Half-year trade update results were roughly in-line with what I would expect. Revenues up sharply (+30%) from new store openings, overall market share gains continue in the 0-4 year old market, and NPS remains at an absurdly high 84.
Pre-tax profits came in much below last year, but that is to be expected. As mentioned in the full write-up, Motorpoint's expenses are elevated throughout this heightened investment period where they are continue to open multiple new stores per year, and market themselves more aggressively than they have historically. I probably made a mistake in the write-up in mentioning that Motorpoint should generate 10-15mm per year in profits until FY24 end. In reality, there is too much noise occurring until these store openings end to really predict interim earnings.
And the most important item here is still what will Motorpoint be generating in profits five years from now, when the heightened expense go away, and new stores have had time to mature. My thoughts there have not changed - still think in five years a ~1.5% after-tax margin is likely on revenue of 2.2bn+.
And since I never want to be the guy who can only blindly promote his investment ideas, I will say I obviously could be wrong on my estimates. But at the current valuation, I think the margin of safety we have is huge. Could still make decent returns if ending margins are much below my guess.
When the more detailed half-year results are released tomorrow, I'll consider doing a new "update" write-up if there are enough new things to be said. If not, I'll at least provide an update when the full FY results are released next year.
I like the write up. I have been studying Motorpoint for some time now. There are a couple of things that I am interested in:
They fired 8% of their workforce ( 70 people) in 2023 H1.
Mgmt. didn't seem to make a big point of this. Which I found a bit strange.
What I find especially interesting is how little has been written about the financing aspect of the business (not just you :). But nobody seems to look at this). In 2022 more than 59% of their gross profit originated from commissions on finance/warranty. They received £63m in commission vs £106m gross profit.
If you look at 2023 H1: financing and warranty penetration increased, but gross profit decreased.
So, I think they actually didn’t make any profit selling the cars.
It's also quite though to find details about the warranty deal they are providing. Do they have any warranty risk or do they just take a commission? I am mainly talking about the product "Extended Guarantee".
Their floor planning is immensely important. In AR 2022 they indicated that they had £176m in interest bearing liabilities. A move of 0.5% would increase interest cost by £ 0.9m. In 2022 they paid £1.5m in interest on their stocking facility. Which seems very low imo. UK 1Y gilts are yielding 3.99%. The rise in interest rates will make it much more expensive for them to operate with the current floor planning. The majority of their floor planning is also provided by Black Horse. Which could get hit badly (they are operating with 7% equity). They are highly dependable on a financing partner.
Financing is also important when it comes to MOTR's customers. MOTR is depending a lot on Black Horse for income (commissions) and stock financing. On the flipside, the customers financed by Black horse probably represent about 8% ( 1 billion pounds ) of Black Horse’s portfolio. (this is a guess) Black Horse has a loan portfolio of 12 billion.
The rise in car values over the last 2 years can't last forever. In the end used car prices have to get more in line with depreciation. So, values have to drop. As they have taken in cars at elevated prices, this has to to taper off. MOTR has very high inventory turns, so they won't be hit as badly as others. But, it will hit them nevertheless. Look at the used Tesla problems they are facing.
These are the issues I am seeing right now. I don't think this year is going to be particularly good for MOTR. I would be surprised if they won't face some serieus constraints.
1) -8% FTE reduction in 1H23 – I view this reduction as a prudent action for a business selling less units. Compared to change in units sold in 1H23, down -8% (YoY) as well, so the two figures match pretty closely as you would expect to some degree.
2) Metal margin (margin they receive solely from selling the car) vs. non-metal margin (finance commissions) – this has been discussed elsewhere and it is something I have discussed with management. But for the sake of keeping the article “short”, I left it out. I think the changing metal margin dynamics are interesting, but ultimately not as important probably as some people believe.
The reason I say this is, that according to management, Motorpoint is basically seeking to get the best all-in deal for the customer. Meaning, as Motorpoint receives more per car from finance commissions, they can charge less for the car itself (metal margin), while ultimately getting the same “all-in” 7-8% gross margin that they have historically.
To put numbers behind this, around the FY14-FY16 timeframe, Motorpoint was getting a ~4.0% metal margin, with metal margin accounting for 50-55% of total gross margin. As finance penetration increased, even pre-COVID, metal’s % composition of total gross margin fell to 38-40%. Meanwhile, Motorpoint also was able to receive lower metal margins (in the low-3% range vs. the previous ~4%). And over this time period, overall gross margin % actually increased (climbing from low-7% to high-7% range), meaning they did not pass 100% of the benefit on to customers. But, this is all a long-winded way of saying, Motorpoint can charge less for the actual car if they are going to get more in commission. And if commissions were to decrease (for whatever hypothetical reason), Motorpoint would just seek to get more on the metal margin again. It’s all a balancing act of trade-offs but the overall gross margin should be fairly steady over time.
Of course, right now, there is a lot of noise in Motorpoint’s gross margin mainly to (1) Motorpoint keeping APRs lower, which means they are receiving less finance commissions, and (2) falling used car prices.
Based on their 1H23 interim results, I calculate a ~1.5% metal margin. Not sure where you got the negative figure from.
3) Extended warranty is 100% commission.
4) Agreed, floorplan financing is essential for any car dealer business to run. In addition to Black Horse they also have a floorplan facility with Lombard North Central. Outside the two floorplan providers, management mentioned to me (very recently) that they continue to have ongoing discussions with other floorplan providers who they believe would be “keen” to provide financing to Motorpoint.
5) Agreed, car prices in the UK will fall and have been, that is partly why Motorpoint’s gross margin was weak this year. UK used car prices have gone up a bit recently as the new car shortage has seemingly turned into a used car shortage to some extent. Regardless, my guess is as good as yours on future UK used car prices, and I’m sure they will gradually come down to some extent. Although historically, Motorpoint always seem to adjust intelligently. For example, if you go on their website, Motorpoint only has 5 Teslas in their entire inventory currently.
6) Agreed, Motorpoint is very likely to have another weak fiscal year – but partly by choice. As mentioned, they continue to keep APRs lower than competitors to give customers the best deal, which lowers commissions, and eats into gross margin. They also continue to run marketing spend at above normal rates (although management says they can turn this off quickly if the economic environment worsens). And, newly opened branches do not normally reach profitability until Year 2, with most of the recently opened branches reaching year 2 between October 2023 and October 2024. So it seems next year (meaning, calendar year 2024) will likely be the “inflection point”, especially as those new branches reach profitability.
Management seems comfortable continuing with this lower profitability investment period despite the economic environment. The CEO, Mark Carpenter, has the highest of reputational risk and financial risk (very low salary compared to his MOTR stock ownership) involved here. I also read him as a very realistic guy, but it will be a very interesting next year or two.
As mentioned in the previous comment, once the full fiscal year annual report is released, I’ll write an update article.
Wondered if you had any updated thoughts now that the annual report is out? They have gone from 12 to 20 stores in the last 3.25 years and a number of the new stores will still be loss making. Your Todd Combs quote comes to mind "Walmart $WMT did not generate earnings or cash flow for over a decade while they were growing, but a look at the store unit economics led to the true story and foreshadowed what the picture would look like in the future.”
Very fair question. Carpenter does have a large stake and lower salary. Obviously we do not know his overall financial position, but seems likely the Motorpoint position represents a very high percentage of his net worth. Due to that, I can understand why he would be hesitant to commit more money, no matter the price.
But regarding the CFO, Executive Chairman, and others, I am surprised buying has not occurred recently. As their current stakes in the company are much smaller.
I think the punch-line for the MOTR situation is when they finally chose to "step on the gas pedal" and push their business model more aggressively (mainly via opening new stores) they ran into the perfect economic storm (higher interest rates caused by high inflation, lower unit sales caused by inflationary weak economic environment, "APR price war" impacting financing commissions, drastically declining EV prices, etc.). Had they chosen to exceed their 1 store opening per year threshold in almost any other year, and the losses from new stores / strategic investment spend would be less noticeable.
I also think they shifted the business model too much to customer, to the detriment of the shareholder. To Mark Carpenter's credit, he seems to acknowledge this.
- Said how price comparisons show they are well-underpricing their cars versus competition in some cases. Working to price cars better now and not give as much away.
- Mentioned in the 1H23 update how they do not want to get much higher in NPS, as then they would be giving too much value away. Anything >=80 is good acceptable for them now
- Raised APRs quietly to 11.9% around the time of the earnings release when Cazoo/Cinch were still at 10.9%. Raises their financing commission per vehicle sold
- Increased auction fees at Auction4Cars. Were well underpricing the competition in this business previously.
The above actions, along with a moderation in the severe EV price decline should all help gross margins going forward. Pre-COVID, MOTR was a 7-8% gross margin business with 5-6% in overheard, and 0.1-0.3% in finance costs (lease+interest). In 2H23, the business ran at 5.7% gross margin, 5.5% SG&A, and 0.6% finance costs. Again, the above pricing actions should help gross margin and further cost cutting along with new stores slowly maturing should help lower SG&A/revenue. Historically (key word), new Motorpoint stores reached breakeven in Year 2. Many new stores will enter Year 2 during this calendar year of 2023. Lower overall strategic investment spend should help too. Additional unit sales will also help lower SG&A/revenue via operating leverage, as the supply of nearly new cars increases. But the demand will need to be there as well.
Of course finance costs will continue to be a headwind, which means FY24 will likely be another tough year for MOTR. From a short-term profitability viewpoint, I like to think about Motorpoint from a breakeven gross margin standpoint. If you assume 5.3-5.5% SG&A/revenue and ~1% of interest/revenue, that implies a required gross margin of 6.3-6.5%.
From a longer-term standpoint, if the APR price war abates and supply (and demand) for nearly new cars increases, I do not see why Motorpoint cannot more than justify their current valuation.
In full disclosure, I did sell a portion of my position. From a worst case scenario view, I worried about the following environment: severe downturn which causes severe declines in used car prices, coupled with sticky inflation and therefore still high interest rates. Were that to occur during Motorpoint's current weakened position, I do think it gets murky on the exact outcome for them. Due to that, I felt more comfortable with a smaller position. As I've mentioned before, I think Mark Carpenter has the highest of financial (very high stock ownership in relation to salary) and reputational risk here but that does necessarily guarantee anything.
***Here is my checklist for Motorpoint's FY24. Basically the important items I want to track split between what is controllable and what is not controllable***
Semi-Controllable #1 – SG&A – Can they lower cost base further (SG&A/revenue) despite loss-making new stores and depressed sales environment?
-Need to see progress on decline in strategic investments
- Should mean much lower SG&A spend if they spent 6mm in FY23 on “strategic investments”
- Also should see lower SG&A from the “further headcount reduction” the CEO mentioned on the call
Semi-Controllable #2 – Gross Margin / Rationalize pricing in retail & A4C – Can they increase GM towards the current interest-rate adjusted breakeven GM% = ~6.3%-6.5%?
- Assumes 5.5% SG&A (assumes SG&A is not brought down further) + ~0.8-1.0% interest/revenue
- This upward growth should not be too difficult for the following reasons:
- Do not have the elevated 2-2.5mm of EV depreciation that they experienced in 4Q23
- Increasing retail prices since they realized they were well underpriced versus competition
- Increasing A4C wholesale fees since they also realized they were well underpriced vs. competition
- Also think their recent digitization of certain processes in A4C can increase margins from faster turns and therefore less “held depreciation”
- Continuing to not try to lead in APR “price war”, as they seem to have taken a step back from pricing with Cazoo/Cinch at 10.9% (MOTR at 11.9% at time of earnings release)
Non-Controllable Potential Negatives -
- Higher interest rates and how long they sustain
- Deep recession
- Falling used car prices dampening GM and un-levering SG&A/revenue
Thanks for this detailed response. I can't really add anything.
I have added to my position significantly at current prices, but I only used a little over half my spare cash. The reason I didn't invest all my cash is that at the end of the day this is a retailer and not only that it is a car retailer and cars are cyclical. But I think if I had seen some insider buying I would have gone all in.
As you say, the CEO likely has the majority of his net worth in the company so no surprises if he doesn't buy any shares, but the CFO and other directors could buy some you would think. It is true that with the low share price and the CEO and CFO being awarded the full value of possible stock awards, they have just been awarded a lot of options so maybe the CFO figures he has just increased his position significantly and he doesn't need to use his own money to buy more.
I noticed they had increased prices at auction4cars but hadn't noticed the increased APR's. I had a look at autotrader today and checked just one of Motorpoint's branches compared to how they were priced through FY23. This little bit of data maybe suggests they have increased prices compared to competitors:
- it seems that mr market and UK institutions & investors more generally e.g investment funds, pensions, individual investment professionals - continue to ignore the growth engine that is being developed at motorpoint, combined with continued grabbing of market share online & offline as well as the metronome revenue/sales growth
- let us not mention the cashflow generation (now and in future) or the share-buybacks that are about to resume (curiously no-one seems to have picked up on this resolution that was passed at their recent AGM) i.e let's pretend they don't exist even though they are clearly two large tailwinds being ignored as catalysts
- most 'analysis' i have seen seems to bleat on about e.g vertu motors and how much superior a company and investment it is, since it is asset-backed and the share price has momentum behind it. which clearly shows these people have fundamentally misunderstood motorpoint's actual business model
- it is a seller of nearly-new cars (you might say...motors huehuehue) along with financing, that deliberately aims for extremely rapid turnover and customer satisfaction to the point of being a detriment to their margins and profits all while opening new sites to create a flywheel effect (hmm, this sounds familiar...oh! it's the costco model)
- alternatively, the analysis will be some meme take that since STONK price go high and motorpoint's has been in decline for 2 years straight it is therefore an awful, unsustainable business that only succeeded due to the pandemic boosting everything (you must ofc ignore the fact that motorpoint has been going 25+ years as a business)
- now, it took a combination of inflation, EV price cuts & a finance e.g API war to make a dent in their gross profits/margins and push them into a loss this year. management has recognised this, alongside recognising that they were, effectively, being 'too nice' to their customers and giving away too much in terms of price
- but fundamentally: each 1% margin = £15m pure profit. you have 20+ stores and growing, w/ new stores paying-back in 2-3 years (for context this is on the levels of domino's pizza payback time, which is why they kicked the shit out of mcd's, pizza hut etc).
- quick napkin maths shows they generated £23m of free-cash flow in FY23. currently the equity in the business is valued at...£78m
completely obvious, right there in front of you, yet no-one seems to notice
would welcome your thoughts + half-yearly update thoughts!
Thank you for the kind words. On the half-year update, I am eager to see the detailed figures that will come out in a month or so.
But based on the summary first half report they recently issued, the improvement in losses from Q1 to Q2 is obviously good to see. I think the second half of this fiscal year will be very important from a financial results standpoint. At that point, they will have a few quarters working to correct the controllable issues in the business. Although headwinds definitely remain, I will be concerned if they do not report a profit over that second half timeframe. Maturing new stores producing less losses (and possibly some turning profitable by then) plus the corrective pricing actions should go a long way.
I do think the business has changed. They recently reported going into 5 year old cars. Pre-pandemic, they were 0-2 year focused, then switched to 0-4 to get more product and now 0-5. Nearly new cars (0-2) require less refurbishment and therefore can be turned quickly. Older cars require more time/cost to fix, which will impact inventory turnover - one of the “defining” metrics of Motorpoint pre-pandemic. Going into five year old cars gives them more product to sell and helps from an operating leverage standpoint. But, it does mean the business has changed. Other used car supermarkets make selling a broader base of aged cars work well, so no reason Motorpoint cannot do so as well. I just think investors (myself included) need to be careful still viewing them as pre-2020 Motorpoint.
yes, figures should be coming out in the next week or two i think?
- well their control of costs has always been incredible, even before they went public. and heh, pre-2020 they still had a dividend! on that note incidentally, i hope they do not bring it back...their focus is (and should remain) on buy-backs to delete the share-count. but that is IMO ofc. the new(er) stores coming online will really start to help throw off the cash here
- but yes, you are correct. there has been a slight widening of the age/vintage of cars they are turning over. i also do not see it as a bad thing since the UK car dealership market is still massively fragmented & regionalised (though less so than it was) which means a lot of market share to gobble up
- so: more product turnover, more happy customers, more stores, more £££££, more re-investment! again, it's the costco model, yet i have not once seen any analyst or firm pick up on this...
I have been delving into research on Big Motoring World (Big), a non-publicly listed car supermarket that has been growing faster and notably has been profitable unlike Motorpoint in recent times. One significant difference is that Big doesn't focus on nearly new cars which may be an advantage to them at this point in time.
I've conducted a comparative analysis of the prices at my local branches for Big and Motorpoint (I'd post an image of my figures here if I could). Motorpoint in Castleford is pricing lower than they do nationally and this means they are a little lower than Big in Leeds. Big has a much larger range, 868 vs 220.
I also compared the financial performance over the last two years and the two years prior to COVID. I chose to include the two years prior to COVID as they might be considered more normal years
Big is growing faster, and while Motorpoint may have lower costs of sales, its administrative expenses as a percentage of revenue are notably higher, 2% on average. This has raised questions for me, especially considering Motorpoint's reputation as an efficient and low-cost operator in the industry.
I should have added in CY22 and CY21 Admin plus interest expenses per car for Big were £833 and £750 respectively. The same numbers for FY23 and FY22 for MOTR were £962 and £868 respectively.
I’ve looked at Big Motoring World too. They seem to be benefiting from two main factors: (1) focus on older vehicles than MOTR, where more supply currently exists, and (2) charge much higher finance rates with a reputation for aggressive/pushy finance sales.
If you look at their figures, they actually have a negative metal margin and only make money on their finance sales (which makes me understand why the pushy culture…). Despite this they have done well as you mention.
Eventually the lack of car supply will hit Big’s older vehicle segment too as it is hitting MOTR’s newer used segment now. And I do wonder if the pushy sales tactics will hurt them in the long run. I like MOTR’s focus on getting the best deal for the customer, although they may have veered too much in that direction. Encouraging to see them re-focus on better pricing and metal margins in the recent financials.
Separately, I recently spoke with management and they mentioned doing some larger deals with fleets to get supply. Pre-COVID, fleet supply was a core part of their business model, helping reduce costly auction vehicles (and fees). Should help gross margins via lower buying costs.
Supply issues will heal slowly but interest rates are the most important variable here effecting both consumer demand and stock financing costs.
As mentioned previously, I sold much of my position in June as I’m still not sure how MOTR fares in a deep recession given its weakened state. In the long run, they may do very well again (much longer discussion on that than I want to get into now) but I find it difficult to know whether they reach that “long run”. Even under a scenario with no recession, rates may still remain somewhat elevated hurting margins and demand keeping them exposed to economic shocks. So I’ll though i retain a position in MOTR it’s almost not material. Just wanted to reiterate all this in the sake of full disclosure.
Interesting, thanks. I hadn't spotted their negative metal margin and good to hear about fleet coming back.
I looked at BMG's website and 12.8% of their stock is under 2 years old. 58.4% of their stock is 2-4 years old. 14.6% is 5 years old. 14.2% is over 5 years old.
Although they may have a pushy culture they score as highly as Motorpoint on Trustpilot. Both companies are rated at 4.6.
Enjoyed the post.
Any updated thoughts on the back of the trade update?
Half-year trade update results were roughly in-line with what I would expect. Revenues up sharply (+30%) from new store openings, overall market share gains continue in the 0-4 year old market, and NPS remains at an absurdly high 84.
Pre-tax profits came in much below last year, but that is to be expected. As mentioned in the full write-up, Motorpoint's expenses are elevated throughout this heightened investment period where they are continue to open multiple new stores per year, and market themselves more aggressively than they have historically. I probably made a mistake in the write-up in mentioning that Motorpoint should generate 10-15mm per year in profits until FY24 end. In reality, there is too much noise occurring until these store openings end to really predict interim earnings.
And the most important item here is still what will Motorpoint be generating in profits five years from now, when the heightened expense go away, and new stores have had time to mature. My thoughts there have not changed - still think in five years a ~1.5% after-tax margin is likely on revenue of 2.2bn+.
And since I never want to be the guy who can only blindly promote his investment ideas, I will say I obviously could be wrong on my estimates. But at the current valuation, I think the margin of safety we have is huge. Could still make decent returns if ending margins are much below my guess.
When the more detailed half-year results are released tomorrow, I'll consider doing a new "update" write-up if there are enough new things to be said. If not, I'll at least provide an update when the full FY results are released next year.
Thanks
I like the write up. I have been studying Motorpoint for some time now. There are a couple of things that I am interested in:
They fired 8% of their workforce ( 70 people) in 2023 H1.
Mgmt. didn't seem to make a big point of this. Which I found a bit strange.
What I find especially interesting is how little has been written about the financing aspect of the business (not just you :). But nobody seems to look at this). In 2022 more than 59% of their gross profit originated from commissions on finance/warranty. They received £63m in commission vs £106m gross profit.
If you look at 2023 H1: financing and warranty penetration increased, but gross profit decreased.
So, I think they actually didn’t make any profit selling the cars.
It's also quite though to find details about the warranty deal they are providing. Do they have any warranty risk or do they just take a commission? I am mainly talking about the product "Extended Guarantee".
Their floor planning is immensely important. In AR 2022 they indicated that they had £176m in interest bearing liabilities. A move of 0.5% would increase interest cost by £ 0.9m. In 2022 they paid £1.5m in interest on their stocking facility. Which seems very low imo. UK 1Y gilts are yielding 3.99%. The rise in interest rates will make it much more expensive for them to operate with the current floor planning. The majority of their floor planning is also provided by Black Horse. Which could get hit badly (they are operating with 7% equity). They are highly dependable on a financing partner.
Financing is also important when it comes to MOTR's customers. MOTR is depending a lot on Black Horse for income (commissions) and stock financing. On the flipside, the customers financed by Black horse probably represent about 8% ( 1 billion pounds ) of Black Horse’s portfolio. (this is a guess) Black Horse has a loan portfolio of 12 billion.
The rise in car values over the last 2 years can't last forever. In the end used car prices have to get more in line with depreciation. So, values have to drop. As they have taken in cars at elevated prices, this has to to taper off. MOTR has very high inventory turns, so they won't be hit as badly as others. But, it will hit them nevertheless. Look at the used Tesla problems they are facing.
These are the issues I am seeing right now. I don't think this year is going to be particularly good for MOTR. I would be surprised if they won't face some serieus constraints.
No input?
1) -8% FTE reduction in 1H23 – I view this reduction as a prudent action for a business selling less units. Compared to change in units sold in 1H23, down -8% (YoY) as well, so the two figures match pretty closely as you would expect to some degree.
2) Metal margin (margin they receive solely from selling the car) vs. non-metal margin (finance commissions) – this has been discussed elsewhere and it is something I have discussed with management. But for the sake of keeping the article “short”, I left it out. I think the changing metal margin dynamics are interesting, but ultimately not as important probably as some people believe.
The reason I say this is, that according to management, Motorpoint is basically seeking to get the best all-in deal for the customer. Meaning, as Motorpoint receives more per car from finance commissions, they can charge less for the car itself (metal margin), while ultimately getting the same “all-in” 7-8% gross margin that they have historically.
To put numbers behind this, around the FY14-FY16 timeframe, Motorpoint was getting a ~4.0% metal margin, with metal margin accounting for 50-55% of total gross margin. As finance penetration increased, even pre-COVID, metal’s % composition of total gross margin fell to 38-40%. Meanwhile, Motorpoint also was able to receive lower metal margins (in the low-3% range vs. the previous ~4%). And over this time period, overall gross margin % actually increased (climbing from low-7% to high-7% range), meaning they did not pass 100% of the benefit on to customers. But, this is all a long-winded way of saying, Motorpoint can charge less for the actual car if they are going to get more in commission. And if commissions were to decrease (for whatever hypothetical reason), Motorpoint would just seek to get more on the metal margin again. It’s all a balancing act of trade-offs but the overall gross margin should be fairly steady over time.
Of course, right now, there is a lot of noise in Motorpoint’s gross margin mainly to (1) Motorpoint keeping APRs lower, which means they are receiving less finance commissions, and (2) falling used car prices.
Based on their 1H23 interim results, I calculate a ~1.5% metal margin. Not sure where you got the negative figure from.
3) Extended warranty is 100% commission.
4) Agreed, floorplan financing is essential for any car dealer business to run. In addition to Black Horse they also have a floorplan facility with Lombard North Central. Outside the two floorplan providers, management mentioned to me (very recently) that they continue to have ongoing discussions with other floorplan providers who they believe would be “keen” to provide financing to Motorpoint.
5) Agreed, car prices in the UK will fall and have been, that is partly why Motorpoint’s gross margin was weak this year. UK used car prices have gone up a bit recently as the new car shortage has seemingly turned into a used car shortage to some extent. Regardless, my guess is as good as yours on future UK used car prices, and I’m sure they will gradually come down to some extent. Although historically, Motorpoint always seem to adjust intelligently. For example, if you go on their website, Motorpoint only has 5 Teslas in their entire inventory currently.
6) Agreed, Motorpoint is very likely to have another weak fiscal year – but partly by choice. As mentioned, they continue to keep APRs lower than competitors to give customers the best deal, which lowers commissions, and eats into gross margin. They also continue to run marketing spend at above normal rates (although management says they can turn this off quickly if the economic environment worsens). And, newly opened branches do not normally reach profitability until Year 2, with most of the recently opened branches reaching year 2 between October 2023 and October 2024. So it seems next year (meaning, calendar year 2024) will likely be the “inflection point”, especially as those new branches reach profitability.
Management seems comfortable continuing with this lower profitability investment period despite the economic environment. The CEO, Mark Carpenter, has the highest of reputational risk and financial risk (very low salary compared to his MOTR stock ownership) involved here. I also read him as a very realistic guy, but it will be a very interesting next year or two.
As mentioned in the previous comment, once the full fiscal year annual report is released, I’ll write an update article.
Thanks.
I recently listened to this interview: https://inpractise.com/articles/uk-used-car-market-competitive-landscape
Wondered if you had any updated thoughts now that the annual report is out? They have gone from 12 to 20 stores in the last 3.25 years and a number of the new stores will still be loss making. Your Todd Combs quote comes to mind "Walmart $WMT did not generate earnings or cash flow for over a decade while they were growing, but a look at the store unit economics led to the true story and foreshadowed what the picture would look like in the future.”
I wonder why management aren't buying any shares at these prices.
Very fair question. Carpenter does have a large stake and lower salary. Obviously we do not know his overall financial position, but seems likely the Motorpoint position represents a very high percentage of his net worth. Due to that, I can understand why he would be hesitant to commit more money, no matter the price.
But regarding the CFO, Executive Chairman, and others, I am surprised buying has not occurred recently. As their current stakes in the company are much smaller.
I think the punch-line for the MOTR situation is when they finally chose to "step on the gas pedal" and push their business model more aggressively (mainly via opening new stores) they ran into the perfect economic storm (higher interest rates caused by high inflation, lower unit sales caused by inflationary weak economic environment, "APR price war" impacting financing commissions, drastically declining EV prices, etc.). Had they chosen to exceed their 1 store opening per year threshold in almost any other year, and the losses from new stores / strategic investment spend would be less noticeable.
I also think they shifted the business model too much to customer, to the detriment of the shareholder. To Mark Carpenter's credit, he seems to acknowledge this.
- Said how price comparisons show they are well-underpricing their cars versus competition in some cases. Working to price cars better now and not give as much away.
- Mentioned in the 1H23 update how they do not want to get much higher in NPS, as then they would be giving too much value away. Anything >=80 is good acceptable for them now
- Raised APRs quietly to 11.9% around the time of the earnings release when Cazoo/Cinch were still at 10.9%. Raises their financing commission per vehicle sold
- Increased auction fees at Auction4Cars. Were well underpricing the competition in this business previously.
The above actions, along with a moderation in the severe EV price decline should all help gross margins going forward. Pre-COVID, MOTR was a 7-8% gross margin business with 5-6% in overheard, and 0.1-0.3% in finance costs (lease+interest). In 2H23, the business ran at 5.7% gross margin, 5.5% SG&A, and 0.6% finance costs. Again, the above pricing actions should help gross margin and further cost cutting along with new stores slowly maturing should help lower SG&A/revenue. Historically (key word), new Motorpoint stores reached breakeven in Year 2. Many new stores will enter Year 2 during this calendar year of 2023. Lower overall strategic investment spend should help too. Additional unit sales will also help lower SG&A/revenue via operating leverage, as the supply of nearly new cars increases. But the demand will need to be there as well.
Of course finance costs will continue to be a headwind, which means FY24 will likely be another tough year for MOTR. From a short-term profitability viewpoint, I like to think about Motorpoint from a breakeven gross margin standpoint. If you assume 5.3-5.5% SG&A/revenue and ~1% of interest/revenue, that implies a required gross margin of 6.3-6.5%.
From a longer-term standpoint, if the APR price war abates and supply (and demand) for nearly new cars increases, I do not see why Motorpoint cannot more than justify their current valuation.
In full disclosure, I did sell a portion of my position. From a worst case scenario view, I worried about the following environment: severe downturn which causes severe declines in used car prices, coupled with sticky inflation and therefore still high interest rates. Were that to occur during Motorpoint's current weakened position, I do think it gets murky on the exact outcome for them. Due to that, I felt more comfortable with a smaller position. As I've mentioned before, I think Mark Carpenter has the highest of financial (very high stock ownership in relation to salary) and reputational risk here but that does necessarily guarantee anything.
***Here is my checklist for Motorpoint's FY24. Basically the important items I want to track split between what is controllable and what is not controllable***
Semi-Controllable #1 – SG&A – Can they lower cost base further (SG&A/revenue) despite loss-making new stores and depressed sales environment?
-Need to see progress on decline in strategic investments
- Should mean much lower SG&A spend if they spent 6mm in FY23 on “strategic investments”
- Also should see lower SG&A from the “further headcount reduction” the CEO mentioned on the call
Semi-Controllable #2 – Gross Margin / Rationalize pricing in retail & A4C – Can they increase GM towards the current interest-rate adjusted breakeven GM% = ~6.3%-6.5%?
- Assumes 5.5% SG&A (assumes SG&A is not brought down further) + ~0.8-1.0% interest/revenue
- This upward growth should not be too difficult for the following reasons:
- Do not have the elevated 2-2.5mm of EV depreciation that they experienced in 4Q23
- Increasing retail prices since they realized they were well underpriced versus competition
- Increasing A4C wholesale fees since they also realized they were well underpriced vs. competition
- Also think their recent digitization of certain processes in A4C can increase margins from faster turns and therefore less “held depreciation”
- Continuing to not try to lead in APR “price war”, as they seem to have taken a step back from pricing with Cazoo/Cinch at 10.9% (MOTR at 11.9% at time of earnings release)
Non-Controllable Potential Negatives -
- Higher interest rates and how long they sustain
- Deep recession
- Falling used car prices dampening GM and un-levering SG&A/revenue
Thanks for this detailed response. I can't really add anything.
I have added to my position significantly at current prices, but I only used a little over half my spare cash. The reason I didn't invest all my cash is that at the end of the day this is a retailer and not only that it is a car retailer and cars are cyclical. But I think if I had seen some insider buying I would have gone all in.
As you say, the CEO likely has the majority of his net worth in the company so no surprises if he doesn't buy any shares, but the CFO and other directors could buy some you would think. It is true that with the low share price and the CEO and CFO being awarded the full value of possible stock awards, they have just been awarded a lot of options so maybe the CFO figures he has just increased his position significantly and he doesn't need to use his own money to buy more.
I noticed they had increased prices at auction4cars but hadn't noticed the increased APR's. I had a look at autotrader today and checked just one of Motorpoint's branches compared to how they were priced through FY23. This little bit of data maybe suggests they have increased prices compared to competitors:
FY23 Presentation stats cover FY23, Castleford Branch 21/7/23 %
Lower, 13.1%, 9.9%
Great, 37%, 30.6%
Good, 49.4%, 59.5%
Fair, 0.5%, 0.0%
excellent write up, have subscribed! a few points
- it seems that mr market and UK institutions & investors more generally e.g investment funds, pensions, individual investment professionals - continue to ignore the growth engine that is being developed at motorpoint, combined with continued grabbing of market share online & offline as well as the metronome revenue/sales growth
- let us not mention the cashflow generation (now and in future) or the share-buybacks that are about to resume (curiously no-one seems to have picked up on this resolution that was passed at their recent AGM) i.e let's pretend they don't exist even though they are clearly two large tailwinds being ignored as catalysts
- most 'analysis' i have seen seems to bleat on about e.g vertu motors and how much superior a company and investment it is, since it is asset-backed and the share price has momentum behind it. which clearly shows these people have fundamentally misunderstood motorpoint's actual business model
- it is a seller of nearly-new cars (you might say...motors huehuehue) along with financing, that deliberately aims for extremely rapid turnover and customer satisfaction to the point of being a detriment to their margins and profits all while opening new sites to create a flywheel effect (hmm, this sounds familiar...oh! it's the costco model)
- alternatively, the analysis will be some meme take that since STONK price go high and motorpoint's has been in decline for 2 years straight it is therefore an awful, unsustainable business that only succeeded due to the pandemic boosting everything (you must ofc ignore the fact that motorpoint has been going 25+ years as a business)
- now, it took a combination of inflation, EV price cuts & a finance e.g API war to make a dent in their gross profits/margins and push them into a loss this year. management has recognised this, alongside recognising that they were, effectively, being 'too nice' to their customers and giving away too much in terms of price
- but fundamentally: each 1% margin = £15m pure profit. you have 20+ stores and growing, w/ new stores paying-back in 2-3 years (for context this is on the levels of domino's pizza payback time, which is why they kicked the shit out of mcd's, pizza hut etc).
- quick napkin maths shows they generated £23m of free-cash flow in FY23. currently the equity in the business is valued at...£78m
completely obvious, right there in front of you, yet no-one seems to notice
would welcome your thoughts + half-yearly update thoughts!
Thank you for the kind words. On the half-year update, I am eager to see the detailed figures that will come out in a month or so.
But based on the summary first half report they recently issued, the improvement in losses from Q1 to Q2 is obviously good to see. I think the second half of this fiscal year will be very important from a financial results standpoint. At that point, they will have a few quarters working to correct the controllable issues in the business. Although headwinds definitely remain, I will be concerned if they do not report a profit over that second half timeframe. Maturing new stores producing less losses (and possibly some turning profitable by then) plus the corrective pricing actions should go a long way.
I do think the business has changed. They recently reported going into 5 year old cars. Pre-pandemic, they were 0-2 year focused, then switched to 0-4 to get more product and now 0-5. Nearly new cars (0-2) require less refurbishment and therefore can be turned quickly. Older cars require more time/cost to fix, which will impact inventory turnover - one of the “defining” metrics of Motorpoint pre-pandemic. Going into five year old cars gives them more product to sell and helps from an operating leverage standpoint. But, it does mean the business has changed. Other used car supermarkets make selling a broader base of aged cars work well, so no reason Motorpoint cannot do so as well. I just think investors (myself included) need to be careful still viewing them as pre-2020 Motorpoint.
yes, figures should be coming out in the next week or two i think?
- well their control of costs has always been incredible, even before they went public. and heh, pre-2020 they still had a dividend! on that note incidentally, i hope they do not bring it back...their focus is (and should remain) on buy-backs to delete the share-count. but that is IMO ofc. the new(er) stores coming online will really start to help throw off the cash here
- but yes, you are correct. there has been a slight widening of the age/vintage of cars they are turning over. i also do not see it as a bad thing since the UK car dealership market is still massively fragmented & regionalised (though less so than it was) which means a lot of market share to gobble up
- so: more product turnover, more happy customers, more stores, more £££££, more re-investment! again, it's the costco model, yet i have not once seen any analyst or firm pick up on this...
I have been delving into research on Big Motoring World (Big), a non-publicly listed car supermarket that has been growing faster and notably has been profitable unlike Motorpoint in recent times. One significant difference is that Big doesn't focus on nearly new cars which may be an advantage to them at this point in time.
I've conducted a comparative analysis of the prices at my local branches for Big and Motorpoint (I'd post an image of my figures here if I could). Motorpoint in Castleford is pricing lower than they do nationally and this means they are a little lower than Big in Leeds. Big has a much larger range, 868 vs 220.
I also compared the financial performance over the last two years and the two years prior to COVID. I chose to include the two years prior to COVID as they might be considered more normal years
Big is growing faster, and while Motorpoint may have lower costs of sales, its administrative expenses as a percentage of revenue are notably higher, 2% on average. This has raised questions for me, especially considering Motorpoint's reputation as an efficient and low-cost operator in the industry.
I should have added in CY22 and CY21 Admin plus interest expenses per car for Big were £833 and £750 respectively. The same numbers for FY23 and FY22 for MOTR were £962 and £868 respectively.
I’ve looked at Big Motoring World too. They seem to be benefiting from two main factors: (1) focus on older vehicles than MOTR, where more supply currently exists, and (2) charge much higher finance rates with a reputation for aggressive/pushy finance sales.
If you look at their figures, they actually have a negative metal margin and only make money on their finance sales (which makes me understand why the pushy culture…). Despite this they have done well as you mention.
Eventually the lack of car supply will hit Big’s older vehicle segment too as it is hitting MOTR’s newer used segment now. And I do wonder if the pushy sales tactics will hurt them in the long run. I like MOTR’s focus on getting the best deal for the customer, although they may have veered too much in that direction. Encouraging to see them re-focus on better pricing and metal margins in the recent financials.
Separately, I recently spoke with management and they mentioned doing some larger deals with fleets to get supply. Pre-COVID, fleet supply was a core part of their business model, helping reduce costly auction vehicles (and fees). Should help gross margins via lower buying costs.
Supply issues will heal slowly but interest rates are the most important variable here effecting both consumer demand and stock financing costs.
As mentioned previously, I sold much of my position in June as I’m still not sure how MOTR fares in a deep recession given its weakened state. In the long run, they may do very well again (much longer discussion on that than I want to get into now) but I find it difficult to know whether they reach that “long run”. Even under a scenario with no recession, rates may still remain somewhat elevated hurting margins and demand keeping them exposed to economic shocks. So I’ll though i retain a position in MOTR it’s almost not material. Just wanted to reiterate all this in the sake of full disclosure.
Interesting, thanks. I hadn't spotted their negative metal margin and good to hear about fleet coming back.
I looked at BMG's website and 12.8% of their stock is under 2 years old. 58.4% of their stock is 2-4 years old. 14.6% is 5 years old. 14.2% is over 5 years old.
Although they may have a pushy culture they score as highly as Motorpoint on Trustpilot. Both companies are rated at 4.6.