- Car seller sounds earnings alarm
- Used car market malaise set to continue
- Liberum Capital slashes profit forecasts
The UK’s fourth largest automotive retailer Vertu Motors (VTU:AIM) has disappointed investors with the news annual profits will be below expectations due to a deterioration in the used car market anticipated to persist into the company’s fourth quarter.
Shares in the Gateshead-based group reversed 21% to 67p as Vertu warned UK used vehicle values are ‘likely to continue to weaken above historic norms in the near term’ and Liberum Capital cut its year-to-February 2024 and 2025 adjusted pre-tax profit forecasts by 17% and 12% to £39 million and £45.4 million respectively.
However, Vertu stressed that the recent short-term pressures on the industry’s profitability don’t change ‘the longer-term underlying attraction of the business and do not have a significant negative impact on its intrinsic value’.
AFFORDABILITY CHALLENGE
Profitability for the year ending 29 February 2024 will be below current market expectations, warned Vertu, with the consumer environment remaining ‘volatile’ and the board remaining cautious.
The car dealership group, which trades as Bristol Street Motors, Vertu and Macklin Motors, has witnessed a ‘material change’ in the used vehicle market ‘with UK wholesale values experiencing a significant reduction in October and November’.
This was due to higher supply into the wholesale markets combined with retail demand being affected by higher interest rates and the affordability impact from high vehicle prices has been flagged by rival Motorpoint (MOTR).
Vertu’s like-for-like used vehicle volumes fell 2% in the third quarter to 30 November and despite efforts to adapt pricing strategies and manage inventory, gross profits from used car sales were below expectations due to declining prices.
The company insisted that once the current pricing correction has eased, used car prices will be more affordable to motorists and margins should stabilise.
‘Reducing interest rates in the medium-term would also aid affordability and provide a further stimulus to a market benefitting from increased supply’, added Vertu.
WHAT DID THE CEO SAY?
CEO Robert Forrester warned the consumer environment ‘remains volatile’ and recent trends of ‘sluggish new car retail demand and weakness in used car pricing are likely to persist for some months.’
The seasoned auto retail executive said his charge remains ‘very focused on delivering outstanding customer experience, tightly controlling inventory and being diligent on costs’.
And given Vertu’s fortress balance sheet, Forrester is very confident ‘in our ability to take advantage of these challenging market conditions and the resulting increased opportunities in the sector.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said Vertu’s profit warning has much wider ramifications.
‘If Vertu is to be believed the company is very much a victim of circumstance rather than being the author of its own misfortune. The material change in the used vehicle market it is pointing to will send a chill through the bones of investors in its rivals – with wholesale values falling significantly over the last two months.
‘And worse, Vertu doesn’t think things are going to get better on this score any time soon. Some of this is down to higher supply – an issue you would expect to even out over time – but higher interest rates making car finance options less affordable and high vehicle prices are also an issue.’
Mould explained this is not just a problem for the car market. ‘The impact of higher rates continues to hit households in a steady trickle as they remortgage or move on to a new finance agreement for their vehicle, for example.
‘This lagged impact means appetite for big ticket purchases is likely to be pressured for some time to come and could make Vertu’s road to recovery a bumpy one.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
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