used cars

Takeaways From Earnings Calls: Examining Retail And Used Car Markets

These are slow weeks in earnings where we explore the general trends and themes that we have noted, including a very strong used car market and retail that is doing quite well.

A Very Strong Used Car Market

There has been a strong desire for people to avoid public transport as the pandemic continues. The desire is for people to travel but with minimal contact with many people. The result has been an increased demand for alternatives like bikes and personal cars. For bike manufacturers, demand is at an all-time high, and given how hard it is to ramp up production and certain supply chain constraints, supply will remain constrained in the medium term. A study by BCG in China gives us insight into what consumers are thinking. They see cars as the preferred mode of travel after the lockdowns around the world, resulting in a higher likelihood to own cars. The story is similar in the UK.

Source: BCG Report

The pandemic disrupted supply chains, with car manufacturers forced to shut down in mid-March. They are now trying to recover from these shutdowns. Some have paused the launch of new models. For instance, General Motors (NYSE:GM) has pushed back to 2021 the launch of updates for the Chevrolet Equinox and Traverse models. It may take time to return to full production capacity.

What happens in recessions is that people tend to hold on to their cars a little bit longer, meaning they do not want to sell them. As a result, there has been a scarcity of second-hand cars. In the week of August 20th and as per data from Cox Automotive, the total supply of unsold used vehicles in the US stood at 2.16 million vehicles which is the lowest in several years. Used-car sales dealers are doing anything to lay their hands on the scarce inventory. At the same time, there has been a spike in demand for used cars resulting in price increases. The prices are getting a bit ridiculous. Used cars are supposed to cost less than new cars, but we are seeing some cases where a used car costs more than the price the owner paid for it before. Manheim Consulting had this to say about their used vehicle prices index:

“Industrial Wholesale used vehicle prices (on a mix-, mileage-, and seasonally-adjusted basis) increased 3.4% in the first 15 days of August compared to the month of July. This brought the mid-month Manheim Used Vehicle Value Index to 163.4, a 15.6% increase from August 2019. If the mid-month value of the Manheim Index holds for the full month, the Index will set a record high for the third consecutive month.”

Source: Manheim consulting

At some point, these prices will normalize, though one can never be sure when that will be. In the meantime, how can one benefit from this? The key here is to realize that the craze in used cars will drive demand for servicing and for car parts. Good investments can be found in car parts manufacturing companies like Advance Auto Parts (NYSE:AAP) and tire manufacturing companies like Nokian Tyres. With used cars raking up car miles, there will be a need to replace motor vehicle parts more as wear and tear increases.

Retail is Holding up Well

As we noted in the last week, retail has been doing very well this quarter and is expected to do even better as we head into Q3. The trends are very strong so far as noted by Best Buy (BBY) CEO Corie Barry who saw favorable trends across literally all categories right now as they exited Q2 and started Q3. Several retail companies are having a hard time keeping inventories stocked. No surprise that products like beverages are in short supply. Back to school demand got off to a better than expected start, so we hope that that too can provide some leg to stand on for retailers.

“Throughout the quarter, we experienced inventory constraints in a number of categories, which did moderate our sales growth. While we expected product constraints as we entered the quarter, the stronger-than-anticipated demand as we open our stores for shopping resulted in more constrained product availability than we expected.” – Best Buy CEO Corie Barry

“Inventory levels in both our segments were impacted during the quarter, as it relates to higher turn consumable categories.” – Dollar Tree (DLTR) CEO Michael A. Witynski

The supply chains have been under intense pressure lately and it is hard to imagine how this will be as we head into the holiday season. The biggest constraint on retail growth has been supply. Getting items to consumers is taking a bit longer as a result. Will we see increased prices and inflation as a result? With needs rising, pay attention to freight charges. The good thing is that the supply chain issues seem to be getting resolved quickly:

“I can just say the supply chain over the last four months has just been hideously complex and nearly impossible to manage… Those problems have slowly dissipated. And I would say starting around mid-July, we’ve seen a much better flow of product.” – Urban Outfitters (URBN) CEO Richard Hayne

“Our single biggest challenge has been the difficulties with getting our seafarers relieved when their tours were up due to travel restrictions, closed borders and lack of flights. And we continue to battle this problem, but we have started to make some real progress.” – A.P. Møller – Mærsk A/S (OTCPK:AMKAF) CEO Søren Skou

E-commerce growth in Q2 has been nothing short of phenomenal. The worry has been on the impact this pivot to online has on margins. Best Buy President Mark Mohan reassured us that online and in-store EBIT margins do end up being pretty similar:

“Overall, on an annual basis, the EBIT levels of both of those channels are actually pretty similar. Now each quarter can be a little bit different. The makeup is a little different, too. Online has typically had a little less, a little lower gross profit rate, a little bit more SG&A leverage. Stores, while carries a little bit more gross profit rate. It carries a little bit more SG&A burden. So they kind of offset each other, and so similar EBIT levels — or they’re pretty similar EBIT level.”

There are several things that worry us about retail currently, though. We are worried that consumer confidence has yet to recover fully, that consumers are changing habits, including being increasingly prone to changing brands, and that they intend to save more should they get some more stimulus checks.

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Source: The Daily Shot

Conclusion

The used car market continues to experience high demand and low supply, leading to higher prices. The key is to pay attention to the car parts and servicing companies. Moreover, retail seems to be putting the supply chain challenge behind it and adapting well to online sales, providing good ground for a good performance in Q3.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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