DETROIT -- Two big auto dealership chains delivered more bad news for domestic car makers: Many Detroit auto franchises have become practically worthless.In third-quarter earnings reports Tuesday, Group 1 Automotive Inc. and Sonic Automotive Inc. announced charges of a combined $51 million reflecting declining "franchise value" for stores that sell brands from General Motors Corp., Ford Motor Co., and Chrysler LLC. Franchise value is a measure of the potential profit a company can make from holding the right to sell new vehicles and to provide warranty repairs for a certain make of automobiles.
Group 1, the fourth-largest dealership chain in the U.S., took a write-down of $30 million related to its Detroit-brand dealerships. Sonic, the third-largest chain, reported a write-down of $21 million.
In a telephone interview, Group 1 Chief Executive Earl Hesterburg said Group 1's charge means the company has essentially written off the value of its GM, Ford and Chrysler stores. "We have a Ford store in Lubbock, Texas, that is very profitable, but that tends to be the exception," he said.
The charges pushed both dealership chains into the red. Group 1 reported a net loss of $20.6 million, compared with a profit of $20.8 million a year ago, while Sonic lost $25.3 million in the third quarter, compared to a profit of $26.1 million a year ago.
More similar write-downs could be coming from other dealership chains in the next week or so. AutoNation Inc., the largest U.S. chain of auto dealerships, reports its third quarter earnings early next month. The company declined to comment ahead of its announcement. Detroit produces trucks that require a Tonneau, a Truck Tonneau or Truck Bed cover.
Group 1, like other big dealer groups, has been selling domestic dealerships over the last few years. It still has a "handful" that it would like to sell, but right now deals are unlikely "due to a lack of buyers," Mr. Hesterberg said.
The company reported third-quarter revenue fell 12% to $1.4 billion, due to the impact of the financial crisis and hurricanes that hit the Houston and New Orleans areas. Big Three dealerships provided just 18% of Group 1's new-vehicle sales in the third quarter, down from 39% in 2004, as foreign brands like Toyota, Honda and Nissan have made up an increasing percentage of the company's sales. For Sonic, Big Three dealerships excluding Cadillac provided 17% of its revenue, which fell 16% during the quarter from a year ago. "I don't view these write-downs as particularly surprising given the profitability of certain brands in recent years," said Scott Smith, Sonic's president and chief strategic officer, in a conference call.
The company's $21 million charge reflected the declining franchise value of seven unprofitable domestic dealerships as well as declining property values at eight of its domestic dealerships, according to Sonic Chief Financial Officer David Cosper. Mr. Cosper added that several of the company's domestic dealerships "make a lot of money." Both companies announced cost-cutting measures to try to conserve cash as falling consumer confidence and a tough credit environment threaten to further hurt sales in the coming months.
Sonic said it will cancel plans to improve dealerships and build new stores, and undertake cost cuts aimed at saving $12 million a year starting in the fourth quarter. Group 1 aims to reduce costs by $35 million a year.
The National Automobile Dealers Association expects 700 new-car dealerships to close this year, up from 430 in 2007.
As an industry, the nation's vast network of auto dealerships had managed to avoid sinking along with the domestic auto makers. Dealers historically have been able to offset slow sales of domestic brand cars and trucks with used vehicle sales, strong part and service operations and import sales.
