AutoNation (AN) Q1 2023: After-Sales Gross Profit Climbs 11% as Used Vehicle Margins Hit New Highs

April 20, 2023 | By EarningsIQ Research

AutoNation’s Q1 highlighted the power of after-sales and disciplined used vehicle strategy, offsetting softer new and used unit volumes. Management’s focus on internal sourcing, cost structure, and expanding service offerings is reshaping the business model for resilience. Investors should watch the measured expansion into finance and mobile repair as the company seeks to reduce cyclicality and capture more customer lifetime value.

Summary

• After-Sales Drives Profitability: Service and parts growth outpaced unit sales, highlighting strategic shift toward recurring revenue.
• Used Vehicle Margin Resilience: Margin discipline and sourcing offset volume headwinds, setting a new record for used vehicle gross profit.
• Expansion Beyond Cyclicality: New finance and mobile repair ventures aim to reduce reliance on new vehicle sales cycles.

Business Overview

AutoNation is a leading automotive retailer in the United States, operating a network of franchised dealerships and standalone used vehicle stores. The company generates revenue through the sale of new and used vehicles, customer financial services (CFS, in-house F&I and product attachment), and after-sales services (service, parts, warranty, and collision repair). Key segments include new vehicles, used vehicles (including AutoNation USA, or ANUSA, dedicated used car stores), after-sales, and CFS.

Performance Analysis

Q1 results showed a strategic pivot toward higher-margin, less cyclical business lines. Total revenue declined year-over-year as lower new and used unit volumes weighed, but after-sales gross profit rose 11% and used vehicle gross profit set a new first-quarter record. New vehicle sales remained in line with industry trends, with profit per vehicle sold (PVR) moderating but still robust above $5,200. Used vehicle supply constraints persisted, yet AutoNation’s focus on internal sourcing and inventory discipline drove PVRs above $2,100 and improved turns.

Customer financial services continued to deliver sector-leading PVRs above $2,700, even as finance penetration dipped slightly on used vehicles amid tighter credit and less subprime exposure. SG&A as a percentage of gross profit remained well below pre-pandemic levels, reflecting structural cost changes and ongoing efficiency gains. Cash flow from operations exceeded $500 million, supporting aggressive share repurchases and investments in new business initiatives.

• After-Sales Outperformance: Customer pay, warranty, and collision all grew in the mid-teens year-over-year, driving record gross profit in this segment.
• Used Vehicle Margin Discipline: Internal sourcing accounted for 90% of used inventory, mitigating auction cost pressures and supporting record gross profit despite lower volumes.
• Capital Deployment: Over $300 million was allocated to share repurchases, reducing share count by 5% in the quarter, while maintaining liquidity and leverage below historical norms.

Operationally, AutoNation’s ability to flex costs and maintain margin discipline in a mixed demand environment stands out, positioning the company for resilience as market conditions evolve.

Executive Commentary

Strategic Positioning

1. After-Sales and Service Expansion

After-sales, recurring revenue from service, parts, and warranty, is now a core growth driver. Management is expanding technician capacity and investing in mobile repair (RepairSmith, mobile service provider) to deepen customer relationships and address the constraint of service penetration, which currently sits at just 40-50% of the addressable vehicle park. This expansion is designed to capture more wallet share and lessen exposure to new vehicle cycles.

2. Disciplined Used Vehicle Sourcing and Inventory Management

Internal sourcing, acquiring used inventory directly from customers or trade-ins, enabled AutoNation to avoid costly auction purchases and maintain margin even as late-model supply tightened. The company continues to expand its ANUSA footprint, now at 15 stores, to densify presence and enhance local market scale.

3. Customer Financial Services (CFS) and AM Finance

CFS, in-house finance and insurance products, remains a margin leader, with average product attachment of two per vehicle. The slow, deliberate rollout of AM Finance, AutoNation’s captive finance arm, is intended to compete on service and response time, not simply to displace external lenders. Penetration is stable on new, slightly down on used due to less subprime activity.

4. Cost Structure and Capital Allocation Discipline

SG&A efficiency is a structural advantage: compensation, advertising, and overhead have all been reduced as a percentage of gross profit compared to pre-pandemic benchmarks. Management remains committed to opportunistic share repurchases and measured investment in new business lines, balancing growth with a strong balance sheet and investment grade rating.

5. Digital and Omnichannel Initiatives

Investments in digital retail and partnerships (e.g., Trucar, online vehicle marketplace) aim to broaden customer reach and enhance convenience, supporting the strategy of deepening household relationships and reactivating dormant customers.

Key Considerations

AutoNation’s Q1 underscores a business model in transition, with management intentionally shifting toward more stable, recurring revenue streams and away from pure reliance on new vehicle sales. Several factors merit investor focus:

Key Considerations:

• After-Sales Penetration Opportunity: Service business currently penetrates only 40-50% of the addressable vehicle park, leaving significant room for growth via technician expansion and mobile offerings.
• Resilient Used Vehicle Margins: Margin discipline and internal sourcing are offsetting industry-wide volume constraints in late-model used vehicles.
• Structural Cost Advantage: SG&A as a percentage of gross profit remains structurally lower, providing downside protection in a cyclical environment.
• Deliberate Expansion of New Businesses: Both AM Finance and RepairSmith are being scaled methodically, with an eye toward long-term profitability rather than short-term volume.

Risks

AutoNation remains exposed to cyclical swings in new and used vehicle demand, with inventory normalization likely to pressure new vehicle margins further. Service growth is constrained by technician availability and competitive labor markets, while the deliberate rollout of new ventures (AM Finance, RepairSmith) could take longer to reach scale. Rising interest rates and tighter credit could further impact finance penetration and affordability, particularly in used vehicles.

Forward Outlook

For Q2 2023, AutoNation signaled:

• Continued focus on operational excellence and cost discipline
• Measured expansion of ANUSA, AM Finance, and RepairSmith

For full-year 2023, management maintained a cautious stance, reiterating:

• Investment in technician workforce and service capacity
• Balanced capital deployment, including opportunistic share repurchases and selective M&A

Management highlighted several factors that will shape results:

• Normalization of new vehicle margins as inventory recovers
• Ongoing constraints in late-model used vehicle supply
• Potential for increased OEM incentives as leasing returns and production ramps

Takeaways

AutoNation’s Q1 shows a business adapting to a new normal, with after-sales and disciplined used vehicle execution mitigating volume headwinds and supporting record profitability.

• Service and parts are now the key margin engine, with further upside as technician capacity expands.
• Used vehicle margin management is a clear differentiator, shielding results from industry-wide supply constraints.
• Investors should watch the pace and impact of new business initiatives, as management seeks to build a less cyclical, more customer-centric platform.

Conclusion

AutoNation’s Q1 2023 results reflect a deliberate evolution toward recurring revenue and margin stability, even as industry headwinds persist. The company’s strategy of expanding after-sales, maintaining cost discipline, and investing in new businesses positions it for resilience and long-term value creation.

Industry Read-Through

AutoNation’s performance signals a broader industry pivot toward after-sales and service as core profit drivers, especially as new and used vehicle volumes normalize and margin tailwinds recede. Dealers with strong internal sourcing and technician pipelines will be best positioned to weather inventory and macro volatility. The measured buildout of captive finance and mobile repair should be watched as a template for other retailers seeking to diversify and deepen customer relationships. Rising SG&A efficiency and disciplined capital allocation are becoming table stakes for sustained outperformance in auto retail.

AN Consumer Discretionary Auto Retail After-Sales Used Vehicles Recurring Revenue Capital Allocation Technician Workforce