getty Images.
A few key highlights of the quarter:
- The sales volume of used and new vehicles fell 4% compared with a 2% drop last quarter and a 2% increase in the fiscal third quarter of 2018. That metric was comprised of flat used-vehicle volume and a 9% slump in new car sales.
- Same-store sales, which were flat in the previous quarter, declined 1% after accounting for currency exchange shifts. The biggest contributor to this trend was falling new-car sales, as revenue increased in both the services and parts and the finance and insurance segments.
- Overall gross profitability ticked up to 15% of sales thanks to higher margin in the ultra-profitable services and parts division.
- The commercial truck segment grew retail sales by a healthy 12%.
- Net income declines reflected the lower revenue and higher depreciation costs, but per-share earnings fell at a slower rate due to aggressive stock repurchasing
What management had to say
"I am pleased with our first-quarter performance," chairman Roger Penske said in a press release, "and optimistic about the remainder of the year."
Penske added, "I am particularly pleased to see the 5.6% increase in same-store service and parts revenue ... and the increase in our used-to-new [sales] ratio."
Commenting on the supply challenges that have hampered sales over the last few quarters, management said "product available issues ... have improved" and so dealership ordering trends are rising.
Penske's shift toward a used-car focus became more pronounced this quarter, and investors are likely to see sales tilt further in that direction over time, especially if the new-car market remains soft. The company's other large growth initiative, digital selling, is also making steady progress. Penske counted 34% of its unit sales in the U.S. as coming from e-commerce sources, and that ratio should improve as it puts more of the auto purchasing process online in the coming months.
The key metric to watch, though, will be new-car sales, which have deteriorated for several consecutive quarters. Management's comments suggest that the trend could stabilize soon, and Penske will need that to happen for the retailer to return to the steady overall revenue growth that investors have come to expect.
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