Republic Buys New-Car Dealers, as Used Cars Lag
Reflecting the rapid changes roiling the auto retailing industry, Republic Industries on Monday acquired 31 new-car franchises but warned of lower earnings, and General Motors Corp.’s Saturn unit formed an independent company to protect its dealer network from competitors such as Republic.
Republic, the nation’s largest car dealer, paid $230 million in cash to acquire 10 dealer groups in five states, including 13 franchises in California. The Southland groups involved are Arrow Volvo in Compton, Gunderson Automotive Group in El Monte and Peyton Cramer Acura in Torrance.
Fort Lauderdale, Fla.-based Republic also said fourth-quarter net earnings will be 22 cents a share, or 5 cents below expectations, largely because of weak used-car sales at its AutoNation USA superstores.
Separately, Saturn Corp. announced that it is forming a holding company to operate its dealerships as a competitive response to “the changing automotive retail landscape,” including the emergence of large, publicly owned dealer groups such as Republic. Saturn, GM’s small-car unit, has resisted the sale of its dealerships to such companies.
Republic, controlled by billionaire Wayne Huizenga, has emerged in just two years as the nation’s premier auto retailer, with 277 new-car dealerships and 40 AutoNation used-car stores. It also owns Alamo Rent-A-Car and National Car Rental System.
But it is struggling to make money selling used cars. Earnings are being crimped by continued strong new-car price discounting in the form of rebates and cut-rate financing by auto makers.
Republic’s lower earnings projection follows a similar announcement two weeks ago by CarMax, the used-car superstore unit of Circuit City Stores, which said it will post a third-quarter loss of 8 cents a share.
“They are proving that the used-car superstore model doesn’t work,” said Maryann Keller, analyst with ING Baring Furman Selz. “At least not in the current deflationary environment.”
Used-car sales are softening as intense competition is forcing manufacturers to hold prices down for new models. Manufacturers are also stimulating sales with rebates of $1,000 to $1,500 per vehicle.
Low-rate financing is allowing customers to buy more expensive new cars with monthly payments lower than those for some older, cheaper used cars. (The interest rate on a used-car loan is typically higher than for a new car.)
Analysts expect the weak used-car market to continue into the first half of 1999. Republic said it will shift its focus to selling more older, higher-mileage used vehicles that face less competition from new cars.
CarMax appears more vulnerable than Republic because it has focused almost exclusively on used cars; Republic is investing heavily in both new- and used-car stores, in hopes of turning AutoNation into a national brand.
“The jury is still out on CarMax,” said Tom Thomson, a retail analyst for Wheat First Union in Richmond, Va. “So far, it hasn’t met expectations.”
Despite the slump in used-car sales, Republic said it is still on track to earn $1.25 a share for 1999.
Republic shares declined $1.31, or 9%, to close at $13.38 on the New York Stock Exchange.
The new-car dealerships Republic acquired Monday are in California, Florida, Georgia, Illinois and Minnesota.
They include Tasha Automotive Group, the largest privately held dealer chain in the San Francisco Bay Area, and Gunderson Chevrolet, the largest Chevrolet dealer in Southern California. Huizenga, who has made a fortune as a consolidator in the video and waste-disposal businesses, has found the going rougher in auto retailing.
Analysts say independent used-car dealers have taken advantage of AutoNation’s higher prices and no-haggle selling, portraying themselves as more willing to negotiate, and new-car dealers and manufacturers have responded with new initiatives.
Saturn, for instance, on Monday formed its independent retail operating company as a response to competition from large, publicly owned dealer chains with extensive inventories.
Saturn will hold a minority stake in the new operation, Saturn Retail Enterprises, to be based in Charlotte, N.C. Spokesman Greg Martin said the new concern could eventually become a public company.
It will be led by Donald W. Hudler, 64, who is retiring as chairman and president of Saturn Corp. He is being replaced by Cynthia M. Trudell.
Saturn has 388 stores owned by 170 dealers. They will be given the option of selling their franchises to the new company. Dealers can cash out or take equity in the new firm and continue to operate their franchises. GM shares lost $3.13 to close at $65.75 on the NYSE.
