Anyone with a lot of debt is going to struggle – that’s why this stock is a sellout
Along with this, would-be car buyers are facing the worst cost of living crisis in a generation, a crisis that has already caused the lowest level of consumer confidence since records began in 1974. In many cases, increasingly cash-strapped consumers are likely to postpone or avoid the luxury of changing out their current car unless absolutely necessary.
In this context, the car retailer Lookers appears vulnerable. Its recent half-year results showed that new and used car sales accounted for 61% of gross profit. Given that nearly half of its used car sales were to customers who paid by financing, it wouldn’t be surprising if its financial performance came under severe pressure as interest rates rise. In the coming months.
The company also faces a significant threat related to structural changes within the automotive retail industry. Online disruptors like Cazoo are increasingly looking to digitize the used car buying process by offering money-back guarantees instead of test drives.
Meanwhile, major auto brands are seeking to exclude dealerships from selling new cars. Volvo, for example, aims to sell all of its vehicles online by 2030. If others follow suit, Lookers’ new car segment could face terminal decline.
Rising costs don’t just affect its customers. The company’s latest half-year results showed payroll costs rose by £8.6m year-on-year, partly due to labor shortages. Higher utility bills contributed to a further £4.1 million increase in operating expenses over the same period.
Overall, Lookers’ underlying operating expenses were 8.6% higher than the prior year. Further increases seem almost inevitable and are likely to act as a formidable drag on margins.