Investors have witnessed slowing sales volumes at Penske Automotive Group (NYSE:PAG) for nearly a year as the market for new cars weakens. Yet the retailer has been able to offset that slump through a combination of spiking services and parts sales and a greater focus on used cars.

In its first-quarter report, Penske revealed that those positive trends have continued into fiscal 2018 while adding an encouraging uptick in profitability. Let's take a closer look.

Penske Automotive earnings

 Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$5.75 billion

$5.08 billion

13.1%

Net income

$108 million

$84 million

30%

Earnings per share

$1.26

$0.96

31%

Data source: Penske's financial filings.

What happened this quarter?

Penske's sales-volume growth declined for the fourth consecutive quarter, but revenue still sped up overall thanks to gains in other areas of the business. Profits soared with help from improving margins and a reduced tax burden.

A customer shops for hubcaps.

Image source: Getty Images.

A few key highlights of the quarter:

  • Unit sales of automobiles rose 6% compared to 7% last quarter and 10% in the prior quarter. That result included a 5% decline in new-car sales and an 18% spike in used-car volume.
  • Same-store sales improved 2.7% to maintain Penske's recent expansion pace. Revenue growth was particularly strong in the retailer's finance division and in its high-margin services and parts segment.
  • Penske offset a slight decline in gross margin per vehicle sale by logging higher finance and insurance profits.
  • Overall, gross profit improved at a slightly faster pace than sales. Expense growth was contained, too, which led to a 17% spike in operating income. Operating margin ticked up to 3.1% of sales from 3% a year ago.
  • Operating-profit gains combined with lower tax expenses to send net income higher by 30%, or about 23% after accounting for foreign currency swings.

What management had to say

Executives stressed the fact that Penske's diverse retailing operation powered broad gains during the period. 

Board chairman Roger Penske said in a press release: "The record results were driven by outstanding performance across each area of our business... A 6.4% increase in retail automotive unit sales, a 37.7% same-store retail revenue increase in the company's North American retail commercial truck business, the growth of the stand-alone used-vehicle supercenter operations, and the investment in Penske Truck Leasing contributed to the record first quarter." 

Penske also highlighted the improving profitability that he said demonstrates "the strong expense leverage our model is capable of producing."

Looking forward

Penske's growth plans call for continued expansion into the large but fragmented used-car segment. With help from recent acquisitions in the U.K. and Italy, its stand-alone used-vehicle supercenters produced $331 million in revenue this quarter, up from $143 million a year ago. Executives believe there's plenty of room for gains ahead because the market for used automobiles is many times larger than its new-car counterpart.

Meanwhile, its earnings outlook seems bright even though new-car volumes are sluggish and pricing remains pressured. Penske is enjoying healthy contributions from its services and parts segment and from its high-margin financing business. That growth, combined with falling costs and a reduced tax burden, could drive significantly higher profits for the retailer in 2018.