SWFL move was part of bumpy road for Hertz; new CEO maps turnaround

When Hertz announced in 2013 it would relocate its world headquarters to Southwest Florida, its then-CEO, Mark Frissora, described the move as "the best, most balanced business decision based on market factors."

The move, he said, would meet the needs of the company's employees and customers, after Hertz's acquisition of the Dollar Thrifty Automotive Group in November 2012.

The goal was to consolidate operations and position the Fortune 500 company for long-term growth in a state known for the strength of its tourism industry.

"The relocation results in a positive financial return to the company," Frissora, a part-time Naples resident, said at the time.

More: Hertz returns to Fortune 500 list

More: Lee appraiser files suit over board's $14M cut in Hertz property valuation

Since then, Hertz has traveled a bumpy road that has included the resignation of two CEOs, accounting errors that forced it to correct and restate three years of financial statements, and strategic missteps that have led to disappointing financial results.

Hertz CEO Kathryn Marinello, a veteran of the banking, business service and technology industries, explained in the last earnings call with analysts how the headquarters move to Southwest Florida actually set the company back. 

"In the move, we lost a significant amount of the people that were running the business," she said. "And over the last two to three years, we've been hiring back that talent and building back that team."

More: Hertz reports 24 layoffs, including 19 at headquarters in Estero

While it was rebuilding its corporate team, she said, there were "very significant jobs" in marketing and other areas that "weren't getting done."

So in many ways Hertz's problems have been "self-inflicted," she said, putting it at a disadvantage to its competitors, namely Avis and Enterprise.

Marinello, who has been in the driver's seat since January, is in the early stages of a turnaround strategy focused on returning to the basics. She has not estimated the cost of those plans, centered on fleet, service, marketing and technology and aimed squarely at improving the customer experience.

"She's solely focused right now on seeding the turnaround initiatives and meeting with field locations, customers and suppliers," Beth Davis, a Hertz spokeswoman, said in an email.

More: Hertz's new CEO outlines priorities for turnaround, focusing first on U.S., basics

Marinello, who declined to be interviewed, told analysts Hertz had an "incredibly optimistic demand forecast" around its fleet and made bad buying and management decisions before her arrival, including purchasing too many smaller models that renters didn't want.

"Much of it is behind us," she said. "We are going to invest in this company and do the right thing, despite some pretty painful headwinds right now."

Investing in the company includes buying the right cars because "cars matter," Marinello said.

Hertz will announce its second-quarter results Tuesday.

Investors are eager to hear more on the road map and financial targets ahead, and how the third quarter is shaping up, Barclays analyst Dan Levy and his team said in a research note last week.

Hertz saw a nearly 100 percent runup in its stock from June 21 to July 28 on news that Apple is leasing cars from Hertz for self-driving software testing, seen as one of the first bits of positive news for the beleaguered rental car company in some time.

But Hertz's shares plunged July 31 after Barclays downgraded the company's stock from equal weight to underweight with an unchanged price tag of $9, suggesting it had risen too far, too fast. 

The excitement over Hertz's stock "ignores the challenges ahead in earnings recovery," Levy said.

Shares rallied again Friday, closing at $14.32, up more than 10 percent, after J.P. Morgan began covering the industry. Still, shares have tumbled more than 33 percent year to date.

Barclays predicts a sharp miss in Hertz's second-quarter earnings.

While analysts on average expect Hertz to post earnings of $95 million before interest, taxes, depreciation and amortization, Barclays pegs them at just $34 million, primarily based on fleet costs.

Looking ahead, Hertz's fleet costs are unlikely to come down, rental pricing is not likely to see much of a recovery and management's commitment to improving service suggests future investment, which would mean higher expenses, Levy said.

The sharp decline of Hertz's stock price for the past year reflects "poor strategic moves, which were magnified due to poor blocking and tackling," and worsened by industry challenges, Levy said.

Industry challenges include everything from a used-car glut to growing ride-sharing competition.

"With management still getting the business on the right track, there is likely little incentive to outperform on estimates, and more incentive to 'kitchen sink,' " Levy said, meaning get all the bad news out.

In the first quarter, Hertz reported an adjusted loss of $1.61 a share, wider than expected, and revenue also disappointed Wall Street. The company blamed the weak performance on several factors, including an unfavorable customer mix and lower values for the used cars its unloading from its fleet.

Hertz's struggles can be traced to its acquisition of Dollar Thrifty, which put it "a little off kilter," said analyst Chris Woronka, with Deutsche Bank.

"That acquisition was possibly more difficult to integrate than they originally envisioned," he said. "It's probably not a coincidence that not long after that acquisition was completed, they started having some operational hiccups."

The two rental car companies, he said, weren't a bad fit, but the execution of combining them "left something to be desired in the early going." Those problems were compounded by Hertz's relocation and by the loss of senior revenue and fleet managers, Woronka said.

"The talent loss, clearly that is a big deal," he said.

Hertz is in a much better place talent-wise than it was a year ago, however, and it continues to make good progress on that front, Woronka said.

In 2014, Hertz took another hit after signing a multimillion-dollar contract with State Farm to supply replacement cars to the insurer's customers when their vehicles needed repair. After landing the contract, Hertz struggled to keep enough cars in place for its usual customers, creating service and logistical issues and surrendering market share to its competitors, Woronka said.

Bad decisions about fleet mix have hurt the company's bottom line, he said.

"Hertz has had to turn over their fleet more often than they would like and there is a cost to doing that and that has definitely hurt their earnings," he said.

On June 30, 2016, Hertz separated from its equipment rental business Herc.

The spin-off from Herc was designed to improve operating efficiencies and to unlock value for Hertz shareholders. So far, the split seems to have benefited Herc more than Hertz, Woronka said.

"Ironically in the short term it might have negatively impacted earnings at Hertz because the equipment business had been a little bit more stable and hasn't faced the same turnaround challenges as the car rental business," he said.

More: Hertz spins off equipment rental as Herc

More: Herc finds its own way as a stand-alone company

Hertz is also saddled with about $14 billion in debt, a risk that has kept some investors away.

"Our firm has no position in Hertz," said Andrew Hill, president and co-founder of Andrew Hill Investment Advisors Inc. in Naples. "The high level of debt violates our investment criteria. I wish them the best in turning around their business. They are a valuable corporate resident in Southwest Florida."

In June, Hertz sold $1.25 billion in new senior notes in a private offering, a move the Wall Street Journal described as "a first step for the car-rental company to repair its battered balance sheet." But the company has been criticized for being secretive about what it's going to do with the money.

Hertz is on its third CEO since announcing its relocation.

Before Marinello took the wheel, airline veteran John Tague, steered Hertz.

Michael Millman, a company analyst and founder of Millman Research Associates, said Hertz already "had a lot on their plate" when Tague arrived on the scene.

"New management really knew nothing about the car rental industry, but somehow believed the car rental industry was like the airline industry, which is not at all correct. So now they had a lot of people who were just learning about the car rental industry and they ended up losing share to Enterprise and Avis as this was going on," Millman said.

As for Marinello, Wall Street's reaction was mixed when she was named CEO. While an analyst at Credit Suisse said she had "less of an operations bent than we would have preferred," Hertz's top investor Carl Icahn lauded Marinello as the "right person to lead Hertz as we move forward."

Hertz CEO change gets mixed reaction

Marinello has been "moving toward flattening out the hierarchy," getting rid of the "people in the middle" so she can more directly deal with the employees in the field to see what needs to get done and get it done, Millman said.

"She is more focused on rentals," he said. "The other group was more focused on getting the company more in line with the airline industry, in terms of technology."

As long as Icahn, who has about a 35 percent stake in Hertz, is a big investor in the company, he's "not going to let this thing go bankrupt," Millman said.

"I don't think he wants to take a big loss, a bigger loss than he already has," Millman said of Icahn. "So I think he would work to help the company in its financing to make sure that indeed it did the things it needs to do to help its debt position or its balance sheet position, either directly or working with the banks."

In April Hertz eliminated two dozen positions, mostly at its headquarters. At the time, a Hertz spokeswoman described them as ongoing changes made in the normal course of business.

Hertz also reported layoffs in February 2016, when the company downsized its information technology department after expanding its partnership with IBM.

Despite the layoffs, the company has exceeded its job creation requirements for local and state economic incentives. As of June 30, it had 719 new jobs in Florida, all based at its headquarters, according to its most recent annual report submitted to Lee County.

Lee County Commission Chairman John Manning said Hertz's move was a great decision for the company and the county. 

"It's a cyclical business," he said. "Their stock is going to be up one day and down the next. It's a situation where they have to analyze the marketplace out there and get it right."

Timeline

Here are the key events that drove Hertz to where it is today:

November 2012: Hertz completes its acquisition of Dollar Thrifty

May 2013: Hertz announces it's moving its corporate headquarters from New Jersey to Florida

September 2013: Hertz issues its first negative surprise, cutting its financial guidance for the year

November 2013: Hertz provides another negative surprise, saying it expects a sharp uptick in its domestic fleet costs for 2014

December 2013: Hertz adopts a one-year shareholder rights plan, commonly called a "poison pill," after noticing "unusual and substantial" trading of its shares

March 2014:Hertz announces its spinning off Herc, its equipment rental business

Spring 2014: Hertz wins a significant insurance replacement car contract at State Farm, outbidding Enterprise

May 2014: Amid financial and accounting errors, Hertz begins a review that later leads it to restate three years of financials

August 2014: Hertz withdraws its financial guidance for 2014, citing a variety of issues including higher operating expenses

Service suffers as Hertz cuts costs to overcome revenue shortfalls

Carl Icahn announces an 8.5 percent stake in Hertz

September 2014: Mark Frissora steps down as CEO

November 2014: Airline veteran John Tague hired as CEO

July 2015: Hertz completes its financial review

January-June: 2016: Hertz's domestic pricing sharply underperforms, due to company-specific issues

June 2016: Hertz completes its spin off of Herc

November 2016: Hertz posts a large miss for the third quarter and cuts its financial guidance for the year by 33 percent

Icahn more than doubles his stake in Hertz

January 2016: CEO John Tague retires, Kathryn Marinello, a veteran of the banking, business service and technology industries, takes his place

Source: Barclays

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