Throughout the last year, DaimlerChrysler (NYSE:DCX) has been the one bright spot among the big three American automakers. Its designs, including the Dodge Durango and Chrysler 300, have been big hits with consumers. It even managed to produce a tough station wagon in the Dodge Magnum. In its latest quarter, though, DaimlerChrysler had a pretty rough road, particularly when you factor in some big expenses.
For the first quarter the company reported operating profit of $814 million. That's down an enormous 59% compared to the $2 billion operating profit it reported in the first quarter of 2004. However, excluding charges from its Smart car product line, operating profits totaled $1.85 billion. That's still a decrease, but it's a much more manageable 7.7% decrease.
Net income was negatively impacted by $664 million as a result of Smart, to end at $374 million, or $0.36 per share, compared to $534 million, or $0.53 per share in the first quarter of 2004.
DaimlerChrysler increased worldwide auto sales by 1%, or 1.1 million cars, in the quarter. However, the appreciation of the euro against the dollar decreased revenues by 2%. Its Mercedes division stumbled to an operating loss of $1.2 billion, compared to a year-ago operating profit of $829 million. While there was a plethora of reasons for the loss, including an unfavorable model mix and higher raw material costs, the main culprit was the Smart business model, which counted $1 billion against the division.
Since it's obviously having such a huge impact, let me take a minute to briefly explain what this Smart brand is all about. In short, it's simply a mini-car, which has lost money since it made its debut in 1998. In the company's latest plans for Smart, fixed costs are to be reduced by 30% within the next two years, and productivity will be boosted. The company anticipates Smart will break even by 2007.
In the quarter, the Chrysler group increased retail sales by 5%, but unit sales (factory shipments) decreased by 3%. As a result of the decrease in unit sales and the appreciation of the euro, first-quarter revenues fell 7% and operating profit was down 16.8% to $327 million.
The automobile market will remain extremely competitive throughout 2005, so DaimlerChrysler will be fortunate if it can improve sales or profits much at all. Add to that its restructuring costs related to its Smart program, and I'd advise shareholders to exercise patience with DaimlerChrysler. It certainly has innovative designs that will continue to perform well, but it's not enough to overcome the above-mentioned factors, plus higher material costs and interest rates.
Fool contributor Mike Cianciolo welcomes feedback. He doesn't own shares of DaimlerChrysler.
