Despite obstacles, dealers remain optimistic about near-term tire demand
After suffering through a seesaw January, where dealers saw the benefits of winter weather to start the month offset by weak trends in the final weeks of the period, our survey respondents reported that business improved in February.
While the year-over-year increase that the dealers in our survey reported was modest, to say the least, the fact that they reported an increase of any magnitude is impressive in its own right. As we all know, there have been a lot of exogenous factors weighing on consumer spending of late; however, these macro pains were particularly acute in February.
For example, fuel prices rose 10.2% in February over prices at the pump in January, which meant that the average cost of a gallon of gas for a consumer filling their tank was 2.6% more expensive this year. Additionally, the Internal Revenue Service (IRS) is paying tax refunds much later this year as a result of delays brought about by the eleventh hour fiscal cliff resolution, which resulted in a significant reduction in the amount of refunds disbursed to consumers in February. Further, consumers were bombarded with media coverage of the sequester and the burden that looming cuts could impose on their budget. All of which occurred amidst the backdrop of higher payroll taxes due to the lapsed payroll tax holiday. In short, consumers had a lot on their plate last month, which doesn’t necessarily leave a lot of room for tire purchases.
In spite all of the obstacles that consumers are facing, dealers reported a modest improvement in business results and retained their cheery disposition about near-term demand trends. While we do not consider ourselves the type of people to get overcome with exuberance, March could have the makings of a very good month — irrespective of the ongoing headwind related to the higher payroll taxes. Indeed, gas prices have moderated and are now lower year-over-year, the sequester is no longer dominating headlines, the IRS is catching up on its refund disbursements, and Mother Nature seemed to help the cause with the unusually late winter weather that graced many parts of the country in March. It’s still too early to call, but things could get interesting in our March wrap-up.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the February 2013 survey are compared with those of February 2012.
General outlook: dealers expressed optimism
According to our dealer survey, 46% of passenger tire dealers believed business would improve over the next six months with another 31% believing it would stay about the same. Twenty-three percent felt business would worsen.
Meanwhile, 36% of the truck tire dealers we spoke with saw business improving and 46% believed that business trends would stay about the same. The rest, 18%, felt business would worsen. All in all, we would characterize the collective outlook of dealers as optimistic.
New tire sales: modest improvement seen
According to dealer reports, business trends picked up slightly in February following a lackluster January. Specifically, dealers reported that passenger replacement tire sales rose 0.1% year-over-year, compared to a 0.9% decline in January.
Unfortunately, this pick-up was largely limited to passenger tires as dealers indicated that sales of truck tires and retreads remained weak. Indeed, truck tire dealers indicated that units were down 2% (vs. 1.5% in Jan.), while retread dealers noted unit sales declined 1.0% (vs. 3.0% in Jan.).
Tire selling prices and tire costs: selling prices stable
Fifty-eight percent of passenger tire dealers indicated that manufacturer pricing had been more aggressive (vs. 65% in January), while 50% of truck tire dealers believed manufacturer tire prices were aggressive (vs. 77% in January). As it relates to cost, dealers noted that their cost for premium brand tires in February was essentially flat with January, while tires in the value spectrum dropped 1.0%. On the sales side of the equation, premium passenger tire prices were unchanged in February, while value tires fell 1.0%.
Inventories: still too much inventory
Forty-six percent of passenger tire dealers believed inventories were too high (vs. 40% in January), while the rest believed inventory levels were just right (50% last month). Meanwhile, 36% of the truck tire dealers we surveyed indicated that inventories were too high (vs. 12% last month), while the rest thought they were just right (vs. 78% in January).
We were surprised to still see so many dealers note that they had too much product for demand in light of the improved sales results that they reported and considering their reluctance to add to inventory.
Service revenues: levels held steady
In February, service work was consistent with the levels we recorded in January as dealers noted that this category, which accounted for roughly 37% of the total revenues of the respondents in our study, was flat year-over-year. In our view, the lackluster service results are an indication that consumers are still hurting for cash and looking to avoid nonessential vehicle expenses. ■
John Healy and Nick Mitchell are research analysts with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy and Mitchell cover a variety of subsectors of the automotive industry.