Soft Used Vehicle Sales Will Impact Republic Industries Q4 Earnings
14 December 1998
Republic Industries Says Soft Used Vehicle Sales Will Impact Fourth Quarter Earnings
Manufacturer Incentives, Acquisition Delays Hurt Performance
FORT LAUDERDALE, Fla., Dec. 14 -- Republic Industries, Inc.
today announced that it anticipates its fourth quarter earnings
per share to be approximately $0.05 below the consensus analysts' estimate of
$0.27 for the period, due to weaker than anticipated used vehicle sales in the
quarter and an unanticipated delay in the closing of a number of acquisitions.
The company said soft used vehicle sales in the quarter are a result of
unusually aggressive financing and rebate promotions presently being offered
on new vehicles by many manufacturers.
Steven R. Berrard, President and Co-CEO of Republic Industries, said, "We
remain confident that Republic Industries is on track to reach the analysts'
projected consensus estimate of $1.25 per share next year, which does include
two full quarters of our solid waste business."
Republic Industries is expected to announce the results of its 1998 fourth
quarter and full year on January 28, 1999.
Republic Industries, Inc. operates subsidiaries in the automotive
retailing, automotive rental industries. The Company owns the nation's
largest chain of new vehicle dealerships and is building a chain of used
vehicle megastores, which it operates under the AutoNation USA brand name.
Republic also owns National Car Rental System, Inc., Alamo Rent-A-Car, Inc.
and CarTemps USA. The company also owns 63.9% of Republic Services, Inc.
, one of the leading providers of non-hazardous solid waste
collection and disposal services in the United States.
Certain statements and information included in this release constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance, or achievements
expressed or implied in such forward looking statements. Additional
discussion of factors that could cause actual results to differ materially
from management's projections, forecasts, estimates and expectations is
contained in the Company's SEC filings.
Backgrounder
(To be read in association with Republic Industries' press release of 12/14/98
entitled, "Republic Says Soft Used Vehicle Sales Will Impact Fourth Quarter
Earnings")
Republic Industries and the Used Vehicle Market in the Fourth Quarter of 1998
Manufacturer Incentives
In the opinion of Republic Industries, the softness in used vehicle sales
this quarter (Q4/98) is a result of the normal seasonal slowdown in the
period, exacerbated by extremely aggressive financing and factory incentives
that the manufacturers are offering on new vehicles.
While manufacturer promotions have spurred new vehicle sales, they have
dramatically narrowed the spread that normally exists between new and used
vehicle prices. In addition, these promotions began much earlier than usual
in the model year, and have been extended to a wider range of models than is
typical.
Specifically, the combination of factory rebates and incentives is now in
the range of $1,000 to $1,500 per vehicle, with offers on some higher end
models of as much as $5,500 in lease subsidies. At the same time, factory
financing of as low as 0.9 percent has narrowed the gap between a new vehicle
payment and a used vehicle payment to the point where some consumers are
willing to trade a higher payment in exchange for a new rather than a used
vehicle. Simply put, with the monthly "out-of-pocket" for many new models
only slightly above that of a comparable late model used vehicle, many buyers
are opting for new vehicles. This has had an obvious impact on used vehicle
sales.
Not surprisingly, used vehicle prices have also softened, as dealers have
worked to maintain the price gap and preserve the value relationship that
normally exists between new and used vehicles. Recognizing this trend,
Republic did take advantage of the surplus of lower cost, late model used cars
to replenish its used vehicle inventory earlier in the year. But the company
could not have anticipated that manufacturers would continue their incentive
programs so late into the 1998 model year, nor that they would commence
similar programs at the start of the 1999 model year. One result of these
factors is the used vehicle volume softness that we have seen in the fourth
quarter.
This set of circumstances is extremely unusual and may, in fact, be
indicative of an overcapacity situation at the manufacturer level.
To cope with this situation, Republic continues to shift its used vehicle
purchasing practices to older, higher-mileage vehicles that can be offered at
lower retail prices, re-establishing a compelling value proposition for the
used vehicle customer. As the automotive retail market enters the first
quarter, an inventory of aggressively priced older model used vehicles should
give Republic a strong start to the new year.
Delayed Closings
Another factor negatively impacting Republic in the quarter (Q4/98) was a
delay in the closings on the acquisitions of several automotive retailers. A
range of factors beyond the immediate control of Republic have led to these
delays. However, each of the transactions is expected to close early in 1999.
Questions and Answers
Q. Why were used vehicle sales soft in the fourth quarter?
A. Used vehicle sales suffered largely due to the fact that auto makers
are offering large incentives at a much earlier stage in the new
model year than is normal. New vehicle dealers are also offering
factory financing at very low rates.
These two forms of promotion have caused the value gap between new and
used cars to narrow significantly, resulting in an oversupply of used
vehicles. Incentives are extremely generous right now, making it
difficult to make profits on 1997 and 1998 used vehicle models.
In addition, millions of vehicles are currently coming off lease.
Most of these are two to three years old. This has increased the
glut of unsold vehicles and adds to the devaluation of used vehicles.
Q. Didn't you see these promotions coming?
A. We saw the heavy level of promotions staring early in 1998 and
adjusted our inventories and purchasing plans to benefit from them.
In June, believing that prices had decreased as far as they would, we
decreased AutoNation's average inventory to what we felt was an
appropriate level.
What we did not expect -- and what no automotive retailer could have
anticipated -- was that the factories would be offering incentives so
early in the new model year, nor the extent to which they would offer
such incentives.
Q. Will the loss cause Republic to take a write-off in the fourth
quarter?
A. No.
Q. Are your competitors experiencing the same softness in used vehicle
sales?
A. CarMax has already revised its earnings estimate lower, primarily as a
result of softness in used vehicle sales. AutoNation USA sells many
more used vehicles than its competitors, so it is not unusual that
its business would be more readily impacted by shifts in used vehicle
market conditions. Other, regional automotive retail groups may be
experiencing fewer problems with softness in used vehicle sales
because their businesses are so much smaller than Republic's
AutoNation USA operating unit, the nation's largest chain of used
vehicle megastores.
Q. This pricing problem isn't likely to 'go away,' at least not in the
short-term. How will Republic deal with this problem long-term?
A. Republic continues to refine its used vehicle purchasing practices to
ensure that its inventory comprises the right vehicles at the right
price. The company's objective is to preserve a compelling price gap
between used and new vehicles so that customers continue to enjoy
good value when purchasing a used vehicle from an AutoNation USA used
vehicle megastore or from any Republic franchised dealer.
Looking forward, Republic can predict that a great many off-lease used
vehicles will enter the market. As Republic sources more and more of
its used vehicles from its own dealers, the company will have a
greater degree of control over the age, quality and price of its used
vehicle inventory.
Q. What about the rest of Republic's businesses for the quarter and the
full year?
A. The automotive rental and the solid waste businesses are on track to
meet or exceed analysts' expectations in the quarter. For the full
year, Republic expects to report revenue of approximately
$17.5 billion, compared with $10.3 billion last year, an increase of
nearly 70%. The company expects to report full-year pre-tax income
of approximately $800 million in 1998, compared with $443 million
last year, before restructuring and other charges, an increase of
more than 80%.