Penske: Smart Electric Vehicle, Inventory Sell-Off Spell Better U.S. Future

(MoneyWatch)  Prospects are looking better for the ailing Smart franchise in the United States, even though Smart sales were down 60.9 percent in the first half, to only 3,349.

Smart is built in France by Daimler (DDAIF.PK) (the same company that makes Mercedes-Benz), and distributed in the United States by Penske Automotive Group (PAG), which has a separate chain of auto dealerships. That means Penske buys Smart cars from the factory and wholesales them to dealers, who then sell them at retail. Smart cars got off to a great start in the U.S. market in 2008, when people were terrified of high gas prices. As soon as gas prices started to subside again, Smart cars started piling up in inventory.

What's the good news? It's partly what's coming. Smart expects to start selling very limited quantities of a Smart electric vehicle in the fourth quarter. That should create some additional interest in the brand.

The other good news is what's happened behind the scenes. Penske Automotive Group is slowly selling its way out of a crisis by getting rid of a big backlog of unsold cars.

Chairman Roger Penske said in a July 29 conference call that Smart had about 2,300 unsold 2010 models in stock. A year ago at this time, the brand had 4,500 unsold 2009 models in stock. That's really bad news in the auto industry, for a couple of reasons.

One, cars don't get better with age when they're sitting still. Their moving parts are better off when the car is operating. Two, inventory is rarely paid for. The way it works is, inventory represents a loan that's paid off only when the car is sold. That means the longer a car sits, the more it costs in interest expense.

A backlog of 4,500 cars in the summer of 2009 is pretty bad by Smart standards, since the company sold fewer than 15,000 cars in all of 2009. Two months worth of inventory is the auto industry benchmark for unsold cars. Penske got rid of the backlog the old-fashioned way: with low-cost loans and leases.

"We had some significant marketing that took place during the third quarter (of 2009) in order to move some of these units we had in stock. Obviously we won't have that this year," Penske said. In the second half of 2010, that's going to make year-over-year comparisons look better, he said.

Still, Penske Automotive's Smart distribution segment lost 2 cents per share in the second quarter, about half the size of the year-ago loss per share. In the latest quarter, that represents a loss of about $1.8 million.

Penske said the Smart brand also had to sell off a high mix of upscale models with lots of options, even though stripped-down models were what was selling. "The mix has changed. We had a lot of higher-priced units in inventory. We find now that gas prices are down, the people buying (Smart cars) are looking for low cost of ownership."

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Photo: Daimler