General Motors (NYSE: GM ) has a pickup problem. For the first time since 2007, the company is revamping its full-size-truck architecture. GM executives hope that an improved pickup lineup will eventually allow GM to overtake industry leader Ford's (NYSE: F ) F-150 series in sales.
The switch from the older GMT900 truck architecture to the new K2XX architecture involves a complex rolling changeover of GM's three pickup plants. The company plans a total of 10 weeks of downtime at those plants over the next few months as they switch to 2014 model year production. Over the past year, GM has built up its full-size-pickup inventories so that it will have enough 2013 models to sell until 2014 models start arriving at dealers. However, management has had trouble keeping inventories at just the right level.
The big three American automakers rely heavily on pickup sales to generate profits. A fully equipped pickup can produce as much as $10,000 of profit per vehicle, far more than a passenger car. However, this assumes that incentives are kept at a moderate level. When the 2014 model year trucks arrive this summer, it will become increasingly difficult to sell the previous generation models without resorting to heavy discounting. On the other hand, GM will have trouble driving sales of the new trucks if 2013 models are sitting in the same showrooms for $5,000-$10,000 less.
A similar problem happened in November. That month, GM saw an unexpected year-over-year decline in truck sales. Management blamed the weakness on having a higher proportion of 2013 models than competitors. Competitors were offering high incentives to clear 2012 inventory, which dampened demand for GM's trucks.
A dangerous game
Last Friday, GM announced strong truck sales for the month of January. Nevertheless, full-size-truck inventories increased by over 12,000 units sequentially, to 234,342 units. This represented 117 days of supply, up from 80 days of supply at the end of December. Despite the inventory increase, on the accompanying conference call, management claimed that inventory and production schedules were "in the middle of the fairway" compared to plans.
However, February is a weaker sales month. GM sold 43,603 combined Silverado and Sierra pickups in February 2012, when sales benefited from an extra day (Feb. 29th) and the industry sales rate was unseasonably high. GM will have a hard time replicating the strong growth it saw in January without resorting to higher incentives. With the new truck launch approaching, GM cannot afford another unexpected spike in inventory.
More broadly, GM's high pickup inventory level creates significant risks for the company's 2013 profitability. If any unexpected development hurts demand for GM's pickups, high inventories of the 2013 models will affect the launch of the new models, as discussed earlier. For example, competitors could ramp up incentive spending as they did in late-2012. Lower consumer confidence could impact sales in the next few months. Lastly, Toyota (NYSE: TM ) is launching its redesigned Tundra pickup at the Chicago Auto Show this month. Given the recent weakening of the yen (which makes U.S. sales more profitable for Toyota), Toyota could move to price the new truck aggressively in order to gain market share.
It is possible that none of these scenarios will materialize. However, until GM completes its pickup transition this year, the stock will be subject to an elevated level of risk, due to the potential for "hiccups."
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