General Motors Co. (GM) stocked Jim Ellis Chevrolet in Atlanta with plenty of Silverado full-size pickups in early 2011, part of a wager on a strong economic recovery. The strategy is backfiring.
“We thought that this year would bring back the kind of economic activity that would translate into us selling more trucks,” Mark Frost, the dealership’s general manager, said in a phone interview. “It’s not happening.”
Supply of Silverado has ballooned to 6 1/2 months worth at the dealership, a figure Frost, 52, calls “a little scary.” The Detroit-based automaker, 33 percent owned by the U.S. after its 2009 bankruptcy, has 280,000 Silverado and GMC Sierra pickups on dealers’ lots around the country. If sales continue at June’s rate, that would be enough to last until November.
After GM’s truck inventory swelled to 122 days worth of average sales, the company said 100 to 110 will be normal going forward for such a large and complex line of vehicles, compared with 60 to 70 days for most models. Peter Nesvold, a Jefferies & Co. analyst, isn’t convinced. Ford Motor Co. (F), which makes similar trucks, is running at 79 days, and Nesvold says GM averaged 78 days on hand at year end from 2002 to 2010.
“It’s unbelievable that after this huge taxpayer bailout and the bankruptcy that we’re right back to where we were,” Nesvold, who has a “hold” rating on the stock, said in a telephone interview. “There’s no credibility.” In a research note he asked: “Is GM falling into old, bad habits?”
Managing the Business
“Unequivocally no,” Don Johnson, vice president of U.S. sales, said in a July 3 interview in response to the question. “We’re managing the business to match production with demand in the marketplace. Nothing in the last few months that we have done would indicate any different.”
Two plants in Michigan and Indiana are idle through July 15, and GM “may make some tweaks or additional adjustments if necessary,” Johnson said on a July 1 conference call. Truck output will slow in the second half of the year, he said.
The net effect of GM carrying higher truck supply is pulling ahead 2012 earnings into 2011, said Nesvold, who has a $36 price target on the stock.
“They feel a lot of pressure to put up some good numbers,” he said.
GM rose 28 cents to $30.86 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 6.5 percent from their $33 initial public offering price in November. The U.S. Treasury Department, which still holds more than 500 million GM shares, is waiting until at least August for another stock sale, a person familiar with the planning said last month.
GM Share Offerings
Additional offerings would follow second-quarter earnings, said the person, who asked not to be identified because the plans are private. Executives at GM have discussed buying some of the government’s shares, a move the Treasury isn’t interested in, the person said.
GM’s June deliveries of cars and trucks rose 10 percent to 215,358 vehicles, according to a July 1 statement. The increase, which fell short of seven analysts’ average estimate of 18 percent, outpaced the market’s gain of 7.1 percent.
GM had the two U.S. best-selling cars in June. The new Chevrolet Cruze was the No. 1 car with 24,896 sold. The Chevrolet Malibu was just 1,159 units behind.
Instead of focusing on GM’s showing in the car segment, analysts on a company call concentrated on trucks. Pickups generate more profit per vehicle than passenger cars, analysts say. GM doesn’t disclose financial results for specific models.
The company took questions from nine analysts on the call. Seven of them asked about trucks. None mentioned Cruze or Malibu.
‘Subpar’ Truck Sales
“Truck sales are pretty subpar, and that’s really the only area that is getting my attention,” Paul Ballew, chief economist for Nationwide Mutual Insurance Co., said in a phone interview. “If you’re at GM or Ford, you’re certainly focused on that issue right now, and you should be.”
Full-size pickups are still the two top-selling vehicles in the U.S. Ford sold 264,079 F-Series in the year’s first half, a 9.9 percent increase, while customers bought 182,785 of GM’s Silverado, a gain of 9.6 percent.
The volumes are much lower than before the recession and the bankruptcies of GM and Chrysler Group LLC, the Auburn Hills, Michigan-based automaker, now controlled by Fiat SpA. (F) In June 2005 alone, GM sold 109,359 Silverados when it offered employee discounts to all consumers. Ford followed suit and sold 126,905 F-Series pickups the next month.
GM’s target of 100 to 110 days supply of trucks at the end of this year and next year is higher than some competitors in part because Silverado and Sierra have fewer direct sales to fleet customers, Johnson said. Those orders spend almost no time in inventory, which can lower the days-supply figure.
Truck Inventory Norm
Trucks also require more inventory than the industry standard of about 60 days in order to meet demand for different combinations of weight classes, cab types, engines and trim levels, according to GM’s Johnson and Jeff Schuster, executive director of global forecasting at J.D. Power & Associates. A truck supply in the 70s or 80s “isn’t considered high,” Schuster said last week in a phone interview.
“When you’re north of 100, it suggests there’s too much,” he said. “Even if you need a lot of variety, that’s still pushing it.”
The higher inventory is helping GM gain share among retail buyers, said Tom Henderson, a company spokesman. The automaker added 2.7 percentage points of retail share in the full-size truck segment and 2.4 points in heavy-duty pickups through May, the most recent data available, he said.
Dealers also want to have enough supply to account for bulk purchases from commercial buyers, said Mike Bowsher, a GMC dealer and president of Carl Black Automotive Group, which has stores in Georgia, Florida and Tennessee.
“You could have a plumbing company walk in and say, ‘I need 15 of them today, or I need 40 -- go find me 20 more,’” Bowsher said phone interview. “That will raise your average day supply. The commercial side can be slow, and then they’ll buy all at once.”
GM is forecasting a rebound in truck sales during the second half, Johnson said. The automaker sees trucks rising to an 11 percent share of the U.S. retail market for the year. It was as low as 9 percent in April, when gasoline prices approached their peak this year of $3.99 a gallon, the highest level since July 2008, according to AAA.
“If they’re looking at an 11 percent figure, it’s probably not too far off,” Jessica Caldwell, an analyst at Santa Monica, California-based Edmunds.com, said in a telephone interview. “We’ve been in the 10 percent range for the past few months, and you can argue that this has been the most difficult time to sell large trucks.”
GM’s challenge will be staying competitive in the segment with “dated” product and may need to start “juicing incentives” in the third quarter, said Ballew, who had been a chief sales analyst at GM before its bankruptcy.
GM’s current lineup of pickups hasn’t been updated since the 2006 model year. Johnson said the company increased truck production earlier this year in part to account for when plants are idled in 2012 to convert for output of next-generation trucks, declining to give specifics on the timing of shutdowns.
Ford has benefited by offering an optional V6 engine with its F-Series after not doing so for two model years. Those with V6 engines outsold V8-equipped models in May and June, the first time that’s happened in consecutive months since the 1980s, Ken Czubay, Ford’s sales chief, said on a July 1 conference call.
‘More in Balance’
Frost, the Atlanta Chevrolet dealer, said he hopes to have truck inventory back in the three- to four-month range before the end of September. He wants to take delivery of more models from GM like Cruze and the Chevrolet Equinox crossover, which has increased sales 43 percent this year.
GM’s Johnson says he sees inventory of higher-mileage cars and lower-mileage trucks being “more in balance” by fourth quarter. The March 11 earthquake near Japan helped deplete industrywide inventory of high-mileage cars.
“General Motors has so many hot-selling vehicles that it’s kind of bipolar,” said Frost, who has been selling cars since 1987. “It’s a strange place in inventory overall.”
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