Group 1 Automotive, Inc. (NYSE: GPI) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing reports annual results, not a standalone fourth-quarter income statement. Unless noted, figures below are for continuing operations and in U.S. dollars.
Business context
Group 1 operates franchised automotive dealerships in the U.S. and U.K., selling new and used vehicles, parts and service, and finance, insurance and other products. At year-end it had 149 U.S. and 55 U.K. dealerships. Brazil was sold on July 1, 2022 and is reported as discontinued operations.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $16.22 billion | $13.48 billion | +20.3% |
| Gross profit / gross margin | $2.97 billion / 18.3% | $2.44 billion / 18.1% | +21.5% gross profit |
| Operating income | $1.09 billion | $884.4 million | +23.4% |
| Income before taxes | $985.3 million | $800.9 million | +23.0% |
| Net income from continuing operations | $754.2 million | $625.4 million | +20.6% |
| Net income, including discontinued operations | $751.5 million | $552.1 million | +36.1% |
| Diluted EPS, continuing operations | $47.31 | $34.11 | +38.7% |
| Net cash from operating activities | $585.9 million | $1.26 billion | Down $673.7 million |
- Revenue growth reflected acquisitions, higher vehicle prices and increased parts and service and F&I sales. Same-store revenue rose 3.7% as reported (6.0% at constant currency); same-store gross profit increased 4.0%.
- New-vehicle gross margin rose to 11.1% from 9.4%, benefiting from supply constraints and higher prices. Used-vehicle gross margin fell to 5.2% from 7.9%; used retail gross profit per unit declined 22.4% to $1,699.
- Parts and service revenue increased 26.3% as reported, while F&I revenue increased 24.2%. F&I gross profit per retail unit rose 12.7% to $2,128.
- SG&A was $1.78 billion, up 20.7%; it declined slightly as a share of gross profit to 60.1% from 60.5%. Other interest expense, net, rose 38.9% to $77.5 million, mainly reflecting additional notes and acquisition-related property borrowings.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $47.9 million. Reported total available liquidity was $638.6 million, including $153.6 million in floorplan offset accounts and $437.2 million of available Acquisition Line capacity.
- Total debt was $2.09 billion, including $750 million of 4.00% senior notes due 2028; long-term debt on the balance sheet was $1.95 billion. Floorplan notes payable, net of offset accounts, totaled $1.01 billion.
- Debt covenants were met at year-end: actual adjusted leverage ratio was 1.89 versus a maximum of 5.75; fixed-charge coverage was 5.61 versus a minimum of 1.20. Management stated it expected sufficient liquidity and no material covenant or liquidity constraints.
- Cash used in investing activities was $484.6 million, including $528.7 million for acquisitions and $155.5 million for property and equipment, partially offset by disposition proceeds and $59.4 million from the Brazil sale. The company also reported adjusted operating cash flow of $915.7 million, a non-GAAP measure that reclassifies certain floorplan financing flows.
- The company repurchased 3.02 million shares for $521.2 million during 2022 and paid $1.50 per share in dividends. A further 76,294 shares were repurchased after year-end for $13.7 million.
Material changes, outlook and risks
- Acquisitions added seven dealerships and two collision centers in 2022 for approximately $541.6 million, net of cash acquired. Management said it intended to pursue attractive dealership acquisitions in 2023; no quantified earnings or revenue guidance was provided.
- The Brazil disposal generated a reported $87.5 million net loss, driven primarily by reclassification of accumulated currency translation losses. Brazil’s 2022 discontinued-operations results included a $2.7 million net loss.
- New-vehicle supply remained below historical levels, though year-end new-vehicle inventory supply improved to approximately 24 days from 12 days in 2021. Management noted that normalized supply could pressure vehicle prices and margins. Used-vehicle prices and margins weakened in the latter half of 2022.
- Key risks include inflation, higher interest rates and energy costs; recession or weaker consumer credit and vehicle demand; continuing supply-chain disruption; manufacturer allocation, franchise and distribution-model changes; used-vehicle price volatility; competition; cybersecurity and data privacy; regulatory and environmental obligations; and foreign-exchange exposure. The GBP weakened 10.4% against the U.S. dollar during 2022; the company does not hedge translation exposure.
- Mercedes-Benz’s U.K. agency sales model began in January 2023. Group 1 expected no material positive or negative effect on U.K. gross margin and consolidated results from that change, but impacts of other manufacturers’ possible agency models remained uncertain.
- The company recorded $1.3 million of franchise-right impairment and no goodwill impairment. Auditors identified valuation of acquired and potentially impaired franchise rights as a critical audit matter. Internal controls were assessed effective, but five acquired dealerships and two collision centers—representing $210.7 million of assets and $92.4 million of revenue—were excluded from the 2022 control assessment pending integration.
Important facts for investors to verify
- Whether new-vehicle supply recovery reduces the unusually strong new-vehicle pricing and margins, and whether used-vehicle margins stabilize.
- How higher rates affect interest expense, consumer financing availability, vehicle demand and the company’s debt capacity.
- Acquisition returns and integration progress, including the excluded businesses’ control integration planned for 2023.
- The sustainability of cash generation and the pace of buybacks and dividends relative to acquisition spending, capital needs and debt obligations.
- Potential effects of manufacturer agency-model changes, franchise approvals, and GBP/USD movements on reported revenue and profitability.