Shares of Group 1 Automotive Sink 10% After First-Quarter Warning

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What happened

Shares of Group 1 Automotive, Inc. (NYSE: GPI), a dealership group that owns and operates 180 auto dealerships, 238 franchises, and 48 collision centers, are down nearly 10% as of 2:41 p.m. EDT, after the company warned of first-quarter challenges impacting financial results.

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So what

The Fortune 500 auto retailer listed a number of headwinds that will negatively impact its first-quarter results. Weaker than anticipated market conditions, including pressure on used car margins, and costs associated with long-term strategies designed to strengthen its business will put more pressure on its first quarter than initially expected.

"Based on a strategic review of our operations, we have reaffirmed that our used vehicle and aftersales segments are the key elements of our business model, which need to be strengthened to compete more effectively in the auto retail environment as it continues to evolve in the future," said Group 1's chief executive officer, Earl Hesterberg, in a press release.

One of those strategies is the introduction of Val-U-Line, a brand aimed to sell high mileage pre-owned vehicles. The brand will target a growing consumer demand for lower retail priced units that previously would have been sent to auctions. Management expects this volume to eventually generate roughly 10% of the company's used car business.

Now what

It's understandable that Group 1, and the automotive industry in general, is facing headwinds as the U.S. new vehicle market slows and a flood of off-lease used vehicles begin to hit the market, putting pressure on pricing and margins. Group 1 retaining talent and adapting its business is an important near-term move, but investors can expect more stock price volatility as the U.S. new vehicle market plateaus and absorbs off-lease vehicles.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.