Pent-up demand should lead to decent volumes throughout the selling season
According to the results of our survey, demand for replacement tires remained somewhat encouraging in October. Indeed, from a volume standpoint the dealers reported that they sold 0.8% more tires last month on a year-over-year basis, following a 1.2% increase in September and a 0.1% increase in August.
We were pleased to see that volume trends remained positive for the ninth consecutive month, as dealers indicated that consumers appear to be allocating a greater portion of their income to tire and automotive repairs during this fall/winter selling season in an attempt to catch-up on work that was deferred in prior months.
In our view, the data support our belief that the underlying fundamentals remain healthy and that consumer demand should remain fairly strong in the coming months.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the October 2014 survey are compared with those of October 2013.
Dealers remain upbeat about sales trends
According to the MTD dealer survey, 75% of passenger tire dealers believe business will improve over the next six months, while 25% believe it will stay about level. Meanwhile, 88% of the truck tire dealers we surveyed see business improving, and 12% believe it will stay about level.
Volume trends remained positive in October
According to our survey, consumer demand for replacement tires remained positive in October. As we stated, the dealers reported that they sold 0.8% more tires last month on a year-over-year basis, following the 1.2% increase reported in September and a 0.1% increase in August. Volumes remained positive for the ninth consecutive month and we believe that the abundance of pent-up demand should lead to decent volumes throughout the 2014-2015 winter selling season despite tougher comparisons from last year’s harsh winter. Trends remained strong in the truck category as the dealers reported that volumes increased 4.3% after increasing 7.3% in September. Volumes fell slightly in the retread business after increasing 5.0% in September.
Dealer costs and retail prices were roughly flat
Survey respondents noted that manufacturer pricing on branded and value tires was relatively stable in October. During September we hypothesized a portion of the decline in manufacturer pricing may have been due to the fact that Chinese manufacturers offered significant volume rebates during the period to right-size their inventories ahead of a potential tariff on Chinese passenger tires imported into the U.S. Despite the event-driven (i.e. potential tariff) pricing pressure on value tires that occurred during September, we believe that pricing in the aggregate market stabilized somewhat in October, as evidenced by the healthy trends in manufacturer pricing of both branded and value tires.
Inventories seen as too high
Nearly 38% of dealers indicated that they had the appropriate amount of inventory in stock for demand (vs. almost 63% in September), while about 62% indicated that inventory levels were too high and none indicated that levels were too low. Almost 50% of the truck tire dealers we surveyed indicated that they had the appropriate amount of inventory (vs. close to 88% in September and 88% in August), while about 38% indicated that inventory levels were too high and some 12% indicated levels were too low. We should note that many wholesalers and dealers imported additional Chinese inventory ahead of the potential tariff.
Vehicle repair sales remain healthy
We were encouraged to see that service sales remained strong during October as the dealers indicated that consumers appear to be allocating a greater portion of their income to auto repairs during this fall/winter selling season in an attempt to catch-up on work that was deferred in prior months. Sales in the service category, which accounted for 26% of the study participants’ total revenues, were up roughly 2% on a year-over-year basis in October following an increase of roughly 8% in September. ■
Nick Mitchell is a research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.
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