AutoNation Earnings: Profit Declines Are Not as Bad as They First Sound

AutoNation’s AN second-quarter adjusted EPS of $6.29 declined 2.9% year over year but still beat the Refinitiv consensus of $5.91. We think the stock falling by over 11% during July 21 trading is from some investors taking profits. The stock increased by about 70% in 2023 before the July 21 drop, after management said on the call that new vehicle profits will continue to moderate as inventory rises. This remark should not be surprising, as inventories have been very low due to the chip shortage, and dealers we cover have long said they expect profits to fall from recent record levels but remain above prepandemic levels. We agree with this prediction because we don’t expect inventory to return all the way to prepandemic levels, which should reduce the need for discounting as much as in the past. Therefore, we are leaving our fair value estimate unchanged.

The quarter saw same-store revenue fall 0.9%, as about 9% service growth and 11% new-vehicle revenue growth did not quite offset a 19.2% decline in used-vehicle revenue. Used vehicles continue to suffer from poor affordability, but total company used revenue per vehicle did fall by 7.6% to a still relatively high $28,326. Used unit volume declined by 10.7%, while new vehicle volume grew 7.9%. Higher new volumes, however, caused new vehicle gross profit per unit to decline by 24.5% to $4,607, which is still far higher than $1,850 in fourth-quarter 2019. Total gross profit only fell by 1.9% despite new and used gross profit down double-digit percentages thanks to 12.6% service profits and 0.5% growth from finance and insurance. F&I is a 100% gross profit business and continued penetration of products like extended warranty and guaranteed asset protection enabled a company record F&I gross profit per unit of $2,815. So, although adjusted operating income fell by 18%, we don’t see the quarter as a poor one.