111
Digital Used and Franchise Auto Dealerships
Sector Thoughts and Handbook
See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.
. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
North America Equity Research
June 14, 2022
US Autos – Equity
Rajat Gupta AC
212-622-6382
@
. Morgan Securities LLC
Bloomberg JPMA GUPTAR<GO>
US Autos – Equity
Ryan Brinkman
212-622-6581
@
. Morgan Securities LLC
US Autos – Equity
Jash Patwa
(91-22)-6157-3635
@
. Morgan India Private Limited
222
1
Page
Updated Thoughts on Sector: Franchise Dealers > Auctions > Used-Only Retailers 7
Summary Stock Views 19
Macro Overview and High-Frequency Data Points: Tracking Key Macro and Industry Metrics 23
Business Outlook: Volumes Likely Remain Constrained Amidst Tight New Vehicle Supply; See
Offsets from GPU Tailwinds and Strong P&S and F&I
35
Franchise Dealers’ Normalized EPS: Addressing the Ongoing Debate/Concern Around Peak
vs. Normalized Earnings
46
Franchise Dealers – D2C/EV Deep-Dive: Moving from 'Narrative' to 'Numbers'; Risks More
than Discounted While Opportunities Underappreciated
55
. Morgan/Chase Auto Annual Dealership Survey: Takeaways from Our April 2022 Survey 68
Unit Economics Comparison Deep-Dive and Forecasts: The Economics of Online vs. Brick
& Mortar
79
Auto ABS (CVNA, KMX): Approach to Finance Income Calculations 89
JPM Online Used Retail Model: Looking at the Competitive Landscape 97
Valuation Deep-Dive: Backdrop and Target Multiples 120
Company Snapshots and Stock Views 136
Agenda
3
Auto Retailer Coverage Summary
Company Ticker Rating Price
Dec-22
Price
Target
Page
#
ACV Auctions ACVA OW $8 $15 137
Asbury
Automotive
ABG N $189 $210 166
AutoNation AN OW $123 $150 178
CarMax KMX N $100 $105 141
Carvana CVNA N $23 $35 146
Cazoo CZOO N $1 NM 157
Group 1
Automotive
GPI N $183 $210 184
Lithia Motors LAD OW $311 $380 160
Penske
Automotive
PAG N $121 $125 172
Shift
Technologies
SFT N $1 NM 154
Sonic
Automotive
SAH N $45 $51 190
TrueCar TRUE UW $3 NM 196
Vroom VRM N $1 NM 151
Top Picks
Lithia Motors
AutoNation
ACV Auctions
Source: Bloomberg Finance . Priced as of 06/09/2022.
4
Franchise Dealers Normalized EPS Analysis (Dec 2021)
Franchise Dealers – D2C/EV Deep-Dive (Dec 2021)
. Morgan/Chase Auto Annual Dealership Survey 2022 (April 2022)
Digital Used Vehicle Retailers Ratings Refresh (VRM, SFT Downgrade, Dec 2021)
Digital Used Vehicle Inventory Tracker (June 2022)
CVNA KMX Auto Loan ABS Primer (Feb 2022)
CVNA Preliminary 2Q22 Prime ABS Deal Pricing (May 2022)
CVNA Revised Operating Plan Takeaways (May 2022)
VRM Investor Day Takeaways (May 2022)
CZOO Business Update Takeaways (June 2022)
Addressing FAQs on GM's CarBravo Used Car Platform (Jan 2022)
Cazoo Initiation (May 2022), Shift Initiation (Oct 2021), ACV Initiation (April 2021)
Key Research Highlights
5
1-month Stock Performance
Source: Bloomberg Finance . Priced as of 06/09/2022.
6-month Stock Performance
Source: Bloomberg Finance . Priced as of 06/09/2022.
3-month Stock Performance
Source: Bloomberg Finance . Priced as of 06/09/2022.
12-month Stock Performance
Source: Bloomberg Finance . Priced as of 06/09/2022.
Relative Stock Performance
-37% -36%
-18%
-15%
-7%
-5%
2% 3% 4%
5%
8% 8%
12% 12%
-40%
-30%
-20%
-10%
0%
10%
20%
-80%
-59% -56% -56%
-41%
-22%
-8% -8% -3% -3%
-1%
2%
11%
20%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
-91% -90%
-82% -80%
-62%
-34% -33%
-16% -11% -9%
2% 8%
9% 15%
-100%
-50%
0%
50%
-97% -91% -91%
-69%
-42%
-25%
-13% -5% -4%
8%
19% 29%
53%
-150%
-100%
-50%
0%
50%
100%
6
Comp Table
Source: Company reports, Bloomberg Finance . and . Morgan estimates. Priced as of 06/10/2022.
Latest Basic Market Latest Latest Net EBITDA EPS
Company Ticker Price Shares Cap Debt Cash Debt
NCI/
Equity EV 2021 2022 2023 2021 2022 2023 NTM 2021 2022 2023 2021 2022 2023
US Auto Dealerships
Asbury Automotive ABG 22 4,053 3,403 284 3,119 7,172 9,838 16,170 16,793 1,902 3,054 2,866 1,182 825 1,242 1,057
AutoNation AN 58 7,006 3,548 608 2,940 9,946 25,844 27,501 29,442 4,953 5,115 4,745 1,931 2,057 2,059 1,415
Group 1 Automotive GPI 17 2,994 1,989 17 1,972 4,966 13,709 15,930 16,483 2,476 2,783 2,530 957 958 1,019 811
Lithia Motors LAD 29 8,559 3,678 161 3,517 12,076 22,832 27,025 27,884 4,259 4,794 4,354 1,791 1,801 1,922 1,588
Penske Automotive PAG 76 8,767 1,463 170 1,293 -3,950 6,110 25,555 28,391 29,824 4,441 4,699 4,379 1,449 1,452 1,540 1,231
Sonic Automotive SAH 40 1,681 1,546 360 1,186 2,867 12,396 15,761 18,577 1,914 2,377 2,316 721 631 740 654
Carmax KMX 161 15,416 3,267 103 3,164 18,580 31,900 35,622 34,403 3,288 3,167 3,341 1,490 1,825 1,490 1,537
Carvana CVNA 189 4,152 9,525 2,497 7,028 -28 11,152 12,814 15,880 19,011 1,929 1,819 2,615 -427 -5 -796 60
Vroom VRM 137 144 1,396 601 796 939 3,184 2,391 2,417 202 213 284 -275 -343 -339 -239
Shift SFT 90 69 245 95 150 219 637 993 1,461 49 66 129 -30 -138 -145 -107
European Auto Retailers
Cazoo (in GBP except price in USD)CZOO 761 830 640 193 448 1,277 668 1,499 2,363 25 49 184 90 65 86 102
Auto 1 (in EUR) AG1 GY 215 1,807 530 64 466 2,273 4,775 6,216 8,009 431 548 687 -173 -107 -173 -66 NA NA NA
TrueCar TRUE 90 261 45 182 -136 125 232 184 233 210 162 210 -28 5 -28 -16
`
Latest Price Upside / Gross Debt/EBITDA EBITDA Margin EV / EBITDA P / E Relative P / E
Company Ticker Rating Price Target Downside 2021 2022 2023 2021 2022 2023 2021 2022 2023 NTM 2021 2022 2023 2021 2022 2023 2021 2022 2023
US Auto Dealerships
Asbury Automotive ABG N 209 14% % % % 105% 97% 99%
AutoNation AN N 150 25% % % % 102% 99% 97%
Group 1 Automotive GPI OW 210 16% % % % 81% 79% 81%
Lithia Motors LAD OW 380 29% % % % 115% 125% 123%
Penske Automotive PAG N 125 8% % % % 118% 121% 123%
Sonic Automotive SAH OW 51 20% % % % 79% 79% 76%
US Dealerships Average 19% % % % 100% 100% 100%
Carmax KMX N 105 9% % % % NM NM NM
Carvana CVNA N 35 59% NM NM NM % % % NM NM NM NM NM NM NM NM NM NM
Vroom VRM N NA NM NM NM NM % % % NM NM NM NM NM NM NM NM NM NM
Shift SFT N NA NM NM NM NM % % % NM NM NM NM NM NM NM NM NM NM
EU On-line Auto Retailers
Cazoo (in GBP except share price) CZOO US N NA NM NM NM NM % % % NM NM NM NM NM NM NM NM NM NM NM
Auto 1 (in EUR) AG1 GY UW 43% NM NM NM % % % NM NM NM NM NM NM NM NM NM NM
TrueCar TRUE UW NA NM % % % NM NM NM NM NM NM NM NM NM
Sales Gross Profit
EV / Gross Profit
7
Updated Thoughts on Sector:
Prefer Franchise Dealers > Auctions > Used-Only Retailers
8
Demand weak for used cars due to lack of affordable supply
Our checks and industry data suggest overall used car demand already in a recession given lack of affordable
supply; pain is likely not over as prices are still 40% above pre-pandemic levels
Affordability the biggest issue as there remains pent-up demand for vehicles relative to other retail sectors
New car supply still the biggest area of uncertainty
Commentary from OEMs suggest that allocations should improve in 2H22; pace of recovery and demand
satiation key to eventual used car pricing moderation
OEMs are also tackling commodity costs that are likely to keep new car prices high for now
Parts & Services for franchise dealers a nice offset in current macro
Longer-running cars support service business; typically dealers able to pass on wage inflation pressures
Customer Pay is tracking higher than pre-COVID levels with warranty still below and collision repair flattish
Technician hiring capability a key area of differentiation; demand currently exceeds service capacity
F&I – Moderating ASPs should impact finance income (1/3rd of F&I) while service contact penetration
continues to rise
We expect F&I GPU to remain comfortably above pre-pandemic levels even when ASPs and supply normalize
Productivity improvements sticky at franchise dealers; online retailers starting to focus on productivity vs
growth
Average productivity for franchise dealers (units sold/sales person) is up ~20%+ vs pre-COVID levels;
underappreciated are further efficiency gains from integration of online platforms for store employees,
dramatically improving productivity; there is also opportunity to further integrate DMS, CRM and Credit
Application processes that should drive further productivity and improve customer experience
Online retailers ramping up initiatives to improve company-wide productivity by applying brakes on growth in
the near to medium term
Overall Sector Themes
9
Negative equity and extending loan terms a concerning issue that could cripple demand recovery
New and used cars sold at elevated levels last couple of years is likely to affect trade-ins and thus demand in
2-3 years from now
Also extended loan terms today in order to support consumers will likely come to bite later
Used car supply in medium term an underappreciated risk
Depleting car parc due to lower new vehicle sales for 2+ years, reduced lease penetration, loan terms starting
to extend, and concerns on negative equity are all headwinds to a v-shaped recovery in the used car market
Auto lending an area of risk that could have meaningful implications
If demand weakens further, passing recent rate increases to consumer will be tough; competition on rates from
local credit unions could hurt large independent used retailers
ABS markets already seeing widening spreads
With fears of recession building, auto dealer consolidation likely to increase once macro normalizes
With concerns around a downturn, multiple corrections and lack of bandwidth to invest in the long term, we
could see franchise dealer consolidation pick up again as well as smaller independent used dealers shut down
D2C/EV narrative likely to remain an overhang in the space
With several new EVs likely to be launched by OEMs, strategies on distribution will remain a key focus
De facto agency like model already in place for some OEMs looking to arrest some control from dealers
We continue to believe the ultimate impact to profitability of large dealerships is likely to be minimal given
opportunity from omni-channel initiatives, consolidation, limitless used car market penetration opportunity,
captive finance operations and, most importantly, leaner workforce
Overall Sector Themes
10
Valuation: Cash is king – despite outperformance, franchise dealers still best positioned, followed by ACVA,
KMX and then online used car retailers
With investors focused on stable and visible cash-generating businesses, at 6x normalized P/E and 10%+ FCF
yield, franchise dealers (ABG, AN, GPI, LAD, PAG, SAH) are well positioned from business model mix as well
as balance sheet strength to navigate near-term consumer slowdown
ACVA trading at ~8x on 2025 EBITDA estimates and ~5x company targets, a ~50% discount to e-comm peers
KMX has historically traded at ~12-13x trough EPS, suggesting stock is not out of the woods yet
CVNA still trading at premium to e-comm peers on NTM and 2023E EV/GP and 2025E EV/EBITDA; a
recession could further hurt equity value meaningfully
VRM, SFT CZOO likely to run into funding issues in the next 6-24 months unless macro or business model
perception improves meaningfully
Overall Sector Themes
2022E FCF (ex-Inventory) as % of Market Cap
Source: Bloomberg Finance . and . Morgan estimates.
-233%
-209%
-44% -41%
-20%
7% 15%
-250%
-210%
-170%
-130%
-90%
-50%
-10%
30%
SFT VRM CZOO CVNA AG1 KMX Average
Franchise
Dealer
11
Peak earnings still dominate the narrative
At 6x P/E vs historical average of 9-10x, investors are already baking in a meaningful decline in earnings
over next couple of years
Relative earnings revisions to remain strong vs used car peers
Positive EPS revision cycle might take a breather due to demand uncertainty in 2H; relative revisions vs
other retail peers to remain robust
Guilty until proven innocent
Supply recovery needed for industry to prove earnings potential relative to pre-pandemic levels
Cost actions taken during the pandemic structural in nature; opportunity to improve productivity even further
from current robust levels – many initiatives under way
Balance sheet actions over the last couple of years and a significant offset to eventual moderation in new
car margins ongoing
F&I has structural tailwinds from higher VSC penetration and gradual move into captive finance and
warranty
Downturn resiliency proven in the past
In a downturn, the resiliency of the franchise dealer business model was on display as recently as 2Q20,
when average US same-store gross profit for the sector was down -20% y/y (Parts & Service same-store
gross profit down -25% y/y) but EBITDA up +10% y/y
Parts & Services an anti-cyclical offset and new vehicles at an already depressed starting point
Variable cost structure helps cushion impact of volume pressures
Cash the biggest positive, 10% FCF yield, balance sheet under-levered vs historical levels
Franchise Dealerships (ABG, AN, GPI, LAD, PAG, SAH)
12
Slowdown in investments at online retailers helps the narrative for traditional dealers, particularly resilient
economics and FCF in different economic scenarios
Traditional dealer model clearly needs to evolve to drive better customer experience
Well-capitalized franchise dealers in an advantageous position to invest at a time when disruptors need to
be cautious in order to preserve EBITDA and cash flow
Resilient economics and FCF allow for better appreciation of business model
CVNA’s ADESA acquisition reinforces nationwide network density approach by LAD and SAH/EchoPark
‘Disruption’ an easy narrative to paint, though actual impact on numbers is too early to gauge and likely
not as bad as feared
L-T secular concerns for franchise dealers from increasing EV adoption and D2C retailing is an intuitive
threat to the legacy business mode; however, the actual impact to dealer profitability involves a lot of moving
pieces, overlooking significant associated offsets, including higher Parts & Service ticket sizes, higher
service retention, potential market share gains (maintenance, new and used vehicles) as well as leaner
operating costs
Well-capitalized dealers that are already making significant investments to scale and build digital channels,
ultimately to support customers through the ownership lifecycle, will play an integral role in the auto retail
eco system, and we believe it is important to take a deeper look at the go-forward impact from this transition
to margins, volumes and overall profitability rather than just the narrative
Franchise Dealerships (ABG, AN, GPI, LAD, PAG, SAH)
13
We visited GPI’s Lexus Store, SAH’s satellite Echopark store, SAH’s BMW store and a private dealership
Customer experience remains a key focus with several efforts under way to reduce transaction time
through in-store use of online platforms
Staff productivity likely to sustain and potentially improve vs current levels even as inventory improves
driven by reduced transaction time and ongoing opportunity to integrate legacy back-end platforms
GPI’s Acceleride platform has reduced in-store customer transaction by >50%, helping both customer
experience and staff productivity
Auto lending environment still generally strong, but seeing some competitive rates from credit unions
Credit Unions being competitive on rates after recent rapid rise in benchmark rate increases
Demand still strong for new vehicles
Demand continues to exceed supply for now
New car GPUs resilient vs 1Q levels
In UK, GPI’s inventory sold out for next 7 months
Franchise dealers better positioned on used supply due to trade-ins and service line purchases, and also
due to less reliance on subprime consumers from a demand perspective
No risk to profitability seen from de facto eventual agency model from OEMs
Dealers see this move as being more profitable longer term given leaner operations
Less visibility on ultimate impact from EVs
Private dealers are somewhat uncertain on the ultimate impact; most agree that they will take share from
independents
Consolidation in space likely to continue
Significant level of investment needed in digital and EV re-tooling
June 2022 Houston Dealership Tour Takeaways
14
Franchise Dealers Normalized EPS After Further Capital
Allocation Potential, and Relative Valuation
Source: Bloomberg Finance .; . Morgan Estimates.
Normalized Earning Power and Related P/E
2019 EPS Normalized 2019 Base 2021 EPS
Normalized 2023 (on 2019
used/new GPUs,
w/announced capital
deployment)
Optionality ($mn, at 3x
net debt/EBITDA on
Normalized EBITDA)
M&A mix
Buyback
mix
Normalized 2023
w/further capital
deployment
ABG $ $ $ $ $1,004 50% 50% $
AN $ $ $ $ $2,578 40% 60% $
GPI $ $ $ $ $641 50% 50% $
LAD $ $ $ $ $2,074 70% 30% $
PAG $ $ $ $ $3,147 25% 75% $
SAH $ $ $ $ $599 50% 50% $
Normalized 2023
w/further capital
deployment
JPM 2023E
% Diff vs Normalized
(w/capital
deployment)
Street 2023E
% Diff vs Normalized
(w/capital deployment)
Implied P/E on
Normalized (w/further
capital deployment)
Implied
Premium/
Discount
Historical (5-yr)
Premium/Discount
ABG $ $ 7% $ -10% 95% 100%
AN $ $ 7% $ -8% 93% 104%
GPI $ $ -2% $ -15% 84% 81%
LAD $ $ 9% $ -12% 119% 120%
PAG $ $ 13% $ 3% 114% 98%
SAH $ $ -15% $ -24% 95% 100%
Average 3% -11%
15
CVNA
Recent operating plan update an effort to improve SG&A productivity but lacks concrete details on bridge to
historical levels, particularly in widely different inflation backdrop and total transaction/retail unit ratio
Hard to get conviction in >$4K GPU for 2023 in elevated used pricing environment that is set to correct if
macro slows down; recent ABS deal pricing doesn’t suggest any snapback in finance GPUs
Ultimately a lot of the SG&A leverage is dependent on retail unit growth
Bonds trading as if pricing in a recession, but the equity isn’t yet as shares are still trading at premium to e-
commerce peers on NTM and 2023 EV/GP
A recession could hurt equity value further, but CVNA should be able to navigate given existing liquidity
position post capital raise and cost-cut actions – we do not see solvency risk at this stage
On recession downside risks specifically, there are still shoes to drop, particularly auto lending and
used car pricing both of which can have significant implications for EBITDA and FCF at CVNA
L-T market share potential, infrastructure moat and unit economics still intact, but path to get there now
uncertain and likely prolonged with higher cash burn than previously anticipated
KMX
Consensus estimates still haven’t bottomed; revision trajectory likely to remain weak near term
CVNA/VRM/SFT setbacks help KMX narrative around competitive risks/disruption; while CVNA is having to
slow down spend, KMX can afford to remain somewhat aggressive given balance sheet cushion
Even though KMX has demonstrated history of navigating downturns, a near-term recession is likely to be
very different than prior given inflation, rising rates, used car pricing starting point that is ~40% above normal
today, and no visible signs of cracks in auto lending yet
Independent Used Car Retailers (KMX, CVNA)
16
CVNA Liquidity Analysis
Source: Company Reports; . Morgan.
$ mn
CVNA Liquidity
2022E 2023E 2024E 2025E
FCF Walk
EBITDA (New JPMe) (796) 60 505 1,025
Stock Comp/Other non-cash 58 40 44 48
Cash Interest (JPMe) (503) (680) (728) (777)
Capex (JPMe) (520) (200) (200) (300)
Working Capital (ex -Inv entory ) 37 (39) (88) (111)
Finance receiv ables pay ments, other (timing diff origination v s sale) 95 200 25 (15)
Beneficial interest in securitizations (inc receipts) (223) (287) (260) (212)
Total (1,853) (906) (702) (342)
Gross Debt on Balance Sheet (pro-forma for ADESA, JPMe) 1Q22 2022E 2023E
Senior Notes 5,725 5,725 5,725
Floorplan facility 2,572 2,783 3,039
Finance Receiv ables and beneficial interest 484 651 939
Other (including real estate, transportation fleet) 744 577 1,189
Total (JPMe) 9,525 9,736 10,892
Ex-floorplan/receivables 6,953 6,953 7,853
Cash on Balance Sheet (pro-forma for ADESA, JPMe) 2,477 1,220 1,215
Stated Liquidity (1Q22, pro-forma for ADESA/cap raise)
Cash on hand (as of 1Q22) 247
Unfunded gross real estate 824
Short-term rev olv ing (floorplan and finance receiv ables) 484
Stated liquidity 1,555
Financing of beneficial interest in securitizations 152
Total (pre-deal) 1,707
Capital Raise 4,500
Acquisition, fees/other (2,270)
Incremental ADESA real estate 939
Total Liquidity (pro-forma for deal) 4,876
17
VRM
VRM’s analyst day was a commendable attempt at providing investors with a path towards refreshed
EBITDA margin targets for the medium (breakeven EBITDA margin target) and long term (L-T EBITDA
margin targeted in the ~5-10% range)
However, execution credibility remains slim for now, and VRM has a tough road ahead as this transformation
needs to occur at a time when used car demand is weak, fears around a recession are growing, and used
car prices are still 40% higher than pre-COVID levels
There was surprisingly little color provided on VRM’s ability or action plan to navigate further industry,
consumer and credit headwinds in the next 6-18 months
Ultimately, until VRM reaches steady-state economics like at peers + revert to consistent above-market
growth, re-rating from current levels is unlikely
SFT
Like at peers, in order to slow the cash burn, SFT is having to pivot its strategy, albeit has done this more
proactively than peers, needing to take a less aggressive expansion path
Ultimately still dependent on capital markets beyond 2022 in a worsening used-car market backdrop
CZOO
Like CVNA and VRM, CZOO is looking to preserve cash by looking to be more agile with investments going
forward and also focused on reducing headcount to match near-term growth expectations, which is
expected to cut FCF burn by ~£200 mn over the next 18 months
While the business realignment plan is likely to hit near-term growth (2022 guidance revised to 70- 80K retail
units vs. 100K+ units prior), the deliberate relative slowdown gives management the opportunity to stabilize
unit economics, right-size operations and, thus, overall customer experience
Beyond the near term, there is uncertainty around the ultimate recovery trajectory of consumer
demand and thus the used car industry, which will need to be navigated
Independent Used Car Retailers (VRM, SFT, CZOO)
18
ACVA
ACVA remains on track to hit medium- to long-term EBITDA targets with the company targeting to exit 2023
with positive EBITDA and targets $ bn in revenue and $325 mn in EBITDA (~25% margin) in 2026
With signs of new car supply coming back, ACVA should see some cyclical upside
Despite the continued uncertainty around the wholesale industry, ACVA continues to invest prudently in new
tools and offerings for customers and market share expansion remains on track, which should ultimately
bode well when the market eventually recovers
Company has levers to slow tech spending in order to hit profitability sooner than official targets
L-T story remains compelling given the sizeable ~22 mn addressable market with <10% online penetration
today
TRUE
TRUE also benefits from improvement in inventory levels at dealers, but competition is also intensifying and
company is ramping investments in growth initiatives
TrueCar+ continues to gain traction and TRUE is currently transitioning its legacy headcount towards the
digital retail platform. Company, however, expects to ramp up marketing spend geared towards TrueCar+ as
platform throughput increases
While TRUE’s robust balance sheet optionality is solid in context of its Mcap and we see compelling new
product initiatives, we remain UW until there is greater visibility on incremental earnings potential given
structural concerns around lower dealer ad spend longer term
Auto Remarketing, Listing (ACVA, TRUE)
19
Summary Stock Views
20
LAD (OW,
$380 PT)
LAD remains one of our top picks with results demonstrating management execution as well as levers
in the business model to navigate near-term industry headwinds, and we see this as a continued
differentiator for the time being as well as longer term. LAD’s broader spectrum of used inventory and
lower relative balance sheet bodes well in the current economic backdrop.
AN (OW,
$150 PT)
AN continues to execute strongly and with best-in-class balance sheet optionality coupled with
continued robust FCF generation; we continue to have increasing comfort around normalized earning
power higher than perceived peak earnings today. AN screens cheapest relative to history on
normalized earnings potential.
PAG (N,
$125 PT)
PAG management has de-levered the balance sheet materially through the pandemic, which is a key
positive, though exposure to UK, like GPI, is an ongoing risk in addition to greater downside risk at
PTL (~21% of EBITDA in 2021) in the event of macro slowdown in US.
ABG (N,
$125 PT)
ABG’s updated view on L-T targets ($55+ EPS in 2025 with room for upside to $70+ on continued
capital deployment) reinforce our view on the strong near-term normalized as well as L-T earnings
potential for the sector. ABG’s used car business has seen improved execution in recent quarters, and
we need higher visibility around Clicklane’s contribution to incremental growth. Lastly, ABG’s relative
balance sheet optionality screens unfavorably in a near-term downturn.
GPI (N,
$125 PT)
While execution in US has been strong and valuation is attractive, UK exposure remains an ongoing
risk, even though there remains plenty of pent-up demand. GPI’s digital platform, Acceleride, is
amongst best in class, and we need to get greater comfort around contribution to incremental growth,
which is likely to be visible once industry supply normalizes.
SAH (N,
$125 PT)
The relative revision backdrop for SAH is likely to remain relatively tough in the near term given still
elevated used car pricing that should prolong profit inflection at EchoPark while investments in the
platform for the long term continue.
Summary Stock Views: Franchise Dealers
21
CVNA
(N, $35
PT)
While the revised operating plan focused on protecting FCF and EBITDA should help put the medium-term
liquidity debate to rest, the biggest question is if CVNA can revert to prior growth rates with a reduced run-
rate of SG&A spend, particularly on advertising and customer advocates. We believe the pullback in
investments/staffing suggests a cautious rebuild once the market normalizes, and does not warrant a
premium multiple. Stock continues to trade at a premium to peers on NTM and 2023 GP estimates.
KMX (N,
$105
PT)
Slowdown in growth at CVNA/VRM to focus on costs helps KMX’s narrative, though revision cycle remains
unfavorable and we see little positive catalysts amidst a tough used car backdrop. That said, we believe
KMX has less relative downside vs online peers in a mild near-term recession given better BS leverage as
well as FCF support.
VRM (N,
no PT)
VRM’s path to slow near-term cash burn and revamping of operations by pressing the brakes on growth is
a step in the right direction, though newly appointed CEO, Tom Shortt, has a very tough road ahead as this
transformation needs to occur at a time when used car demand is weak, fears around a recession are
growing, and used car prices remain elevated. Execution credibility in the recent past has been weak, so
not only does this need to be re-established but also needs to happen amidst a tough used car backdrop.
SFT (N,
no PT)
Like at peers, in order to slow the cash burn, SFT is having to pivot its strategy, albeit has done this more
proactively than peers, and needing to take a less aggressive expansion path, though we ultimately see
the company still dependent on capital markets beyond 2022 in a worsening used-car market backdrop,
which in our view should remain an investor overhang in the medium term.
CZOO
(N, no
PT)
Like at US digital-only used retail peers, CZOO is looking to preserve cash by looking to be more agile
with investments and costs going forward, and while this likely comes with some hit to near-term growth,
the deliberate relative slowdown gives management the opportunity to stabilize unit economics, right-size
the organization and ultimately improve consumer experience.
Summary Stock Views: Independent Used Car Retailers
22
ACVA
(OW,
$15 PT)
Despite near-term uncertainty around the wholesale industry, ACVA continues to invest prudently in new
tools and offerings for customers, and market share expansion (buoyed further by CVNA’s acquisition of
ADESA) remains on track, which should ultimately bode well when the market eventually recovers. In
addition, we believe a gradual improvement in supply coupled with dealer caution on inventory bodes well
for a pickup in auction industry volumes. We continue to view L-T story as compelling given the sizeable
~22 mn addressable market with <10% online penetration today.
TRUE
(UW, no
PT)
We expect continued headwinds to TRUE’s legacy business from tight new vehicle supply, and while we
remain encouraged by TRUE’s robust balance sheet optionality as well as solid new product initiatives
(including TrueCar+), we remain UW until there is greater visibility on incremental earnings potential from
investments in TrueCar+, and also given structural concerns around lower dealer ad spend longer term.
Summary Stock Views: Auto Remarketing, Listing
23
Macro Overview and High-Frequency Data Points:
Tracking Key Macro and Industry Metrics
24
Source: Bloomberg Finance .; Google; Apptopia; Apple; Cox Automotive.
JPM Macro Dashboard (Green = Improving, Yellow = Stable, Red = Deteriorating)
JPM US Auto Retail Macro Dashboard
Key Macro Stat Metric Recent 2-yr Comps Rolling 3MA Rolling 12MA Rolling 5Y
Historical 5
Year Trend-
Rolling 12MA
Monthly Stats
Auto sales Y/Y SAAR -25% 5% -24% -16% -4%
Auto SAAR Absolute (mn units) -
NA Class 8 truck orders Y/Y -56% 272% -52% -30% 5%
Manheim used v ehicle index Absolute (Index ) -
Univ of Mich consumer sentiment Absolute (Index ) -
Unemploy ment rate % % - % % %
Housing starts Y/Y 15% 12% 12% 13% 7%
Housing completions Y/Y -8% 11% -4% -1% 4%
Plan to buy auto Absolute (Index ) -
Personal sav ings Y/Y -65% -87% -75% -56% 5%
CPI new v ehicles Y/Y 13% 17% 13% 10% 2%
CPI used v ehicles Y/Y 16% 51% 24% 32% 9%
CPI inflation % % - % % %
Retail sales Y/Y 7% 56% 9% 13% 7%
Chase card spending total 7-day rolling av erage Y/Y 9% 55% 14% 21% -
E-commerce transaction grow th M/M MTD -7% - 1% 11% -
Vehicle miles trav elled Y/Y 3% 26% 8% 14% 0%
Apple mobility Index 7-day rolling av erage Y/Y 34% - 40% - -
Personal dsposable income Y/Y 0% -3% -6% 0% 5%
Public transit apps MAU Y/Y 52% 13% 45% 28% 16%
Public transit ridership Y/Y 31% -52% 41% 16% -12%
New v ehicle inv entory Y/Y -27% -61% -43% -58% -16%
New v ehicle day s supply Absolute (day s) 22 - 23 23 57
Cox used retail SAAR Absolute (mn units) - -
UK new car registrations Absolute (thousand units) -
UK new car registrations Y/Y -21% 514% -16% -14% -10%
Quarterly Stats
E-commece sales Y/Y % % % % %
E-commerce sales as % of retail sales % % % % %
Household debt- auto loan Y/Y % % % % %
Finance rate- new autos 48 month loan % % % % %
Weekly Stats
Initial jobless claims Absolute (000's claims) 229 193 278 501
Gas prices Absolute ($ per gallon) $ $ $ $ American Automobile Association
Trucking rates Absolute ($ per mile) $ $ $ $
25
US LV SAAR and US Unemployment Rate
Source: Company reports and . Morgan estimates.
US LV SAAR and Consumer Sentiment Index
Source: . Morgan estimates.
US LV SAAR and Used Vehicle Prices
Source: . Morgan estimates.
US LV SAAR and Housing Starts (000’s)
Source: . Morgan estimates.
8
10
12
14
16
18
20
22
50
60
70
80
90
100
110
120
Consumer Sentiment (L-Axis) SAAR (R-Axis)
8
10
12
14
16
18
20
22
0
500
1,000
1,500
2,000
2,500
Housing Starts (L-Axis) SAAR (R-Axis)
US LV SAAR Trends in Relation to Key Macro Metrics
8
10
12
14
16
18
20
22
100
150
200
250
Manheim (L-Axis) SAAR (R-Axis)
26
New Vehicle SAAR and US Oil Prices ($/barrel)
Source: . Energy Information Administration and . Bureau of Economic Analysis.
Used Vehicle SAAR and US Oil Prices ($/barrel)
Source: . Energy Information Administration and Edmunds.
New LV SAAR and Average New Vehicle Loan Rate
Source: Board of Governors of The Federal Reserve and . Bureau of Economic Analysis.
Used SAAR and Average Used Vehicle Loan Rate
Source: Board of Governors of The Federal Reserve and Edmunds.
0
2
4
6
8
10
12
14
16
18
20
0
20
40
60
80
100
120
WTI Crude Price (L-Axis) US LV New SAAR (R-Axis)
0
5
10
15
20
25
30
35
40
45
50
0
20
40
60
80
100
120
WTI Crude Price (L-Axis) Used SAAR (R-Axis)
0
5
10
15
20
25
30
35
40
45
50
%
%
%
%
%
%
%
%
%
%
Average Interest Rate for Used Vehicle Loan (L-Axis) Used Vehicle SAAR (R-Axis)
New and Used Vehicle SAAR Trends in Relation to Gas Prices
and Loan Interest Rates
0
2
4
6
8
10
12
14
16
18
%
%
%
%
%
%
%
%
Average Interest Rate for New Vehicle Loan (L-Axis) New Vehicle SAAR (R-Axis)
27
US New Total New LV SAAR (mn units)
Source: US Bureau of Economic Analysis.
US New Vehicle Inventories (days supply)
Source: AutoData.
US New Vehicle ATP
Source: TrueCar.
Auto Retailer Monthly Profit Per Unit Estimates
Source: . Power.
0
2
4
6
8
10
12
14
16
18
20
59
53
39
33
23 25 22 23 22 24 23 23 23 22
25 23 22
0
10
20
30
40
50
60
70
$7,000
$12,000
$17,000
$22,000
$27,000
$32,000
$37,000
$42,000
$47,000
$52,000
High-Frequency Data – New Vehicle Sales and Inventories
$5,258
$5,066
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
28
Used Inventory (Days Supply)
Source: Cox Automotive.
Manheim Used Vehicle Value Index (Indexed to 100 for
January, 1995)
Source: Manheim.
13-month Rolling Used SAAR Estimates (mn units)
Source: Cox Automotive.
Consumer Equity on Trade-In Vehicles ($/unit)
Source: . Power.
$7,057
$7,501 $7,715
$7,994
$8,738
$9,549
$10,199
$9,852 $9,663
$9,274
$9,668$9,922
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
48 48
33
35
38
40 41
38
42 42
45
51
55
53
42
49
44
0
10
20
30
40
50
60
80
100
120
140
160
180
200
220
240
260
Used SAAR
High-Frequency Data – Used Vehicles
29
Source: Manheim and Bureau of Labor Statistics.
US New and Used Vehicle CPI Trends vs. Manheim Index (Indexed to 100 for March, 2020)
100
89
97
105
111
115
114 114 114 114
115
119
126
137
143
141
138 137
144
158
164
166 167
163
158
156 157
100
99
98 97
101
106
109
110
108
107 106 107
109
120
128
141
142
140
135
139
142
147
149
151
148 147
100 100 100 100 100 100 100 101 101
101 102 102 101 102
103
105
107
108 109
110
112
113 114 114 114
115
80
90
100
110
120
130
140
150
160
170
180
Manheim Index CPI for Used Cars and Trucks CPI for New Vehicles
High-Frequency Data – New and Used Vehicle CPI
30
Wholesale and Retail Price Index (Indexed to 100 for
January 1, 2022)
Source: Black Book and . Morgan estimates.
Used Retail Listing Volume Index (Indexed to 100 for
January 1, 2022)
Source: Black Book and . Morgan estimates.
New and Used Vehicle Retail Sales Trends (vs. 2019
levels)
Source: Cox Automotive and . Morgan estimates.
Wholesale and Retail Price Index (Indexed to 100 for
January 1, 2022)
Source: Cox Automotive and . Morgan estimates.
92
94
96
98
100
102
Weekly Wholesale Price Index Retail L istings Weekly Price Index
90
92
94
96
98
100
102
104
106
Used Retail Listing Volume Index
-50%
-40%
-30%
-20%
-10%
0%
Used Retail Sales vs. 2019 New Retail Sales vs. 2019
86
88
90
92
94
96
98
100
102
Retail Price Index YTD Wholesale Price Index YTD
High-Frequency Data – Weekly Used Vehicle Market Trends
31
Cox Automotive Repair Order and Repair Volume
Index (Indexed to January 1, 2019)
Source: Cox Automotive.
Cox Automotive Vehicle Affordability Index (Number of
Median Weeks of Income Needed to Purchase Average
New Vehicle)
Source: Cox Automotive.
0
20
40
60
80
100
120
140
High-Frequency Data – P&S and Consumer Health
32
UK Used Vehicle Prices (£)
Source: Auto Trader.
UK New Vehicle Sales (‘000 units)
Source: SMMT.
90
51
284
142
157
186
123
68
215
106 116 109 115
59
243
119 124
0
50
100
150
200
250
300
£7,000
£9,000
£11,000
£13,000
£15,000
£17,000
£19,000
High-Frequency Data – UK Auto Trends
33
Source: Experian Information Solutions Inc.
Auto Auction Volume Trends
High-Frequency Data – Auto Auction Volume Trends
34
Source: Black Book.
Estimated Average Weekly Sales Rate at US Auctions
0%
10%
20%
30%
40%
50%
60%
70%
80%
High-Frequency Data – Auto Auction Trends
35
Business Outlook:
Volumes Likely Remain Constrained Amidst Tight New Vehicle Supply; See
Offsets from GPU Tailwinds and Strong P&S and F&I
36
We see potential for <15 mn US LV SAAR in 2022 given the weak 1H start and see production picking up only
gradually
Offsets to volume weakness continue to come from elevated pricing and robust GPU strength, which is likely to
sustain through the remainder of 2022, albeit we expect gradual moderation in GPUs as tight supply eases
Historical & Forecast Same-Store New Vehicle Retail Unit Sales Growth by Dealership Group vs. Industry Light
Vehicle Sales
Source: . Morgan estimates; Company data. Note: GPI data shown are for the United States only.
US Retail SAAR Recent Trends (mn units) US Fleet SAAR (mn units)
Source: JDPA. Source: JDPA.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 7% 6% 6% -1% -2% 2% -3% -12% 4% -10% 7%
AN 5% 7% 5% -5% -2% -4% -8% -10% 5% -11% 9%
GPI 4% 4% 4% -7% -2% -5% -1% -15% 10% -7% 11%
LAD 14% 8% 7% 1% 0% -4% -3% -14% 4% -12% 10%
PAG 13% 6% 5% 1% -3% -4% -5% -17% 10% -6% 9%
SAH 2% 0% 3% -2% 0% -5% 1% -13% 8% -8% 11%
Group 8% 5% 5% -2% -1% -3% -3% -14% 7% -9% 10%
SAAR 8% 6% 6% 0% -2% 0% -3% -16% 3% -3% 10%
New Vehicle Outlook: SAAR Likely to Remain Constrained by
Continued Tight Supply
0
5
10
15
20
0
1
2
3
37
Historical & Forecast New Vehicle Same-Store Gross Profit Growth
Average New Vehicle Gross Margin
Source: . Morgan estimates; Company data. Note: GPI data shown are for the United States only.
Quarterly Average New Vehicle Gross Margin Forecasts
Source: Company reports; . Morgan estimates. Source: Company reports; . Morgan estimates.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 6% 7% -2% -6% -10% -4% -8% 19% 89% 7% -29%
AN 2% 4% -1% -10% -9% -12% -2% 16% 104% -2% -41%
GPI -3% 3% -4% 1% 1% -8% -1% 17% 90% 3% -36%
LAD 7% 8% 5% -2% 1% -5% -1% 10% 81% -5% -35%
PAG 9% 12% 2% -3% -3% -4% -4% -4% 58% 6% -33%
SAH 3% -1% -6% -3% 0% -7% 1% 4% 93% 27% -32%
Group 4% 6% -1% -4% -3% -6% -2% 10% 86% 6% -34%
%
%
%
%%%
%
%
%
% % %
%
%
%
%
Average New Vehicle Gross Margin
% % % % % % %
%
%
%
%
12
14
16
18
20
%
%
%
%
%
%
%
Average New Vehicle Gross Margin US SAAR
New Vehicle Outlook (Cont’d)
38
We model MSD used unit same-store decline in 2022 given demand headwinds stemming from declining
vehicle affordability amidst sustained elevated prices in an unfavorable macro backdrop
We model same-store gross profit decline of -25% y/y in 2022 driven by a moderation in GPUs due to non-
repeat of price appreciation tailwinds witnessed through 2021
Historical & Forecast Same-Store Used Retail Unit Sales Growth by Dealership Group vs. Industry Sales
Source: . Morgan estimates; Company data. GPI is for US only.
Used Vehicle Outlook: Elevated Prices and Uncertain Macro
Environment Softening Used Demand
Historical & Forecast Same-Store Used Retail Gross Profit Growth by Dealership Group
Source: . Morgan estimates; Company data. GPI is for US only.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 18% 5% 4% 0% 1% 5% 4% -9% 20% 2% 6%
AN 9% 4% 4% -5% 4% 3% 5% -1% 25% -1% 3%
GPI 4% 4% 9% 1% -4% 9% 8% -11% 15% -2% 4%
LAD 14% 8% 9% 10% 4% 4% 12% 1% 16% 0% 5%
PAG 12% 8% 5% 0% 0% 2% 1% -17% 12% 2% 4%
SAH Franchise Dealerships 4% 2% 6% 2% -1% 3% 8% -4% 3% -7% 6%
SAH EchoPark 66% 46% -2% 7% -22% 38%
Group 10% 5% 6% 1% 1% 13% 12% -6% 14% -4% 9%
Used SAAR 36 36 38 39 39 40 40 37 41 36 37
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 15% 4% 0% -1% -7% 3% 0% 3% 60% -22% -8%
AN 7% 10% -4% -10% -7% 8% 7% 20% 49% -25% -7%
GPI 1% -1% 1% -1% -7% -3% 14% -1% 69% -31% -4%
LAD 19% 5% 11% 5% 1% 3% 12% 13% 47% -21% -5%
PAG 8% 5% -3% -5% -8% 8% -10% 6% 69% -32% -15%
SAH Franchise Dealerships 3% 5% 2% -3% -3% 3% 6% -13% 45% -20% 2%
Group 9% 5% 1% -3% -5% 4% 5% 5% 56% -25% -6%
39
Absolute Units (000s)
2017 2018 2019 2020 2021 2022E 2023E
CAGR
(2020-
2023E)
CVNA 44 94 178 244 425 487 610 36%
VRM E-Commerce NA 10 19 34 75 50 58 19%
KMX 722 749 833 752 924 936 993 10%
SFT 7 8 9 23 32 52 76%
CZOO 12 35 74 135 123%
Units (Y/Y)
CVNA 136% 113% 89% 37% 74% 15% 25%
VRM E-Commerce NA NA 89% 82% 117% -32% 14%
KMX 7% 4% 11% -10% 23% 1% 6%
SFT 14% 15% 145% 39% 61%
CZOO 187% 112% 82%
Average 72% 58% 51% 31% 109% 27% 38%
Used SAAR Y/Y 2% 3% -1% -12% 16% -2% 0%
Our volume growth assumptions for independent used retailers are predicated upon overall industry trends,
macro/consumer backdrop, new vehicle supply and used pricing moderation expectations in addition to
company-specific factors
We model y/y volume decline at VRM and double-digit growth at CVNA and SFT. Volume assumptions are softer
than previously anticipated, as improving unit economics are prioritized over volume growth.
We model strong triple-digit volume growth at CZOO as the company is still sub-scale, spending on advertising
and value proposition continues to resonate with increasing number of customers in UK as well as Europe.
Historical & Forecast Used Retail Unit Sales Growth for Used-Only Retailers vs. Industry Sales
Source: . Morgan estimates; Company data. *Calendar 2022E = FY23E for KMX.
Used Vehicle Outlook (Cont’d)
40
Our gross profit assumptions are a function of our volume expectations and anticipated GPU moderation as
used prices moderate towards normalized levels
Historical & Forecast Used Vehicle Retail Gross Profit Growth for Used-Only Retailers
Source: . Morgan estimates; Company data. *Calendar 2022E = FY23E for KMX.
Gross Profit Overall ($ mn) 2017 2018 2019 2020 2021 2022E 2023E
CVNA 33 97 252 401 1,043 990 1,344
VRM 61 58 72 202 213 284
KMX 2,750 2,919 3,178 2,942 4,089 3,905 4,079
SFT 5 (2) 12 49 66 129
CZOO (3) 25 49 184
Gross Profit Overall (Y/Y)
CVNA 157% 190% 160% 59% 160% -5% 36%
VRM NA NA -5% 24% 182% 5% 34%
KMX 8% 6% 9% -7% 39% -4% 4%
SFT 301% 35% 95%
CZOO 97% 276%
Average 83% 98% 55% 25% 171% 26% 89%
Used Vehicle Outlook (Cont’d)
41
We model continued recovery in P&S gross profit in 2022 primarily led by customer pay and collision
segments driven by pent-up demand coupled with normalizing miles driven, while warranty likely remains
pressured given lower industry sales base over past 2 years and ongoing parts shortages
We model +7% Parts & Services gross profit growth in 2022 followed by LSD growth in 2023 after being up
+14% in 2021
Business a beneficiary of inflation that alone could drive LSD-MSD growth
Beyond this, we see secular tailwinds to P&S retention driven by an uptrend in warranty periods, longer loan
durations as well as market share gain opportunities at the expense of independent aftermarket providers that
are unable to cater to increasingly complex vehicle technology and active safety systems
Historical & Forecasted Parts & Service Same-Store Gross Profit Growth
Source: . Morgan estimates; Company data. GPI data shown are for US
only.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 11% 11% 9% 7% 5% 3% 6% -9% 14% 7% 5%
AN 6% 7% 9% 3% 4% 5% 5% -7% 13% 7% 4%
GPI 9% 7% 8% 4% 4% 2% 10% -7% 15% 9% 3%
LAD 7% 12% 11% 8% 6% 6% 10% -2% 13% 8% 3%
PAG 7% 9% 4% 1% 3% 4% 3% -12% 16% 8% 3%
SAH 4% 4% 8% 2% 1% 1% 6% -8% 13% 6% 1%
Group 7% 8% 8% 4% 4% 3% 6% -8% 14% 7% 3%
Parts & Services: Expect Continued Steady Recovery Trajectory
into 2022
42
We expect F&I GPU strength sustaining at public franchise dealership groups in 2022
Our sense is that improvements in F&I GPU over past few quarters are a function of both ASPs (which help
financing that is ~1/3rd of F&I) and increased product penetration rates that are structural in nature
Captive fincos of independent used retailers, CVNA and KMX, are likely to see some profitability headwinds
Headwinds are likely to arise due to challenges associated with passing on rapid funding cost increases to
consumers and also widening of ABS spreads due to prevailing macro backdrop
Franchise Dealer Historical & Forecast Finance & Insurance Gross Profit per Unit (GPU) Growth
Source: . Morgan estimates; Company data. GPI data shown are for US only.
Used Only Retailer Historical & Forecast Finance & Insurance Gross Profit per Unit (GPU) Growth
Source: . Morgan estimates; Company data. *Calendar 2022E = FY23E for KMX.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG 8% 1% 3% 3% 8% 1% 6% 8% 9% 21% -3%
AN 7% 4% 9% 4% 5% 7% 8% 11% 13% 7% -5%
GPI 9% 7% 9% 0% 0% 4% 4% 10% 10% 12% -8%
LAD 5% 7% 6% 8% 4% 5% 9% 8% 17% 11% -8%
PAG 4% 6% 4% 1% 7% 7% 6% 8% 21% 14% -2%
SAH 5% 7% 5% 5% 4% 7% 9% 10% 15% 8% -5%
Group 6% 6% 6% 4% 5% 5% 7% 9% 14% 12% -5%
2018 2019 2020 2021 2022E 2023E
CVNA 36% 38% 16% 49% -17% 8%
VRM 2% 53% 23% 11% 14%
KMX 5% -5% 14% 12% -3% 4%
SFT 28% 60% 35% 24% -1%
CZOO 321% -7% 7%
Average 20% 16% 36% 88% 1% 6%
F&I Outlook: Expect Sustained F&I Strength at Franchise Peers;
Used Retailer Captive Fincos Pressured Amidst Rising Rates
43
We expect continued solid cost execution at franchise dealers
Key drivers are productivity improvements and leaner headcount structure amidst the pandemic coupled with
added advantages from adoption of digital retail platforms and associated tools and technology
Leverage at online independent used retailers (VRM, SFT and CVNA) likely to improve from elevated levels
as companies focus on cost discipline at the expense of growth
Franchise Dealer Historical & Forecast SG&A/Gross Profit
Source: . Morgan estimates; Company data. GPI data shown are for US
only.
Used-Only Retailer Historical & Forecast SG&A/Sales
Source: . Morgan estimates; Company data.
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E
ABG % % % % % % % % % % %
AN % % % % % % % % % % %
GPI % % % % % % % % % % %
LAD % % % % % % % % % % %
PAG % % % % % % % % % % %
SAH % % % % % % % % % % %
Group % % % % % % % % % % %
2017 2018 2019 2020 2021 2022E 2023E
CVNA % % % % % % %
VRM Ov erall % % % % % %
KMX % % % % %
SFT % % % % %
CZOO % % % %
SG&A Leverage: Sustained Cost Reductions at Franchise Dealers;
Independent Online Used Retailers Pivoting to Productivity
44
Adjusted EBITDA Forecasts, 2019-2023 ($ in millions)
Source: Company reports and . Morgan estimates.
EPS Forecasts, 2019-2023 ($ per share)
Source: Company reports and . Morgan estimates.
Franchise Dealers Comparable Net Debt/EBITDA (adjusted for leases, turns)
Source: Company reports; . Morgan estimates. Note: The above calculations might be different from company calcs,
which are not 100% comparable across the group.
2018 2019 2020 2021 2022E 2023E
ABG
AN
GPI
LAD
PAG
SAH
Average
Earnings Outlook: Franchise Dealers
2019 2020 2021 2022E 2023E
2019-2023
CAGR
2021-2023
CAGR
ABG $331 $425 $825 $1,242 $1,057 34% 13%
AN $840 $1,111 $2,057 $2,059 $1,415 14% -17%
GPI $410 $565 $958 $1,019 $811 19% -8%
LAD $510 $756 $1,801 $1,922 $1,588 33% -6%
PAG $825 $930 $1,826 $1,969 $1,571 17% -7%
SAH $303 $359 $631 $740 $654 21% 2%
Group $3,220 $4,145 $8,097 $8,950 $7,096 22% -6%
Group y/y 29% 95% 11% -21%
2019 2020 2021 2022E 2023E
2019-2023
CAGR
2021-2023
CAGR
ABG $ $ $ $ $ 31% 0%
AN $ $ $ $ $ 39% 0%
GPI $ $ $ $ $ 37% -2%
LAD $ $ $ $ $ 32% -6%
PAG $ $ $ $ $ 28% -4%
SAH $ $ $ $ $ 33% -1%
Average 33% -2%
45
Used Retailers Adjusted GP Forecasts, 2020-2023 (KMX FY21-FY24), $ mn
Source: Company reports and . Morgan estimates.
Used Retailers Adjusted EBITDA Forecasts, 2020-2023 (KMX FY21-FY24), $ mn
Source: Company reports and . Morgan estimates.
Used Retailers EBITDA Margin Forecasts, 2020-2023 (KMX FY21-FY24), $ mn
Source: Company reports and . Morgan estimates.
Earnings Outlook: Used-Only Retailers
2019 2020 2021 2022E 2023E
2019-2023
CAGR
2021-2023
CAGR
KMX 2,722 2,379 3,288 3,167 3,341 5% 1%
VRM 58 72 202 213 284 49% 19%
CVNA 506 794 1,929 1,819 2,615 51% 16%
SFT 7 13 49 67 129 109% 61%
CZOO (3) 25 49 184 NM 172%
Average 54% 54%
2019 2020 2021 2022E 2023E
KMX 1,454 1,285 1,825 1,490 1,537
VRM (127) (174) (343) (339) (239)
CVNA (243) (257) (5) (796) 60
SFT (60) (68) (138) (145) (107)
CZOO (81) (180) (255) (178)
2019 2020 2021 2022E 2023E
KMX % % % % %
VRM % % % % %
CVNA % % % % %
SFT % % % % %
CZOO % % % %
Average % % % %
46
Franchise Dealers’ Normalized EPS:
Addressing the Ongoing Debate/Concern Around Peak vs. Normalized
Earnings
47
There continues to remain a lot of confusion and debate around normalized earnings potential for the sector
Near-term debate that continues to re-emerge, and is keeping investors at bay, is on the duration of peak
earnings and the concern around y/y EPS declines once we start to move beyond peak pricing/GPUs
There is some agreement among bulls and bears around the ultimate normalization in new and used GPUs at
some stage (likely 2024)
There is seemingly less credit being given for capital allocation that’s already in the base and ongoing FCF
generation (and further capital deployment) until the normalization in GPU occurs
There is also some skepticism around the durability of cost reductions and inventory levels (and related low
floorplan rates)
Clearly little credit is being given (from both bulls and bears) for any impact from ongoing omni-channel
initiatives and ultimate market share potential
Also little credit is being factored for ongoing moves to integrate back-end systems, in-store digital usage to
reduce transaction time, and developing captive finance and warranty operations
Next few slides show our view of near-term normalized EPS (scenarios described below) for each of the
franchise dealers in our coverage, and also upside potential for each, as further capital is deployed from the
elevated FCF being generated with net debt/EBITDA capped at ~
2019 normalized base giving credit for permanent cost reductions and lower floorplan interest/inventory levels
2023 normalized base with already announced/completed capital allocation; using above scenario with new
and used GPUs back to 2019 levels, but giving credit for higher F&I GPU (penetration, ASPs, mix), ongoing
organic volume growth and acquisitions/buyback already completed/committed
2023 normalized base with further capital deployment from using excess FCF; 2023 normalized base
from above, but giving credit for further capital deployment from M&A/buyback using excess FCF generated
over the next year; assumed max net debt/EBITDA (adjusting for leases) of ~
Franchise Dealer Normalized EPS Analysis
48
Source: Company Reports and . Morgan estimates.
ABG 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
ABG’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Redution and
Lower Inventory
Normalized 2023 (after already
announced/committed capital
allocation)
New v olumes (000s units) 105 105 175
New GPU $1,516 $1,516 $2,250
New Gross Profit 160 160 395
Used Volumes (000s units) 89 89 169
Used GPU $1,502 $1,502 $1,500
Used Gross Profit 133 133 254
Parts & Serv ices Gross Profit 559 559 1,204
Blended F&I GPU $1,630 $1,630 $2,400
F&I Gross Profit 316 316 827
Other Gross Profit 1 1 1
Total Gross Profit 1,169 1169 2681
SG&A/Gross %
SG&A 800 750 1,675
Cost Cuts Permanent 50
Normalized SG&A/gross % % %
Inv entory lev els 985 700 1253
Floorplan ex pense (LIBOR driv en) (38) (18) (31)
Rate % % %
EBITDA 331 402 974
D&A/Other (37) (37) (74)
Net Interest ex pense (55) (55) (157)
Pre-tax income 239 309 742
Tax Rate % % %
Net Income 181 234 557
Share Count 19 19 23
EPS $ $ $
49
AN’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
Source: Company Reports and . Morgan estimates.
AN 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Redution and
Lower Inventory
Normalized 2023 (after already
announced/committed capital allocation
on buyback/M&A, higher F&I
penetration, AutoNation USA build-out)
New v olumes (000s units) 282 282 265
New GPU $1,789 $1,789 $1,789
New Gross Profit 504 504 474
Used Volumes (000s units) 245 245 401
Used GPU $1,414 $1,414 $1,400
Used Gross Profit 347 347 562
Parts & Serv ices Gross Profit 1,623 1,623 1,932
Blended F&I GPU $1,942 $1,942 $2,200
F&I Gross Profit 1023 1023 1465
Other Gross Profit 26 26 26
Total Gross Profit 3,523 3523 4459
SG&A/Gross %
SG&A Ex penses 2,559 2,344 2,898
Cost Cuts Permanent 215
Normalized SG&A/gross % % %
Inv entory lev els 3306 2500 2593
Floorplan ex pense (LIBOR driv en) (138) (63) (78)
Rate % % %
EBITDA 826 1,117 1,483
D&A/Other (141) (141) (211)
Net Interest ex pense (73) (73) (128)
Pre-tax income 613 903 1,143
Tax Rate % % %
Net Income 451 665 840
Share Count 91 91 56
EPS $ $ $
50
GPI’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
Source: Company Reports and . Morgan estimates.
GPI 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Redution and
Lower Inventory
Normalized 2023 (after already
announced/committed capital
allocation on buyback, M&A)
New v olumes (000s units) 169 169 185
New GPU $1,777 $1,777 $1,777
New Gross Profit 301 301 328
Used Volumes (000s units) 159 159 187
Used GPU $1,269 $1,269 $1,269
Used Gross Profit 201 201 237
Parts & Serv ices Gross Profit 815 815 1,066
Blended F&I GPU $1,520 $1,520 $1,800
F&I Gross Profit 498 498 668
Other Gross Profit 1 1 1
Total Gross Profit 1,816 1816 2301
SG&A/Gross %
SG&A 1,343 1,223 1,550
Cost Cuts Permanent 120
Normalized SG&A/gross % % %
Inventory lev els 1902 1500 1395
Floorplan ex pense (LIBOR driv en) (62) (38) (35)
Rate % % %
EBITDA 411 555 716
D&A/Other (72) (72) (85)
Net Interest ex pense (75) (75) (68)
Pre-tax income 264 408 563
Tax Rate % % %
Income from Continuing Ops 204 315 422
Earnings allocated to participating securities 8 8 21
Net Income 196 307 401
Share Count 18 18 15
EPS $ $ $
51
LAD’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
Source: Company Reports and . Morgan estimates.
LAD 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
Pre-COVID 2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Redution and
Lower Inventory
Normalized 2023 (after already
announced/committed capital allocation
in M&A/buyback)
New v olumes (000s units) 181 181 306
New GPU $2,136 $2,136 $2,136
New Gross Profit 386 386 654
Used Volumes 170 170 326
Used GPU (LAD Definition) $2,157 $2,157 $2,157
Used Profit 368 368 704
Parts & Serv ices Gross Profit 668 668 1,430
Blended F&I GPU $1,478 $1,478 $2,300
F&I Gross Profit 519 519 1454
Other Gross Profit 14 14 30
Total Gross Profit 1,954 1954 4271
SG&A/Gross %
SG&A 1,371 1,271 2,670
Cost Cuts Permanent 100
Normalized SG&A/gross 65% 65% 63%
Inv entory lev els 2,434 1,500 3,647
Floorplan ex pense (73) (38) (91)
Rate % % %
EBITDA 510 645 1,511
D&A/Other (69) (69) (133)
Net Interest ex pense (61) (61) (112)
Pre-tax income 380 515 1,265
Tax Rate % % %
Net Income 275 371 911
Share Count 23 23 28
EPS $ $ $
52
PAG’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
Source: Company Reports and . Morgan estimates.
PAG 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Redution and
Lower Inventory
Normalized 2023 (after already
announced/committed capital
allocation in M&A, buyback,
CarShop)
Retail Automotive
New volumes (000s units) 223 223 209
New GPU $3,124 $3,124 $3,124
New Gross Profit 696 696 652
Used Franchise Volumes (000s units) 284 284 339
Used GPU $1,288 $1,288 $1,288
Used Gross Profit 366 366 436
Parts & Services Gross Profit 1,306 1,306 1,495
Blended F&I GPU $1,286 $1,286 $1,500
F&I Gross Profit 652 652 821
Other Gross Profit 19 19 19
Total Gross Profit Automotive 3,039 3039 3423
Commercial Truck Dealership
New volumes (000s units) 12 12 14
New GPU $5,161 $5,161 $5,161
New Gross Profit 61 61 75
Used Franchise Volumes (000s units) 2 2 3
Used GPU $4,708 $4,708 $4,708
Used Gross Profit 9 9 16
Parts & Services Gross Profit 182 182 318
Blended F&I GPU $895 $895 $925
F&I Gross Profit 12 12 17
Other Gross Profit 12 12 12
Total Gross Profit Commercial Truck 278 278 438
Other 139 139 139
Total Gross 3,456 3,456 4,000
SG&A/Gross %
SG&A Expenses 2,693 2,518 2,915
Cost Cuts Franchise Permanent 175
Normalized Franchise SG&A/gross % % %
Inventory levels 4261 3500 4071
Floorplan expense (LIBOR driven) (85) (53) (61)
Rate % % %
Equity in earnings of affiliates 148 148 340
EBITDA 825 1,032 1,364
D&A/Other (110) (110) (137)
Net Interest expense/other (124) (124) (66)
Pre-tax income 592 799 1,161
Tax Rate % % %
Net Income 435 587 871
Share Count 82 82 74
EPS $ $ $
53
SAH’s Normalized Earnings (Before Incremental Capital
Deployment from Excess FCF in 2022/2023)
Source: Company Reports and . Morgan estimates.
SAH 2019 vs. Normalized 2023 ($ in mn, except EPS, share count, volumes and GPU)
2019
Normalized 2019 Base Assuming
No Business Growth, But
Permanent Cost Reduction and
Lower Inventory
Normalized 2023 (after already
announced/committed capital
allocation in buyback/M&A,
EchoPark)
New v olumes (000s units) 114 114 122
New GPU $2,042 $2,042 $2,042
New Gross Profit 233 233 249
Used Franchise Volumes (000s units) 113 113 120
Used GPU $1,310 $1,310 $1,310
Used Gross Profit 148 148 157
Parts & Serv ices Gross Profit 668 668 785
Blended F&I GPU $1,601 $1,601 $2,100
F&I Gross Profit 363 363 507
Other Gross Profit -3 -3 -3
Total Gross Profit 1,409 1409 1694
SG&A/Gross Franchise %
SG&A Ex penses Franchise Stores 1,081 981 1,180
Cost Cuts Franchise Permanent 100
Normalized Franchise SG&A/gross % % %
Franchise Stores Income 327 427 514
EchoPark Volumes 50 50 200
EchoPark GPU 2,270 2,270 $2,250
EchoPark Gross Profit 112 112 450
EchoPark SG&A/Gross % % %
EchoPark Income 25 25 68
D&A/Other (93) (93) (131)
Inv entory lev els 1518 800 1951
Floorplan ex pense (LIBOR driv en) (49) (20) (49)
Rate % % %
EBITDA 304 432 533
Net Interest ex pense/other (54) (54) (92)
Pre-tax income 157 285 310
Tax Rate % % %
Net Income 116 211 226
Share Count 44 44 40
EPS $ $ $
54
Franchise Dealers’ Normalized EPS After Further Capital
Allocation Potential, and Relative Valuation
Source: Bloomberg Finance .; . Morgan Estimates.
Normalized Earning Power and Related P/E
2019 EPS Normalized 2019 Base 2021 EPS
Normalized 2023 (on 2019
used/new GPUs,
w/announced capital
deployment)
Optionality ($mn, at 3x
net debt/EBITDA on
Normalized EBITDA)
M&A mix
Buyback
mix
Normalized 2023
w/further capital
deployment
ABG $ $ $ $ $1,004 50% 50% $
AN $ $ $ $ $2,578 40% 60% $
GPI $ $ $ $ $641 50% 50% $
LAD $ $ $ $ $2,074 70% 30% $
PAG $ $ $ $ $3,147 25% 75% $
SAH $ $ $ $ $599 50% 50% $
Normalized 2023
w/further capital
deployment
JPM 2023E
% Diff vs Normalized
(w/capital
deployment)
Street 2023E
% Diff vs Normalized
(w/capital deployment)
Implied P/E on
Normalized (w/further
capital deployment)
Implied
Premium/
Discount
Historical (5-yr)
Premium/Discount
ABG $ $ 7% $ -10% 95% 100%
AN $ $ 7% $ -8% 93% 104%
GPI $ $ -2% $ -15% 84% 81%
LAD $ $ 9% $ -12% 119% 120%
PAG $ $ 13% $ 3% 114% 98%
SAH $ $ -15% $ -24% 95% 100%
Average 3% -11%
55
Franchise Dealers – D2C/EV Deep-Dive:
Moving from 'Narrative' to 'Numbers'; Risks More than Discounted While
Opportunities Underappreciated
56
‘Disruption’ an easy narrative to paint; L-T secular concerns for franchise dealers from increasing EV
adoption and D2C retailing is an intuitive threat to the legacy business model
The actual impact to dealer profitability involves a lot of moving pieces, overlooking significant associated
offsets, including higher Parts & Service ticket sizes, higher service retention, potential market share gains
(maintenance, new and used vehicles) as well as leaner operating costs
We saw the resiliency of the franchise dealer business model as recently as 2Q20, when average US SS GP
for the sector was down -20% y/y (Parts & Service SS GP down -25% y/y) but EBITDA up +10% y/y
Industry should and will most likely change, though focusing on impact to numbers is more important than
narrative
With evolving customer preferences and increasing comfort around digital purchases, the franchise dealer
model is likely to eventually become more efficient and customer centric, which provides consumers the
flexibility to transact in their preferred format in a haggle-free environment
We believe well-capitalized dealers with established digital channels and focused on providing strong customer
experience will continue to play an integral role in the auto retail ecosystem
Key risks from secular trends include:
Direct headwind is likely to simply come from shrinking overall TAM for franchise dealers as direct-to-
consumer EV players (like Tesla, Rivian, etc.) gain market share (~2% combined share today)
Parts & Service revenue is likely to come under pressure from fewer parts and lower repair frequency of EVs
as compared with ICEs
Lower new vehicle GPU as an increasing mix of unit sales are transacted via D2C OEM channels (agency
sales), where dealers earn relatively low but stable commissions (agency fees) for fulfilling the transaction
Lower financing commissions as OEM captive fincos can potentially provide consumers with direct financing
though this is still likely further out given the value proposition of dealer F&I remains intact due to its ability to
cater to a wide spectrum of consumer financing needs via custom solutions from multiple lending partners
Franchise Dealerships D2C/EV Impact Deep-Dive
57
Offsets and Opportunities countering risks associated with L-T secular trends include:
The biggest offset is likely to come from significant SG&A cost reductions as an agency sales model transitions
dealer showrooms to experience centers with fewer personnel and fixed compensation structures, coupled with
further offsets from lower advertising spend for new vehicles, which is largely catered to by OEMs in an agency
structure
On Parts & Service, we see higher ticket sizes and retention rates for EVs coupled with potential share gains
as partial offsets to any negative impact from fewer parts and lower repair frequency for EVs
Significant runway for growth and improved profitability from used vehicle market share gains leveraging
upcoming (and scaling quickly) digital platforms, along with structural used vehicle F&I GPU upside from
expansion into captive lending (already seen at LAD)
Greater consolidation opportunity vs. what is perceived with potential for loosening of framework agreements
that restrict market share as OEMs rely on dealership chains that can provide the best consumer experience
(in-store and online)
Overall transition of the auto retail experience is likely to take place through the course of this decade with
any noticeable impact to earnings even further out, likely beyond 2030
We expect to see early stages of ‘agency model’ rollout in the US by 2025, followed by a gradual transition to
100% agency/D2C model beyond 2030
EV penetration is likely to continue inflecting driven by improved consumer awareness and developing
infrastructure combined with increasing government focus, though meaningful car parc penetration is still
tangibly several years away with an all-electric car parc expected only by 2060, in our view
A copy of the sensitivity/scenario analysis spreadsheet is available upon request.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
58
We lay out three scenarios: 1) Initial Agency model (2025), 2) Base Case Agency Model (2030), and 3) L-T
Agency Model + Fully EV Car Parc (2040+)
Scenario #1: 2025 Scenario #2: 2030 Scenario #3: 2040+
Initially, we expect OEM direct sales
initiatives focused on newer EV
models (~10% volumes via D2C)
resulting in little impact to new
vehicle GPUs
New vehicle TAM is likely to be
reduced by ~5% as D2C EV players
continue to gain share
Dealer F&I is likely to remain intact,
with little impact to Parts & Service
as EV penetration likely remains
seemingly low (~3% of car parc),
with offsets coming from lower SG&A
expenses (~8% lower vs. pre-
pandemic) and improved used
vehicle F&I as captive lending
operations ramp up (~10%
penetration)
In this scenario, we see zero
impact to our normalized 2025
EBITDA assumptions
Overall new vehicle GP is likely to
decline by ~40% driven by a combination
of lower volumes as D2C EV brands
command a larger slice of the market
(~13% lower TAM vs. current levels),
coupled with lower new vehicle GPU as
OEMs capture a higher portion of the
front-end economics of the car (assuming
~50% volumes via D2C channels)
F&I business starts to see some
leakages as OEM captive finco
penetration improves
Increasing EV penetration is expected to
have a notable impact on P&S (~10% of
car parc becomes EVs)
SG&A cost cuts (~25% reduction) and
improved used vehicle F&I profitability
are expected to continue offsetting
In this scenario, we again see zero
impact to our normalized 2025 EBITDA
assumptions
New vehicle volumes continue to
decline as TAM shrinks (~15%
lower TAM vs. current levels)
with continued downward trend
in both front-end and back-end
GPUs, as OEMs along with their
captive fincos, capture more
economics of the transaction
P&S headwinds continue to
intensify (GP down ~40% vs.
pre-pandemic) as EV car parc
penetration grows (assume
~100% EV car parc), and is
offset by continued
improvements in SG&A leverage
(expenses ~40% lower) and
captive finco penetration (~50%
penetration)
In this scenario, we see -15%
pro forma headwind to our
normalized 2025 EBITDA
assumptions
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
59
Transaction Flow in Agency Model vs. Traditional Sales Model
Source: Natural Resources Defense Council and . Morgan.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
60
OEM Direct-to-Consumer Sales Initiatives and Plans
Source: Company reports and . Morgan.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
OEM Direct Sales Initiatives - US Direct Sales Initiatives - Global (ex-US)
Ford
• Ford is allocating its Mustang Mach-E electric crossover, F-150 Lightning electric pickup and Bronco models to dealerships based on online customer
reservations, and customers can complete their purchases without any physical interaction at dealerships via dedicated dashboards.
• Ford noted that it is banking on its franchise dealer network to deliver the consumer experience needed for the upcoming EV (Model-e) models. As part of the
strategy, dealers will have to opt in to be part of the EV network and adhere to certain standards as well as transform into specialized experience centers.
General
Motors
GM is allocating Hummer EV inventory to dealerships primarily on the basis of online customer reservations with a fixed pricing structure, and dealers generate
fixed pre-determined margins for facilitating the transaction. Notably, dealers will still be identified as the merchant on the customer's billing statement, though GM
is likely to restrict them from using customer information (generated from the reservation) beyond that transaction – leading to some uncertainty regarding dealers'
ability to sustain high P&S retention rates going forward. GM expects to continue leveraging its dealer network citing competitive advantages over D2C EV players
with respect to customer delivery and purchase experience, and sees online channels providing the additional flexibility to cater to a growing subset of consumers
that are comfortable with 100% online sales.
Stellantis No plans for US dealership consolidation.
Stellantis plans to terminate all dealer contracts for its 14 brands by June 2023
in order to establish an agency model distribution structure, expected to be
operational in all of Europe’s 10 largest markets by 2026, with dealers expected
to generate roughly ~5% gross margins (in the form of fees), albeit with some
nuances across brands.
Mercedes No plans for US dealership consolidation.
Mercedes-Benz plans to trim its global dealer headcount by ~10% (~15-20% in
Germany) and plans to transition toward a direct-sales agency-like model,
targeting ~80% of European sales via this distribution structure by 2025. The cut
in German dealership footprint is likely to take effect by 2028. The company is
targeting 25% online sales by 2025. That said, Mercedes expects to continue
adding showrooms in China.
Volvo
Volvo’s range of battery-electric vehicles (particularly 2022 models such as the XC40 Recharge) will be available for sale only via online channels, which allows
consumers to select from a range of pre-configured vehicles at fixed pricing. Vehicles ordered by consumers are likely to be shipped to dealer locations from a
central inventory facility (dealer inventory of ~5-10 vehicles for test drives and impulse buyers), and dealers will continue to play a key role in delivering the vehicles
and upholding customer relationships.
BMW and
Mini
No plans for US dealership consolidation.
BMW and Mini are considering a switch to an agency distribution model in
Europe, which would involve the manufacturer selling direct-to-consumer, while
dealerships serve as delivery and service points. The timing of the transition is
still under discussion and the company noted that the Rolls Royce brand would
continue with the franchise dealer model. Lastly, BMW noted that an agency
model in China is not on the table at the moment.
Renault Continue to leverage traditional dealer model.
Toyota Continue to leverage traditional dealer model.
61
Automobile Dealer Franchise Laws by State
Source: Natural Resources Defense Council and . Morgan.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
62
US Car Parc Mix Forecasts (% of Overall Car Parc)
Source: . Morgan estimates.
Legacy vs. D2C OEM Market Share Estimates in 2030
(% of US LV Sales)
Source: Company reports, IHS Markit Inc. and . Morgan estimates.
New Vehicle Annual Sales Mix Estimates – D2C vs.
Legacy OEMs (% of US LV Sales)
Source: . Morgan estimates.
New Vehicle GPU Impacts in Agency Model
Source: . Morgan estimates.
10%
45%
100%99% 97%
90%
55%
0%
20%
40%
60%
80%
100%
2020 2025 2030 2040 2060
BEV Non-BEV
Legacy OEMs,
91%
Tesla, 5%
Rivian, 3%
Other D2C EV
Players, 1%
D2C EV OEMs,
9%
99% 99% 97% 97% 96% 95% 95% 94% 93% 92% 92% 91%
85%
1% 1%
3% 3%
4% 5%
5%
6% 7%
8% 8%
9%
15%
%
%
%
%
%
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Legacy OEM New Vehicle Market Share EV D2C OEM New Vehicle Market Share
$1,500
$750 $750
$2,400 $2,400
$2,000 $2,000
$2,400 $2,310
$1,375
$1,000
0
500
1,000
1,500
2,000
2,500
3,000
Pro-Forma Franchise
Dealer (2025)
Initial Case Agency
Model (2025)
Base Case Agency
Model (2030)
L-T Agency Model/Full
EV Parc (2040+)
D2C/Fulfilment only Purchase Dealer (negotiated) Purchase Blended New vehicle GPU
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
63
Average Franchise Dealer Lifetime P&S GPU for BEV
vs ICE
Source: . Morgan estimates.
Service Retention Rates BEV (Normalized)
Source: . Morgan estimates.
Average Franchise Dealer P&S GPU Retained for BEV
vs ICE
Source: . Morgan estimates.
Normalized P&S Gross Profit Impact
Source: . Morgan estimates.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
$193 $93
$265
$127
284
$136
298
$143
311
$149
314
$151
312
$150
310
$149
$2,287
$1,098
$0
$500
$1,000
$1,500
$2,000
$2,500
Average GP Across All Units Sold ICE Average GP Across All Units Sold BEV
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
53%
73%
63%
53%
43% 38% 33%
28%38%
48%
38%
33%
28%
23% 23% 18%
0%
20%
40%
60%
80%
Year - 1 2 3 4 5 6 7 8
Retention New BEV Retention Used BEV
Retention New ICE Retention Used ICE
$76 $42
$140
$76
126
$68
105
$61
86
$52
75
$45
64
$41
52
$33
$724
$419
$0
$100
$200
$300
$400
$500
$600
$700
$800
Average GP per Sold Units Retained
ICE
Average GP per Sold Units Retained
BEV
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
-2%
-5%
-32%
-11%
-14%
-47%
0%
-20%
-30%
0%
-10%
-25%
-7%
-12%
-41%
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
Initial Case Agency Model
(2025)
Base Case Agency Model (2030) L-T Agency Model/Full EV Parc
(2040+)
Warranty Customer Pay Collision Reconditioning Total Parts & service
64
Franchise Dealer F&I Penetration Trends
Source: National Auto Dealers Association (NADA).
Estimated F&I GPU in Different Scenarios
Source: . Morgan estimates.
Blended New Vehicle F&I GPU in Agency Model
Source: . Morgan estimates.
Normalized New Vehicle F&I Gross Profit Impact
Source: . Morgan estimates.
$2,344 $2,227
$1,793
$1,035
$0
$500
$1,000
$1,500
$2,000
$2,500
Pro-Forma Franchise
Dealer (2025)
Initial Case Agency
Model (2025)
Base Case Agency
Model (2030)
L-T Agency
Model/Full EV Parc
(2040+)
-9%
-30%
-62%-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Initial Case Agency Model
(2025)
Base Case Agency Model
(2030)
L-T Agency Model/Full EV
Parc (2040+)
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
84% 82%
85% 86%
82%
90% 90% 90% 90% 88%
91%
55%
57%
59% 61%
67%
71%
74% 73% 73% 75%
76%
50%
60%
70%
80%
90%
100%
F&I Penetration on New Vehicles F&I Penetration on Used Vehicles
$2,227
$1,793
$1,035
$2,700 $2,700 $2,700
$1,935 $1,935 $1,935
$2,012
$2,126
$2,318
$2,112
$1,975
$1,756
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Initial Case Agency Model (2025) Base Case Agency Model (2030) L-T Agency Model/Full EV Parc (2040+)
new vehicle F&I captive finco F&I used Third-party F&I used used vehicle F&I F&I GPU
65
SG&A/Unit Assumptions (sold through negotiated dealer Channel, ex-agency model)
Source: . Morgan estimates.
Absolute SG&A Expense Declines in Difference
Scenarios
Source: . Morgan estimates.
Used Vehicle Retail Industry Market Share
Source: Group 1 Automotive.
$2,600 $2,539 $2,529
$2,240
$400 $400 $400 $400
$1,000 $991 $1,108 $1,075
$4,000 $3,930 $4,037
$3,715
$4,000
$3,747
$3,122
$2,413
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Pro-Forma Franchise Dealer (2025) Initial Case Agency Model (2025) Base Case Agency Model (2030) L-T Agency Model/Full EV Parc
(2040+)
Fixed personnel costs Variable commission (new)
Variable commission (new, negotiated by dealer) Variable commission (used)
Personnel/unit (retalied through Dealer channel) Advertising/unit (retalied through Dealer channel)
Overhead/unit (retalied through Dealer channel) SG&A/unit (Dealer Channel)
SG&A/unit (Total Units Transacted)
-8%
-25%
-44%-50%
-40%
-30%
-20%
-10%
0%
Initial Case Agency Model
(2025)
Base Case Agency Model
(2030)
L-T Agency Model/Full EV
Parc (2040+)
Franchise
Dealers
37%
Independe
nt Used
Dealers
36%
Private Party
Transactions
27%
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
66
Public Franchise Dealers Used Car Market Share
Source: Company reports and . Morgan estimates.
Estimated Finance Income/ Used Vehicle (unadjusted
for penetration)
Source: . Morgan estimates.
Estimated Used F&I GPU in Different Scenarios
Source: . Morgan estimates.
Estimated Overall F&I GPU in Different Scenarios
Source: . Morgan estimates.
$1,700
$1,900
$850
$0
$500
$1,000
$1,500
$2,000
CAF (KMX) finance GPU CVNA finance GPU Franchise Dealers
$1,935
$2,012
$2,126
$2,318
$1,700
$1,800
$1,900
$2,000
$2,100
$2,200
$2,300
$2,400
Pro-Forma Franchise
Dealer (2025)
Initial Case Agency
Model (2025)
Base Case Agency
Model (2030)
L-T Agency Model/Full
EV Parc (2040+)
$2,227
$1,793
$1,035
$2,700 $2,700 $2,700
$1,935 $1,935 $1,935
$2,012
$2,126
$2,318
$2,112
$1,975
$1,756
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Initial Case Agency Model (2025) Base Case Agency Model (2030) L-T Agency Model/Full EV Parc (2040+)
new vehicle F&I captive finco F&I used Third-party F&I used used vehicle F&I F&I GPU
% % % % % % % % % % % %
% % %
% % % % %
% % % %% %
% %
% % %
% %
% % %
% %
%
% % %
% %
% % % %
% %
%
% %
% % %
% % %
%
%
% %
%
% % %
%
% %
%
%
%
% %
%
% %
%
%
%
% %
%
%
%
%
%
%
%
%
%
GPI (US) PAG SAH ABG AN LAD
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
67
Normalized earning power at steady-state post consolidation to achieve sufficient nationwide scale
Incorporating all the moving pieces, the ‘%’ on ‘normalized’ earnings is likely to occur on a significantly elevated
EBITDA base, which is ~465% higher vs. 2019 levels, given the permanent cost reduction, ongoing consolidation
trends in the industry in a heavily fragmented market, and assuming new and used GPUs are back to pre-
pandemic levels
The sector should still end up with pro forma 2040+ normalized earnings that are structurally ~380% higher vs.
2019 levels, with room to grow further from market share expansion in used
Valuation – Current levels discount multi-decade evolution of risks but underappreciate already visible
offsetting opportunities
Franchise dealer shares trading at <6x near-term (2023E) normalized P/E, a ~40% discount to L-T historical
averages, and at its widest discount ever to the S&P 500
We believe the eventual risks, that will evolve over the next 5-20 years, are more than discounted at current
levels, with no appreciation of the already visible and ongoing opportunities to reform/transform the business
model and ultimately elevate margins, revenue and ROIC
EBITDA Impact in Different Scenarios
Source: . Morgan estimates.
Franchise Dealerships D2C/EV Impact Deep-Dive (Cont’d)
68
. Morgan/Chase Auto Annual Dealership Survey:
Takeaways from Our April 2022 Survey
69
We received ~200 responses that were collected from 3/30/22 through 4/8/22
New vehicle retail
Lower manufacturer incentives and increasing ATPs were cited as key drivers of profit pressure going forward
Rising interest rates and concerns related to consumer credit quality the key long-term concerns
New vehicle GPUs are expected to stabilize between current elevated levels and pre-pandemic levels in a
normalized supply environment
What do you view as the primary drivers of new vehicle gross profit per unit (GPU) pressure going forward?
Source: . Morgan.
29%
18%
16%
12% 12%
8%
6%
21%
17%
10%
13%
19%
8%
12%
22%
15%
33%
4%
13%
12%
0%
5%
10%
15%
20%
25%
30%
35%
Lower manufacturer
incentives (volume
based) and
rebates/floorplan
assistance
Increasing Average
Transaction Prices
(ATPs) for new
vehicles diverting
demand to used
Weak new vehicle
retail sales
environment
Move to Direct-to-
Consumer Pricing and
Selling Model from
OEMs
Not seeing any
pressure on GPU
Concerns around
consumer credit
quality
Attractive pricing on
nearly-new (used)
vehicles
April'22 April'21 April'20
. Morgan/Chase Auto Annual Dealership Survey
70
What do you see as the biggest threats to new vehicle demand over the long term?
Source: . Morgan.
46%
19%
12%
8% 7% 6%
3%
32%
19%
13%
7%
13% 13%
3%
13%
18%
16%
7%
14%
21%
11%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Rising interest
rates
Consumer credit
quality
Car subscription
programs directly
from OEMs
Consumer
awareness of
climate change
Autonomous
vehicles
Proliferation of
ride-hailing and
ride-sharing (Uber,
Lyft, etc.)
Improvements in
public transport
infrastructure
April'22 April'21 April'20
Where do you expect new vehicle gross profit per unit (GPU) to
stabilize once OEM supply normalizes?
Source: . Morgan.
2%
24%
63%
10%
1%
0%
10%
20%
30%
40%
50%
60%
70%
Higher than elevated
levels seen over last 6-
9 months
At or near elevated
levels seen over last 6-
9 months
Lower than recent
elevated levels but
above pre-pandemic
(2019) levels
At or near pre-
pandemic (2019) levels
Lower than pre-
pandemic (2019) levels
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
71
Used vehicle retail
Inventory procurement the key area of both challenges and opportunities, and consumer sourcing the key
alternative amid tight auction supply
What do you view as the primary drivers of used
vehicle GPU pressure going forward?
Source: . Morgan.
What are the biggest opportunities in the near term to
improve volume and GPU growth for used vehicles?
Source: . Morgan.
44%
33%
17%
7%
68%
15% 17%
58%
33%
9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Inventory procurement
challenges (auction vs
retail, off-lease supply)
Used car pricing
moderation from current
elevated levels
E-commerce proliferation Not seeing any pressure on
GPU
April'22 April'21 April'20
39%
26%
22%
14%
38%
20%
27%
15%
32%
21%
27%
20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Improving inventory
procurement strategies
(including changes in
sourcing channels like
retail vs auction, etc)
Improving pricing
strategies and analytics
Push more F&I (Finance &
Insurance) and VSC
(Vehicle Service Contracts)
products
Moving to on-line channels
and omni-channels of
vehicle purchasing and
trade-ins
April'22 April'21 April'20
Amidst tight auction supply, which alternate source of
inventory procurement have you leaned into more?
Source: . Morgan.
Who is your preferred auction vendor?
Source: . Morgan.
52%
22%
20%
7%
0%
10%
20%
30%
40%
50%
60%
Consumer sourcing
(trade-ins, street
purchases, etc.)
Digital dealer-to-dealer
auction platforms (like
ACV Auctions,
BacklotCars/TradeRev,
CarOffer, etc.)
Direct OEM supply of
off-lease, repo and
rental return vehicles
Independent
wholesalers
Manheim (on-
site), 28%
Manheim
Express, 16%
ACV Auctions,
15%
ADESA (on-site),
14%
BacklotCars/Trad
eRev, 8%
CarOffer, 8% Other regional
auction houses,
7%
Independent
wholesalers, 4%
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
72
Parts & Services
Increase in UIO sweet spot, vehicle complexity, and recall activity highlighted as key drivers of growth medium
term
Technician availability, EV shift, and declining new vehicle sales cited as key challenges
What do you view as the primary drivers of Parts &
Services revenue and profits?
What are the biggest constraints/challenges you see
to Parts & Services profit growth over the long term?
Source: . : . Morgan.
41%
24%
21%
14%
40%
21%
23%
16%
43%
25%
15%
17%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Increase in the units in
operation (of 4-8 year
old vehicles)
Higher vehicle
complexity (Hybrid, EVs,
Autonomous/ADAS,
etc.)
Vehicle recall activity Increases in technician
headcount
April'22 April'21 April'20
39%
26%
19%
16%
34%
24%
11%
31%
46%
28%
26%
0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Availability (lack of) of
skilled technicians
Shift to electric vehicles
(fewer vehicle parts) and
over-the-air (OTA)
software updates
Declining new vehicle
sales, which means less
vehicles on the road over
time
Lower miles driven by
consumers due to a shift
in behavior for many
(shop, eat and work from
home)
April'22 April'21 April'20
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
73
F&I GPU
Higher penetration was cited as the biggest opportunity for continued GPU growth while interest rates starting
to rise again is the key long-term challenge, and negative consumer equity is a key concern in the medium
term
What do you view as the primary drivers of F&I GPU?
Source: . Morgan.
What are the biggest constraints/challenges you see
to F&I growth over the long term?
Source: . Morgan.
Are you concerned about negative consumer equity on vehicles sold during elevated
pricing environment over the past 6-9 months impacting consumer affordability in the
next purchase cycle?
Source: . Morgan.
37%
33%
17%
12%
35%
21%
19%
25%
39%
22%
18%
20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Higher penetration of
both finance, GAP
insurance & service
contract products
Higher average
transaction prices (which
means higher F&I
dollars)
Change in consumer
mindset to have a hassle-
free ownership of cars
Low interest rates
April'22 April'21 April'20
42%
22% 22%
14%
39%
27%
17% 17%
23%
40%
14%
23%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Interest rates start to rise
again
Potential for consumers
to shift to alternate
financing options outside
the dealership
Increasing average loan
terms
Saturation in penetration
levels of Financing, GAP
insurance and VSC
(Vehicle Service
Contracts) products
April'22 April'21 April'20
40%
47%
13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Yes, significantly concerned Yes, slightly concerned No concerns
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
74
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
Manufacturer-driven enhancements in order to prepare for surge in acceleration of EVs likely the key focus
areas of investment and spending in the near to medium term
Capex is expected to be up for the majority of the dealers in 2022
What are your expectations for overall store capital
expenditures (y/y spending change), INCLUDING
maintenance and refurbishment/renovation in 2022
but EXCLUDING new store openings?
Source: . Morgan.
What are your primary focus areas for investment (both
capital expenditures and SG&A) in the near to medium
term (next 1-2 years)?
Source: . Morgan.
25%
32%
18%
23%
1% 0% 1%
23%
20%
18%
34%
2% 3%
0%
0%
10%
20%
30%
40%
Up 10%+ Up 5-10% Up 0-5% Flat Down 0-5% Down 5-
10%
Down 10%+
April'22 April'21
36%
26%
24%
13%
30% 29%
27%
14%15%
20%
33% 33%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Manufacturer-driven
enhancements
(including in service
bays) to prepare for
surge in EVs and Hybrids
IT/digital infrastructure,
including areas like
inventory management,
sourcing, etc.
Advertising and
marketing expense
Expanding into omni-
channel for new and
used vehicle sales
April'22 April'21 April'20
75
Electrification trends
~50% dealers see “moderate” shift in consumer preference for EVs/hybrids (vs. ~34% in 2021), with ~10%
seeing “significant” shift (vs. ~4% in 2021), while ~40% see no change in consumer preference
Charging infrastructure/range anxiety cited the biggest bottleneck to EV uptake in the country
~95% of respondents expect to opt in for OEM EV brands requiring refurbishment and other investments/store
enhancements
What in your view are the key reasons for the lackluster uptake of Electric Vehicles (EVs) in the US?
Source: . Morgan.
35%
26%
12%
9%
8%
6%
4%
29%
24%
11%
15%
6% 7%
9%
26%
15%
8%
17%
9%
8%
16%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Charging infrastructure/Range
anxiety
Appropriate Pricing (for the
value)
Technological capabilities of
recent premium EVs vs Tesla
Consumer
awareness/education/mindset
Government subsidies Lack of multiple options to
choose from
Manufacturer marketing and
advertising strategies
April'22 April'21 April'20
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
76
Digital/online retail trends
See a likely permanent shift in consumer
willingness toward online vehicle purchases
~40% of respondents sell <1% of their vehicle with
just ~10% of respondents having online sales
penetration >10%
What % of vehicles you sell today are completely
online (minimal sales force involvement)?
For what % of your auction purchases/sales are
you using new upcoming digital auctions?
Source: . Morgan.
Note: Digital auctions include ACV Auctions, BacklotCars, CarOffer, etc.
Source: . Morgan.
Do you see the pandemic-induced shift in consumer
willingness to purchase vehicles completely online
without coming to the store as a permanent shift in
consumer behavior in terms of moving to online
shopping?
Source: . Morgan.
37%
31% 31%
40%
35%
24%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Yes, on-line penetration will
continue to grow
meaningfully
Yes, but it’s likely to hit a
saturation point
No, expect consumers to
move back to in-store
shopping
April'22 April'21
39%
37%
13% 11%
34%
37%
20%
9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
<1% 1-5% 5-10% >10%
April'22 April'21
57%
24%
7%
12%
50%
25%
10%
14%
0%
10%
20%
30%
40%
50%
60%
<10% 10-25% 25-50% >50%
April'22 April'21
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
77
Long-term industry opportunities — haggle-free pricing, digital capabilities and service capacity, higher
flexibility/efficiency in purchase process
What in your view are the key opportunities for dealerships to tackle industry changes longer term?
Source: . Morgan.
29%
27%
24%
14%
6%
27% 27%
24%
13%
9%
29%
19%
33%
12%
7%
0%
5%
10%
15%
20%
25%
30%
35%
Move to a more haggle-
free pricing model for
both new and used
vehicle sales in order to
attract consumers,
particularly millennials
Investing in digital
capability and service
capacity in order to tackle
more complex service and
parts replacement work
as the industry moves
towards electrified
vehicles
Provide higher flexibility,
more efficiently and
broader option set for
financing and insurance
products
Move to omni-channel
retailing to tackle pricing
and margin pressure
Opportunities to
participate and
collaborate with
Autonomous vehicle
ventures (like Waymo,
Cruise, Uber, Argo, etc.)
for servicing and parts
delivery (like the
Autonation/Waymo
collaboration)
April'22 April'21 April'20
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
78
Long-term industry challenges — near-term recession, move to direct-to-consumer selling, EVs/AVs, e-
commerce driven pricing pressure, F&I disruption
What potential challenges are you most concerned about over the longer term?
Source: . Morgan.
29%
25%
17%
10% 9%
8%
2%
23%
22%
17%
14%
11%
10%
4%
39%
10%
18%
10%
2%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
A potential near-term
recession in the US
Move to Direct-to-
Consumer selling
from OEMs –
Relaxation in
franchise dealership
laws in certain states
that would de-
emphasize the OEM-
dealer franchise
model altogether
Electrification and
advancement in
technology may
significantly lower
the number of shop
visits for repair and
service work at the
dealership
E-commerce driven
pricing pressure will
continue to impact
vehicle profitability
The move to
electrification and
subsequent pick-up
in sales for non-
legacy and direct-to-
consumer brands
(Tesla, Rivian, etc.)
may impact
dealership profits
longer term
Financing &
Insurance
commission might
get disrupted away
by new entrants and
new offerings in the
market, with
consumers
potentially opting for
alternate sources for
financing
Eventual adoption of
ride-share +
autonomous vehicles
may significantly
impact new vehicle
demand and shift the
mix of OEM sales to
fleet vs retail
April'22 April'21 April'20
. Morgan/Chase Auto Annual Dealership Survey (Cont’d)
79
Unit Economics Comparison Deep-Dive and Forecasts:
The Economics of Online vs. Brick & Mortar
80
GPUs vary significantly among franchise dealers, online-only and independents
We see a range of ~$800 to ~$3,800 used vehicle GPUs across key retailer models with different strategies
across each and at different levels of scale/investments/overhead expenses
We see that well-established legacy players like KMX and franchise dealers have higher retail GPUs than
upcoming online-only retailers that are still in the early stages of growth
Key components determining the differences in retail GPU include pricing, reconditioning costs, days supply
(including inbound logistics time/costs) and sourcing mix (retail vs. auction)
Estimated Used Retail GPUs (ex-Wholesale) Across Different Retail
Business Models in a Normalized Environment
Source: Company reports; . Morgan estimates.
$2,063
$806 $775
$1,197
$2,200
($642)
$3,408
$2,022 $2,018
$3,229
$3,800
$666
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
CarMax FY23E Vroom 2022E Shift 2022E Carvana 2022E Franchise
Dealers 2022E
Cazoo 2022E
Retail GPUs Front-end Retail GPUs including F&I
Unit Economics Comparison Deep-Dive and Forecasts
81
Differences in reconditioning approach: Centralized vs. hybrid vs. local
KMX employs a local approach and reconditions its vehicles to meet internal standards (“CarMax Quality
Certified”) and also engages third parties for specialized reconditioning services. Franchise dealers also
recondition vehicles at local & near
