Ford's Sales Dropped: Is the Market Overheating?

By John Rosevear Markets Fool.com

Ford Motor Company (NYSE: F) said that its U.S. sales fell 4% in February from a year ago, as strong results for its trucks and pickups weren't enough to overcome a big year-over-year decline in car sales.

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Ford's sales dropped a bit more than the overall U.S. market for light vehicles (cars, pickups, and SUVs), which declined 1.1% from a year ago last month. The decline happened amid growing signs that automakers are boosting incentives to try to spur sales.

Sales of Ford's F-Series pickups rose 9% last month, thanks in part to strong demand for its highly profitable all-new Super Duty models.Image source: Ford Motor Company.

Why did Ford's sales drop last month?

Why were Ford's U.S. sales down in February? One reason was simply because it was a tough year-over-year comparison. Ford's sales jumped 20% in February of 2016 on a great retail performance and a huge surge in sales to rental-car fleets.

At the time, Ford explained that its deliveries to rental-car companies would be "front-loaded" in 2016, meaning they'd be high in the beginning of the year and then taper off as the year went on. (That proved to be true.)

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Ford's deliveries to rental fleets were again high last month, but down from a year ago. Ford's commercial- and government-fleet sales were both steady, but the rental-fleet drop meant that the Blue Oval's overall fleet sales declined 5% year over year.

Ford's retail sales fell 3% from what Ford U.S. sales chief Mark LaNeve said was an exceptionally strong retail performance a year ago:

This comes against a tough February comparison to last year, which was our best retail share performance for 2016. So while the year-over-year comp for February was a tough one, February's retail performance was our second-best February retail sales in 11 years, and this was accomplished with strong pricing dynamics for Ford and flat incentive spending, both month-to-month sequentially and year-over-year.

Still, the retail decline happened despite good year-over-year increases for Ford-brand SUVs and pickups, and for the Lincoln luxury brand. Ford's cars were the culprit: Sales of Ford-brand car models as a group were down almost 26% from a year ago, paced by a 35% decline for the Fusion and a 32% drop for the Focus.

Buyers continue to favor SUVs and trucks over sedans

Much of that drop in car sales is attributable to changing buyer preferences, Ford executives say. Nearly all automakers doing business in the U.S. have seen SUV sales rise while car sales have fallen. With a solid, up-to-date lineup of crossover SUVs, Ford has been able to capture many of those lost sales: Overall Ford-brand SUV sales were up 6%, with big gains for the compact Escape (up 16%) and big Expedition (up 48%).

Last but definitely not least, Ford's F-Series pickup line had a good month. Sales rose almost 9% on strong demand for both the F-150 and the all-new Super Duty models. Ford made a point of saying that its year-over-year increase wasn't due to a big boost in incentives. Overall F-Series incentives in February were actually down about 9% from a year ago, to $4,167 per truck, according to J.D. Power data made available to The Motley Fool.

That's despite a huge jump in archrival General Motors' (NYSE: GM) pickup incentives, which rose over 50% from a year ago, to a whopping $6,996 per truck on the Chevy Silverado. Fiat Chrysler Automobiles(NYSE: FCAU) paid $5,545 per truck on its Ram pickup line last month, according to the data, down slightly from a year ago. (GM's overall U.S. sales rose 4.2% last month, while FCA's declined 10%.)

Lincoln continued its good run of growth

As mentioned above, Ford's luxury Lincoln brand continued its recent run of growth in February. Lincoln sales rose 8.8%, with good gains for both its sedans (up 16%) and SUVs (up 5%). Lincoln's all-new Continental sedan outsold its predecessor, the now-discontinued MKS, by almost 2 to 1 year over year.

Sedans have been a tough sell across the industry recently, but Lincoln's all-new Continental is off to a strong start. Image source: Ford Motor Company.

Incentives and average transaction prices

Ford's average transaction price (which includes the impact of incentives) rose about $1,900 from a year ago, LaNeve said, versus an industry-average increase of about $750. LaNeve credited strong sales of "high-series" (meaning well-optioned) pickups and a stronger overall mix of pickups and SUVs relative to cars. SUVs and pickups tend to sell with fatter profit margins than sedans.

LaNeve said that Ford's overall incentive spending was roughly flat year over year. Preliminary estimates from ALG, the analytics unit of TrueCar, suggests that Ford's incentives weren't flat, but jumped 23.5%, to a hefty $4,097 per vehicle.

Ford's incentives on pickups and SUVs may well have been flat year over year -- that may have been what LaNeve meant to say -- but ALG's estimate suggests that the automaker's incentives on slow-selling car models like the Focus and Fusion may have risen substantially. If true, it's no surprise.

ALG's estimates also show a roughly $1,900 increase in Ford's average transaction price over the same period last year, to $35,871, in line with what LaNeve said.

The upshot: The U.S. market is showing signs of stalling

One of the big signs of softening demand for new vehicles is an increase in incentive spending to more than 10% of average transaction prices. ALG estimates that the industry's incentives averaged 10.3% of average transaction prices in February -- and that Ford's ran at 11.4%.

Both of Ford's Detroit Three rivals had even higher percentages in ALG's estimates, 12.5% for GM and 13.1% for FCA, likely fueled by their more aggressive pickup incentives. But broadly, the increase in incentives strongly suggests that automakers and their dealers are having an increasingly tough time finding sales growth in a plateaued market. That will haveimplications for profit margins as the year goes on, and not good ones.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors and TrueCar. The Motley Fool has a disclosure policy.