Dealer Lab: Another small profit in November

Publish Date: 
Feb 1, 2011
By Joe Delmont

Editor’s note: The Dealer Lab project is a joint effort between Dealernews and PowerHouse Dealer Services, a consulting firm run by former dealer Bill Shenk, detailing his efforts to return Florida Motorsports to profitability. When he took over management in July 2009, the two-store (Naples, Fla., and Punta Gorda, Fla.) network wasn’t in good shape — it lost money in 2007, 2008 and 2009. Shenk and a partner have purchased the Punta Gorda store and have renamed it Destination Powersports to break away from its poor reputation. Shenk no longer has ties to the Naples location.

The financial information in this report is taken from the dealership’s Composite Report supplied by Shenk and prepared for the dealership’s participation in the PowerHouse Dealer 20-Group. The Composite Report is prepared from the store’s monthly financial report. In preparing these reports, Dealernews reviews the dealership’s unaudited P&L statement and balance sheet, as well as its Composite Report.

Destination Powersports in Punta Gorda, Fla., posted another small profit in November — the sixth profitable month out of the last seven months — but the operation is still running a hefty YTD loss because of a very poor performance in January and February.

Prior to the acquisition on March 1, 2010, by Shenk and his partner, the dealership lost $8,878 in January and $39,372 in February, putting the operation $48,610 in the hole after the first two months of the year. Over the next nine months under Shenk’s management, the dealership lost $13,741, compared to a loss of $209,746 during the same nine-month period in 2009.

Besides February, most of the damage this year was done in July when the store lost $15,331. On the sales side, the dealership sold only 22 units, 15 new and seven used, in July. That’s better than July 2009 when it sold only nine units total, but it’s down from the 39 units it sold in June and 36 units in May. Payroll in sales for the month of July was more than $11,000 higher than it was in June.

“With the amount of inventory we have, and a smaller percentage of the units sold in what we consider to be our marketplace than we like, we continue to overstaff the sales department in an attempt to re-establish ourselves in the marketplace,” Shenk said at the time.

Progress in November
November 2010 was an improvement over the same month the previous year, but it was a struggle and didn’t produce the results that Shenk was looking for. Net income for the month was $2,436 on total sales of $346,282, up from a net loss of $6,681 on sales of $265,268 in November 2009.

The improvement would have been much better if it weren’t for the huge disparity between sales payroll in the two months. Total sales payroll in November 2010 was $19,053, up a huge $12,673 from the previous November when the dealership ran without a sales manager. That fact alone amounted to a difference of $7,689.

Reduced flooring costs continued to boost the dealership’s bottom line. Flooring costs dropped from $17,286 in November 2009 to only $5,502 in November 2010, adding almost $12,000 to the bottom line. “We continue to reap huge benefits from getting rid of the old inventory,” Shenk says, noting that noncurrent inventory increases flooring costs because rates are higher on older equipment. “Our interest rate now is better,” he says, “and we don’t pay as much of a premium on that old stuff.” The new lender is GE Financial. Two other improving areas are the parts and service operations. The improved numbers reflect a major shift in emphasis in service, where Shenk is reducing large work projects and increasing smaller, more profitable jobs. The number of repair orders (ROs) improved from 172 last year to 223 in November 2010, a gain of 51 jobs or nearly 30 percent. Shenk’s goal is 300 ROs per month.

The average labor amount of an RO dropped from $183 in November last year to $129 this year. “We actually processed more customers and our average RO got smaller,” Shenk says, “which is what we want because it’s easier to make a customer happy when putting on accessories than when you are repairing a motor that doesn’t run properly.” The labor gross profit per RO went from $97.95 (54 percent GP and total dept. GP of $16,847) last year to $99 (72 percent GP and total dept. GP of $22,181) this year. Smaller is better.

Smaller jobs also mean lower payroll costs for technicians since you don’t need an “A” technician if you’re not offering major motor rebuilds. “You don’t need a guy with 20 years’ experience to add a windshield or change a tire,” Shenk says. “It gives you more access to a larger pool of technicians, and as we transition more work to ‘B’ and ‘C’ technicians, you pay them less for the same amount of revenue.”

Consider this change: The total revenue for parts and accessories, including sales at wholesale and direct mail, in November this year was $57,449 ($25,305 in parts, $25,998 in accessories and $6,146 wholesale) compared to $61,289 last November ($40,288 in parts, $8,283 in accessories and $12,718 wholesale). “The total number looks similar,” Shenk says, “but the makeup is totally different, and that is a beautiful thing.”

Why? Because Shenk now runs more customers through service, and these so-called lifestyle customers are ones who want to come to the store, not ones who need to come because they have a broken machine. “We’re trying to change the personality of the store from a place to ‘fix it when it’s broke’ to one that makes the ride more exciting. We need the lifestyle rider who buys accessories. You can put more margin in little stuff than you can in big parts because customers price-shop the big parts more.”

Shenk is doing three things to push the shift from fewer large ROs to more, smaller ones:

• Raising prices on wholesale business and letting the business fall away if it wants to. Total revenue goes down, but profit goes up.
• Shifting to smaller service jobs and postponing tough work, making these customers wait. The wait often causes them to go away.
• Increasing marketing for small jobs, including running service specials, e-mail specials, and tire discounts in an effort to get the “good, lifestyle” riders.
• Shenk’s goal is to have accessories revenue double that of parts revenue.

While progress is being made, there’s still room for improvement. Total parts margin was 30 percent in November, compared to 35 percent for the best Top Gun dealers. But margins on Accessories are about the same: 30 percent vs. 29 percent for Top Gun.

This story originally appeared in the Dealernews February 2011 issue.