Lookers — Strong performance continued through Q321

Lookers delivered a strong recovery in profitability in H121 against the pandemic disrupted H120, which saw extended showroom closures and lockdown restrictions that caused upheaval in car markets. While there were showroom closures in Q121 in the third national lockdown, click and collect and the development of the omnichannel offering allowed a greater level of transaction completion, with aftersales services operating more normally. The H120 figures were restated to reflect the adjustments to the reported H120 results consistent with the adjustments made in the FY20 audited results and applied to the H121 unaudited results. The key highlights were:

Used car and aftersales segments contributed around 71% of group gross profits, aided by their normally higher-margin business dynamics and boosted in H121 by the exceptional strength of used car values, which are persisting in H221. While the inflated used car performance may persist into FY22, we expect sales values to moderate as supply chain issues are resolved and the proportion of used and aftersales gross profit to return to historical norms below 70%.

Despite the Q121 lockdown and increasing supply issues as the half progressed, Lookers continued to outperform both new and used car markets. H121 new car sales grew 46% to £1.0bn with used car sales rising 36% and the aftersales segment recovering by 30%. Group gross margin increased significantly to 12.0% (Q120: 10.3%), reflecting higher margins in new and used car transactions as well as an improvement in the aftersales segment. The small leasing business also increased its gross profit contribution, although the margin fell by 100bps to 11.1%.

As comparatives are inflated by the very depressed situation seen in H120, it is encouraging that Lookers’ new car performance continues to outperform UK car registrations, increasing market share to 6.7%. The UK new car market recovered strongly in H121 with a year-on-year increase in registrations of 39.2%. Within that, the retail new car market rose 30.6% and the fleet market by 47.3%.

Lookers benefited from the continued investment in its omnichannel offering and improved efficiency in its operational processes. The ability to continue to deliver cars on a click and collect basis in Q121 allowed volumes to be better maintained. The return to more normal trading in Q221 compared to very depressed trading volumes during Q220, when there was almost total lockdown in the UK including all showrooms being closed. Lookers’ retail unit volumes rose 46.4% to 27,589 vehicles with fleet unit sales up 42.7% to 23,062, delivering an overall increase of 44.7%. With average selling prices up modestly at £20.3k, the improved margin performance was apparent in the 55.8% improvement in gross profit to £66.6m (H120: £42.7m), a 7.7% increase in gross profit per unit (GPU) to £1,315. The tightness of supply that intensified as the half progressed meant sales discounts were considerably reduced.

The UK used car market saw an unprecedented increase in selling prices as demand, which after falling by around 1.5% in Q121, started to rise from April, with Q321 average selling prices up by around 3% year-on-year. Demand was stimulated by a switch by some frustrated consumers from new to high-quality used cars, which added to the continued shift to private from public transport as people progressively returned to normal work patterns. Lookers’ improved online presentation and enhanced operational controls also facilitated the exceptional performance. Lookers’ used unit volumes rose 33.9% to 46,380, underpinning the revenue increase of 35.7% to £1,045m (H120: £770.3m). Gross profit more than doubled to £89.8m (H120: £43.5m) with gross margins up 295bps to an exceptional 8.6%. GPU was up 54.2% to £1,935 (H120: £1,255), but that only tells half the story. The Q121 GPU was £1,603 but the rise in selling prices saw that increase to £2,171 in Q221, which compares to a pre-pandemic level averaging around £1,400.

Aftersales delivered 30.4% revenue growth to £211.4m (H120: £162.1m) and 33.9% gross profit year-on-year growth to £92.4m (H120 £69.0m), boosting gross profit margin by 115bp to 43.7%. Compared to the sales segments, the comparatives for aftersales are against a period when there were higher levels of activity as during the first lockdown most operations remained open to service key workers vehicles. The company continues to invest to improve processes and digitalise the aftersales offering, which together with efforts to increase service plan penetration is helping to improve customer retention. Management believes these factors will prove increasingly important as the UK vehicle market continues the transition to electric vehicles over the next decade.

The favourable mix of trading conditions in car markets continued through Q321, despite the intensifying supply constraints as the global semiconductor shortage disrupts production at car manufacturers. Delivery lead times for new cars are extending, with margins strong and at unprecedented levels in the used car segment leading to further strengthening of the already excellent profit performance despite lower volumes. The new car supply constraints caused by production cuts are reflected in UK new car registrations. These fell 34% year-on-year in September 2021 and by 31% in Q321 versus Q320, when sales benefited from the release of pent-up demand following the end of the first national lockdown. Used car market volumes were also reduced but were again facing a strong comparison for Q320 exacerbating the tighter availability of product. Used car selling prices continued to rise sharply through Q321, increasing by an average of 12.7%, and have progressively risen by an unprecedented 26.3% in the last seven months.

Lookers again outperformed the new car market by 3% but saw used car unit sales drop 17% against the tough prior year comparison as supply remained constrained. The volume declines were offset by strong margin performance. High-margin aftermarket sales remained more robust, with sales less than 4% down on Q320. The continued focus on cash management and liquidity left Q321 adjusted net cash (excluding leases) at around £30.0m (Q320 adjusted net debt: £25.9m). As previously announced, Lookers has now repaid all of the £4.1m CJRS (furlough support) payments received in FY21.

Supply constraints continue and, while there may be a few green shoots of recovery in production volumes, seem likely to persist into FY22. While there is no certainty as to when trading conditions will normalise, we expect margins to moderate in FY22 as car supply improves, but underlying demand appears to be healthy as UK buyers adjust to the post lockdown economy. We expect profitability to return to more usual levels next year and growth to resume in FY23. With a strong opening new car order bank above normalised levels, the demand side of the market appears robust, but supply issues may well defer some of these.

Lookers management indicated in the Q321 trading statement on 6 October 2021 that it expects underlying PBT to be materially ahead of its previous expectations and thus market consensus at the time, and we have adjusted our FY21 estimates to reflect the continuation of the exceptionally strong trading performance, especially for used vehicles. As we expect the environment to moderate in FY22, we expect a return to more usual margin levels and our forecast remains little changed except for the improved adjusted net debt arising from the FY21 trading.