Detroit 3 Franchises Drag Down Auto Retailers

The falling value of the traditional Detroit 3 domestic franchises helped drive two of the nation's biggest auto dealer chains in the red for the third quarter.

Sonic Automotive, based in Charlotte, N.C., had a net loss of $25.3 million, versus a net profit of $26.1 million in the year-ago quarter. This year's results included a write-off of about $14 million, part of which reflects lower values for the assets of some discontinued operations.

"In light of the current economic conditions and the expectation of lower profitability at a small number of our domestic dealerships, we have written down the value of the franchise assets assigned to these dealerships," said Sonic CFO David Cosper, in an Oct. 28 conference call.

Meanwhile, Houston-based Group 1 Automotive also had a net loss of about $20.6 million, versus a net profit of $20.8 million in the year-ago quarter. Results for the quarter just ended included a similar charge to Sonic's, in this case for $48.1 million pre-tax.

Group 1 reported on Oct. 28 that it disposed of five franchises in the third quarter; four domestic franchises (Pontiac, Buick, GMC and Cadillac) in Beaumont, Texas; and a Volkswagen franchise in Kansas.

The auto retailers and their competitors for several years now have been concentrating on acquiring mostly luxury and import franchises, and shedding mostly domestic franchises.

Group 1, for instance (see above), got only about 18 percent of its third-quarter revenue from domestic brands, down from 39 percent in 2004.

Earlier this month, Group 1 had also warned that the effects of two hurricanes, Gustav and Ike, would hurt third-quarter results. The company said on Oct. 10 it expected third-quarter earnings in the range of 39 to 44 cents per share. Reported earnings from continuing operations were about 42 cents per share or about $9.4 million, but that was before the write-off for "asset impairments."

Both retail groups said they cut jobs, personnel expenses and advertising. Group 1 said it cut its advertising budget by $11 million; Sonic, by $2.8 million. "We'll continue to reduce advertising if the downturn lasts longer than currently expected," said Scott Smith, president of Sonic.