Group 1’s restructurings during the financial crisis, such as new dealer and customer systems

Business Strategy & Outlook

Group 1’s restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1’s ratio improved to 60.3% including rent expense in 2021 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omni channel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. Digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales.

Most growth will come via acquisition because Group 1’s model is similar to that of the other large dealerships, which have been consolidating stores. The industry is consolidating because smaller players cannot compete with the scale and cost savings achieved through roll-up acquisitions pursued by the largest franchise dealerships. The industry is still highly fragmented, so Group 1 will not have a problem finding desirable stores to buy. Most deals to be in the U.S. Parts and servicing was about 12% of 2021 revenue but made up 36% of gross profit. This significant contribution to profitability is less volatile than vehicle sales and mitigates some of the cyclical risk of the auto industry. Vehicles are becoming more complex to repair, which favors the dealer that can more easily invest in service operations. Financing also helps profits with 100% gross margin from commission.

Financial Strengths

In the third quarter of 2014, Group 1 retired all of its convertible bonds outstanding. The firm funded the convertible retirement with $550 million of new 5.00% senior unsecured notes due in June 2022. These 2022 notes were retired in September 2020 and replaced with $550 million of 4% notes due in 2028. The firm issued another $200 million of the 2028 notes in 2021 to help fund the Prime acquisition. Group 1 redeemed all $300 million of its 5.25% 2023 notes in April 2020 via cash on hand and credit line borrowing. Group 1 has about $790 million in liquidity from cash and capacity on its credit lines and no bond debt due until 2028. Availability on credit lines excluding floor plan at the end of September was about $550 million. Group 1 reinstated its dividend in 2010 and had been repurchasing shares, but COVID-19 led to the suspension of the dividend and the end of buybacks. In October 2020, the company announced the resumption of the dividend, and it recently bought back over 20% of its stock. In March 2022, Group 1 amended its credit facility to expire in March 2027. The facility has $1.65 billion for U.S. inventory floorplan financing and another $349 million for working capital, acquisitions, or general corporate purposes. The $349 million can be expanded to $500 million and up to $150 million can be in euros or pounds. The credit facilities are secured by essentially all of the company’s domestic personal property. The facilities also contain financial covenants including a fixed-charge coverage test and total leverage test. The total adjusted leverage covenant is less than 5.5 times and was 1.8 times at Sept. 30. The fixed-charge coverage covenant is greater than 1.20 times and was 6.1 times at the end of 2021. Group 1 had $800 million of mortgage debt at Sept. 30 and owned 66% of its real estate, up from 36% in 2011. Group 1 can continue to maintain a reasonably healthy balance sheet and fund more deals as needed.

Bulls Say

Auto dealerships are stable, profitable businesses with a diversified stream of earnings beyond selling new vehicles.
Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly complex vehicles. Parts and service provide a large portion of gross profit, despite being a small part of overall revenue.
If successful, AcceleRide and Val-U-Line could prove good future sources of profit.

Company Description

Excluding its Brazil operations about to be sold, Group 1 owns and operates 46 collision centers and 201 automotive dealerships in the U.S. and the U.K., offering 34 brands of automobiles altogether–nearly 150 of the stores are in the U.S. with American locations mostly in metropolitan areas in 17 states in the Northeast, Southeast, Midwest, and in California. Texas alone contributed 40% of new vehicle unit volume in 2021 excluding Brazil and the U.K. about 19%. Texas, Oklahoma, and Massachusetts combined were about 55%. Revenue in 2021 totaled $13.5 billion. The company was founded in 1995 and is based in Houston.

(Source: Morningstar)

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