AutoNation, Inc. Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 354 new-vehicle franchises across 253 stores as of September 30, 2023, plus collision centers, used-vehicle stores, auction operations, parts distribution, mobile repair and maintenance, and captive auto finance operations. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $6,892.7 million | $6,666.0 million | $20,181.5 million | $20,288.0 million |
| Gross profit | $1,294.6 million | $1,312.8 million | $3,916.3 million | $3,983.4 million |
| Gross margin | 18.8% | 19.7% | 19.4% | 19.6% |
| Operating income | $419.5 million | $522.5 million | $1,302.0 million | $1,599.6 million |
| Operating margin | 6.1% | 7.8% | 6.5% | 7.9% |
| Net income | $243.7 million | $352.6 million | $804.9 million | $1,091.0 million |
| Diluted EPS | $5.54 | $6.31 | $17.65 | $18.52 |
| Operating cash flow | Not separately presented | Not separately presented | $762.6 million | $1,443.3 million |
- Q3 revenue increased 3.4%, but gross profit declined 1.4%, operating income declined 19.7%, and net income declined 30.9% year over year.
- Nine-month revenue declined 0.5%, gross profit declined 1.7%, operating income declined 18.6%, and net income declined 26.2%.
- Q3 new-vehicle revenue increased 11.3% and units sold increased 12.1%, while new-vehicle gross profit per vehicle declined 32.2% to $4,025. Used-vehicle revenue declined 9.6% and units sold declined 3.8%.
- Parts and service revenue increased 12.1% in Q3 and 10.4% for the first nine months; gross profit increased 14.0% and 12.5%, respectively.
- SG&A increased 7.4% in Q3 and 8.2% for the first nine months. SG&A represented 63.3% of gross profit in Q3 versus 58.1% in the prior year.
- Floorplan interest expense increased to $38.3 million in Q3 from $10.7 million and to $98.2 million for nine months from $21.7 million.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $64.0 million at September 30, 2023, compared with $72.6 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $78.4 million.
- Inventory increased to $2.646 billion from $2.048 billion, primarily reflecting higher new-vehicle inventory. New-vehicle inventory was 31 days of supply versus 15 days at September 30, 2022.
- Vehicle floorplan payable increased to $2.815 billion from $2.109 billion. The weighted-average interest rate on both new- and used-vehicle floorplan borrowings was 7.0% at September 30, 2023, versus 5.9% at December 31, 2022.
- Long-term debt, net of current maturities, was $3.580 billion; commercial paper outstanding was $350.0 million, compared with $50.0 million at year-end 2022. Non-recourse debt, net, was $238.9 million.
- The amended revolving credit facility was increased to $1.9 billion and extended to July 18, 2028. No borrowings were outstanding, and approximately $1.9 billion was available, subject to letters of credit.
- Reported leverage was 2.02x against a maximum requirement of 3.75x; interest coverage was 7.15x against a minimum requirement of 3.00x. The company was in compliance with its debt covenants.
- Nine-month investing cash outflows were $497.0 million, including $286.0 million of capital expenditures and $271.1 million for acquisitions. Financing cash outflows were $282.6 million, including $723.2 million of share repurchases.
Material changes, outlook, and risks
- Management attributed margin pressure primarily to increasing new-vehicle supply, moderating pricing, and lower new-vehicle gross profit per vehicle. The company expects continued net new-vehicle inventory carrying expense if interest rates remain elevated without offsetting floorplan assistance or lower inventory.
- Used-vehicle performance was pressured by lower availability of nearly new vehicles, lower unit volume, and a shift toward lower-priced entry-level vehicles.
- Parts and service provided a partial offset through higher customer-pay service, warranty work, vehicle preparation, repair-order values, and parts and labor rates.
- SG&A increased due to acquisitions, newly opened stores, technology and strategic initiatives, advertising supporting internal used-vehicle sourcing, deferred compensation obligations, and self-insurance losses related to hailstorms and other natural catastrophes.
- The company acquired RepairSmith and seven stores during the first nine months. It opened four AutoNation USA used-vehicle stores and had more than 20 additional stores under development. Management expects to continue expanding AutoNation USA, AutoNation Finance, and mobile repair operations, but identified customer adoption, used-vehicle availability, market conditions, construction costs, and execution as uncertainties.
- AutoNation discontinued acquiring installment contracts from third-party independent dealers in September 2023 and plans to increase finance penetration through its own stores.
- United Auto Workers strikes against Ford, General Motors, and Stellantis began September 15, 2023. Management reported no material third-quarter impact but warned that prolonged strikes could reduce parts supply and vehicle availability.
- Key risks include consumer demand and economic conditions, higher interest rates, manufacturer dependence and supply disruptions, vehicle margin compression, auto-finance credit losses, debt and refinancing risk, covenant compliance, litigation and regulatory matters, cybersecurity, natural disasters, and potential impairment of goodwill or franchise rights.
- Legal proceedings were accrued when probable and estimable; management stated there was no indication of a reasonable possibility of a material loss beyond accrued amounts, while noting that outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether new-vehicle gross profit per vehicle and overall margins continue to normalize as inventory supply improves.
- The sustainability of parts and service growth and its ability to offset vehicle-margin pressure.
- Exposure to variable interest rates, including the estimated $28.1 million annual floorplan-interest sensitivity for a 100-basis-point rate change.
- Used-vehicle sourcing, unit volumes, inventory aging, and future write-down requirements.
- AutoNation Finance loan performance, past-due balances, credit-loss provisions, and the effect of discontinuing third-party dealer contract acquisitions.
- Execution and returns from AutoNation USA, RepairSmith, technology investments, acquisitions, and new-store development.
- Remaining debt maturities, commercial-paper refinancing, liquidity availability, and compliance with leverage and interest-coverage covenants.
- Future share repurchases, with $439.4 million remaining available under the repurchase authorization as of October 25, 2023.