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Morningstar | Group 1 Is Ramping Up Its Used Vehicle Plans and Taking Great Effort to Retain Technicians

Group 1's restructurings during the financial crisis, such as new dealer and customer systems have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit, and Group 1's ratio improved to 74.6% including rent expense in 2018 compared with 77.9% in 2007. The company in 2018 started to transform itself again with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians that are already improving employee retention. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line will only sell high-mileage used vehicles, and the brand will not be a stand-alone used-vehicle store like three other public dealers are doing. Group 1 feels the economics of stand-alone used stores do not work though opinions are mixed throughout the dealer sector. Management eventually expects Val-U-Line to make up 10% of Group 1’s used-car business, and it has hired a used-car director and other staff for this initiative, which could squeeze profits as Val-U-Line ramps up.Most growth will come via acquisition because Group 1's business model is similar to the other large dealerships, which have been consolidating stores. Group 1 is the only public dealer with stores in Brazil, which could fuel more growth. The industry has been consolidating because smaller players cannot compete with the scale and cost savings achieved through roll-up acquisitions pursued by the six publicly traded franchise dealerships. The industry is still highly fragmented so we do not anticipate Group 1 having a problem finding desirable stores to buy.Parts and servicing was about 12% of 2018 revenue but made up 44% of gross profit. This significant contribution to profitability is less volatile than vehicle sales and mitigates some of the cyclical risk of the auto industry. Vehicles are becoming ever more complex to repair, which we think favors the dealer that can more easily invest in service operations. Financing also helps profits with 100% gross margin from commission.