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In-Depth Industry Overview - Franchised New Car Dealership Industry
In-depth article on franchised new car dealership industry. https://mjsinvestments.substack.com/p/in-depth-industry-overview-us-franchised

Summary:
(1/7) The industry is a defensive and (surprisingly) asset-light business. Gross margin mix is weighted towards their higher-margin parts/service biz. Parts/service is also much less cyclical.

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(2/7) Resilient service biz combined with an overall highly variable cost structure allowed dealers to stay cash profitable during 08-09. Costs are mainly employees and advertising. Much compensation is commission-based, meaning lower car sales "automatically" reduces costs.

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(3/7) “...dealership business...can be a very good business. ...no receivables... floorplan your inventory, you can lease your real estate and you can do a large volume…You work on fairly narrow margins and still earn a high ROC” - Warren Buffett on dealerships = asset-light

(4/7) Floating rate floorplan debt used to fund inventory creates interest rate risk. Certain dealers such as $GPI use interest rate swaps to swap a portion from floating-to-fixed. And the auto manufactures $F $STLA $TM do provide "assistance" to help offset some interest.

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(5/7) The industry is low-to-no growth and is mainly driven by household growth. But, dealership groups located in higher population growth areas, such as FL/TX, will likely experience slightly better growth.

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(6/7) Asset-light and limited organic growth means much excess capital for dealership management teams to allocate. Some have been highly successful at acquisitions $ABG $LAD, others have focused on share repurchases $AN. Others are more mixed in their approach $GPI $PAG $SAH

(7/7) The COVID shortages juiced dealers profits. This allowed them to make even greater acquisitions or repurchases, accelerating EPS growth even further.

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mjsinvestments.substack.com
In-Depth Industry Overview - U.S. Franchised New Car Dealerships
Low-margin but (surprisingly) asset-light industry combined with good historical capital allocation

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