Used car sales boost U.S. dealers amid slow recovery

Major U.S. auto dealerships reported double-digit jumps in used vehicle sales for the third quarter, a sign that car shoppers remain cautious in the midst of a sluggish U.S. economic recovery.

Typically, new car sales outpace used vehicle sales in a recovery.

But that rule of thumb has been "thrown out of the water" during this recovery as consumers veer toward used cars, Group 1 Automotive Inc (GPI.N) Chief Financial Officer John Rickel said during a call on Tuesday.

"People are being a little more conservative when they do need to replace a vehicle, taking a certified pre-owned instead of a new," Rickel said.

Group 1 said revenue from used vehicle sales shot up 34 percent. Asbury Automotive Group Inc's (ABG.N) sales from used vehicles rose 19 percent, while Sonic Automotive Inc (SAH.N) reported an increase of 20 percent in the category.

Used vehicle sales command higher margins for auto dealers and prices have been rising over the past year. This has provided dealership groups with a buffer at a time when the recovery in new car sales in the U.S. market has proved slower than expected.

Last week, J.D. Power and Associates said 2010 annual sales would be near 11.5 million, down from its earlier forecast of 11.6 million.

As the gap between the price of used and new vehicles narrows, some consumers may be prompted to buy new cars, Asbury Chief Executive Charles Oglesby said in an interview.

"(As) those prices get closer to new vehicle pricing, the consumer will probably opt for new vehicles," Oglesby said.

Based on current data, the price of vehicles about three years old is up around 7 percent compared with last year, according to industry tracking site TrueCar.com.

Oglesby forecast that industrywide auto sales in the United States would increase around 7 to 8 percent in 2011.

The three dealership groups reported third-quarter earnings on Tuesday. The No. 1 dealership group in the United States, AutoNation Inc (AN.N), is due to report results on Thursday.

A FRACTURED MARKET

The U.S. dealership market is a large and fragmented market, Group 1 said in a slideshow presentation. The top 10 groups of dealerships represent just 8 percent of the overall market.

Group 1, the No. 4 auto retailer based on 2009 vehicle sales, said it preferred to use its cash to acquire dealerships.

Asbury, the No. 6 U.S. dealership group, is also open to buying dealerships in its top markets, Oglesby told Reuters. He said it was key for the company to "create density" in areas it already operates.

But No. 3 group Sonic Automotive struck a different tone.

"We don't believe it's necessary to go out and start making expensive acquisitions in order to grow our profits," President Scott Smith said during a call with analysts.

Sonic reported higher earnings, while Group 1 and Asbury results surpassed Wall Street expectations.

Shares of Group 1 closed more than 8 percent higher at $35.08 on Tuesday. Asbury's stock ended 3 percent lower, while Sonic's shares closed 0.8 percent higher.