Car dealer group Lookers (LOOK) last week announced that it was delaying its 2019 annual results for a fourth time, as it widened an investigation into its financial controls. Lookers' shares were suspended in July after auditors were unable to finalise their appraisal of its 2019 results by the Financial Conduct Authority’s (FCA) 30 June deadline.
Lookers first delayed the release of its results on 10 March after disclosing that it had “identified potentially fraudulent transactions in one of its operating divisions”. Two days later, then chief operating officer Cameron Wade’s departure from the company was announced, just a month after he had been promoted to the role from his previous position as Lookers’ Audi franchise director.
The division in question has since been confirmed as Lookers’ Audi branch, but it is also understood that Mr Wade’s conduct is not a significant part of the investigation. “We’re aware of the situation and we would assist if we were asked for any information,” an Audi spokesperson said. Mr Wade could not be reached for comment.
In June, the group announced that it had broadened its probe to cover all of its operating divisions. It received a report from Grant Thornton identifying £19m in adjustments needed to correct overstatements in profitability that had taken place over several years. The report also identified “several areas where certain financial controls and some behavioural and cultural aspects require strengthening”.
Lookers’ investigation has since been extended to examine its corporate leasing division and vehicle financing arrangements, as well as examining balance sheets dating back from 2018. Its half-year results have also been delayed as a result of its inquiry. The retailer has appointed an independent committee to implement Grant Thornton’s recommendations.
Controls are difficult to assess
This is not the first time the motor retailer has faced scrutiny over its controls. Last year, the FCA opened its own investigation into Lookers’ sales processes between 1 January 2016 to 13 June 2019. This commenced after Lookers shared an internal review with the regulator that identified “some control issues” relating to its sales methods.
Lookers' shares had been depressed both by its internal problems and a punishing automotive environment in the run-up to suspension, illustrating the challenges facing car retailers regardless of the sanctity of their operations. One former employee at rival Pendragon (PNG) said that Lookers’ overstatement of its profitability was particularly galling given that Lookers had been held up “as the shining light in the industry” within Pendragon, with employees challenged to match Lookers’ results.
A director at a rival car dealer group, however, disputed the claim that Lookers was the industry benchmark.
Should we be concerned about the rest of the sector?
There are myriad reasons to be worried about the state of the automotive retail sector. Automotive supply chains have been heavily disrupted by the coronavirus pandemic, although the release of pent-up demand following months of dealership closures has translated into heightened sales activity. in the short term at least.
New UK car registrations rose by 11 per cent in July, according to the Society for Motor Manufacturers and Traders, although overall sales for the year were down by 42 per cent. Demand for used cars has ballooned too – Provident Financial's (PFG) car finance division Moneybarn experienced a record July writing more than 4,500 deals. Even Lookers recently signalled an upturn in fortunes, after recording a 17 per cent like-for-like increase in the number of new retail and used vehicles it invoiced and delivered last month.
Car dealers are rewarded by manufacturers with bonuses linked to sales, as well as the attainment of certain standards such as training and internet response times. While the pandemic has hit sales, it has also prompted the relaxation of manufacturer targets. Marshall Motors (MMH) saw its manufacturers remove targets and guarantee the payment of bonuses during its second quarter, which helped support cash flow.
Zeus Capital analyst Mike Allen is not convinced that Lookers’ travails mean there is cause for concern about controls across the automotive sector. "You can piece it back from probably 2014 to 2016, [Lookers] did some big acquisitions and clearly just didn't integrate them well enough,” he said. “That's happened at Pendragon as well," he added, pointing to deals conducted in 2005 and 2006.
Yet he emphasised that both retailers have been dogged by problems that took place under previous management, with new leadership now attempting to remedy these issues. "You need an organisation with core values, core infrastructure and proven integration on acquisitions, and clearly that hasn't happened with Lookers and Pendragon."
Lookers and Pendragon have both set about reducing their number of stores in line with the view that the sector will consolidate over the coming years. The enhanced use of digital channels during the pandemic has provided a glance into the future of car sales. But while some players are cutting back on dealerships, Marshalls and Vertu Motors (VTU) have both signalled intentions to forge ahead with acquisitions.