By: Brian I. Gordon, Dave Cantin Group Partner and Chief Business Officer
Imagine there were competitors that revealed intimate details about their business strategy, their financials and even told you what they think is going to happen with their business in the year ahead. There are seven such retail public dealership companies that operate primarily in the U.S. and report on their business, in detail, every quarter.
It is not just your retail competitors; your business partners are doing the exact same thing. Nearly all major manufacturers are public companies that provide details on all aspects of their business and share their perspectives on the industry.
How many of you are paying attention?
When Are Earnings Released and What Information is Available?
Earnings are released quarterly, and each industry tends to release earnings as a group over a couple of weeks. The automotive industry usually announces earnings about a month after the close of each quarter. The calendar third quarter ended on September 30, and most automotive industry earnings roll out between October 22 and November 7.
Each public company releases earnings via some public press release, and nearly all companies post the release, financials and some other presentation on the investor relations section of their corporate websites. Additionally, each company holds an open conference call (which you can join) where the executives walk through the quarter, provide additional details and answer questions from the media. Information on joining the call is available on their respective websites (usually included in the press release).
How Can These Help My Business?
What to look for depends on whether you are looking at the public retailers or the manufacturers; here are some simple things that will help you with your business and business strategy for each:
Public Retailers
Trends and Forecasts: Public dealership companies have access to significant data and large analytics teams responsible for uncovering trends and creating forecasts for all aspects of the retail auto business. They have visibility into the performance of each manufacturer and a complete picture of the differences among U.S. geographies. Look for trends and forecasts across each retail business segment that will allow you to benchmark your dealership’s performance and help you develop better business strategies.
Challenges and Concerns: Public companies have a fiduciary responsibility to alert shareholders of potential challenges or risks and manage the general expectations of “the street.” This provides you with a lens into some of the issues that every dealer should be paying attention to and developing plans for mitigating. In many cases, the executives will use conference calls to outline how they are addressing these challenges to calm analysts and shareholders. This enables you to not only hear what the challenges are, but how the largest companies plan to address them.
Business Strategies: It may surprise you to find that each public retailer employs very different business strategies to win customers, manage costs, grow revenue, and maintain margins. Exploring these strategies through a review of the materials accessible on the investor relations sections of their websites can spark ideas for your own business strategies.
Resource Allocation: For better or worse, public companies need to do two simple things: grow revenue and manage costs. To grow revenue, publics need to allocate resources toward the parts of their business where they believe they can find growth. Conversely, the publics must manage costs by pulling back resources from the areas they aren’t performing or are not expected to perform as well in the future. Keeping an eye on how they are allocating their dollars will give you clues on where they believe the greatest opportunities are in retail automotive.
Automotive Manufacturers
Business Strategies: These are your business partners, and outside of highly curated and produced dealer meetings, public earnings are a lens into how they plan to operate their business moving forward. Every dealer should pay attention to the quarterly earnings reports from their partner manufacturers, listen to the conference calls and review the available documents. Remember, it is your choice as a dealer whether you want to remain in a business partnership with a certain OEM or whether you should divest one and invest in another OEM that you believe has a better strategy.
Investment: Earnings are the best opportunity to dig into exactly where your partners intend to invest their dollars in the future. The earnings will provide you with a more holistic view of where dollars are being allocated and how “corporate” views the North American market (especially for foreign manufacturers). Understanding their investment strategy and feeling confident in it allows you to gauge your level of comfort and excitement for your partner’s potential.
Problems: It’s much more difficult to hide problems in an earnings report. Numbers don’t lie; prudence typically trumps unwarranted optimism, and the media asks questions. It’s critical that you see your partner for what they are, good and bad. Earnings are a great way to do that.
What We’re Watching This Quarter
Analysts are focusing on all aspects of the public companies’ business and there are specific numbers or trends that may be particularly important for each individual company. However, industries tend to have a few macro trends that analysts and shareholders are really paying attention to because they supersede everything else. This quarter, there is one thing that every company will be judged on: margins.
Margins are always important but usually occupy a place of equal and relative importance along with revenue growth, profit, expenses, unit economics (not sure what that is), current business strategies, etc. Covid created a period of artificially high margins in the automotive industry but beginning in 2023, these margins started coming back down to earth. For the past 18 months, as the industry worked its way into a new normal, “the street” focused on all these metrics while exercising a great deal of understanding for an industry that, as a whole, saw crashing margins.
The general feeling that we are entering the new normal has analysts and shareholders watching closely to see which companies are finding the right balance in their business and most importantly, stabilizing margins in all segments of their business. In short, time is up for companies who haven’t figured out how to navigate the post-Covid automotive industry, complete with its ongoing challenges with inflation, interest rates, production, economic worries, etc.
This quarter, it will be all eyes on the margin. Which executives have guided their companies toward the new normal and found stabilization of margins not only as a total business, but in specific segments of the business and within unit economics. This will trump revenue growth and profit. Consequently, if margins matter for every public company in the automotive industry, this is what should matter to you.
Why This Matters So Much to the Dave Cantin Group
Public companies strive to do one primary thing: create shareholder value. They create shareholder value by increasing the overall value of their business. DCG is always watching to see how public companies are creating this value and how analysts are measuring the value of these businesses. While not apples to apples with private dealership companies, public company value can tell us a great deal about the asset value of private dealerships. This insight allows us to better advise our clients when they are not contemplating a transaction but are focused on building value for the future. Our work with clients on M&A strategy, value creation, platform management, and other non-buy/sell topics presents the starkest differences between DCG and other M&A companies.
Beyond this, everything in the industry impacts M&A because an M&A valuation is the product of three things: how a specific business is being operated, how a manufacturer is performing or is perceived to be performing, and the broader performance of the automotive industry. To properly advise our clients, it’s critical that we track the whole industry and gather all the available data to help us develop perspectives and strategies that will help our clients.
M&A Advisors Are Critical
Knowing the market and properly advising sellers and buyers on what’s right for them has never been more important. Dave Cantin Group has invested significant capital over the past 12 months to develop tools and resources to ensure that we can provide industry-leading insights to our clients, whether they are focused on an immediate buy/sell opportunity or not.
This year, DCG introduced Jump IQ, a new proprietary AI-powered machine learning platform that gives us access to financial information, key performance factors, custom multiples, and valuation estimates for every dealership in the U.S. As an example, Jump IQ leverages over 20 factors to develop customized multiples for each dealership considering the unique scenarios impacting M&A that we discussed above.
Also, in January of this year, DCG introduced the Market Outlook Report, published in partnership with Kaiser Associates, which shares the most critical themes that will impact the retail automotive industry. No matter where you are in your journey of operating or buying and selling dealerships, this report shares insights that can be invaluable as you make decisions and set a strategic direction for the months and years to come. In August, we released the midyear update.
If you’re considering or actively pursuing an acquisition or sale or looking for other advisory support, the DCG team is here to provide expert guidance and support. Contact us to talk to one of our automotive M&A specialists.