Don’t back Lookers in anger

Struggling car retailer Lookers (LOOK) is vulnerable and the last thing it needs is another headwind. The UK’s largest Mercedes vendor acknowledges in its annual report that changes to import duties and processes would affect its business, potentially causing the loss of revenue and issues with its supply chain. All of the Mercedes vehicles it sells, along with its Renault and Volkswagen cars, are imported. Worryingly (but not unreasonably) management has based its forecasts on an assumption “that the UK will leave the UK through an orderly exit”. But this feels far from a given. 

Lookers, which generates income from new and used cars (31 and 26 per cent of gross profit respectively), as well as higher-margin aftersales work (39 per cent), has seen broker forecasts gradually downgraded over the past three years, tail-ended by a significant cut following a profit warning in July (see chart) ahead of half-year results due this month. Low consumer confidence, retail sector cost inflation, the threat of new vehicle supply regulations and new emissions laws are all factors.

What's more, with inventories of £1.03bn at the year-end, a recent fall in used car values (down 8 per cent in June) and an established slowdown in new car sales could well see further warnings on the back of stock write-downs and sales disappointments. Wafer-thin operating margins increase the car dealer's vulnerability.

Lookers faces other sales issues, too. An investigation by the Financial Conduct Authority (FCA) into the group's car-finance sales processes between 1 January 2016 and 13 June 2019 announced in June is another cause for concern. A Lookers investigation last year already uncovered control issues. And while the company can point to its £309m of freehold and long-lease property assets as a source of comfort, there is also a £57m pension deficit to consider. The pension could prove an obstacle for any would-be sector consolidators.