Pendragon axes 500 jobs and warns of slump in sales

A huge drop in sales has forced Pendragon to cut 500 jobs and the country's largest car dealer said profits for the rest of this year "were difficult to predict" as inflation, particularly on the price of fuel, deprives buyers of the cash for big-ticket purchases.

Sales of new cars to retail customers plunged by 9.5 per cent in May, while the drop from small business buyers was more extreme at 15.4 per cent compared to the same period last year. So far this year, sales have fallen by 2.2 and 0.1 per cent respectively.

Trevor Finn, the chief executive, said the high fuel price was the biggest reason, above all other economic headwinds, for the sudden drop. "The fuel dimension is making people re-evaluate their personal expenditure and how they spend their money. I think that is more of a feature [behind the sales fall], even than interest rates." He added even if the oil price persists, he did not expect future cuts because Pendragon is now "sized" for the tough conditions. "This is the market for the foreseeable future until some kind of macro factor changes motivations or renews consumer confidence."

Mr Finn said temporarily reducing the tax and duty burden on fuel – it comprises nearly 50 per cent of the price at the pump – "is something Government could look at to immediately put liquidity back into the system".

The profits warning sent the company's shares reeling 23 per cent to 15p, leaving it worth just £98m, more than 80 per cent off the peak it reached last August and less than a fifth of the £504m it paid for rival Reg Vardy in 2006.

Some analysts think Pendragon has further to fall. Citigroup rated it "high risk", highlighting its luxury dealership unit Stratstone as susceptible to further pain. The tightening of lending conditions from banks trying to deal with credit crunch-strained balance sheets has also hurt business. In a note, Citi warned other risks stalking the company include "extreme declines in new car registrations, pricing pressure from manufacturer oversupply, a reduction in car finance, increased regulatory burdens and higher petrol prices".

Brewin Dolphin classified the company as bloated after several acquisitions, of which Reg Vardy was the largest. Its rival Inchcape, for example, recently reported a slight uplift in sales.

"Inchcape showed last week how a well-managed and focused business can outperform the market with like-for-like sales growing 3 per cent year to date," the broker said. "Alas Pendragon is too big, has lost too much management and has the wrong financial model."

But Mr Finn said yesterday the company will be able to drive through the difficult market because more than half of its profits – 55 per cent – comes from service and maintenance, which will likely do well as fewer people buy new cars and instead stick with their old banger until they get comfortable again with spending large sums of money.