CDK Cyberattacks Sink Some Retail Auto Sales

Dealership groups hope that the service, body and other fixed ops businesses lost as a result of the June CDK cyberattack will return. Executives at publicly traded auto retailers, however, predict much of it is gone.

The good news:  Those who needed Fixed Ops – whether it’s maintenance, parts or something else -- because of the shutdown are more likely to reschedule their service, says Bryan DeBoer, president and CEO of Lithia & Driveway, Medford, OR.

Yet new- and used-car buyers probably already have defected to a dealer who wasn’t on the CDK system, DeBoer says.

“Those new and used customers probably bought already. People may research for a long time, but they buy within 72 hours once they make that decision,” he says.

Lithia reports revenue for service, bodywork and parts was $778.1 million for the second quarter, down 1.4% vs. a year ago. For the first half, it was almost flat at $1.5 billion, up 0.8%.

Overall, the CDK outage lowered Lithia’s second-quarter earnings by about $1.10 per share, says DeBoer. At 27.2 million shares outstanding, that’s some $30 million. Because car buyers probably moved on, “I don’t believe there’s a ton of that $1.10 sitting out there –  unfortunately,” DeBoer says.

To put that $1.10 per share in context, Lithia’s total net income for the quarter was $214.2 million, or $7.87 per share, down 27.9% vs. a year ago. DeBoer says he expects earnings to bounce back in the third quarter.

Separately, AutoNation Inc., Fort Lauderdale, FL, reports its parts and service revenue was $1.1 billion for the second quarter, down 3.2% vs. a year ago. For the first half, it was about $2.3 billion, up 1.5% vs. a year ago.

Through April and May, AutoNation says the trend in its parts and service revenue was similar to the first quarter. In the first quarter, AutoNation’s parts and service revenue was up 6.5% on a same-store basis vs. a year ago.

Then came the shutdown after the CDK debacle.
“Virtually all of our business processes, including CRM, deal processing, financial services, inventory management, aftersales systems and accounting are wired in one form or another to the CDK backbone, and therefore, were all immediately impacted,” says AutoNation CEO Mike Manley.

CDK Global, Hoffman Estates, IL, says it serves 15,000-plus auto retail locations in North America, including some in Canada. There are about 18,000 U.S. dealerships.

Like other publicly traded dealership groups, AutoNation says that during the shutdown, it came up with workarounds to stay in business. However, those solutions were largely done by hand and were enormously time-consuming.

“We manually processed close to 60,000 repair orders during the outage. As you can imagine, this slowed things down tremendously,” Manley says.

AutoNation says a $42.8 million cut in operating income in the second quarter was attributed to the CDK outage.

Most of that was money paid to commission-based employees in sales, parts and service to help offset their loss of income due to the downtime, Manley says.

“Retention of technicians, development of the technicians, is so important. And given all of the work that we have done, I think it was a very necessary, and right, investment for us to make,” Manley says.

In contrast, Penske Automotive Group reports the CDK shutdown in June did not have a material effect on second-quarter results since the group’s automotive operations aren’t on CDK, according to Chair and CEO Roger Penske.

There was a temporary impact on the group’s commercial truck business, he says.

Other favorable factors for dealers in parts and service include higher average labor rates and an 8% increase in service technicians vs. a year ago, Penske says.

Penske Automotive, Bloomfield Hills, MI, reports its second-quarter retail automotive parts and service revenue, including its U.K. dealerships, was $717.3 million on a same-store basis. That’s up 5% vs. a year ago. For the first half, it was $1.4 billion, also up 5%.

Within the total, customer pay was up 3% vs. a year ago; warranty, up 12%; and collision repair, up 5%, says Penske. He says, “I think there was definitely a benefit of not being on CDK on the automotive side.”