Modern Tire Dealer

MAR 2019

Magazine for the professional tire industry

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M T D M a r c h 2 0 1 9 16 Y o u r M a r k e t p l a c e R ecent discussions with dealers provide us confidence that retail sell-out continues its positive trajectory as retail condi- tions remain healthy and volumes improved over the prior year's period. Surveyed dealers reported they saw unit sales volumes improve modestly (approximately 1.2%) compared to the same period last year. Last month we pointed out a few different risk factors that had recently materialized in the external atmosphere that could pose a risk to an acceleration in retail sell-out trends moving forward (effects of the government shutdown, unfavorable weather trends, raw material cost pressures). Fortunately, these issues have mostly been resolved which should create a healthier demand backdrop and act more supportive of demand trends. First, the longest government shutdown in U.S. history ended aer a 35-day standoff on Jan. 25, 2019. Prior to the end of the shutdown, President Trump signed legislation that guaranteed back pay for the roughly 800,000 federal government workers impacted by the shutdown. Although the shutdown may have had some influence on volumes in January as government employees went over a month without pay, we think the overall impact was minimal and any pent-up demand should be unleashed shortly aer workers receive back pay. Second, aer a perplexing bout of unseasonably mild weather in December and the first-half of January, climate conditions returned to more normalized patterns, and then some, as a polar vortex swept across most of the U.S. in the back-half of January. Many auto service providers experienced heightened levels of business activity during this time, especially in regard to dead batteries which allowed dealers the opportunity to upsell customers on additional services needed for the winter season. is, in combination with a return to precipitation patterns historically consistent with this time of year (especially the northeast region which experienced above average precipitation for January), likely acted as a tailwind to helping bring our contact base of dealers their seventh consecutive month of positive volume growth. Lastly, raw material prices seem to have stabilized their upward trajectory and found a temporary top. We view this as a positive for dealers as the absence of higher raw material costs will not force manufacturers to implement price increases and helps keep pricing stable at the retail level which should bode well for future sell-out trends. However, with the above being said, a new conundrum has surfaced that could affect the level of volumes that dealers are customarily used to seeing around this time of year. e Tax Cuts and Jobs Act, which was theorized to be a positive for tire dealers last year, may not have the same type of effect in 2019. When this new legislation was implemented at the beginning of 2018, the majority of American workers were not proactive in adjusting their withholding to account for the new changes in the tax code and elimination of certain deductions. As we have seen so far in 2019, this has led to a lot of confusion around how the new tax laws affect each household and has caused a noteworthy reduction in tax filings when comparing IRS statistics from a year-over-year perspective. As of Feb. 15, 2019, the total individual income tax returns received by the IRS was down by 4.8% compared to the same time period in 2018. Furthermore, not only are total returns down but the refund statistics paint an even more grim picture. e total number of refunds is down 26.5% year-over-year while the average refund is down 16.7% comparatively. e new tax laws are complex, so a delay is filings can be expected, but by failing to adjust their withholdings consumers will most likely not be receiving as big of a refund as they have in past years. We believe this could have an impact on dealer sell-out as many people use sizeable tax returns toward big-ticket purchases like a new set of tires and this could spell trouble if this customary early year influx of cash is significantly reduced. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the January 2019 survey are compared with those of January 2018. REPLACEMENT TIRE SALES: BRINGING IN THE NEW YEAR WITH HIGHER VOLUMES Dealer commentary suggests consumer demand for PLT replace- ment tires rose in January compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 21.4% of contacts. We note that our tire demand index increased 3.1% year-over-year and reached the second highest level seen in six months indicating that demand trends remain not only healthy but continue to improve. See the whole report on www.moderntiredealer.com. ■ John Healy is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry. Recent economic risk factors have been resolved with minimal negative impact on dealers John Healy By Tier Nov '17 Dec '17 Jan '18 Nov '18 Dec '18 Jan '19 Tier 1 1 3 3 2 3 3 Tier 2 3 1 1 1 2 2 Tier 3 2 2 2 3 1 1 SOURCE: NORTHCOAST RESEARCH ESTIMATES Average tire tier rankings

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