WEDA Cost of Doing Business Study – What Dealers Told Us
We want to stress the importance of participation in the annual Cost of Doing Business Study. The study was used back in 2017 to support the floor plan interest deduction for the farm equipment industry. If it was not for the supporting information provided from the study, this deduction would have been left out of the legislation.
The study also provides values of merging companies or dealers looking to sell their business. Moreover, the study is used for estate/gift tax planning and providing a fair value of dealerships transferring interests to family members and trusts.
The study represents all brands and dealerships in Canada and the U.S. The study is free to members who participate. Please note, volume categories will change for next year’s study, so plan on participating. Here are some highlights and low spots from the 2021 study, which contains 2020 financials.
Comparing changes for dealerships in different volume groups, total inventory in dollars decreased over the 2020 results for all volume dealers, especially the largest volume dealerships whose inventory decreased close to $15 million. The middle volume dealerships saw inventory decrease by $5 million and inventory at lower volume dealerships decreased by $200,000. This is a substantial change from a year ago.
This was expected with almost a full year of COVID-19, people not working in factories, shipping being delayed, and government-mandated closures for a couple of months in most major cities. We saw a $10 million decrease in new inventory, and used equipment decreased by over $3 million for higher volume dealerships. The actual percentage of inventory to total assets decreased for the lower and higher volume dealerships. The middle volume dealerships had an increase in inventory of 1.5%.
Parts inventory stayed about the same for all volume dealerships, both in dollars and as a percentage of total assets. The decrease of inventory to total assets increased the inventory turns for all three levels of dealerships. Inventory turns were 2.14 for lower volume dealerships, 2.19 times for middle volume dealerships, and 3.20 times for the larger volume dealerships. This is a great improvement from 2019. So far in 2021, all inventory levels are expected to remain low. For used equipment, it will stay extremely low throughout North America.
Receivables increased for the higher volume dealerships from a year ago. The change from the middle volume dealerships was a 2.71% decrease, while the lower volume dealerships decreased by .58%. The majority of the increase for the high-volume dealerships was in customer receivables and Contracts in Transits, so hopefully those will be collected in the following year. Contracts in Transit are usually very collectible since they are approved by a finance company before a deal is finalized.
There was an increase in fixed assets as a percentage of total assets across the board. The higher volume dealerships had a 2% increase from a year ago, middle volume dealerships increased by 3.59% and the smaller volume dealerships increased by 3.62%. This shows that all volume categories of dealerships were spending more money on service trucks, tools, etc. to offset the increase in net income from a year ago among lower volume and higher volume dealerships. The middle volume dealerships reported a slight decrease in net income.
Corresponding to the inventory levels, so went a dealership’s payables. We saw a decrease in the overall payables for lower, middle and upper volume dealerships to coincide with inventory fluctuations.
We did see an increase in equity percentage in the lower and upper volume dealerships, which reflected a rebound from last year. The middle volume dealerships decreased to 16.28% after rising to 24.47% a year ago. The decrease is due to $200,000 less in net income and an increase in Treasury Stock, which reduces equity. From what we learned, some middle volume dealerships bought out shareholders during the year. The higher volume dealerships increased to 38.03% from 30.90%, which is a substantial change. Lower volume dealerships increased to 36.45% from 31.35%, which is also a good increase. Most of the increases are from the boost in net income for both volume groups, which was $2.6 million for higher volume dealerships and $300,000 for lower volume dealerships.
Total sales volume increased for lower volume dealerships by almost $2 million and increased by $5 million for higher volume dealerships. Total sales for middle volume dealerships decreased by $5.4 million, which helps explain the decrease in net income for this group. The increase in sales volume for both the lower and higher volume dealerships explains the increases in net income and the equity percentage. The increase in sales volume helps explain the decrease in inventory levels, plus dealerships could not order inventory from their manufacturers and receive it in the normal time frame, more examples of issues related to COVID-19, shipping problems and lack of workforce.
Where you see sales volume increases, you then need to look at the gross margin percentage. In most instances, increased sales volume does not always equate to greater gross margin percentages. In this case, the higher volume dealerships gained .69% margin and the middle volume dealerships decreased 1.60% margin. Both of these instances reflect the increase in net income for the higher volume dealerships and the decrease in net income by middle volume dealerships. While lower volume dealerships show a margin decrease of 1.39%, even with an increase in sales volume, this group still showed an increase in net income, which was caused by another factor noted below. So, overall, this was a decent outcome.
Dealers did an excellent job in controlling overall operating expenses. The lower volume dealerships decreased operating expenses by 2.17%, which is mainly from increased sales volume. The actual dollar amount increased by $97,000, so, with the increase in sales volume, the bottom line actually improved from a year ago. The middle volume dealerships decreased by .047% and the higher volume dealerships decreased by .89%. Most of the decrease in operating expense percentages for middle volume dealerships was in salary/benefits area and interest expense. The decrease for the high-volume dealerships was in interest expense, occupancy and total other expenses.
Service quality expenses as a percentage of sales decreased some for the middle and higher volume dealerships. This is good to see, especially in lost warranty expense, comeback and After Cost of Sales expenses. Both the middle and higher volume dealerships saw a decrease of .04% and .06%, respectively. The percentage for lower volume dealerships stayed the same at .35%, but the actual dollar amount increased around $5,000. This was due from the increase in sales volume.
Occupancy expenses for all three dealership categories did not fluctuate greatly from the prior year.
Net income as a percentage of sales increased over last year for the lower and higher volume dealerships. The increase was 2.52% increase for the former and 1.38% for the latter. The increases were needed by both groups and represent a great increase from last year. The middle volume dealerships saw a decrease of .28% for a 3.09% overall net income before tax of sales.
Inventory turns increased greatly from a year ago. Turns for lower volume dealerships increased by .79 times, the middle volume dealerships increased by .34 times, and the higher volume dealerships increased by .54 times. This is yet another indicator of why inventory levels decreased.
The last comment would be Return on Equity. The lower volume dealerships increased from 7.82% to 24.17%, the middle volume dealerships increased from 28.50% to 40.03%, and the higher volume dealerships increased from 18.45% to 26.79%. All of these were expected, since the changes we mentioned before affect the ROE.
The Return on Assets showed similar changes. The lower volume dealerships increased from 2.51% to 8.42%, the middle volume dealerships increased from 6.20% to 6.52%, and the higher volume dealerships increased from 6.19% to 10.19%.
I would say the most improved group was lower volume dealerships, which was needed after the 2019 results. The higher volume dealers also added to the bottom line, ROE, ROA, and increased margin percentages. The middle volume dealerships are holding their own and we will see what year-end results for 2021 look like compared to 2020 year-end results.
We have been dealing with another year of the pandemic in 2021 and shortages of inventory and shipping problems continue. It will be interesting to watch, but the equipment industry held its own in 2020 and held its own deep into 2021. The challenge in 2022 will be rising inflation (if it continues), inventory shortages, supply chain issues, and shortages in the workforce.
Written by Curt Kleoppel, CPA, CVA
CURT KLEOPPEL, CPA, CVA, is treasurer of the Western Equipment Dealers Association. He also serves as president of Equipment Dealer Consulting, LLC, a long-term association partner. The consulting group was created to provide financial services to association members. For information, visit www.eqdealerconsulting.com or write to email@example.com.