Recall Repairs Hurts Dealer Profits

Second-quarter profits at the publicly traded dealership groups — mixed amid weak new-vehicle sales — took a hit from the thousands of vehicles languishing on lots under stop-sale orders, waiting for recall repairs. Now those groups are taking on the problem.

“We are going to get more aggressive in our pricing to blow some of this out,” said Jeff Dyke, Sonic Automotive Inc.’s executive vice president of operations.

Most vehicles on stop-sale orders have been recalled because of potentially faulty Takata airbag inflators. BMW and Honda are two of the brands most affected. Until parts are available, dealership groups’ options are limited.

Sonic will discount affected BMW 3 and 5 series and Honda Accords. Dyke said Sonic will rely on profit from its finance and insurance operations to offset the front-end profit hit from discounting.

About 10 percent of Asbury’s used-car inventory, valued at $16 million, is under a stop-sale order, COO David Hult said, with the affected used inventory “as high as 40 percent at certain locations.” He said most vehicles likely won’t be fixed until later this quarter or next quarter.

Group 1 Automotive Inc. has about 500 new and 600 used vehicles in its inventory under stop-sale orders, said CEO Earl Hesterberg. They represent less than 2 percent of Group 1’s U.S. new-vehicle inventory and about 4 percent of its used.

Roger Penske, chairman of Penske Automotive Group Inc., aims to sell his stop-sale vehicles at retail.

“We’re not going to discount them,” he said. “We want to take these cars and recondition them because we get some internal gross profit in the parts and service area by doing the reconditioning and then retailing them.”

Sales of about 2,200 used and 400 new vehicles in Penske’s U.S. inventory, valued at $57 million, are on hold.

Penske expects to have a “good portion” of the stop-sale used vehicles reconditioned and ready for sale within 60 to 90 days. So far, Penske has reconditioned about half of its used BMW inventory, he said. “We’re on the right end of the curve.”

AutoNation Inc. had roughly 20 percent of its used-vehicle inventory — about 6,900 units — grounded because of stop-sale orders at the end of June. About three-quarters of those were related to the Takata recall, the company said.

CEO Mike Jackson said the stop-sale situation was the top factor contributing to AutoNation’s second-quarter decline in used-car sales and profits.

“I think we’ll still be talking about Takata in 2017 as an issue, but it’s hard to judge,” Jackson said. “It really depends on how the suppliers ramp up production of replacement units.”

Some of the financial hit is being offset by compensation paid “by certain manufacturers,” Jackson said. He expects that compensation to be more than $3 million, and to cover about 60 percent of the used inventory AutoNation has on hold.

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