AUTONATION, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• New Vehicle sales increased market share, recovering from the CDK outage impact, with same store units up 2% across all segments.
• After-Sales team delivered an all-time record gross profit.
• Operational challenges included the CDK outage (impacting ~$0.21 per share), significant weather events closing ~50 stores, and high OEM stop-sales in premium luxury brands.
• Divested 7 domestic and 1 import store, generating over $150 million, to reallocate capital to more attractive opportunities.
• New vehicle gross profit PVRs stabilized, and CFS showed sequential improvement in PVRs.

Segment Performance

• New Vehicle sales: Total revenue was $6.6 billion, a 4% decrease from the prior year. New vehicle unit volumes recovered from the CDK impact, with same store units increasing 2% across all segments (Premium Luxury, Import, Domestic). New car margins are moderating but stabilizing.
• Used Vehicles: Unit sales decreased from the prior year's strong third quarter but increased sequentially. Demand for lower-priced vehicles remained resilient, but supply challenges persisted for mid and higher-priced tiers. Used Vehicle PVR was down ~9% year-over-year but held steady sequentially.
• Customer Financial Services (CFS): Saw 10% sequential PVR growth from June to September. AN Finance originated $700 million of loans YTD, expects $1 billion full-year originations, with a focus on building a prime portfolio and deepening customer relationships.
• After-Sales: Achieved an all-time record gross profit. Same store gross margin rate reached 47.7%, up 50 basis points, driven by warranty and customer pay growth.

Guidance

• Expect moderation in seller expectations for franchise store valuation.
• Anticipate continued strong performance in CFS and growth of AN Finance, with AN Finance aiming for ABS prime issuer status.
• Fourth quarter New Vehicle unit sales expected to benefit from seasonal strength of premium luxury brands.
• Used unit sales projected to perform well in Q4 with improved affordability and ample inventory.

Risks

• CDK outage negatively impacted performance, reducing EPS by approximately $0.21 per share.
• Significant weather events led to temporary closure of ~50 stores.
• Unusually high OEM stop-sales, concentrated in premium luxury brands, affected performance.

Question and Answer

Q: Good morning, guys. Just a first question, Mike, on the parts and service side. You made a comment that comps get tougher, but then Tom mentioned that you guys are still looking for mid- single digit same store sales growth. But I'm just thinking, as you think about that business, there's a tremendous amount of warranty work that seems to be popping up from stop-sales, ranges across automakers. Doesn't that present a potential opportunity here in the near term and maybe even over the next couple of years to maybe outstrip that? And sort of on the other side, on the customer pay, how are you measuring retention levels so that some of those comps that might get tougher on the customer pay side might be eased by holding onto the consumers for a few years longer?

A: Thanks John. So let me just focus on the customer pay to begin with and we've talked about this before. So we look very closely at penetration of the vehicle park in each of the areas we represent, zero to three years, three to seven years and seven years above, which led around depending on the franchise, higher for premium luxury, a little bit lower for domestic between 50% and 55% penetration of zero to three years. That's obviously influenced by the number of vehicles that are sold outside of the immediate vehicle park, but it shows you that there is opportunity on the customer pay side to grow and improve penetration there. We have a lower penetration, but in line with industry on three to seven years, I think that's a huge opportunity for us, and frankly, most of our OEM partners are now laser focused on that as well, and they're very much looking at the content required to win some of those customers back to the franchise network. We're involved with many of them, and we've developed in plans there, so I think we can grow that. And I also believe we're entering a period now where we're going to start to see some growth in the vehicle park that has typically been addressed by franchise dealerships. After two to three years now of reduction in the three and the seven year vehicle park, we're going to begin to see the three year park growth as we get into next year, and I'll be followed by the seven year park. So I think there are a number of positives available for us to continue to grow that business, and we're very, very focused on it. As I think about Tom's comments, I agree with what he says, but clearly what he's doing, he takes a more cautionary approach in terms of what is available in the business, and the discussions that I have with my team are very different focused. But, Tom, I think does a phenomenal job at being realistic. I do, I think, a different job at setting targets that I think are very ambitious. So somewhere in between, we'll probably end up, and what happens with stop-sales, hopefully they get progressively reduced with improved quality, as we've seen over many years, because that can't be our strategy for growth.

Q: Good morning, guys. Just a real quick second question. Tom, you talked about doing your first ABS deal sometime next year. What does that mean for the relative cost of funding for AutoNation Finance, and what is the opportunity, yes, I mean, what is the opportunity to lower the cost of funding significantly? And at 10% it sounds a little bit high even on the equity side. I mean, could that be closer to 5% of what you might need to put into deals ultimately over time?

A: I mean, Mike said I'm conservative, so maybe you're right on the equity funding, but I think we have to first get a portfolio that's seasoned enough to get some ABS activity going, and then hopefully we can drive some good interest and get good funding levels. I do think it'll be a benefit to the overall cost of the portfolio compared to our warehouse lines. I'm not entirely sure what number I'd put on it until we get a little bit closer to those events, but it should be positive relative to the funding cost of the portfolio.