According to the results of our survey, demand for passenger and light truck replacement tires increased modestly in May. From a volume standpoint, the dealers reported they sold 0.8% more tires last month relative to the previous year’s period. Despite the fact that demand improved in May, sales trends were not significant enough to definitively change the narrative that demand trends have not met expectations for the first half of 2017, which included three consecutive months of negative volumes.
While the tax refunds normalized in April, it is worth mentioning that some respondents continued to speculate that the late tax season resulted in consumers allocating more of their tax refunds to other big-ticket items and less to car repairs and tires, which could explain why the industry did not experience a sharp recovery in sell-out trends in April or May.
Dealers were encouraged by the upswing in trends in May and many believe trends will continue to improve throughout the second half of the year. In fact, the majority of the dealers continue to speculate that underlying sales trends should benefit from a stronger consumer due to low energy costs and a solid labor market; favorable miles driven trends over the past 24 months; and an expanding car parc, especially the number of cars entering the first replacement cycle. That said, dealers are still unable to point to any specific cyclical or secular developments that might have been pressuring sell-out trends during the beginning of the year.
From a pricing perspective, promotional activity remained high during May after the poor results in April left dealers with an uncomfortable level of inventory. Recall that in March we estimated that industry-wide sell-in trends outpaced sell-out trends during the first months of the year, and flagged the risk that rising channel inventories could lead to higher promotional activity across the supply chain if volumes did not accelerate in April and May. This concern has manifested itself through the end of May as many dealers reported an uptick in volume-based promos upstream and rebates and price investments downstream. While the manufacturers continue to implement disciplined production schedules at domestic plants in order to control inventory levels downstream, we think the market needs to see an even bigger uptick in sell-out trends before the promotional activity moderates. Regardless what the future holds, we believe the dealer community will be able to offset any net cost pressures through their own price adjustments. In our opinion, operators who lead with a model that includes high quality of service at fair prices will be able to maintain their margin structure in this category, while those who sell on price alone will only opt to pass along the higher costs and neutralize the impact on gross profit.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the May 2017 survey are compared with those of May 2016.
Dealers still expect gains in 2Q17
According to the survey results, 33% of passenger and light truck tire dealers believe business will improve over the next six months, and none are worried trends will worsen. The rest of the respondents, 67%, felt business trends will stay about level. While the outlook of the dealers has fluctuated slightly over the past six months, we remain encouraged by the fact that none of the respondents expect trends to decline. The outlook for commercial truck tire demand was also positive, as 100% of the dealers we spoke with see the business improving in the coming months while none of the participants see business trends staying about the same or worsening.
Volume trends improved in May but high inventories remain a problem
According to dealer reports, consumer demand for passenger and light truck replacement tires increased in May compared to the prior year’s period. From a volume standpoint, the dealers reported they sold 0.8% more tires last month relative to the previous year’s period. May’s results are encouraging, but the positive performance is not a cure all for dealers after four consecutive months of weak volume trends. The improving results likely benefitted from the dissipation of headwinds associated with abnormal weather patterns in the spring and the delayed disbursement of tax refunds, in addition to the benefits of lower unemployment, low fuel prices, and an expanding car parc. Despite the lackluster results to start the year, we were encouraged that dealers still speculated volumes would increase going forward, as nearly all of them believe that there is some pent-up demand on the sidelines after a mixed 2016 and slow start to 2017.
Dealers reported mixed demand trends across the other tire categories in the period, with trends turning positive in the commercial truck category, and weaker results persisting in the retread channel. In fact, the dealers who responded to the survey reported medium truck replacement tire volumes increased 6.3% versus the prior year in May after flat results in April and March, while retread units were down 1.5%, continuing a stretch of declines, including five of the past six months.
Dealer costs were higher versus the prior year’s period; driven by increases in branded product’s pricing
The tire dealers who responded to the survey noted manufacturer pricing on value products was at about the same level as it was in the previous year’s period while branded products, on a net basis, increased 1%. It is important to remember that the first price increase in the channel (Goodyear’s) became effective in February 2017, with the majority of manufacturers following suit in March and April. We will monitor upstream pricing closely moving forward as we have heard promotional activity picked up in the second half of the month.
Inventory levels were too high in the PLT channel while uncertainty remains among commercial truck tire dealers
Of the dealers who responded to the survey, 33% of them noted that inventories at the end of the month were at an appropriate amount to satisfy demand (vs. 83% in April), while 67% noted that inventories were too high (vs. 17% in April), while none noted that inventories were too low (the same as in April). Some dealers indicated the weak sell-out trends year to date are partially responsible for inventories being too high at the end of the period, but manufacturers are doing a diligent job on managing the supply.
The responses regarding inventory levels among commercial truck tire dealers indicated more balanced inventories than we’ve seen over the previous few months, as 100% of those surveyed noted that they had the appropriate amount of inventory, none of respondents indicated inventory was too high, and none thought inventory was too low during the period. The net neutral results show inventories are balanced overall, but we believe the varying responses of the past few months can be directly tied to the mid-February ITC ruling, which determined that no anti-dumping/countervailing duties will be levied against Chinese TBR manufacturers. Keep in mind this ruling is being appealed by the USW and Pirelli. To this point, some dealers noted they are going to take advantage of the changing supply/demand dynamics and build up a safety stock in the event that the appeal is successful; however, uncertainty about future demand remains the prevailing sentiment.
Repair sales declined slightly year-over-year in May
The dealers who responded to the MTD survey indicated automotive repair sales trends deteriorated slightly in May which marks a change from the previous six months which saw increases in service revenues in five of the six months (February was flat). Specifically, these dealers indicated service sales, which accounted for a net 35% of total revenues, were down 2% on a year-over-year basis in May, which compared to increases of 5% or more from October through January, flat trends in February, and a 1.8% and 2% gain in March and April, respectively.
Nick Mitchell is managing director, research analyst, for Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.
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