LA Private

Peter Warren Automotive issues earnings warnings

Peter Warren Automotive Holdings (ASX:PWR) has joined its larger rival, Eagers, in issuing an earnings warning as new car sales slow and profit margins contract.

A week ago today, Eagers said its half-year June 30 result looks to be around 15% lower. On Tuesday, Peter Warren (PWR) revealed a possible fall at least double Eager’s estimate.

PWR stated that it now expects underlying profit before tax for the 2023-24 financial year to be in the range of $52 million to $57 million—down more than 30% from the $81.9 million earned in 2022-23.

The second-half slump followed a smaller fall at the half-year at December 31 when underlying profit before tax dropped to $34.4 million from $43.2 million in the first half of 2022-23.

Tuesday’s statement is, in fact, an acknowledgment that the crunching of margins has accelerated in the June half due to increased supply of new vehicles.

The downgrade will come as a surprise to many investors—the shares not only jumped 3.65% on Monday but are up more than 18% year-to-date. This downgrade was not obviously expected even after Eagers shares lost 19% at one stage a week ago after its surprise downgrade.

PWR said that the earnings drop has come despite revenue continuing to grow—meaning that new car sales are being made at even smaller margins.

PWR sells a long list of brands from Ford to BMW, Jeep, and Fiat, Mercedes, Toyota, Honda, Skoda, RAM, Kia, Volvo, VW, LandRover, Chrysler, and others and sells through outlets in NSW, Queensland, and Victoria.

The company told the ASX on Tuesday that there had been a “significant increase in vehicle supply by OEMs has led to greater competition between dealerships and lower gross profit margins on new vehicles.

“The contraction in new vehicle margins has occurred across the industry and is most acute in brands and models where supply levels and inventory holdings are highest.”

The company said that “customer demand for new vehicles has reduced as a result of cost-of-living pressures,” and its financing and interest costs have increased versus the prior year in line with interest rates and inventory.

“The revenue streams of the business have performed well with growth being achieved in a number of areas, including the volume of vehicles sold. Service and parts revenue has continued to see good growth, along with used cars where further growth is expected,” PWR said.

Peter Warren said that to try and counter the slide it had “implemented a number of steps to mitigate the impact of the decline in new car margins which includes limiting inventory levels and associated costs by partnering with OEMs on supply intake and increasing sales and marketing activities in some areas;

“Maximizing the revenue growth in service, parts, and used cars by leveraging our size, scale, and existing platforms; and

“Continuing our cost-management activities to limit cost increases and maximize the leveraging of fixed costs as revenues continue to grow across the business.

“These actions have not fully offset the impact of falling new car margins. The new vehicle order-bank has also cushioned the margin reduction, but order-bank refill is now occurring at lower margins,” PWR said.

And the company warned that these strains are not going away, telling the market on Tuesday that it “expects that new car margins may remain under pressure and see some further small reductions.”

“However, Peter Warren will continue to benefit from ongoing growth in service, parts, and used cars and also by the continued management of costs and inventory.

“Ultimately, margins and performance are expected to remain above the levels seen prior to the Covid disruption. The Board remains committed to the Company’s growth strategy including selectively pursuing disciplined acquisitions,” the company said optimistically.