Used Cars Down, Carvana Down, Colors That Pick You Up

November 4, 2022
It’s time for a Friday as we cover the Q3 earnings reports from the major auto retailers from across the country, as well as Carvana’s drop and their strategy to turn it around. We also get into the psychology of color and how to deploy it to your advantage.
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Third quarter results reveal that all 6 top public auto groups are seeing significant declines in used car gross profits from 11 - 31% as volume also drops for some

  • AutoNation Inc., Lithia Motors Inc., Penske Automotive Group Inc., Group 1 Automotive Inc., Asbury Automotive Group Inc. and Sonic Automotive Inc.
  • Gross profit per vehicle ranged from $1,588 to $2,478 for the quarter
  • Penske’s CarShop and Sonic’s EchoPark stand alone used car stores have also been brake-tapped as both companies announce they won’t be opening any more stores this year due to the slowdown
  • A combination of higher acquisition costs and softening demand
  • Stephens analyst Daniel Imbro told Automotive News; While there is demand for used vehicles at a price point of $15,000 or less, Imbro said, there aren't many vehicles available in that range…But I think the used market will be a weaker profit stream relative to the new-vehicle side

In yesterday’s earnings report Carvana reported a $508M net loss which is larger than the $506M loss from Q1 and more than 7x the $68m loss it reported a year ago as interest rates and inventory costs continue to rise

  • CEO Ernie Garcia and CFO Mark Jenkins, wrote in a letter to shareholders.“The environment has continued to get increasingly difficult since the end of the quarter and it is probable things will continue to get more difficult before they get easier,” as the company shifts its strategy from focusing on growth to focus on profit.
  • On a call w/ analysts Garcia also noted: “Cars are extremely expensive, and they’re extremely sensitive to interest rates.” He added he was hopeful rates might be close to peaking. “Interest rates have moved up materially, and most customers use financing to buy a car.”
  • Profit per vehicle retailed dropped to $3,500 down $1,172 from $4,672 in Q3 2021
  • There will be no outlook for 2023 provided

The colors you choose can make a distinct difference in the emotions you trigger in guests and buyers. This new infographic from Luxury SoCal Realty intends to help you be more likely to  sell your house faster, curb child aggression, and even wake up happy

  • Color can help you increase or decrease appetite, Enhance mood, increase memory, boost attention spans, calm down customers, reduce perceptions of wait time, encourage sales or conversations
  • Red increases pulse, orange stimulates circulation, yellow increases metabolism,
  • 60% of people who sleep in blue rooms wake up happy
  • 75% prefer purple over other colors
  • White paint reflects 98% make rooms look

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SPEAKERS

Kyle Mountsier, Paul Daly


Paul Daly  00:23

Yo, it's Friday. We made it through another week. I don't know what counts swinging back and forth. Today we're talking about the use car reports yesterday there were a lot of them. Here's a hint use cars are down. Carvanha is down. But we have a color chart that might just pick you up. I think you will really want is an ad they stopped this day. Welcome to Friday,


Kyle Mountsier  00:41

where we talk colors.


Paul Daly  00:44

The only place where you're gonna get Automotive News and color theory all on the same 15 in the same deal. Color stories. Fine. We'll get to that the we'll get to that. We got a trip next week. A week from today, Week, a week from today on wheels up. So it goes up only a week.


Kyle Mountsier  01:02

You're not on retail conference. To get an exciting talk to Glenn talk to Brian seems like there's just a lot of energy around it. It's crazy because the same week modern retail conference in huge car week are happening. And like the level of expertise, knowledge, capacity at both, is pretty obscene. Like if you look at the industry, so there's


Paul Daly  01:23

some brain power going to be firing. Next weekend for sure. Next weekend into the following week. We're gonna be on the ground and in the dirt. We're teaching you creative track, but we're also bringing the whole podcast gear. We're gonna talk to every expert, every dealer we can find and bring it back to you on our new podcast series called in the dirt searching on Apple and Google and Amazon in the dirt. I know it's


Kyle Mountsier  01:44

crazy if you just search in the dirt. And don't put the with asoto comes up first.


Paul Daly  01:49

Get out of here. I know. That's interesting, because they're a bunch of other incidents on the way because it's


Kyle Mountsier  01:55

new and we already uploaded 25 As this communities


Paul Daly  01:57

up on it. That's why because this community is like we will listen to that. We like that. Yeah, the first episode is the first episode so we'll have no it's not. No, no, yesterday's episode was that


Kyle Mountsier  02:08

no, the yesterday's episode on auto collabs was Cirilo. We got a couple of podcasts. You guys do that or not?


Paul Daly  02:15

Okay, so we got a podcast called Auto collabs you may know about auto collabs and yesterday's episode was with Michael Cirillo, who is also a co host of the show but Kyle and I interviewed him about his start the business and it is probably the most fun I've had in a podcast in a really really long time. I think we


Kyle Mountsier  02:31

should have like a fan vote on whether or not we should just do like a 10 minute podcast with Cirilo every week and just like have some random topic that we that we like someone throws a ball thing and we just 10 minutes and then get out we're


Paul Daly  02:43

gonna get in so much trouble so much so much. Oh, speaking of getting in trouble ah played. Third quarter results reveal that all six top public auto groups are seeing significant declines in use car gross profits from down 11% All the way down to 31% as volume also drops for some auto here will give you a little so we're talking about auto nation Lithia Penske, group one as vary and Sonic gross profit per vehicle range from 1588 to 2478 for the quarter. Also notable Penske is car shop and Sonics Echo Park that's their standalone use car stores said announced they will not be opening anymore, the pumping the brakes. They have some plan, actually, Penske actually has some built, and then in the UK, and they're not opening them. Just they're just yeah, they're up. They're ready. They're just like, hey, I think Roger Penske was like we're tapping the brakes. Little brake check. That's okay. That's okay. It is okay. Like to be able to tap the brakes and just say we don't have to pull out we just have to like, Let's slow roll it. So this is a combination of higher acquisition costs, softening demand. An analyst, analyst Daniel ibro, told automotive news. It's from a company called Stephens. I've never heard of him before. But sure they're smarter Automotive News is talking to him. While there's demand for US vehicles at a price point of $15,000 or less, which we know we know that in bro sector in that way. There aren't many vehicles in that range. But I think the US market will be a weaker profit stream. I've never actually this is what this bolt in the nose because I never thought I'd hear these words, read these words or now say these words. They use car market will be a weaker profit center relative to the new vehicle.


Kyle Mountsier  04:24

So can you imagine like, real quick, like in 2015. Just lob that across. Just see if anyone grabs


Paul Daly  04:34

I think people would have assumed Well, I mean, people would assume that something crazy happened and I guess something crazy kind of


Kyle Mountsier  04:40

crazy has happened. There you go about that. Here's here's the thing. I think that what we're seeing from the large Publix the publicly traded used car operators is that they are much more susceptible to market fluctuations like broad market fluctuation. is because when you start to pick out like local markets or local operators, you don't see a lot of that across the country. And this is where I think, you know, when you look at Publix or you look at large organizations, they are much more influenced by, by broader trends in the economy. And so I would say to like, especially local operators, single, you know, one to five rooftop operators that are in a region, like, don't just take that and be like, oh, we need to pump the brakes, because they're doing that. I don't think it's like one of those leading indicator type things, I think it's a they are they are, they are dominated by like broad market economy. And local local brands and local dealers can actually have like a different perspective on that local economy, depending on where you're at. And so, like, hyper focus a little bit understand that these are trends that are changing, but don't like go start changing your whole business model. Because, you know, you're you're different. You see, you see these as leading indicators, because you're a different business, for sure.


Paul Daly  05:59

It's like we'll call it operational exposure. Yes, right. They just have they have broad exposure. On the flip side of that do, they probably also have some level of resiliency built in, which is the cool part about this industry. It's like everyone's got a strength and weakness, right? If you're local one, five rooftops, if you're a major public, you all have a different game to play. Right? So trying to play someone else's game. That's we talked about that all the time. There's so many different opinions, so many different avenues, you can take so many ways to skin the cat that it's like, that's a gross metaphor, by the way,


Kyle Mountsier  06:29

right? And well, but think about this, because if you have one of those large public's operating in your area, because they're going to make like larger scale decisions on operations, you might actually be able to go gain market share about a market segment of your of your local economy is not acting like the broader economy that they're operating in. So just watch that because you could go grab that market share pretty quickly.


Paul Daly  06:55

One last quote on this story, it's all about inventory management group, one CEO Earl Hesterberg said October 26, the industry decline in US vehicle prices required quick action by our team to rapidly sell through existing inventory so we can restock at the latest market prices. This action enabled us to slightly increase sales in a market, which declined in double digits. So hey, the lesson to take away from that is pay attention to your inventory move really fast when you see the need to move fast. And we're probably going to talk about this quite a bit in the clubhouse room. And we're about to jump in. Yes. And that's what I was about to say the lesson from that is join all things used car weekly. Friday at 9am. Eastern because on club talk a lot about inventory started. We had it yeah, we'll be heading there next. And I'm sure this this conversation will be top and you'll have 140 operators and people who are paying attention to inventory in one room really tossing this around from different markets across the country. Speaking of tossing things around segue and yesterday's earnings call Carvana. Obviously, we will talk about Carvanha. Next, they reported a $508 million net loss which is larger than their q1 loss, which was 506 million and more than seven times the loss from same time last year, which was only 68 million. As interest rates and inventory costs continue to rise CEO Ernie Garcia and CFO Mark Jenkins wrote in a letter to shareholders, the environment has continued to get increasingly difficult since the end of the quarter. And it is probable things will continue to get more difficult before they get easier as the company shifts its strategy from focusing on growth, to focusing on profit about that.


Kyle Mountsier  08:37

Is there a laugh button somewhere?


Paul Daly  08:43

I don't know if you can find it. That was that was the collective response. response.


Kyle Mountsier  08:51

I mean, here's the thing, like first of all, can you imagine in year whatever they're, you know, they're like, you're 12 or 13? Can you imagine posting continual $508 million net losses. And just finally saying like, that will focus on profit. And, and shareholders going? Yeah, they can probably focus on that they probably know how to make profit in a not in a in a non pandemic, you know, environment. Like what's to say they even have the capacity to get there as an organization.


Paul Daly  09:25

They're nothing I mean, they did they did achieve I mean, it was the big story when they did achieve profitability for the first time and they showed was that a couple was a two quarters. Yeah, when everybody was was a two quarters of profit. I mean, but yeah, but but the total I mean, I do think that them proving that the model could be profitable, like once I think everyone it triggered like what happened when Amazon first turn profitable because years and years business is like a it's gonna be profitable, we're gonna lose a lot of money. But then once they turn profitable, they just that trajectory kept going. Garcia also noted that cars are very expensive. And St. Nick extremely sensitive to interest rates. He added he was hopeful that rates might be peaking. It doesn't seem like that to me. Yeah. Interest rates have moved up materially, he says, and most customers use financing to buy a car. So it seems like a lot of like blanket statements coming out, which is what you talk about when you're like, I'm not sure what we


Kyle Mountsier  10:16

are, the prices are high interest rates are going up. And people finance


Paul Daly  10:21

cars. And people usually borrow money to buy cars, all the other shareholders.


Kyle Mountsier  10:26

Let me write down yes, no,


Paul Daly  10:28

no, they're not. I mean, you do have a lot of retail investors and things in Carvana. So there's a level of like educating them. But the three things that are right, there are things that have been in headlines across the board, not in automotive things, but just in everything. Their profit for retail vehicle, retail dropped to $3,500, down from down, dropped to $1,172. From what it was year over year. $3,500 is still a lot. How is it just operational overhead, they have debt service, they have operational overhead, because if you like contrast the two for a minute, their profit per unit retail is 3500. When of the Publix it's somewhere between 1588 to 2478. Yeah. Well, they just have a different


Kyle Mountsier  11:11

business model a lot more overhead. Yeah, a different business model a lot more overhead. I wonder if, like, one of the interesting things is because they have their own financing company, they can report that income on their profit per vehicle. And so you have the overhead of banking, the business as well, which is, which is a whole, you know, that's a whole different level. Kid. Yeah, it's a complicated I, you know, I don't sit on the earnings call. So I don't want to speculate or anything like that. I just didn't know they had


Paul Daly  11:37

a call, it seems like this was like a letter, which is another thing, like we're gonna we're gonna write a letter,


Kyle Mountsier  11:42

but it's gonna rather well, I think, you know, I've talked to a lot of people like, what would you do what you know, and I think that the idea is like, hey, look, you know, the, the, the core technology and the, and the idea is, right, it's just like, the capacity of the operators, the managers, the people like, there is something about being a quote, unquote, car person that allows you to make decisions in an environment like this, that require a different level of focus and intention. That, you know, dealers have the ability to work through and people that have come through that structure. And so, you know, a lot of people are like, Why hire some car people to make some decisions about cars? You know, and I just don't know what that you know what that management structure looks like. But I would have to guess that it's a lot of like, people from outside the industry trying to make retail decisions, solely retail decisions in an altogether different vertical, that can look like retail, and we encourage retail a lot. But there, but there's just some different things that if you've never been in it, if you've never sat in, you know, the inventory marketing and the merchandising and those meetings, then, you know, you can make some decisions that are perceivably good, but maybe aren't aren't the best for the end user.


Paul Daly  12:53

Yeah, I mean, they kind of ended up by saying, they're not going to be providing an outlook for 2023. They said, We believe forecasting the environment over the coming months and quarters is difficult.


Kyle Mountsier  13:07

Well, we bring you down to shoot your right back up to the sky. So speaking of shooting back up to the Midway, we were both like, I like all of our sentences are like


Paul Daly  13:20

that was the fun one, we wanted to end on a really fun one. Not I mean, like, let's not paint the picture, that it is doom and gloom because it's not fun. I don't know if that's the truth for Carvana because it feels like that over there. But maybe we'll pull one up. But so let's get back to like the retail auto industry that we live in today. And talk a little bit about marketing. This is a fun one. The colors you choose can make a distinct difference in the emotions you trigger in guests and buyers. There's an infographic we have up on the screen right now it's linked up in the show notes. You have to check it out. It's such an interesting read from a luxury so cap from luxury SoCal Realty and they want to help you sell your house faster, but also give a lot of other things like hey, these will help you sell your house faster. These will help you decrease childhood aggression. This will help you calm down customers reduce I mean, like college can do a lot. I don't know. Let's let's let's give them some of the some of the quick details on the colors. Take some notes.


Kyle Mountsier  14:18

Some of the details, you know, like red increases pulse rates by point 356 points. I thought that that was wild. Yep, white, white paint reflects up to 98.1% of sunlight making rooms look bigger. So like if you got a little small house or you got a small situation, make that room white boom, all of a sudden feels a lot bigger, especially if you get some sunlight in there. I thought those were both like kind of interesting things that you can you can think about in a car dealership, like if you put read too many places like people are already anxious. So adding to blood pressure, not the greatest thing. You know? We were Toyota doesn't feel


Paul Daly  14:57

like that. Well, yeah, But as I was going through that, reds not everywhere. I know, I know I was going through this and I was just like affiliating these colors with with automotive brands sizes that you like. Yeah, it was like Red was like a Toyota like, what are they going to do to counteract that like 75% people of people prefer purple over other colors. You go cars.com I get to it a little bit. White paint reflects 90% Like you said, makes rooms look bigger. I thought a Roadster for some reason. They kind of like got that that real white star getting you think about like the Apple Store and the Apple website, like okay, okay, pink reduces aggression in children by 45%. So I think there shouldn't be child


Kyle Mountsier  15:36

area, that's just gonna just paint that sucker pink.


Paul Daly  15:41

Whenever I go to store and I see the child area, like the books in the games, I'm like, Man, I wish we had a highlight reel of the meltdowns that happened in that room. That's a tricky business right there.


Kyle Mountsier  15:51

You know, the dichotomy on red though, is what's interesting is that, like, it draws attention and actually increases conversions more than any other color. So like, you know, there's there's kind of an excitement alongside the pulse rate. So, you know, just like looking at those two things was really interesting to me. And then I think that a lot you know, like one of the colors that you know, they've got this whole like maximizing market value they associated with some brands but you see a lot of especially like luxury brands and auto or those that are pushing toward luxury, kind of doing this monochromatic with a black heavy focus and yeah, you know, they they know that it's one you know that it's a color that offers strength, sophistication and mystery in your product so it's a very luxurious type feel and also strength is mystery that kind of like who what am I getting myself into here so I think you can make some a lot of decisions off of this.


Paul Daly  16:51

The one that we didn't put in the show notes was on the sheet yellow triggers appetite. So I'm a sudden start to take McDonald's In and Out Burger they got the yellow tree in your advertising, the red generating some excitement, right? Like, no wonder, no wonder red and yellow are the colors. But whatever you're doing today, pay attention to some colors around you but more than anything, pay attention to your business, which means pay attention to your people going into this weekend because you got some people to meet some people to sell to some people to take care of