AutoNation, Inc. — Form 10-Q Summary
Business Context and Reporting Period
AutoNation is the largest U.S. automotive retailer. For the quarter ended March 31, 2021, it operated 315 new-vehicle franchises across 230 stores, 73 collision centers, five AutoNation USA used-vehicle stores, four auction operations, and three parts distribution centers. The filing compares the first quarter of 2021 with the first quarter of 2020, which was significantly affected by the onset of the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $5,903.8 million | $4,667.0 million | +26.5% |
| Gross profit | $1,032.8 million | $813.2 million | +27.0% |
| Gross margin | 17.5% | 17.4% | +0.1 percentage points |
| Operating income (loss) | $336.9 million | $(219.3) million | Improved by $556.2 million |
| Operating margin | 5.7% | Not meaningful | Improved |
| Net income (loss) | $239.4 million | $(232.3) million | Improved by $471.7 million |
| Diluted EPS | $2.85 | $(2.58) | Improved |
| Net cash from operating activities | $526.3 million | $113.7 million | +$412.6 million |
| Capital expenditures | $44.4 million | $30.0 million | +$14.4 million |
Revenue increased across the major categories: new vehicles rose 30.7% to $2,982.3 million, used vehicles rose 40.1% to $1,749.1 million, finance and insurance rose 32.7% to $313.0 million, and parts and service declined 2.9% to $851.0 million. Retail new- and used-vehicle unit sales increased 22.2% and 27.8%, respectively.
Gross profit per retailed vehicle increased to $2,739 for new vehicles from $1,699 and to $1,744 for used vehicles from $1,487. Finance and insurance gross profit per vehicle increased 6.2% to $2,218. Selling, general, and administrative expense increased 7.9% to $647.9 million, but declined to 62.7% of gross profit from 73.9%.
At March 31, 2021, cash and cash equivalents were $350.0 million, compared with $569.6 million at December 31, 2020. Total assets were $9.27 billion and shareholders’ equity was $3.19 billion. Vehicle floorplan payable totaled $2.30 billion, down from $2.76 billion at year-end 2020.
Long-term debt, net of current maturities, was $1.79 billion. AutoNation repaid $300.0 million of 3.35% Senior Notes due January 2021. It had no borrowings under its $1.8 billion revolving credit facility, no commercial paper outstanding, and approximately $1.8 billion of revolving-facility borrowing capacity after letters of credit. The company reported a 1.32x leverage ratio versus a 3.75x maximum and a 45.0% capitalization ratio versus a 70.0% maximum.
Material Changes Versus the Prior Comparable Period
- AutoNation moved from a $232.3 million net loss to $239.4 million of net income.
- Q1 2020 included $318.3 million of goodwill impairment, $57.5 million of franchise-rights impairment, and $8.5 million of other asset impairment charges; no comparable goodwill or franchise-rights charges were recorded in Q1 2021.
- Gross profit from new vehicles increased 97.1%, used vehicles increased 54.1%, and finance and insurance increased 32.7%.
- Inventory constraints and strong demand increased vehicle gross profit per vehicle. New-vehicle inventory declined to 29 days of supply from 98 days, and used-vehicle inventory declined to 31 days from 48 days.
- Floorplan interest expense declined to $9.4 million from $25.5 million, primarily because of lower average balances and interest rates.
- Operating cash flow increased to $526.3 million from $113.7 million. Financing cash flow was $(816.5) million, reflecting share repurchases, repayment of the $300.0 million senior notes, and net repayments of non-trade vehicle floorplan borrowings.
- AutoNation repurchased 3.8 million shares for $306.1 million, or an average $79.76 per share. The remaining authorization was $891.7 million at March 31, 2021.
- The company sold its remaining Vroom equity investment for $109.4 million and recognized a $7.5 million gain in Q1 2021.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expected the annualized U.S. new-vehicle sales rate to approach 16 million units in 2021, but cautioned that component shortages and reduced manufacturer inventory were expected to continue throughout the year. Demand for new and used vehicles remained strong, supported by low interest rates and consumer preference for personal transportation.
AutoNation plans to expand its AutoNation USA used-vehicle stores and targets more than 130 locations by the end of 2026. Estimated initial capital investment is approximately $10 million to $11 million per new store. In April 2021, the company announced a pending agreement to acquire 11 stores and one collision center in South Carolina and Georgia, subject to customary closing conditions and expected to close in summer 2021.
Key risks include COVID-19 and broader economic conditions, vehicle supply shortages, interest-rate exposure on variable-rate floorplan borrowings, dependence on vehicle manufacturers and their incentive programs, manufacturer franchise restrictions, execution risk on AutoNation USA expansion, potential goodwill and franchise-rights impairments, legal and regulatory proceedings, cybersecurity and information-system risks, and debt covenant restrictions.
A 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $23.0 million based on March 31, 2021 variable-rate floorplan balances. Legal proceedings were accrued where probable and reasonably estimable; management stated that it was not aware of a reasonable possibility of a material loss beyond recorded amounts, although outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Whether vehicle supply shortages and elevated gross profit per vehicle persist or normalize.
- The sustainability of used-vehicle demand, finance and insurance margins, and the 2021 earnings rebound against pandemic-affected Q1 2020 comparisons.
- Cash deployment among share repurchases, debt repayment, capital expenditures, acquisitions, and AutoNation USA expansion.
- Completion, purchase price, financing, and expected contribution of the announced 11-store and one-collision-center acquisition.
- Exposure to variable interest rates, manufacturer concentration, and vehicle floorplan obligations due on demand.
- Potential future impairment charges affecting goodwill, franchise rights, and other long-lived assets.
- The carrying value and future impairment risk of the $50.0 million Waymo equity investment, which has no readily determinable fair value.
- Compliance with debt covenants and availability under the revolving credit and vehicle floorplan facilities.