Auto retailer beats on earnings, thanks to higher used-car sales

Key Points
  • Group 1 Automotive, the third-largest auto retailer in the U.S., beat earnings estimates, thanks largely to sales of used cars in the U.S.
  • Earl Hesterberg, the company's CEO and president, says the majority of sales were in trucks and SUVS and that the sedan business is shrinking.
Group 1 Auto CEO on state of the auto industry and tariff threats

Group 1 Automotive's earnings rose to new records thanks to an increase in sales of used cars, Earl Hesterberg, the firm's president and CEO, told CNBC on Thursday.

Same-store used car sales in the U.S. were up 11 percent in the quarter. "That's a number I've never seen before," Hesterberg said on "Power Lunch."

Sales of new vehicles also rose, 7.4 percent.

The company, the third-largest auto retailer in the U.S., beat Wall Street's expectations Thursday when it posted a 44 percent increase in quarterly profits.

Hesterberg credits the increased sales in used vehicles for the jump and said internal measures were put in place to promote used vehicle offerings. Those included focusing on lower-priced used cars that were once sent to auction and adjusting the amount of money salespeople can earn from selling used cars.

"Typically you make a little bit more margin on a used car than you do on a new car," he said.

"It's a good business," Hesterberg said, adding that sales have typically been higher in larger vehicles such as trucks and SUVs.

"In markets like Texas, for us it's as much as 80 percent truck and SUV ... [in the U.S.] overall, probably closer to 70 [percent]," he said. "I wouldn't say sedans are dead, but it's certainly a shrinking part of our business."

David Paul Morris | Bloomberg | Getty Images

The company, with dealerships in the U.S., the U.K. and Brazil, reported net income of $56.46 million, or $2.72 a share, up from $39.13 million, or $1.84 a share, a year earlier.

The news came after a very bad day for automakers on Wednesday. Ford, General Motors and Fiat Chrysler all scaled back their 2018 earnings forecasts due to rising prices for raw materials. Shares of all three companies fell as a result, although Fiat Chrysler was trading higher during Thursday's intraday trading.

Despite the positive earnings beat, Group 1 was down nearly 2 percent during Thursday's intraday trading.

On Wednesday, President Donald Trump announced that he and European Commission President Jean-Claude Juncker had agreed to work "towards zero tariffs, zero non-tariff barriers and zero subsidies for the non-auto industrial goods."

Hesterberg said he was "absolutely relieved" by the news.

"Any appreciable tariff ... would ultimately increase the price of new cars. We represent a lot of German brands ... also, imports from Mexico and Canada. We retail cars that come from all those markets," he said. "And if prices were to go up — selling prices — volume would come down. And ultimately that hurts us."