US auto retailers’ falling new vehicle margins compress quarterly profits

By Nathan Gomes

(Reuters) – Several U.S. auto retailers reported dour fourth-quarter profits this week, as price cuts and incentives to lure in buyers in a turbulent economy put a strain on new-vehicle margins.

Higher vehicle production, which has eased supply, has also trimmed dealer margins, auto retail chain executives said this week.

This is in contrast to high prices that auto dealers commanded over the past few years, taking advantage of strong demand for new vehicles and short supplies of popular models due to supply chain bottlenecks.

“Discounts and incentives on new-vehicles continue to rise, and that is putting downward pressure on pricing and profitability for dealers and automakers alike,” a Cox Automotive report showed on Tuesday.

But despite lower prices and higher incentives, U.S. new-vehicle sales pace slowed in the first month of the year, the report said.

Electric vehicles (EV) have also been a cause of concern for retailers. They have had to shell out more to market EVs, which have seen varying levels of demand owing to their higher maintenance costs and lower resale values.

To make matters worse, EV prices have come down significantly in the U.S. in the past year, led by price cuts at Tesla, Cox added.

“New vehicle margins continue to decline, but the rate of moderation in the fourth quarter, which was about $120 per month was more modest than earlier quarters,” car retailer AutoNation CEO Mike Manley said on an earnings call on Tuesday.

While dealer Lithia Motors’ new vehicle margin fell to 7.9%.

However, retailers showed confidence in their after-market service units, lifting their profits from maintenance related to new vehicles, with more technology and software adding an extra layer of complexity.

Shares of Sonic Automotive, which missed fourth-quarter estimates on Wednesday, were down about 5%. AutoNation’s shares were also marginally down, while those of Lithia were slightly up.

(Reporting by Nathan Gomes in Bengaluru; Editing by Shinjini Ganguli)