Shares in motor retailer Lookers (LOOK) careered downhill in early trading, losing 13% to 43p after the firm halved its full-year profit target due to weak sales in the third quarter.

In a trading update for the nine months to 30 September the company said that while the first half had been ‘challenging’, and that it had expected a tough second half, ‘trading has been much more challenging than expected’ especially since mid-September.

As a result it cut its full year underlying pre-tax profit forecast to just £20m against market estimates of close to £40m, prompting a round of downgrades by analysts and sending shares in rival car dealers such as Inchcape (INCH) lower in sympathy.

NEW CAR MARKET WEAK

The new car market has struggled all year with sales of diesel cars faring particularly badly, down 20% in the first nine months according to the Society of Motor Manufacturers (SMMT).

However the SMMT figures show a small rise in total sales in September helped by a surge in demand for battery-electric and hybrid-electric cars.

In contrast, Lookers saw sales in the third quarter fall 3.2% with a ‘much weaker than expected finish’ in September, which is traditionally one of the most profitable months of the year.

Like-for-like new-car sales to retail customers sank 11.5% in the quarter, on top of which the firm experience pressure on its profit margins.

CHANGE AT THE TOP

In another surprise development, the firm announced that the current chief executive Andy Bruce and chief operating officer Nigel McMinn would step down immediately, with the chairman Phil White and one of the non-executive directors taking over until permanent replacements are found.

As AJ Bell investment Director Russ Mould observed, ‘So much bad news is piling up at Lookers that it isn’t really a surprise to see the board want new leadership.

‘In times of strife you need someone who is prepared to make very bold decisions to stop the business going into a ditch. But finding someone brave enough to take the top job at Lookers won’t be easy given the headwinds facing the sector.’

REGULATORY SCRUTINY

To add to Lookers’ woes, the Financial Conduct Authority (FCA) announced in June that it was launching an investigation into ‘legacy sales processes between the period 1 January 2016 to 13 June 2019’.

The investigation kicked off in October and is in the fact-finding phase. At this stage, Lookers says it is ‘unable to predict what, if any, impact the outcome of the investigation may have’.

‘There are growing concerns that the car industry could be the next PPI scandal’ commented Mould. ‘If the regulator forces retailers to compensate some car buyers by proving that personal contract purchase (PCP) car financing deals were improperly sold, such as inadequate disclosure around interest rates versus hire purchase agreements, then the whole car industry potentially faces a very large bill at a time when their normal day-to-day business is drying up’.

Lookers says it has already set to work improving its internal controls and audit process at a cost of £10m with £7m budgeted for this year and £3m next year which will be financed from cash flow.

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Issue Date: 01 Nov 2019