Kerrigan Report: December Capped Off Another Strong Year for Auto Sales

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Thanks so much for joining us today for the Kerrigan Market Update. We’re joined today by Erin Kerrigan, founder and managing director of Kerrigan Advisors.

VIDEO TRANSCRIPT:

Bridget Fitzpatrick: Erin, thanks so much for joining us today.

Erin Kerrigan: Thank you, Bridget, so much for having me.

Bridget Fitzpatrick: What’s your view on how the market did in December?

Erin Kerrigan: Well, December was really quite an impressive month for car sales. We were all very pleased to see that car sales far out performed expectations. We came in at a 17.7 million SAAR as a result of 1.6 million vehicle sales in the month. That was second highest month for the year. With that kind of month, the year of 2018 turned out to be another strong year of car sales overall. We had 17.3 million sales in the year, which makes 2018 the fourth consecutive year of over 17 million car sales. That’s pretty remarkable because we’ve actually never had four consecutive years of over 17 million in car sales.

Very pleased to see that the market is robust, the economy’s strong. While interest rates are going up that doesn’t seem to be effecting car sales too much because frankly, incomes have also been increasing.

Bridget Fitzpatrick: With that in mind, how did the Kerrigan Index perform in 2018?

Erin Kerrigan: Well, that’s the interesting thing. There’s a little bit of a paradox going on because as most of us noticed, December was a pretty awful month for the stock market, and likewise, for the Kerrigan Index. For 2018, for the full year, the index was down an abysmal 17.7%, and actually, it’s now skirting around the lows we saw in 2016.

To remind everyone, those lows were hit because the market really realized that we were hitting this sales plateau and there was concern that earnings growth would slow. But interestingly enough, earnings growth continued for these car companies, these auto retailers, and so we saw the index improve from ’16 through to 2018, but in ’18, it started to decline.

To give you a sense of how poorly the index performed in 2018, the S&P was down around 6%, but again, our index was down 17%. What is interesting to us is that Carvana, our new darling of Wall Street, actually was up 60% in 2018.

Bridget Fitzpatrick: What do you think Carvana means for the future of auto retail?

Erin Kerrigan: That is a very interesting question to answer. I do think Carvana’s tremendous success, both in growing their sales in a market that’s flat and also in growing their valuation, is an indication that investors believe online retailing is going to be very much coming to auto retail.

It’s not surprising, in some regards, to see the success of Carvana. If you look at Amazon, it’s amazing, but Amazon is now the most valuable company in the world. It is surpassing now Microsoft in valuation, and really the power of Amazon really shows us that retailing is becoming an efficiency game.

I do think that, that’s what Carvana’s bringing to auto retail. I would expect other companies to really take note and to see how they can insert some more efficiency and more online sales to their business to increase profitability by effectively taking out the cost of sale.

Bridget Fitzpatrick:: What do you think about AutoNation’s restructuring announcement?

Erin Kerrigan: Well, AutoNation’s restructuring announcement is a similar kind of issue that they are trying to address. They’re looking at how expensive it is for them to operate their business and ways they can take out expense to, again, become a more efficient retailer. They’ve consolidated the management of their regions from three to two, and that makes sense because the name of the game today is efficiency and that is what they’re going for.

Bridget Fitzpatrick: How are buy/sells in 2018 and what does this mean for the buy/sell market for 2019?

Erin Kerrigan: 2018 was an incredible year. We don’t have the full year’s data yet, but just looking at our third quarter Blue Sky Report, you can see that we are tracking to one of the most active years on record. What we’ve really seen it there are more sellers coming to market. They are very aware of the fact that, again, technology and efficiency are probably gonna be the name of the game in the near future, and to invest in technology and to invest in new sales models, maybe one price models. You need a really deep well of capital and a big balance sheet. Many operators that own one, two, or maybe three dealerships just don’t feel that they can take those kind of risks to reinvent their sales model, and so more and more are looking to go to market.

What is exciting is that on the flip side, we do have a tremendous number of buyers, a growing pool of buyers, who have tapped into new capital sources and are looking to invest in auto retail because auto retail is the largest retail industry in the US. The evolution of the way we retail is probably gonna make many, many people very, very wealthy as we look to increase the profitability of the front-end sales model. Which we think is gonna happen as you, again, increase the efficiency of the model by reducing, frankly, the expense associated with delivering a sale.

Bridget Fitzpatrick: Thank you, Erin, for your insight and commentary. We’re looking forward to speaking with you again soon.

Erin Kerrigan: Thank you so much and I hope you have a great rest of the month and look forward to you in 2019.

Thank you for watching the official, new source of the retail automotive industry. This has been a JBF Business Media production.

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