Modern Tire Dealer

APR 2019

Magazine for the professional tire industry

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M T D A p r i l 2 0 1 9 16 Y o u r M a r k e t p l a c e R ecent conversations with dealers leave us with a view that retail sell-out continues to trend positively as retail conditions remain healthy and volumes improved over the prior year's period (8th straight month). From a volume standpoint, surveyed dealers relayed they saw unit sales volumes improve modestly (approximately 1.1%) compared to the same period last year. We would be remiss to ever underestimate the impact that weather conditions can have on the tire retailing industry. Accordingly, we saw the direct result of this last month as the majority of the United States encountered harsher winter weather conditions than we have seen in recent Februaries. Precipita- tion levels were elevated for most of the country, with 19 states recording a month that was in their top 10% wettest Februaries on record with Tennessee experiencing its wettest February ever. e western region may have had an outsized impact on results as year-over-year comparisons show a triple-digit increase in precipitation levels with California alone showing a nearly 1,500% increase compared to the same month last year, which is notable because of its size and overall impact on the economy (over 14% of total GDP). It seems that the weather environment helped aid our contact base of dealers in delivering their 8th consecutive month of positive volume growth and offset the headwinds that were presented by the continuance of a disrupted tax return season among American consumers. As of the end of February, the total individual income tax returns received by the IRS was down by 3.2% compared to the same time period in 2018. Furthermore, the total number of refunds issued was down 4.2% year-over-year while the average refund was down 3.5% comparatively. Although these percentage comparisons may not seem significant at first glance, we note that there has been 1.92 million fewer refunds filed and $5.18 billion less in refunds issued (roughly $2,700 per return filed) at the end of February 2019 versus the end of February 2018. Despite a noteworthy improvement in tax return activity since the middle of February when we pointed out that individual returns and refunds were down 4.8% and 26.5%, respectively, we still believe that these reduced levels of cash flow that consumers are normally accustomed to receiving in the first few months of the year could be inhibiting bigger ticket purchases like a new set of tires. Looking closer at the recent trajectory of raw material costs, the basket of raw materials to make a common replacement vehicle tire was up 2.2% on a year-over-year basis in February while increasing 2% from January. From a quarterly perspective, it appears that we may have witnessed a temporary top in price pressures near the end of 2018 (1Q18 to 2Q18: +3.4%, 2Q18 to 3Q18: +0.6%, 3Q18 to 4Q18: -2.7%, 4Q18 to 1Q19: +0.2%) although it is worth monitoring price movements closely through 1H19 to gauge the trajectory of raw material prices as that could foreshadow if manufacturers have to implement price increases to offset higher costs much like we saw in 2H18. Index readings for Q4 indicate raw material prices are projected to increase 5.3% year-over-year versus 4Q17 following a 10% increase year-over-year in 3Q18 and early estimates for 1Q19 are indicating prices will show a 1.3% year-over-year increase. In assessing raw material price movements, we note materials such as carbon black and synthetic rubber have been seeing meaningful multi-period increases on a y/y basis (since early 2018) while natural rubber and crude oil have been experiencing a resurgence from their depressed price levels in 2018. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the February 2019 survey are compared with those of February 2018. See the report on www.moderntiredealer.com. REPLACEMENT TIRE SALES: CLIMATE CONDITIONS AID CONSUMER DEMAND FOR TIRES Dealer commentary suggests consumer demand for PLT replace- ment rose in February compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 34.8% of contacts. A LOOK AT MIX TRENDS IN THE MARKET In response to best and worst performers, our recent survey revealed that Tier 3 brands showed the strongest relative per- formance among surveyed contacts for the third consecutive month (see chart). Go to www.moderntiredealer.com for our complete commentary on tire tiers. ■ 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. Reduced levels of cash flow from tax refunds inhibits big ticket purchases John Healy By Tier Dec '17 Jan '18 Feb '18 Dec '18 Jan '18 Feb '18 Tier 1 3 3 3 3 3 2 Tier 2 1 1 1 2 2 3 Tier 3 2 2 2 1 1 1 SOURCE: NORTHCOAST RESEARCH ESTIMATES Average tire tier rankings

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