Ford (NYSE: F ) said on Wednesday that its U.S. sales were up 0.4% in August over year-ago totals.
That beat Wall Street expectations, as analysts surveyed by Bloomberg had forecast a 1.2% decline. But it trailed the overall U.S. market's gain of about 5%.
Analysts had expected year-over-year sales gains to be modest last month, which had one fewer "selling day" than August 2013. ("Selling days" exclude Sundays and holidays, when many U.S. dealers are closed.)
It's not a big surprise that Ford beat expectations in a month when many of its peers did likewise. But Ford has trailed the overall market several times in recent months. What's going on?
There are two separate reasons that Ford's sales growth isn't as impressive as it might be -- and they're both important for the automaker's investors to understand.
Cutting back fleet sales, but not all fleet sales
The good news for Ford was quite good. Overall sales of the Explorer rose 25%, and sales of the C-Max hybrid spiked by 15.5%. And retail sales of the Fusion and Escape were both up 23% over strong year-ago results.
But overall sales, including fleet sales, were less impressive for some models: The Escape was up just 8.5%, while sales of the subcompact Fiesta were actually down 17%.
What's that about?
It's about this: Ford says it is deliberately reducing its sales to rental-car companies.
"Fleet sales" are often spoken of as a negative when it comes to Detroit automakers, but some kinds of fleet sales are much better than others. Ford actively pursues commercial-vehicle sales (lots of Ford's pickups and vans are sold to businesses) and government sales (all those Ford police vehicles, for starters).
Ford officials say that those kinds of fleet sales are solidly profitable business that the company actively pursues. But daily rental fleet sales are more of a mixed bag.
Sales to rental car fleets have a bad reputation among some investors, for a couple of reasons. First, historically, Detroit automakers used rental car companies as a kind of dumping ground for excess inventory, selling off big lots of vehicles at deep discounts. That made their sales numbers look better, but it hurt profits. The dumping part is less true today, but it's still true that sales to rental fleets have much lower profit margins than retail sales.
Rental fleet sales also hurt resale values: All those vehicles end up on the used-car market after a couple of years. Why do new-car makers care about used-car prices? Because it affects their lease offers: Leasing has become much more popular in recent years, and the price of a lease is based on a vehicle's "residual value," which is an expectation of what the new vehicle will be worth at the end of the lease.
By reducing its rental fleet sales, Ford increases the percentage of its overall sales that are (more profitable) retail sales, while also helping its credit arm offer more attractive leasing deals to those retail customers. It's a win-win.
So why sell any rental cars at all?
So why does Ford do any rental car fleet sales at all?
Ford says some level of daily rental sales is still a good thing, because it gives people who might not ordinarily try a Ford product a taste of the company's much-improved quality. And daily rental fleet sales remain a profitable business.
But the company has resolved to do less of them, and it has been rolling them back for several months. Daily rental fleet sales were just 4% of Ford's total U.S. sales in August. For the year to date, they represent 10% of the company's total U.S. sales, down from 12% through the same period last year.
There's one other factor that is probably part of Ford's thinking here: making the most of the company's production capacity. At times, supplies of some vehicles -- the Fusion, the Explorer, the Focus -- have been constrained, with factories maxed out. When supplies are fixed and demand is strong, allocating a larger percentage of production to (higher-profit) retail sales over (lower-profit) daily rental fleet sales just makes sense.
The 2015 F-150 is already impacting Ford's sales growth
The other factor putting a damper on Ford's sales growth has to do with pickups, specifically the complicated overhauls that Ford needs to do in its two pickup factories in order to start producing the all-new 2015 F-150.
As you probably know, the all-new F-150 has aluminum body panels. Making aluminum-bodied vehicles requires different tooling and processes than Ford typically uses for its steel-bodied vehicles. That means that Ford's two pickup-truck factories need elaborate changes in order to make the new F-150s. And that means that they'll each be closed for an extended period, so Ford won't be able to make as many pickups this year as it would like. In fact, Ford's Dearborn, Michigan, pickup factory has already stopped producing 2014 F-150s; it was closed last month, and renovations have already begun.
Ford North America chief Joe Hinrichs has said that the company will lose 90,000 units of production as a result of the changeovers. That in turn means Ford intends to sell fewer pickups in 2014 than it might have otherwise.
How is it deliberately reducing sales of America's most popular pickup? By reducing its incentives, which are a big factor in the full-size pickup market. Ford officials said on Wednesday that its pickup incentives were down about $650 in August from year-ago levels.
The upshot: Watch Ford's profits, not just its sales
Ford's U.S. sales gains have lagged the market for several months, for both reasons cited above. But its profits in North America in the second quarter were very strong, thanks to a focus on high-profit retail sales and good discipline around incentives, especially on the F-Series pickups.
As long as Ford's profits in the region continue to be strong, its subdued sales results (which may well continue for several months) shouldn't be a source of worry for investors.