Group 1 Automotive, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Group 1 operates automotive dealerships in the U.S. and U.K.; at quarter-end it had 150 U.S. and 55 U.K. dealerships. Unless noted, figures are in millions of U.S. dollars and reflect continuing operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4,558.5 | $4,145.4 | $8,688.5 | $7,989.7 |
| Gross profit | $775.5 | $768.4 | $1,503.4 | $1,493.1 |
| Income from operations | $270.8 | $284.5 | $512.3 | $569.5 |
| Net income | $170.5 | $195.9 | $329.0 | $398.9 |
| Diluted EPS | $12.04 | $11.90 | $23.13 | $23.79 |
| Total gross margin | 17.0% | 18.5% | 17.3% | 18.7% |
- Q2 revenue grew 10.0%, led by new vehicle retail sales (+21.2%) and parts and service (+11.8%); used vehicle retail sales declined 3.6%. Gross profit rose 0.9%, while operating income fell 4.8% and net income fell 13.0%.
- Q2 new retail units sold increased 15.2%; used retail units declined 4.4%. New vehicle gross profit per unit fell 16.9% to $4,503; used retail gross profit per unit fell 7.9% to $1,684. F&I revenue was nearly flat, but F&I gross profit per unit declined 4.1% to $2,080.
- For the first half, revenue rose 8.7%, but operating income declined 10.1% and net income declined 17.5%. Diluted EPS increased in Q2 despite lower net income, alongside a reduction in weighted-average diluted shares to 13.8 million from 16.0 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was $239.0, down from $360.2; the company’s adjusted non-GAAP operating cash flow was $386.7 versus $456.5. Inventory growth was a major cash use: inventory increased $283.8 in operating cash flows.
- Investing cash outflow was $369.1, including $363.5 paid for acquisitions and $86.7 for property and equipment. Financing cash inflow was $103.0. Cash declined to $22.8 from $47.9 at year-end.
- At June 30, gross debt reported in the debt note was $2,259.1, up from $2,092.7 at December 31; this excludes floorplan notes payable. Net floorplan notes payable totaled $1,160.5. The $450.0 acquisition-line borrowing carried an average Q2 rate of 6.04%; the U.S. floorplan line’s weighted-average rate was 6.31% at quarter-end.
- Reported available liquidity was $628.3, comprising $22.8 cash, $267.7 in floorplan offset accounts and $337.8 available under the acquisition line. The company reported compliance with debt covenants: actual leverage ratio 2.11 against a maximum of 5.75, and fixed-charge coverage 4.97 against a minimum of 1.20.
Changes, outlook and risks
- Vehicle supply improved for some manufacturers, lifting new-unit sales and inventory, but supply remained constrained versus pre-pandemic levels. New vehicle inventory was about 27 days in the U.S. and 29 days in the U.K. Used-vehicle margins weakened amid supply constraints, price volatility, inflation and higher financing rates. Certain EV inventories were building faster than non-EV inventory.
- Higher inventory and interest rates drove floorplan interest expense up 165.3% in Q2 to $15.6; other interest expense rose 40.2% to $25.9. Management cited acquisitions and inventory growth as contributing factors.
- The company acquired five U.S. dealerships for $363.5 during the first half; purchase accounting remains preliminary. It also recorded a $10.1 pretax gain from four U.S. dealership dispositions.
- Management stated it expects operating cash flow, cash and borrowing capacity to fund working capital, debt service and recurring needs, and does not anticipate material liquidity constraints or covenant-compliance issues. The filing provides no specific numerical earnings or revenue guidance.
- Risks include further vehicle-supply or used-price volatility, consumer affordability and lender tightening, rising rates, financial-institution or counterparty disruption, foreign-exchange movements and proposed U.S. emissions rules that could affect vehicle mix. A floorplan lender’s capacity was replaced by an existing facility lender.
- No legal proceeding was identified as reasonably expected to have a material adverse effect. A $33.4 payment for an additional dealership remains classified as goodwill while distributor approval is pending; the seller’s legal action seeking approval remains unresolved. The company also estimated $34.4 of remaining lease obligations guaranteed after dealership dispositions.
Important facts for investors to verify
- Whether vehicle margins, especially U.S. new and used retail gross profit per unit, stabilize as inventory and supply conditions change.
- Whether cash generation improves as inventory investment and acquisition spending evolve, and how reported liquidity is affected by floorplan offset balances and borrowing availability.
- Debt and interest-cost trends, including utilization and rates on floorplan and acquisition facilities, and continued covenant compliance.
- Final purchase-price allocations for the 2023 acquisitions, the pending dealership approval and related litigation, and recovery of the Brazil disposal escrow receivable.
- How inflation, consumer financing conditions, financial-counterparty risks and proposed emissions regulation affect demand, F&I income and vehicle mix.