The automotive industry's year-over-year sales numbers for the month of May aren't exactly heartwarming reading for investors. But, they need to be viewed in context, as May 2015 had a couple of extra selling days and a favorable five-weekend calendar quirk, which helped inflate its numbers, as many vehicles get sold on the weekends.
In part because of those issues, this May, sales were down 6.1% year over year, which was the U.S. auto industry's steepest decline in the past six years. Even worse was General Motors' (GM 0.01%) result -- a staggering 18% decline.
Is this finally the signal investors needed to bail on Detroit's largest automaker? Definitely not -- at least not based on the May sales decline. Here's why.
By the numbers
As a refresher, here are the sales statistics for General Motors' May. All four of GM's brands -- Chevrolet, GMC, Buick and Cadillac -- posted double-digit percentage sales declines. When looking at just retail sales, those to individual consumers, that total was also down 13.4% compared to the prior May. Zooming out and looking at the first five months of the year, GM's total sales are down 5%, but it managed to squeak out a meager 1.3% gain in retail sales.
Let's start with explaining part of the driving force behind May's decline, in addition to the tough comparisons the industry faces as a whole.
GM's Lordstown assembly plant. Image source: General Motors.
Though this year's earthquakes in Japan didn't make headlines as they did in 2011, there was indeed a smaller series of earthquakes there on April 14. Those earthquakes forced Toyota to shut down most of its factories in the country due to parts shortages, and that's not surprising given that Toyota is based in Japan. What might surprise you is that the earthquakes also negatively impacted General Motors' production at its Fairfax, Lordstown, and Spring Hill plants thanks to a shortage of certain parts. After commenting about the production issues, GM also noted that the current dealer inventories for launch products were roughly half of ideal levels. Now, it should be noted that this disruption had an impact on May's sales results, but it won't impact second-quarter results or full-year production rates -- it's just a small speed bump.
While the production and inventory speed bumps only impacted recent sales results, the full-year total sales decline of 5% has been driven by GM's change in retail strategy.
Fleet woes no more?
GM has made a policy choice to reduce its sales to rental fleets, widely accepted to be the least profitable of the three fleet channels -- the other two being commercial and government fleet sales. In fact, GM has reduced its sales to rental fleets this year by roughly 82,000 units. Hypothetically, had the automaker not chosen to reduce rental fleet sales to focus on profitability, its year-to-date sales tally would have flipped to a 1.8% increase rather than its actual 5% decline.
That reduction in rental fleet sales has also helped drive GM's fleet sales down to 21.6% of total sales for the year, a 490 basis point reduction from 26.5% during the same period last year. For comparison's sake, Ford Motor Co.'s (F -1.19%) fleet sales account for 34% of its overall sales during 2016 – a figure that is expected to decline closer to 30% throughout the year.
"Our incentives continue to be well below our domestic and many Asian competitors. Also, our rental reduction strategy is clearly divergent from our key competitors and it's playing a critical role in our efforts to strengthen our brands, improve our residual values and build the fundamental health of our business." said Kurt McNeil, U.S. vice president of sales operations, in a press release.
GM's full-size trucks continue to drive ATPs and profits higher. Image source: General Motors.
It's a strategy that appears to be paying off for GM, as its average transaction prices (ATPs), which reflect retail prices after sales incentives, were $35,722 last month -- almost $4,600 above the industry average. Further, its incentive spending as a percentage of ATPs was 9.8% last month, below the industry average of 10.6%.
How about that bottom line?
Despite sales declining throughout 2016, General Motors' focus on more profitable sales, especially at a time when sales of SUVs and full-size trucks are accelerating, has paid off for investors. Consider the automaker's first-quarter adjusted earnings-per-share was $1.26 compared to last year's $0.86, with a 130 basis point increase in EBIT-adjusted margin. Moreover, GM's return on invested capital (ROIC) continues to soar as it focuses on more profitable vehicles and consolidating platforms to cut costs; GM's ROIC moved from 19.5% during last year's first-quarter up to 28.5% in the recent first-quarter.
Now, to be fair, General Motors remains in a capital intensive industry, and the auto industry is one that Wall Street refuses to give a benefit of the doubt to as sales in the U.S. market approach a peak. But, if last month's 18% decline in sales has you anxious as a GM investor, it absolutely shouldn't, because in addition to the calendar quirk, the automaker's focus on reducing fleet sales has had a huge net benefit for investors.
