General Motors (NYSE:GM) said on Wednesday that its U.S. sales fell 3% in June, as strong retail results for the automaker's pickups and crossovers were more than offset by a planned decline in sales to rental-car fleets.
It's never good to see a drop in overall sales. But GM argues that it actually had a good month in June -- and looking past the headline, there are reasons to be encouraged.
GM is changing its fleet sales to boost profits
GM said its retail deliveries rose 7% year over year, and sales to commercial fleets were up 4%. But it lost ground in the overall sales race as a result of its decision to cut low-profit sales to rental-car companies, which were down 45% from last year.
Auto investors have come to hate the term "fleet sales". In the bad old days of Detroit, rental-car fleets were used as dumping grounds for excess production -- or, put another way, as a way for automakers to keep factories going at full speed (and sales numbers looking strong) despite weak retail demand.
It doesn't really work that way nowadays. But it's still true that sales to rental-car fleets aren't very profitable, and it's also true that all those rental cars coming to auction two or three years later hurt resale values. That in turn makes it harder for an automaker to offer competitive leasing deals, which hurts sales of new models.
General Motors, like other automakers, argues that some rental-fleet sales are a good thing. Rentals can be a way to expose strong products to new buyers who might rent one while on a business trip or vacation. But if an automaker makes too many rental-fleet sales, then profit margins and resale values suffer. That's why GM has been gradually reducing its sales to rental fleets. It plans to continue the reductions into 2016.
But not all fleet business is "bad." Both GM and rival Ford consider sales to government and commercial fleets to be good, profitable business, and they compete hard for it.
In recent months, GM has had an opportunity to gain ground on Ford in commercial-fleet sales. Pickups are a big part of sales to commercial fleets (think contractors, mining companies, and so forth), and supplies of Ford's new F-150 pickup have been very tight for months. Ford chose to prioritize retail sales, and that gave GM an opportunity to grab market share.
The upshot: Year to date through June, GM's sales to commercial fleets are up 20%, while sales to rental-car fleets are down 7%. Both trends will help boost GM's bottom line in North America.
GM has strong products in the sweet spots of the market
Demand for pickup trucks is strong. The full-size Chevy Silverado was new last year and sales rose 18% in June. Sales of its plusher sibling, the GMC Sierra, rose 21%. Want something a little smaller? The midsize Chevy Colorado and GMC Canyon are new for 2015, critics love them, and sales have been booming.
Crossovers? General Motors has some of the market's favorite models. The small-but-plush Buick Encore posted a 33% sales gain in June, while the bigger-and-plusher Cadillac SRX (a model in the last year of its life) gained 24% over a good year-ago result.
The small Buick Encore crossover has been a nice hit for GM. It's also a hit in Europe, where it is sold as the Opel Mokka. Source: General Motors.
Not all of the news is rosy. Like many of its rivals, GM's sedans have struggled as more buyers choose crossovers. That's both good and bad: While falling sales never look good, to the extent that GM has been able to retain those customers with (more profitable) crossovers and SUVs, it's a net win for the General.
And after months of gains, GM's big truck-based SUVs all saw sales fall back in June. That's worth watching: Those SUVs -- the Chevy Tahoe and Suburban, GMC Yukon, and Cadillac Escalade -- are exceptionally profitable products. But it could be a supply issue, as the Texas factory that builds the big SUVs is already working around the clock.
Despite the ups and downs, GM is moving in the right direction. Across the board, GM's average transaction prices ("ATPs") in June were about $34,000, a roughly $800 increase from a year ago. Year to date, they're up over $1,300, GM said on Wednesday. Meanwhile, GM's spending on incentives as a percentage of ATPs fell in the first half of 2015, while the overall industry's rose.
Long story short: Strong products that can be sold with fewer discounts lead to good profits.
The upshot: Good trends for profitability
It's a pleasant change for GM to have strong products in the market's hottest segments. It's also a big change for investors to hear GM executives talk about the need to reduce incentives and fleet sales in order to boost profitability -- and then to see that talk turning into action in the marketplace.
Despite the dip in the headline number, June was a pretty good month for GM. It bodes well for the General's second-quarter earnings report, due later this month. But more importantly, it lets us see that the bigger changes that CEO Mary Barra wants to impose on GM really are unfolding. That bodes very well for GM's prospects in a few years.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.