Lookers has issued a trading update indicating the performance of its new vehicle activities deteriorated as the important September selling month progressed. As a result, Q319 new car gross profit fell by £7m compared to the prior year. In addition, it has accelerated its site consolidation and closure plan to improve operational performance and will take a charge of £8m in H219. Despite robust performances by the higher-margin used car and aftersales segments, management cut its FY19 underlying PBT guidance by 50% to £20m. The CEO and COO are both stepping down with immediate effect. The interim executive team and full-time replacements need to focus on restoring internal and external confidence, as well as driving recovery in still-challenging markets.
As the second largest selling month of the year for new cars in the UK, September is crucial to second-half performance. Management had been satisfied with advance orders, but additional sales failed to appear as the month progressed. The impact seems likely to be due to continuing political uncertainty undermining confidence, especially amongst consumers. Lookers’ Q319 like-for-like retail new car unit sales fell 11.5% (H119 -5.6%), with volume brands particularly affected. The £7m drop in gross profit is likely to reflect missed sales target performance payments from manufacturers, exacerbating the continued under-recovery of operational cost inflation that was evident in H119. Used car like-for-like sales and aftersales performance appear to have been more in line with management expectations. We have cut our FY19 and FY20 PBT and EPS forecasts by 52%.
The chairman Phil White and non-executive director Richard Walker are assuming interim executive responsibility. The board has accelerated its portfolio consolidation programme, working with its brand partners, and has earmarked 15 additional underperforming dealerships for closure, with potential relocation or consolidation into adjacent dealerships. The board expects £3m of annual financial benefit and Lookers should then have c £28m of freehold sites available for sale.
The multiple contraction that was apparent for Lookers in 2019 now appears justified by the drop in earnings. Clearly, as the company transitions to a new management team and despite challenging markets, there is scope for significant recovery in profits, although we take a cautious view of FY20.