Automobile public sale firm KAR is 100% digital years forward of schedule

An Indiana-based auction house emerges as a technology company amid the coronavirus pandemic, and the disruption caused by the global health crisis has turned a three-year process into an overnight success.

KAR Auction Services, based near Indianapolis, has made a name for itself in the used car auction business.

As pandemic lockdown made more businesses rely on remote work and citizens to shop online last year, the company digitally shut down auction services in April, CEO Jim Hallett told CNBC’s Jim Cramer on Tuesday.

“We wanted to go 100% digital in the next two or three years,” he said in a “Mad Money” interview. “We basically got it taken care of in two or three weeks, and frankly, it exceeded our expectations.”

The process of digitizing the auction house began about five years ago, and by 2019 three out of five auto sales that KAR enabled were on the internet, Hallett said.

The company doubled in both the digital and dealer-to-dealer markets with the purchase of BacklotCars, an online dealer-to-dealer vehicle wholesale platform, for $ 425 million last September. BacklotCars serves dealerships in 46 states across the country. Dealer-to-dealer transactions are a key business for KAR, and Hallett announced that up to 15 million cars are auctioned annually under this umbrella.

By facilitating online auctions, buyers will have access to more inventory than is available in their local market, while sellers will have access to a larger buyer base, Hallett said. KAR serves 150,000 registered buyers in the US As of July, the company said it was facing a shortage of used cars in the wholesale market.

“All in all, it has been a win-win and our dealers are very pleased and satisfied with the performance of the digital model,” said Hallett.

The digital process has made the business more efficient, Hallet said, and the company’s cost of sales has decreased in recent years. In the quarter ended September 30, KAR saw its cost of sales decrease nearly 20%, according to Factset, followed by a decrease of around 23% last year.

In the first nine months of 2020, KAR saw sales drop 21% to around $ 1.66 million as the country battled the pandemic. Sales fell by double digits for seven quarters.

Cramer found the company’s workforce is now below 10,000 (up from 15,400 in April), suggesting that the gross margin, or the amount of capital a company retains for every dollar of sales, has increased.

Despite the downsizing caused by the online transition, Hallet expects the company to regain jobs as its digital business grows.

“If you become a digital company and continue to innovate, we will bring additional talent back into the market so we can support this digital platform and any digital acquisitions we have focused on going forward,” he said.

Since the start of the new year, KAR stocks have risen 11.50%, closing Tuesday’s session at $ 20.75 within the dollar of pre-pandemic price levels.

KAR stock was down nearly 15% in 2020 as the market rebounded from the coronavirus-induced shutdown in the first quarter of last year. The stock has more than doubled from its pandemic lows of less than $ 10 per share.