‘Terrific’ year for 2 Cheap
The 2023/24 financial year was “terrific” for 2 Cheap Cars with the company’s turnaround strategy becoming “fully embedded”.
That was one of messages shareholders heard from Angus Guerin, chief financial officer, at their annual meeting.
“Full-year revenue and income increased by five per cent to $86.8 million,” he reported. “Net profit after tax was $6.2m, up 383 per cent from $1.3m in financial year 2023. Underlying NPAT – excluding the previous year’s non-recurring costs – increased by 21 per cent to a record $6.2m.
“Financial year 2024 saw the restart of dividends with shareholders receiving a total gross dividend of 11.56 cents per share. Underlying earnings per share rose from 4.4c to 14c.
“Net operating cash flow excluding lending was $6.9m, down $6.3m. Gross margin notably improved on the back of efficiencies, optimised pricing, effective promotional activity and improved finance penetration. The full-year contribution margin increased 40 per cent to $20.7m.”
Supply chain ‘efficient’
“While we already have an efficient supply chain, we continue to refine it,” Guerin told shareholders last month. “Our focus is on achieving the greatest possible efficiencies from logistics.
“In-housing, expanding and improving operations at our processing hub [in Onehunga] remain an advantage.
“Last year, we added Car Safety NZ to our group, providing integrated in-house compliance. More than 60 per cent of cars receive certification at our hub, removing the need to transit them and pay an external provider.
“We’ve nearly finished upgrading panel and paint at the hub – a significant part of refurbishment and costly to outsource. Once complete, more than 80 per cent of [these] needs will be in-house.”
Guerin explained 2 Cheap Cars’ procurement team in Japan was a crucial part of its supply chain and “sets us apart from much of the competition” by delivering a consistent supply of vehicles.
“We’ve partnered with more shipping companies to eliminate the impact of shipping constraints on inventory levels. Our singular objective is getting vehicles onto yards as quickly and cheaply as possible to maximise margin and drive sales.
“While we realise scale is important and have a sensible expansion plan, we will continue to prioritise gross margin.”
Dynamics of market
The cost of living, interest rates and immigration are impacting on 2 Cheap Cars’ business. “Traditionally, higher cost-of-living increases demand for affordable vehicles as consumers seek to manage their budgets,” said Guerin.
“However, in the prolonged downturn, low-wage earners are disproportionately affected by inflation, high interest rates and cost-of-living increases. Our potential customers have significantly decreased purchasing power.
“In a high interest-rate environment, low-wage individuals find it harder to qualify for loans or may face higher borrowing costs. We’ve seen more finance applications declined in recent months.
“Lower immigration rates can also reduce new customers and impact finance rates as new immigrants often need to finance a vehicle.
“Last year, the country experienced significant immigration growth as regulations loosened following Covid 19. Provisional data for mid-2024 shows rates are now falling, but are coming off record highs and remain strong compared with historical averages.
“The pace of immigration has reduced as New Zealand’s high cost of living makes it a less attractive proposition. We’ve also noted regional differences as immigrants move to find stable employment.
“Despite these challenges, 2 Cheap Cars maintains solid sales and, importantly, margin hasn’t been sacrificed as much as it could have been.”
While gross margin has been lower prices in order to maintain competitiveness, this has been partially offset by the strength of the kiwi against the yen.
“As the recession continues to bite, many dealers are importing fewer vehicles and there’s an inventory deficit in the country as a whole,” added Guerin. “2 Cheap Cars maintains strong inventory levels and continues to trade well.
“The number of used-car dealerships is dropping as businesses go to the wall. We expect dealer numbers to continue falling. Scale, which 2 Cheap Cars has, is crucial for winning.”
Bigger retail footprint
2 Cheap Cars has 13 branches – eight in Auckland and one each in Hamilton, Tauranga, Palmerston North, Wellington and Christchurch. Its property strategy is based on the right sites and scale at the right time, focused on big urban centres.
“Last year, we doubled the size of our Christchurch yard and sales are up 56 per cent year on year,” said Guerin.
“We will develop mega and satellite sites depending on scale. Our rationale is additional sites require very low overheads to run and, given our business model, most new yards require minimal capital investment.”
The company’s plans for Auckland are now “well-advanced”. In July, it opened a 1,700m2 site in Wairau Road on the North Shore, which has sold more than 100 vehicles by the time of the annual shareholders’ meeting on September 28.
It’s developing a flagship at 620 Great South Road, Greenlane. “Our site has brilliant street frontage,” said Guerin. “Having a major yard there will not only be a game-changer for sales, but enhance our brand presence.
“Our existing Greenlane site, which will close once the new one is open, has delivered the group’s highest vehicle margins. The new site has even better potential.
“It makes sense to invest in our brand by developing a site consistent with the more upscale environment, including digital signage on a road that sees daily average traffic of 21,000 vehicles.
“Once we receive resource consent, construction is planned to begin in October with the site open for business before the end of the year.”
That said, Guerin described the mega Mount Wellington site – due to open in 2025 – as “our most exciting development”. The lease has been signed and consent is pending. It will be 2 Cheap Cars’ largest yard, eventually with more than 150 vehicles.
“It’s strategically located in front of New Zealand’s first IKEA, which is due to open in late 2025. The traffic the store is expected to generate is unprecedented. Most of it will drive past and be exposed to 2 Cheap Cars.
“At close to 5,000sq m, 150 cars on-site and minimal capital investment, this is a major step forward for us.”
Finally, on the branches front, company closed its yard in Smales Road, East Tamaki, because of major health and safety concerns on an adjacent site.
“Fortunately, we were able to swiftly secure a new site in Allens Road, Botany, which opened three weeks after the forced closure. The impact on trading was minimised as much as possible.”
Looking to the future
In the five months to August 31, 2 Cheap Cars’ NPAT was $1.5m – down by $900,000 versus the same period in 2023/24. While the company has sold more vehicles, average retail prices dropped by 10 per cent.
Its rates for finance penetration have decerased by four per cent due to strong competition and higher decline rates.
Guerin said: “However, this impact has been partially offset by the strength of the NZ dollar against the yen.
“The net effect of these pressures has seen gross margin reduce by three per cent to 21 per cent. Year-on-year operational cashflow is down $3m, primarily driven by financial year 2024 terminal and 2025’s provisional tax.
“Despite headwinds in the first five months of trading in 2023/24, 2 Cheap Cars is encouraged by several factors in play that we anticipate will gain traction in the second half.
“The impact of interest-rate cuts is expected to begin trickling through to customers, alleviating some financial strain they face and improving ability to secure finance. This should help support an eventual recovery in demand, reduce pricing pressures and improve finance penetration.
“Our ongoing focus on enhancing operational efficiencies and in-house capabilities, along with our expansion plans, are expected to improve profitability.
“We anticipate a trading uptick as the Botany site becomes fully operational and the Greenlane flagship opens. The NZ dollar is expected to remain strong against the yen.
“These factors, combined with expanding in-house compliance and panel-and-paint initiatives, will help contain vehicle costs and improve margins.
“Affordable cars are a necessity. While we anticipate weak market conditions persisting and immigration numbers to reduce, there are reasons for optimism in the medium term.”
