Lookers (LOOK) shares fell 20 per cent after turmoil in new and used car markets prompted the motor retailer to lower its first-half profit forecasts, ahead of the release of its results in August.
Political and economic uncertainty has weighed upon consumer confidence, the company said. There were just shy of 1.3m car registrations in the year to June 2019, according to the Society of Motor Manufacturers and Traders (SMMT), a level that is 3.4 per cent down on the same period in 2018. The trade body predicts 2.33m registrations for 2019, which is 1.6 per cent below last year, and a subsequent fall to 2.31m in 2020.
The new car market declined by 4.6 per cent in the second quarter, while margin pressure increased in used cars. Lookers said that it had begun the year “satisfactorily” and that it had outperformed the new car market in the first quarter, but the company reduced its estimate for underlying pre-tax profits from £43m to £32m. Its shares cratered in June after the Financial Conduct Authority (FCA) announced an investigation into the retailer over commission arrangements, which it says may be harming consumers and costing as much as £300m more annually than flat fee models.
Used car prices fell 8 per cent over June 2019 as consumer demand dropped, according to Lookers’ house broker Peel Hunt. The broker said that the retailer would feel the impact through stock write downs, harming gross margins. Used car gross profit and margins were up at the end of the first quarter, but Peel Hunt expects these to sit below the prior year at the half-year stage.
Lookers is not the only motor retailer to have issued a profit warning in recent months. Pendragon, (PDG) whose shares dropped 7 per cent on the day of Lookers' warning, said in June that its first half would be “significantly loss-making”. Used cars are expected to contribute to losses in the car store business more than doubling to £25m over the year. Former chief executive Mark Herbert then left the stricken retailer “by mutual agreement” after just three months at the helm. Marshall Motor Holdings (MMH) has fared better, achieving growth in used car sales and aftercare revenues over its first half and reiterated full-year guidance. However, management said it was "right to remain cautious" over the outlook for the rest of the year, given weak consumer confidence, ongoing cost challenges for the retail sector and further potential new vehicle supply constraints in the lead up to the implementation of further emissions-related regulations on 1 September 2019. Vertu Motors (VTU), Inchcape (INCH) and Motorpoint (MOTR) all having experienced share price volatility following Pendragon’s profit warning.
Along with well-documented market uncertainty and Brexit, Steve Oliver, founder of consultancy Oliver & Twist suggested that a rising consumer preference for doing their business online is squeezing retailers out, as “customers want to progress further down the buying route”.
Citing Pendragon’s recent profit warning, Mr Oliver added that “the challenges at Pendragon can clearly be seen when used car stock was at a record high - valued at £458m versus £372m a year earlier - suggests issues beyond weak demand.”
Lookers’ house broker Peel Hunt forecasts adjusted 2019 pre-tax profits and earnings per share of £38.7m and 7.6p respectively, rising to £39.9m and 7.9p in 2020.
