Motorpoint's road to profit narrows

Last year, however, the top 20 car dealership groups reported a jump in profits to £764mn, up from £105mn in the previous year, the accountancy firm said.

Behind the rise was a boom in the secondary market for motors. Average used car prices sold online jumped from less than £5,000 at the outset of the pandemic to a high of almost £12,000 last September, according to vehicle remarketing group BCA, as customers who couldn’t get their hands on new vehicles due to a shortage of semiconductors sought out second-hand alternatives as the next best thing.

Derby-based Motorpoint (MOTR) has been a beneficiary of this trend. The company, which describes itself as “the UK’s leading omni-channel retailer of nearly new vehicles”, reported an 83 per cent increase in revenue in the year to March, to £1.32bn. Pre-tax profit more than doubled to £21.5mn.

The company focuses on selling cars that are up to four years old through both a branch network and its online portal. It recently began buying cars from customers, too, as another source of stock to resell. It earns commission for selling finance on cars (taken up by 52 per cent of customers last year) and has an online marketplace aimed at trade buyers, Auction4Cars.com.

It has some pretty ambitious growth targets, too, proposing to increase sales to £2bn and online revenue to £1bn over the “medium term”. The latter figure grew by 43 per cent last year to £625mn.

The company is “focusing very hard on digital transformation” to achieve this, chief executive Mark Carpenter told investors when reporting its results in June. Operating expenses rose by 63 per cent last year to £81.3mn, and an increased marketing spend represented about £19mn of this – more than doubling from an average of about £7mn in the preceding years.

Motorpoint is also increasing the number of its physical sites, adding three more this year in Milton Keynes, Edinburgh and Coventry, bringing its total to 20.

Speculate to accumulate

The company is keen to keep spending because it argues wherever it gets its message across about its competitive pricing, it wins market share.

“We believe others will be retreating...and during this period of probably a slightly worse macro outlook, we believe we can aggressively take share by responsibly investing,” Carpenter said.

Competitors certainly appear to be retreating, and not always by choice.

The online used car retail market is incredibly competitive, and many rivals have racked up sizeable losses in the race for market dominance.

Cazoo (US:CZOO) said in June that it was cutting its headcount by 15 per cent and lowering its marketing spend as well as freezing all non-essential capital expenditure to reduce its cash burn by around £200mn. Its shares already resemble a car crash. The company, which declared a pre-tax loss of £549mn on revenue of £668mn last year, has seen its market value dive by 95 per cent since floating on Nasdaq just 12 months ago.

Constellation Automotive Group, which owns the WeBuyAnyCar, Cinch and BCA auctions brands, reported a loss of £34.3mn on revenue of more than £3.45bn for the year to 28 March 2021 (the latest date for which accounts are available), and the TDR Capital-backed venture had to pay £100mn of interest on more than £1.3bn of debt.

Another privately-owned online car retailer, Carzam, which reportedly raised £112mn in November last year to compete in this space, folded in June.

Carzam was co-founded by Peter Waddell, who also runs the Big Motoring World dealerships, with former Manheim auctions boss John Bailey two years ago. In an interview with The Times following its demise, Waddell said Carzam needed more funding but potential investors had been put off following the steep declines in the share prices of Cazoo and its US competitor (US:CVNA) Carvana.

Carzam was a “genuinely used car business run by a very experienced car guy”, Hacker Young’s McMahon said.

“For him just to put it into administration...I think that’s a telling sign that even an experienced individual can’t make [online used car retail] pay.”

Motorpoint, to be fair, has grown much more prudently and the company’s physical presence means it isn’t entirely reliant on online sales. Indeed, the company argues that its share of the used car market is much higher – at 7.7 per cent – in areas that are within a 50-mile drive of one of its branches than its overall market share of 3.1 per cent.

It also tries to keep the cost of this physical presence low. Branches are now almost always leased – it has just one remaining freehold site in Peterborough after it recently agreed a £5mn sale and leaseback of its Stockton-on-Tees property. Newer sites also operate on smaller, more efficient footprints, combining sales and customer service operations.

Its ‘capital light’ model helped the company achieve a return on capital employed of 74.6 per cent in the year to March, up from 52.7 per cent on the prior year despite having to tie up much more cash in stock, due to higher selling prices. Its inventory increased by £100mn in the year to March.

Slowdown or crash?

Given the inventory build, investors may have some concerns over falling used car prices, which have dropped in seven of the past nine months and are 29 per cent below their September high, according to BCA.

Speaking at an industry event last month, Alastair Cassels, head of automotive advisory at law firm MHA, said that while car dealers had enjoyed bumper profits over the past two years, the tougher macroeconomic environment meant he expected “to see some distress” in the market during the second half of 2022 and into next year.

Motorpoint shouldn't be stuck with too much overpriced inventory – it told investors its stock turn had improved to 54 days last year, from 67 the year before. Carpenter also said it reprices on a daily basis to account both for the market and its own stock mix.

Moreover, even if demand is weakening, there's hardly a glut of supply.

The Society for Motor Manufacturers and Traders, the sector’s trade association, said last week that although production increased for the second successive month in June, numbers remain subdued.

New car production in the UK fell by around a fifth in the first six months of the year as supply chains faced disruption following Russia’s invasion of Ukraine and strict lockdowns in China. Full-year production forecasts have been downgraded to 866,000 vehicles – a 1 per cent increase on last year but more than 110,000 fewer than expected.

The number of new cars built in the UK is only expected to surpass 1mn by 2025, compared with 1.3mn made in 2019.

A multi-year production squeeze means fewer used cars in the pipeline, with data firm Cox Automotive forecasting a 6.4 per cent decline in used car transactions in the UK this year, taking them to around 11 per cent below pre-pandemic levels. VRA chair Philip Nothard said last month that he feared used car supply may never return to pre-pandemic levels as some manufacturers have found they “can make equivalent or greater profits" on fewer sales.

In the context of a different, weaker economic environment, this does not bode well for used car dealers.

The question for investors is how much of this negative sentiment has already been priced in. Motorpoint’s shares are down 42 per cent since the start of the year, reducing its market capitalisation to just £176mn, or about a twelfth of forecast sales. This may seem a little harsh for a business that has achieved double-digit compound annual sales and earnings growth over the past five years, but the decline is pretty much in line with the level of downgrades to brokers’ earnings estimates, which for the year to next March are 46.6 per cent lower than six months ago, according to FactSet.

EPS estimates for its March 2024 year-end have also been cut by 49.3 per cent.

In a trading update last week, the company said it had achieved revenue growth of 30 per cent in the first quarter to £402mn, but volumes were lower in April and May and its gross margins had also fallen. Interest rate increases have also hit financing commissions, as the company chose to maintain the same APR rates charged to customers and take a lower cut from funders.

Given broker forecasts of a 70 basis point decline in the operating margin to just 1.2 per cent, however, Motorpoint’s room for manoeuvre looks limited.