February 11, 2010 / 9:32 PM / in 8 years

WRAPUP 2-U.S. dealers see short-term hit from Toyota

 (For more on Toyota's recall and quality crisis, double-click
on [ID:nN27231388])
 * Dealership groups see Q1 hit on slower Toyota sales
 * Warranty revenue seen offsetting lost sales over 2010
 * Shares of AutoNation, Group 1 end lower
 (Recasts first sentence, adds analyst comment paragraph 11)
 By Kevin Krolicki and David Bailey
 DETROIT, Feb 11 (Reuters) - Toyota Motor Corp's 7203.T
safety recalls will hurt U.S. dealer sales in the first quarter
but payments from Toyota for the repairs will offset any dealer
losses over the rest of the year, two major U.S. auto
dealership groups said on Thursday.
 The comments from AutoNation Inc AN.N and Group 1
Automotive GPI.N marked the first time that two of Toyota's
major retail partners have detailed the financial impact on
dealers of the ongoing recalls by the Japanese automaker.
 Sales of Toyota and Lexus-brand sales accounted for 23
percent of AutoNation's first-quarter new car sales.
[ID:nN11228602] For Group 1 the total was 38 percent.
[ID:nN11210203]
 Toyota's ongoing recall and quality crisis has been seen as
a risk to both dealership groups. The automaker has recalled
more than 8.5 million vehicles for faulty brakes and
accelerator-related problems and faces criticism for its
handling of the crisis.
 The two recalls in the United States -- one for sticky
accelerator pedals and the other to address the risk that
floormats could trap the pedal -- have disrupted Toyota's sales
in its largest single market since late January.
 Shares of AutoNation ended 3 percent lower at $17.69 on the
New York Stock Exchange on Thursday, after falling as much as
4.2 percent. Group 1 shares closed 6.1 percent lower at $28.41,
after falling as much as 9.5 percent during the day.
 "Obviously the sales impact is right now," AutoNation Inc
AN.N Chief Executive Mike Jackson told analysts on a
conference call after the leading dealership group reported
quarterly results.
 "The recoupment of that will take more time and come over
the course of the next several quarters. I would say all in,
they probably offset each other. So for the year it's a
non-event," Jackson said.
 Earl Hesterberg, chief executive of Houston-based Group 1
Automotive GPI.N, also said he believed warranty claims would
offset the loss of new car sales.
 "I think over the long term that's likely to be the case,"
Hesterberg said in response to a question.
 JP Morgan analyst Himanshu Patel also said the impact on
Toyota sales from its recalls would be short in duration.     
"We think Toyota's recalls will affect its U.S. market share in
the near term, but they are unlikely to have a material impact
in the long term," Patel said in a note for clients on
Thursday.
 The Toyota recall for sticky accelerator pedals announced
in late January was the more disruptive of the two for dealers.
Dealers have been prohibited from delivering vehicles covered
by the recall to consumers until the cars have been fixed.
 Fort Lauderdale, Florida-based AutoNation said it expected
to have completed repairs on Toyota vehicles in its inventory
over the next week to 10 days. At one point, 56 percent of the
company's inventory of new Toyotas and 22 percent of the used
Toyotas it has for sale had been frozen by the recall.
 Hesterberg said the sales hold on Toyota vehicles under
recall represented about 20 percent of its new vehicle sales
and would be a drag on first-quarter results.
 "I would guess we lost two-plus weeks, if not three weeks,
of some pretty good volume Toyota sales," Hesterberg said.
 PROFITABLE REPAIRS
 U.S. new car sales have been in a four-year decline,
slumping to a 27-year low at 10.4 million vehicles in 2009.
 But major dealership groups have been sheltered during the
decline because parts and service generate far higher margins.
 At Group 1, for example, parts and service revenues cover
between 80 and 90 percent of fixed costs in a quarter.
 While the Toyota recalls will be costly for the automaker,
they will be profitable for dealerships, which will charge the
repair costs back to Toyota under warranty programs.
 For example, the metal shim that dealers will install in
Toyota accelerator pedals to keep them from sticking is a 15
cent part, Jackson said. The charge to Toyota for the repair is
about $70, he said.
 The cost of reshaping an accelerator pedal and the
surrounding area to address the floormat recall will be about
$250, Jackson said.
 Most of the cost of providing the repairs will be labor,
both dealership groups said.
 Group 1 reported a fourth-quarter operating profit broadly
in line with expectations. The company posted a net loss of $2
million, or 8 cents per share. Excluding one-time items, the
retailer had an operating profit of 43 cents per share, a penny
shy of analyst expectations as tracked by Thomson Reuters
I/B/E/S.
 AutoNation, which posted earnings that beat analyst
expectations for the fourth quarter on Thursday, said it
expected that the Toyota recalls would reduce first-quarter
earnings by less than a penny per share.
 Excluding one-time items, AutoNation reported earnings from
continuing operations of 29 cents per share. Analysts on
average expected 27 cents.
 "February will be a disrupted month from a sales point of
view," Jackson told Reuters in a telephone interview when asked
about Toyota.
 Sales should hit their "stride again in March, April and in
that period of time Toyota should have recovered the majority
of share it has lost during this disruptive period," he said.
 Jackson said he expected Toyota to "move aggressively" to
support new car sales once the recalls are completed.
 "The Toyota brand will not suffer any significant long-term
damage to its reputation for quality, safety and
dependability," he said.
 AutoNation and Group 1 both said they expected 2010 U.S.
industry-wide sales to recover to 11.5 million vehicles.
 (Reporting by Kevin Krolicki and David Bailey, editing by
Matthew Lewis)

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