Modern Tire Dealer

APR 2017

Magazine for the professional tire industry

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MTD April 2017 A ccording to the results of our survey, demand for passenger and light truck replacement tires declined in February. Indeed, from a volume standpoint, the dealers reported they sold 1.4% fewer tires in February relative to the previous year's period. e decline marks the second straight month of weak results. Needless to say, the warmer-than-normal winter weather seen in January persisted in February, creating an unfavorable operating backdrop. In fact, nearly every tire dealer and distributor whom we spoke with in these markets cited the balmy weather as a notable headwind to sell-out trends of replacement tires versus the prior year's period. Our contacts also suggested they believe the delayed disbursement of tax refunds to upwards of 40 million individuals pushed sales out of January and February into March, which compounded the weather headwinds. In our opinion, the slow start to the tax season is a sizeable hurdle for the industry given the fact that many households earmark these funds for big ticket purchases, such as new tires. e Internal Revenue Service's data indicates cumulative tax refunds were down 7% year-over-year through the end of February despite disbursements being up over 80% since Feb. 10. e laer stat helps explain why many of the respondents noted traffic and sales picked up significantly in the second half of the month. Lastly, the loss of Leap Year Day also contributed to the shortfall. at said, these headwinds were partially offset by the benefit of a beer economic backdrop for consumers including, higher employment levels, improving consumer sentiment and low fuel prices. Despite the slow start to the year, we continue to believe a favorable backdrop, including low fuel prices, solid job growth, an expanding car parc and healthy miles driven trends, combined with more normalized weather paerns going forward, should lead to decent volume growth in 2017. It is worth noting that most dealers shared this sentiment, as a large percentage of the survey respondents indicated they, too, anticipate sell-out trends will accelerate throughout the next six months. e sharp move in raw material prices since 3Q16 combined with nearly every notable tire manufacturer already announcing or enacting sharp price hikes almost guarantees that tire costs are going to be meaningfully higher in 2017. At this point, we think the dealer community will be able raise prices to offset the cost pressures. In our opinion, operators who lead with a model that includes high quality of service at fair prices will be able to maintain their margin structure in this category, while those who sell on price alone will only opt to pass along the higher costs and neutralize the impact on gross profit. at said, we are paying close aention to commentary regarding inventory levels given the slow sell-out trends in the first two months of the year. At this point, we have not heard anything too alarming on this front; however, we will start to worry more about this risk if retail demand remains weak in March and April. To this point, we were encouraged to hear dealers indicate the second half of February was much stronger than the first half of the month and strong demand continued into March. Monthly survey A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the February 2017 survey are compared with those of February 2016. Go to www. moderntiredealer.com for complete survey results. Dealer costs modestly increase Branded tire costs increased 2.8% and value tires were up 2% versus the same period a year ago. Remember, the first pricing increases from manufacturers became effective in February 2017 with the majority following in March and April. As such, cost pressures will continue to build. Meanwhile, the dealers noted like-for-like incentives were firmer (less discounting) in the period due to the industry's successful rebalancing of inventory levels in 2H16. Repair sales were essentially the same year-over-year Dealers indicated service sales, which accounted for a net 29% of total revenues, were flat on a year-over-year basis, which compared to increases of 7% in October, November and December and a 5% increase in January. ■ Nick Mitchell is a managing director, research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automo- tive industry. Your marketplace Sell-out trends will accelerate throughout the next six months By Nick Mitchell How dealers view near-term business Dealers OCT NOV DEC JAN(R) FEB(P) FEB(15) Passenger tire Will improve 50% 50% 50% 25% 67% 67% Will worsen 0% 0% 0% 0% 0% 0% Will stay level 50% 50% 50% 75% 33% 33% Truck tire Will improve 50% 100% 50% 50% 40% 50% Will worsen 0% 0% 0% 25% 0% 17% Will stay level 50% 0% 50% 25% 60% 33% R-Revised P-Preliminary 20

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