GROUP 1 AUTOMOTIVE INC quarterly report, Q3 FY2022

Group 1 Automotive, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Financial amounts are in U.S. dollars unless noted. Group 1 operates automotive dealerships in the U.S. and U.K.; Brazil is reported as discontinued operations following its sale on July 1, 2022.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Revenue	$4,163.4 million	$3,412.8 million	$12,153.1 million	$9,992.3 million
Gross profit	$752.6 million	$638.7 million	$2,245.8 million	$1,769.5 million
Income from operations	$279.9 million	$241.5 million	$849.4 million	$654.7 million
Net income	$195.7 million	$172.1 million	$594.6 million	$465.0 million
Diluted EPS	$12.48	$9.33	$36.25	$25.21

Q3 revenue increased 22.0% and net income increased 13.7% year over year. Gross margin narrowed to 18.1% from 18.7%; SG&A was 59.9% of gross profit versus 58.9%.
For the first nine months, revenue rose 21.6%, gross profit 26.9%, and net income 27.9%. Gross margin improved to 18.5% from 17.7%; SG&A was 59.2% of gross profit versus 59.7%.
Q3 same-store revenue grew 3.6% reported (7.1% constant currency), while same-store gross profit declined 0.9% reported (increased 1.7% constant currency). Used vehicle retail and wholesale profitability weakened; new vehicle retail, parts and service, and F&I contributed positively.
Cash and cash equivalents were $20.5 million at September 30, 2022, versus $14.9 million at year-end 2021. Nine-month operating cash flow was $533.4 million, down from $1,117.5 million; management’s adjusted operating cash flow measure was $730.3 million, up from $593.8 million.
Total debt was $1.953 billion, excluding floorplan notes payable, compared with $2.047 billion at December 31, 2021. Net floorplan notes payable totaled $745.9 million. Reported total liquidity was $790.3 million, including cash, floorplan offset accounts and available Acquisition Line capacity.
At quarter-end, assets were $6.252 billion and stockholders’ equity was $2.214 billion. Inventory was $1.186 billion, up from $1.073 billion at year-end.

Material changes and business developments

Revenue growth reflected acquisitions, including Prime Automotive Group, completed in November 2021, and five U.S. dealership acquisitions plus a collision center, as well as a U.K. dealership and collision center acquired in 2022. Prime contributed $448 million of Q3 revenue and $34.2 million of Q3 net income, including certain stores later disposed of.
Same-store results were more moderate than reported growth, which benefited from acquisitions. New vehicle supply remained constrained; Group 1 reported 16 days of total new-vehicle supply at quarter-end, including 15 days in the U.S. and 20 days in the U.K.
New vehicle pricing and gross profit per unit were strong, but used vehicle retail gross profit per unit declined amid inflationary pressure on customers and higher acquisition costs. Wholesale used-vehicle results also weakened as the company shifted more sales to retail channels.
Q3 U.K. reported revenue fell 9.5%, primarily due to currency translation. U.K. same-store revenue increased 5.2% on a constant-currency basis; sterling had declined 17.3% against the dollar year over year at quarter-end.

Liquidity, capital allocation and outlook

The revolving credit facility was amended in August 2022; the company reported $551.2 million of available Acquisition Line capacity and $703.8 million of available U.S. floorplan capacity at September 30. It was in compliance with debt covenants: actual leverage ratio was 1.77 against a maximum of 5.75, and fixed-charge coverage was 5.77 against a minimum of 1.20.
During the first nine months, the company repurchased $359.5 million of shares and paid dividends of $18.1 million. It repurchased a further $100.0 million of shares after quarter-end under a short-term Rule 10b5-1 plan.
Management forecast 2022 capital expenditures of approximately $105 million, excluding real estate purchases and future acquisitions. It expected a 23.5%–24.0% effective tax rate for the remainder of 2022. The filing provides no specific revenue or earnings guidance.
Management stated that operating cash flow, cash on hand and borrowing capacity were expected to support working capital, debt service and recurring expenditures, and that it did not anticipate material liquidity constraints.

Risks, contingencies and unusual items

Semiconductor and parts shortages continued to constrain vehicle production and deliveries. The company also cited inflation, rising energy and labor costs, higher interest rates, possible recession, and the Russia-Ukraine conflict as risks to supply, costs and customer demand.
Higher rates may increase company borrowing costs and reduce consumers’ ability or willingness to finance vehicle purchases. A 100-basis-point rate change was estimated to affect annual interest expense by approximately $6.2 million based on variable-rate borrowings and hedges during the first nine months of 2022.
The company completed the Brazil disposal on July 1, 2022. It reported an $87.5 million cumulative net disposal loss, including a $122.8 million foreign-currency translation loss reclassified from accumulated other comprehensive income. A $21.8 million Brazil-related receivable remained, including amounts expected to fund retained liabilities and a tax settlement.
The company identified proposed Federal Trade Commission rules for automotive dealers as a potential source of added compliance burdens, costs, transaction delays and possible lost revenue. It also disclosed ordinary-course litigation and manufacturer chargeback exposure, but no legal proceeding expected to have a material adverse effect. It guaranteed certain assigned dealership lease obligations estimated at $38.0 million.
The CEO was scheduled to retire effective December 31, 2022, with Daryl Kenningham to succeed him on January 1, 2023. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Key facts for investors to verify

How much reported growth and earnings reflect acquisitions versus underlying same-store performance, and how results evolve as new-vehicle supply and pricing normalize.
Whether used-vehicle margins and wholesale results stabilize after the Q3 declines, and whether labor and other cost inflation continues to pressure SG&A.
The effect of further interest-rate moves, currency fluctuations—particularly sterling—and recessionary conditions on financing costs, customer demand and reported results.
Cash generation after inventory investment, acquisitions and share repurchases; also confirm available borrowing capacity and covenant headroom.
Final cash proceeds and retained obligations related to the Brazil disposal, including the escrow receivable and tax settlement, and any material developments in the pending Prime dealership approval litigation.