AutoNation, Inc. (AN) Earnings

Management highlights

### Overall Industry and Consumer Condition - June Seasonally Adjusted Annual Rate (SAR) is the highest June reading in four years, and consumer sentiment has improved month-over-month. Banking partners reported a 20% increase in loan applications and originations, with improving delinquency rates. - Auto affordability has improved significantly over the past 24-48 months and remained stable between Q1 and Q2 2026, the best balance since pre-COVID times, supporting underlying industry demand. ### After Sales Strategy and Execution - After sales is a durable, recurring, high-margin business that drives customer retention and half of total profits. Management continues to prioritize growing this segment, focused on improving market penetration of customer pay services. - Wholesale parts growth of 16% is driven by a new centralized supply chain model (previously managed per store) that captures share from independent aftermarket suppliers, mostly with OE parts. This growth is incremental, and margin improvements are expected as the business scales. - To compete with independent repair shops, management focuses on packaging and communicating value to customers, with a focus on penetrating the 3-10 year and 10+ year old vehicle parks (addressable volume for newer vehicles is temporarily depressed due to COVID-era production declines). - Technician headcount at same-store franchises grew over 2% year-over-year, driven by competitive total rewards, clear career development paths, and investments in improved working conditions, supporting continued mid-single-digit gross profit growth targets. ### Capital Allocation - Capital allocation priorities are (in order): fund maintenance CapEx, pursue selected M&A that adds scale and density in existing markets, return residual cash to shareholders, and maintain an investment-grade credit rating. Balance sheet leverage remains comfortably within the 2x-3x EBITDA target range. - In H1 2026, the company deployed $900 million in total capital: $457 million for share repurchases, $317 million for M&A, and $126 million for CapEx. Acquisitions included a Toyota store in Atlanta, GA and three premium luxury stores in the San Francisco Bay Area, adding ~$600 million in annual revenue and ~9,700 annual unit sales, increasing scale in core existing markets. - H1 2026 adjusted free cash flow was $439 million (up 11% year-over-year), with a cash conversion rate of 125% (up from 100% year-over-year). ### Strategic Priorities - The company focuses on customer lifetime value rather than short-term volume or margin alone: it is willing to accept modestly lower per-unit new vehicle gross profit to acquire new customers, who generate long-term recurring revenue through after sales and financial services. - AutoNation Finance is scaling profitably, improving earnings diversification, with long-term profit recognized over the life of loans rather than at origination (creating temporary near-term headwinds for CFS per-unit profit). - SG&A productivity is a core focus, with meaningful sequential improvement in Q2 2026.

Guidance

- SG&A as a percentage of gross profit is expected to reach the 66% to 67% target range on a run-rate basis by the end of 2026, driven by higher gross profit, AI-enabled productivity initiatives, moderating first-half heavy advertising investments, and portfolio actions. - Off-lease vehicle supply is expected to increase 30-40% in H2 2026 compared to H1 2026, easing supply constraints for lower-priced used vehicles. - Full-year 2026 CapEx is expected to remain on track at approximately $325 million. - Management expects adjusted EPS growth to continue in the second half of 2026, extending the streak of six consecutive quarters of year-over-year EPS growth. Unit sales are expected to continue tracking in line with the overall markets and brands AutoNation serves. - Continued mid-single-digit growth in after-sales gross profit is expected over the long term, driven by improved penetration and technician workforce growth. - AutoNation Finance is expected to continue delivering attractive returns on equity as profitability grows and incremental equity investment requirements moderate.

Segment performance

1. After Sales: Record gross profit of $607 million, with revenue of $1.26 billion (up 3% year-over-year). Customer pay revenue increased 7% year-over-year, wholesale parts revenue grew 16% year-over-year, customer pay repair orders rose 5%, and warranty repair orders grew 8%. Gross margin was 48.1%, and after sales contributes ~50% of total company profit. Customer pay gross profit increased 7% year-over-year, while internal gross profit declined due to cyclical softness in used vehicle reconditioning. It accounts for ~49% of total gross profit. 2. Customer Financial Services (CFS): Total gross profit of $358 million, with per unit profitability of $2,799 (up 3% year-over-year, after absorbing a 2% drag from increased AutoNation Finance originations). Finance penetration reached ~75% of total units sold, with customers purchasing an average of two products per vehicle (led by extended service contracts). It contributes ~29% of total gross profit. 3. AutoNation Finance (captive finance): Generated $11 million profit for the quarter (up from $9 million in Q1 2026 and $2 million in Q2 2025), with total interest margin up 35% year-over-year. The portfolio grew 52% year-over-year to $2.67 billion, with 91% of the portfolio debt-funded (up from 83% a year ago). Originations hit $485 million, with penetration of 11% of total vehicle sales and 18% of financed vehicle sales. 4. New Vehicle Sales: Total unit sales of 63,240 units (down 4% year-over-year, driven by a 30%+ decline in BEV sales). By segment: import unit sales up 1%, domestic down 12%, premium luxury down 4% (down 1% excluding BEV impact). Gross profit per unit was $2,381 (down from $2,785 year-over-year due to higher vehicle costs), with stable sequential profitability over four consecutive quarters. Inventory days supply: 73 days for domestic, 66 days for luxury, 34 days for import. 5. Used Vehicle Sales: Retail unit sales down year-over-year, with mix shifted to higher-priced vehicles: units priced above $40,000 up 10% year-over-year, driving an 8% increase in revenue per unit. Gross profit per unit was $1,582 (stable year-over-year, down slightly from $1,622 a year ago). ~90% of used vehicles are internally sourced, and CPO sales now represent ~20% of total used vehicle sales (up from ~15% in H1 2025). It contributes ~22% of total gross profit. Overall total revenue for Q2 2026 was $6.93 billion (flat year-over-year, up 6% sequentially from Q1 2026), total gross profit was $1.23 billion (17.8% margin), and adjusted diluted EPS was $5.56 (up from $5.46 year-over-year), marking the sixth consecutive quarter of year-over-year EPS growth.

Risks & headwinds

- Addressable after-sales volume for newer vehicles is temporarily depressed due to COVID-era production declines, requiring active penetration efforts to offset this structural headwind over the next 12-24 months. - Supply constraints remain for lower-priced (under $20,000) used vehicles, pressuring overall used unit volume. - BEV sales have declined more than 30% year-over-year, creating headwinds for new vehicle total volume growth. - Technician labor markets remain highly competitive, requiring continued investments in compensation and working conditions to grow and retain workforce. - Forward-looking statements are inherently subject to unknown risks that could cause actual results to differ materially from guidance, with additional risk factors detailed in SEC filings.

Analyst Q&A

• Q: After-sales saw revenue growth but decelerated gross profit growth due to mix impacts. Is this slowdown temporary, and when will gross profit return to mid-single-digit growth? What is driving the SG&A improvement to hit the 66-67% target by year-end?

  A: The gross profit deceleration is entirely temporary, driven by point-in-time mix shifts: lower internal reconditioning from a shift away from sub-$20,000 used vehicles, lower content per warranty repair order, and faster growth in lower-margin wholesale parts (which is incremental share gain). Underlying customer pay penetration growth remains strong, offsetting the temporary COVID-related hole in the 3-10 year old vehicle park, and mid-single-digit growth will resume. SG&A improvement comes from multiple drivers: higher gross profit, AI-powered productivity initiatives, moderating first-half heavy advertising spend, and recent portfolio actions.

• Q: What is driving the stability of combined new/used and CFS per-unit profitability, and is this stable range the new normal? How has CPO penetration trended, and will increasing off-lease supply boost CFS?

  A: Management focuses on total unit profitability rather than individual segment metrics, and stability over the last four quarters is expected to continue, supported by growing CFS profitability. CPO penetration has increased from ~15% in H1 2025 to ~20% in H1 2026. Off-lease supply will rise meaningfully in H2 2026, and finance penetration for used vehicles continues to grow, with incremental upside from AutoNation Finance as it scales, creating modest CFS growth tailwinds.

• Q: How large can the wholesale parts business become, what is its current margin profile, and where are you gaining share?

  A: Historically, wholesale parts were managed per store, but the new centralized single supply chain model has delivered large commercial wins driving 16% quarterly growth, mostly gaining share from independent aftermarket and collision shops. The vast majority of sales are OE parts, leveraging existing store inventory and brand rights, with lower current margins that will improve as the business scales via fixed cost leverage and better centralized management of supplier incentives. This is a high incremental growth business enabled by AutoNation's existing market density.

• Q: How does AutoNation balance M&A versus share repurchases, and what is your approach to valuation for acquisition targets?

  A: Management prioritizes the highest return on invested capital (ROIC) for every dollar deployed. Acquisitions are only pursued for properties in core strong brands and existing dense markets, where AutoNation can deliver synergies and meet ROIC hurdles; deals that don't meet requirements are passed over, and residual cash is returned to shareholders via buybacks. The company has a strong balance sheet and is open to large acquisitions if they meet return targets, with the ability to deleverage quickly after closing, and prioritize EPS growth for shareholders over headline revenue growth.

• Q: What will be the direction of share repurchases in H2 2026, and what is the trend in online vehicle purchasing?

  A: Residual cash flow after funding CapEx and M&A will continue to be allocated to share repurchases, in line with the company's stated capital priorities. Online vehicle research and purchasing continues to grow as younger generations become the dominant buyer group, and AutoNation is continuing to invest in digital channels to meet changing customer preferences for research, purchase, and fulfillment.