By autonews |

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

UPDATED: 12/12/18 4:16 pm ET - adds stock close

Cars.com, one of the auto industry's largest online shopping sites, is restructuring its sales operations and eliminating more than 100 sales positions amid pressure from an activist investment group that has called for a leadership change or sale at the publicly held company if there is not a marked improvement.

The move comes after a letter to Cars.com was released Monday by Starboard Value Inc. chastising the shopping site for "an almost two-year continuing trend of customer losses and organic declines in revenue," despite increased operating expenses. It's resulted in missed profit expectations and lowered guidance, said Starboard, which held a 9.18 percent stake in Cars.com as of its latest regulatory filing. It is the third-largest shareholder in the company, behind BlackRock Inc. and Vanguard Group Inc., according to Nasdaq.

Asked whether he expected the restructuring to assuage Starboard, Cars.com CEO Alex Vetter said, "We listen to all investors and take feedback seriously." In a call with Automotive News, Vetter and Chief Revenue Officer Doug Miller pointed to the company's ongoing transition from a traditional media and listings service to a digital solutions provider.

"We've intentionally been expanding our business strategy beyond media and listings to capitalize on what we see are increasing dynamics within the industry," Vetter said, adding that the vehicle sales space is rapidly changing for dealers and consumers alike. "There aren't many dealers I'm talking to today that aren't seeking operating efficiencies."

Starboard's letter included a chart (below) showing losses in adjusted earnings before interest, tax, depreciation and amortization beginning in the second quarter of 2017 and continuing through the third quarter of 2018, along with a loss of dealer customers for each period. Cars.com's revenue grew 6 percent to $497.8 million for the first three quarters of 2018, while operating income fell 37 percent to $60.1 million. Net income dropped 59 percent to $29.5 million for the nine-month period.

The company has about 1,600 employees, including 480 in sales and account management. Cars.com said only members of the sales team will be impacted by the cuts.

The restructuring will break the company's sales team into four groups: a field team focused on serving and growing customer bases; an expanded account management team; a specialized sales team focusing on more complex and deeper product offerings; and a major accounts team.

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

Digital products

Meanwhile, as vehicle shoppers increasingly shop online, Miller said, Cars.com is introducing products to help dealers meet those consumers in the digital realm. In the third quarter, the company launched its Social Sales Drive tool, which provides an artificial intelligence-driven messaging service on Facebook that ostensibly helps dealers track leads from customers shopping Facebook Marketplace after hours. In a conference call discussing the company's third-quarter results, Vetter said retention rates were 70 percent better among franchised dealerships using Social Sales Drive than at stores not using the tool.

Cars.com also is testing a home delivery service that would allow dealers to deliver vehicles beyond their markets. It's expected to be rolled out next year.

The company's fastest-growing product area is its dealership website products, driven by its Dealer Inspire unit, which it acquired this year. The company added consumer review website DealerRater in 2016 when it was still a subsidiary of media company Tegna Inc.

Leveraging its name recognition and established national network is one way Cars.com aims to separate itself from other third-party vendors and help sell its services to dealers who otherwise may be trying to launch their own digital solutions.

"Many dealers out there are adding digital tools to their website, but the difference when you work with us is, we're going to provide national distribution and drive traffic directly into the dealer's website," Vetter said.

Among third-party vehicle-shopping sites, Cars.com comes in second among its peers, with revenue of $654 million for the 12 months ended Sept. 30, according to AIM Group. But the company's revenue growth rate — 4 percent for that period — lags two of its key competitors, the fast-growing CarGurus and TrueCar. Revenue for CarGurus rose 46 percent to $419 million during that period, while TrueCar revenue 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 ended Sept. 30, according to AIM. Although a comparison to 2017 was not available, that Autotrader/KBB revenue dipped from an estimated $1 billion in 2016, AIM said. The information will be released Tuesday in AIM's 2018-2019 Automotive Advertising Annual.

A chart in Starboard Value Inc.'s letter to Cars.com shows declining EBITDA and dealer count. Photo credit: Starboard Value Inc.

Pricing pressure

Steve Dyer, managing partner of analyst research firm Craig-Hallum Capital Group, said Cars.com has been facing pricing pressure from some newcomer competitors that have offered "freemium" models for some of their services.

"The crux of the issue with Cars.com is kind of their core organic business has declined pretty steadily since they've gone public," said Dyer, who likens the loss of core dealer business to "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 with $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's a lot to like," Dyer said, adding, "I'm skeptical this could be a growth business again. I certainly could have my mind changed."

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

After being spun off from Tegna, Cars.com was listed on the New York Stock Exchange on June 1, 2017. Its initial public offering gave the company a market capitalization of $1.95 billion, after shares closed up 9 percent at $27.28 apiece. The company's 52-week high is $32.94. The shares rose with Wall Street on Wednesday, gaining 6.3 percent to close at $25.35. 

"It's very undervalued, and I think that's why Starboard is doing what they're doing," said Gary Prestopino of Barrington Research Associates Inc. "In all fairness to the company, when it was part of the media companies, the media companies were just taking cash out of it and not investing in the platform," Prestopino said.

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

National advertising also has taken a hit. But Prestopino remains fairly bullish on Cars.com.

"It's a got a very bright future on a long-term basis," he said. "I'm a more patient investor."

In the third-quarter earnings call, Vetter acknowledged a "competitive environment" but said not all dealer cancellations are equal. Some large dealership groups had been demanding rate concessions, and in some cases, the company is walking away instead of conceding in order to preserve its value.

"Our own data shows that about 20 percent of our dealers re-sign with us within a six-month window," Vetter said in the earnings call. "So they feel the pinch of not being on our platform."