Cars.com plans to restructure sales operations, cut staff amid investor pressure

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UPDATED: 12/12/18 16:16 ET – adds close to share

Cars.com, one of the largest online shopping sites in the automotive industry, restructures its sales activities and eliminates more than 100 sales positions under pressure from an activist investment group that has called for a change of leadership or sale to the public company if there is no clear improvement.

The move comes after a letter to Cars.com Monday was released by Starboard Value Inc., which chastises the shopping site for "an almost two-year ongoing trend of customer losses and organic revenue declines" despite the increased operating costs. It has resulted in missed earnings expectations and reduced guidance, Starboard said, which had a 9.18 percent stake in Cars.com from the last registration request. It is the third largest shareholder in the company, behind BlackRock Inc. and Vanguard Group Inc., according to Nasdaq.

When asked if he expected the restructuring to take Starboard, CEO Alex Vetter of Cars.com said: "We listen to all investors and take feedback seriously." In a telephone conversation with Automotive News, Vetter and Chief Revenue Officer Doug Miller pointed out the ongoing transition from a traditional media and listings service to a digital solution provider.

"We intentionally expanded our business strategy with media and offers to take advantage of what we see as an increasing dynamic within the industry," Vetter said, adding that the vehicle sales space is changing rapidly for both dealers and consumers. "There are not many dealers with whom I speak today and who do not strive for operational efficiency."

The starboard letter included a chart (below) with losses in adjusted income before interest, taxes, depreciation and amortization from the second quarter of 2017 through the third quarter of 2018, along with a loss of dealer clients for each period. Turnover at Cars.com grew 6 percent to $ 497.8 million for the first three quarters of 2018, while operating profit fell 37 percent to $ 60.1 million. The net result decreased by 59 percent to $ 29.5 million for the nine-month period.

The company has approximately 1,600 employees, of which 480 in sales and account management. Cars.com said that only members of the sales team will be affected by the cutbacks.

The restructuring will divide the company's sales team into four groups: a field team that focuses on serving and growing customer base; an extensive account management team; a specialized sales team that focuses on a more complex and deeper product range; and a large account team.

Cars.com chief revenue officer Doug Miller Photo Credit: Cars.com

Digital products

Meanwhile, as car buyers increasingly shop online, Cars.com has introduced products to help dealers meet consumers in the digital domain. In the third quarter, the company launched its Social Sales Drive tool, which offers an artificial intelligence-based messaging service on Facebook that apparently helps dealers track customer leads that shop on Facebook after hours. In a conference call that discusses the company's results in the third quarter, Vetter said that retention percentages were 70 percent better at franchise services with Social Sales Drive than at stores that did not use the tool.

Cars.com also tests a home delivery service that allows dealers to deliver vehicles outside their markets. The next year is expected to be rolled out.

The fastest growing product area of ​​the company is the products of the dealer website, powered by the Dealer Inspire unit, which it took over this year. The company added the website for consumer reviews DealerRater in 2016 when it was still a subsidiary of Tegna Inc. used to be.

Employing brand awareness and the established national network is one way that Cars.com wants to distinguish itself from other external suppliers and sell its services to dealers who might otherwise try to launch their own digital solutions.

"Many dealers add digital tools to their website, but the difference when you work with us is that we offer national distribution and direct traffic to the dealer's website," says Vetter.

Among third-party sites for vehicle shopping, Cars.com ranks second among its competitors, with sales of $ 654 million for the 12 months ending September 30, according to AIM Group. But the company's sales growth – 4 percent for that period – is lagging behind two of its main competitors, the fast-growing CarGurus and TrueCar. Turnover for CarGurus rose by 46 percent to $ 419 million in that period, while TrueCar sales increased 10 percent to $ 346 million.

Cox Automotive's Autotrader and KBB units lead the segment with $ 975 million in combined revenue estimated for the 12 months ending September 30, according to AIM. Although a comparison with 2017 was not available, Autotrader / KBB sales in 2016 fell to an estimated $ 1 billion, AIM said. The information will be released Tuesday in the Automotive Advertising Annual 2018-2019 of AIM.

A graph in the letter from Starboard Value Inc. at Cars.com shows declining EBITDA and the number of dealers. Photo credit: Starboard Value Inc.

Price pressure

Steve Dyer, managing partner of Craig-Hallum Capital Group, analyst firm analyst, said that Cars.com has been affected by the price pressure of some newcomers who have offered "freemium" models for some of their services.

"The crux of the problem with Cars.com is a kind of their core organic business has been steadily declining since they have gone public," said Dyer, who compares the dealer's loss of core business with "a melting ice cube."

Still, the company generates a significant amount of free cash flow, Dyer said. It was $ 111.1 million in the third quarter compared to $ 119.6 million in the same period last year. It also has a great brand name in the industry and good margins, he added.

"There is much too much fun," Dyer said, adding, "I am skeptical, this could be a growth company again, I could certainly change my mind."

The Dyers office has a "hold" rating on Cars.com because it was spun in 2017 by the media company Tegna. Cars.com was launched in the pre-social media days of 1998 by a group of newspapers from Chicago. The newspaper owners were bought by Gannett in 2014 before Gannett split into two companies, one of which became Tegna, the new owner of Cars.com.

Following the divestment of Tegna, Cars.com was listed on the New York Stock Exchange on June 1, 2017. The company's initial public offering gave the company a $ 1.95 billion market capitalization after shares had closed 9 percent for $ 27.28 per Unit. The 52-week high of the company is $ 32.94. The shares rose on Wednesday with Wall Street and came in at 6.3% at $ 25.35.

"It's very undervalued, and I think that's why Starboard does what they do," said Gary Prestopino of Barrington Research Associates Inc. "In all honesty to the company, when it was part of the media companies, the media companies were simply withdrawing money and not investing in the platform," said Prestopino.

Vetter and his team have corrected this course, Prestopino said. But, like Dyer, he said that newer companies like CarGurus have tried some of Cars.com's business.

National advertising has also received a hit. But Prestopino remains reasonably optimistic on Cars.com.

"It has a very bright future for the long term," he said. "I am a more patient investor."

In the win call in the third quarter, Vetter recognized a "competitive environment", but said that not all cancellations of dealers are the same. Some large dealership groups demanded tariff concessions and in some cases the company is running away instead of admitting to keep its value.

"Our own data show that approximately 20 percent of our dealers re-sign with us within a half-yearly window," Vetter said in the income call. "So they feel that they are not on our platform."