Group 1 Automotive, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Group 1 operates automotive dealerships in the U.S. and U.K. (149 and 55 dealerships, respectively, at quarter-end). The Brazil business, sold in July 2022, is presented as discontinued operations. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior year-end |
|---|---|---|
| Revenue | $4,130.0 | $3,844.4; up 7.4% |
| Gross profit / gross margin | $727.9 / 17.6% | $724.7 / 18.9% |
| Operating income | $241.5 | $285.0 |
| Income from continuing operations | $158.8 | $201.1 |
| Net income / diluted EPS | $158.4 / $11.10 | $202.9 / $11.88 |
| Cash from operating activities | $143.4 | $226.8 |
| Adjusted operating cash flow (non-GAAP) | $190.8 | $318.6 |
| Cash and cash equivalents | $21.3 | $47.9 at Dec. 31, 2022 |
| Total debt, excluding floorplan notes | $1,998.4 | $2,092.7 at Dec. 31, 2022 |
Revenue growth reflected higher new-vehicle and parts-and-service sales, acquisitions, and greater unit volumes. Gross profit was nearly flat as lower new- and used-vehicle and F&I profit offset parts-and-service gains. SG&A increased 10.6% to $462.8, and SG&A rose to 63.6% of gross profit from 57.7%. Floorplan interest expense increased 139% to $12.6; other interest expense, net, increased 12.9% to $19.7. The effective tax rate was 23.1%, versus 23.3%.
Inventory growth was a major cash use: inventories increased $172.6 on the cash flow statement. Capital expenditures were $35.8. The company reported total liquidity of $672.2, comprising $21.3 cash, $122.8 in floorplan offset accounts, and $528.2 available under the Acquisition Line. At quarter-end, floorplan notes payable were $848.7 under credit facilities and other and $297.4 with manufacturer affiliates. Debt covenants were met; actual leverage and fixed-charge coverage ratios were 1.87 and 5.29, against limits of less than 5.75 and greater than 1.20.
Material changes and operating trends
- Same-store revenue increased 3.9% reported (6.0% constant currency), while same-store gross profit declined 2.5%. New-vehicle retail unit sales rose, but gross profit per new vehicle fell 14.0% to $4,710.
- Used-vehicle retail gross profit per unit declined 15.8% to $1,689; F&I revenue per unit declined 9.7% to $1,940. Parts-and-service sales increased 16.0%, with gross profit up 14.4%.
- U.K. reported revenue growth was 4.6%; same-store revenue growth was 2.1% reported and 12.5% constant currency. Sterling translation reduced reported results.
- Q1 2023 included a $76.9 acquisition of one U.S. Chevrolet dealership, with $36.5 of preliminary goodwill. Q1 2022 acquisition spending was materially higher. Q1 2022 also included $18.7 in pre-tax gains on dealership dispositions, compared with $1.9 in Q1 2023.
- The company repurchased 180,982 shares for $34.7 and paid a $0.45-per-share dividend. Remaining repurchase authorization was $128.5 at quarter-end.
Outlook, risks, and unusual items
Management provided no specific financial guidance in the supplied filing text. It said it expects operating cash flow, cash on hand, and available borrowing capacity to fund working capital, debt service, and recurring expenditures, and does not anticipate material liquidity constraints or covenant-compliance issues.
Management cited continuing manufacturer production and inventory constraints, though deliveries improved for some manufacturers. Inflation, higher interest rates, lower customer disposable income, and changing used-vehicle supply and prices pressured used-car margins and F&I. The filing also identifies potential risks from financial-sector instability, including exposure of cash and offset balances above FDIC insurance limits; a Revolving Credit Facility participant plans to exit auto-dealer floorplan lending. Proposed EPA emissions rules could affect future vehicle mix and manufacturer costs, but impacts are uncertain.
Other items to note: a $3.1 after-tax gain previously deferred in accumulated other comprehensive income was reclassified to interest expense after a mortgage swap was de-designated. A $22.0 receivable remains in connection with the Brazil disposal escrow, of which $6.5 is expected to settle retained liabilities. A previously paid $33.4 for an additional dealership remains contingent on distributor approval; related litigation outcome is uncertain. The company reported no legal proceedings expected to have a material adverse effect and no material changes to market-risk exposure.
Important facts for investors to verify
- Whether vehicle inventory availability and gross profit per unit stabilize, especially for used vehicles and F&I.
- How higher interest rates, floorplan balances, and inventory investment affect future interest expense and operating cash flow.
- Whether stated liquidity remains available subject to facility terms, borrowing limits, counterparties, and covenants.
- Progress on the EPA rulemaking, financial-institution risks, and the lender’s planned exit from floorplan lending.
- Final purchase-price allocation for the Chevrolet acquisition, collection and settlement of Brazil escrow amounts, and the outcome of the pending dealership approval dispute.