AutoNation, Inc. — Fiscal 2023 Form 10-K Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer reporting for the fiscal year ended December 31, 2023; the filing is an annual Form 10-K, not a standalone fourth-quarter filing. The company operated 349 new-vehicle franchises from 252 stores, 53 collision centers, 19 AutoNation USA used-vehicle stores, four auction operations, three parts distribution centers, AutoNation Mobile Service, and AutoNation Finance. Reportable segments were Domestic, Import, and Premium Luxury.
Revenue mix was 47% new vehicles, 30% used vehicles, 17% parts and service, and 5% finance and insurance. Parts and service and finance and insurance generated approximately 42% and 28% of gross profit, respectively, despite representing smaller portions of revenue.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $26.95 billion | $26.99 billion | (0.1%) |
| Gross profit | $5.13 billion | $5.27 billion | (2.5%) |
| Operating income | $1.65 billion | $2.02 billion | (18.4%) |
| Net income | $1.02 billion | $1.38 billion | (25.9%) |
| Diluted EPS | $22.74 | $24.29 | (6.4%) |
| Operating margin | 6.1% | 7.5% | (140 bps) |
| Gross margin | 19.0% | 19.5% | (50 bps) |
| Cash flow from operations | $724.0 million | $1.67 billion | (56.6%) |
| Capital expenditures | $410.3 million | $329.0 million | Higher |
New-vehicle revenue increased 8.6% to $12.77 billion and retail new-vehicle unit sales increased 6.3% to 244,546. However, new-vehicle gross profit fell 22.3% to $1.06 billion, with gross profit per vehicle declining 26.9% to $4,342 as inventory availability increased and pricing normalized.
Used-vehicle revenue decreased 15.1% to $8.20 billion and retail used-vehicle unit sales declined 8.6% to 274,019. Used-vehicle gross profit decreased 8.2% to $508.0 million. Parts and service revenue increased 10.6% to $4.53 billion, while gross profit increased 12.6% to $2.14 billion, raising its gross margin to 47.2%. Finance and insurance revenue and gross profit declined 1.3% to $1.42 billion, although gross profit per vehicle increased 0.8% to $2,736.
SG&A increased 7.5% to $3.25 billion, or 12.1% of revenue versus 11.2% in 2022. Increases reflected acquisitions, newly opened stores, technology and strategic investments, higher advertising, deferred compensation expense, self-insurance losses, and severance. Interest costs also increased materially: floorplan interest expense rose to $144.7 million from $41.4 million, and other interest expense rose to $181.4 million from $134.9 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $60.8 million at December 31, 2023, compared with $72.6 million a year earlier.
- The company reported $1.90 billion of available revolving credit capacity, $440.0 million of commercial paper outstanding, and $0.9 million of available secured used-vehicle floorplan capacity.
- Total vehicle floorplan payable was $3.38 billion, up from $2.11 billion, reflecting higher inventory levels. New-vehicle inventory increased to approximately 35,300 units from 18,100, and days supply increased to 36 from 19.
- Non-vehicle long-term debt was $4.0 billion before discounts and current maturities; non-recourse debt was $209.4 million under warehouse facilities plus $50.5 million of term securitization debt.
- The company had $462.4 million of current maturities of long-term debt, including $450.0 million of 3.5% senior notes due November 2024.
- At year-end, the leverage ratio was 2.19x against a 3.75x maximum and the interest coverage ratio was 6.06x against a 3.00x minimum. The company stated that it was in compliance with its debt covenants.
- AutoNation repurchased 6.4 million shares for $863.6 million in 2023, leaving $320.8 million available under the authorization. It paid no cash dividends and does not currently anticipate paying dividends.
- Cash used in acquisitions was $271.4 million. The company acquired RepairSmith, purchased seven stores, opened six AutoNation USA stores, and had more than 20 such stores under development.
Material changes versus the prior comparable period
- Revenue was broadly flat, but profitability declined because new-vehicle margins normalized, used-vehicle volume weakened, SG&A increased, and interest expense rose.
- New-vehicle inventory supply increased substantially, benefiting unit sales but pressuring gross profit per vehicle.
- Higher new-vehicle availability and manufacturer incentives reduced demand for higher-priced used vehicles.
- Parts and service became a larger earnings contributor, supported by customer-pay service, warranty work, and vehicle preparation activity.
- Operating cash flow fell by approximately $944 million, primarily because of higher working capital requirements, lower earnings, and increased auto-loan originations.
- AutoNation discontinued acquiring installment contracts from third-party independent dealers in September 2023 and is focusing AutoNation Finance on financing penetration through its own stores.
Outlook, management commentary and risks
Management expects moderation of new-vehicle margins to continue in 2024 as inventory supply and manufacturer incentives remain higher. The company expects to continue investing in AutoNation USA, AutoNation Finance, AutoNation Mobile Service, digital capabilities, facilities, acquisitions, and other strategic initiatives. Management believes cash flows, cash on hand, and available borrowing capacity will fund operating needs, debt service, capital expenditures, commitments, and seasonal requirements for the foreseeable future.
Key risks include economic weakness, consumer affordability, elevated interest rates, vehicle manufacturer supply or financial distress, margin pressure from increased inventory and incentives, used-vehicle valuation changes, auto-loan credit losses, regulatory and consumer-protection requirements, cybersecurity events, litigation, severe weather, environmental obligations, franchise restrictions, and compliance with debt covenants. The FTC’s CARS Rule was stayed pending judicial review; if implemented, it could increase dealer disclosure, record-keeping, compliance costs, and potential liability.
Unusual or notable items included a $12.4 million after-tax adverse impact from hailstorms and other natural catastrophes in 2023, a $16.4 million pre-tax gain from changes in corporate-owned life insurance value, a $6.1 million net gain from divestitures, and a $34.2 million initial credit-loss expense associated with the acquired CIG Financial loan portfolio in 2022. No goodwill or franchise-rights impairment charges were recorded in 2023.
KPMG issued an unqualified opinion on the consolidated financial statements and effective internal control over financial reporting. The fair value of franchise rights, with a December 31, 2023 balance of $876.2 million, was identified as a critical audit matter because of the judgment involved in forecast revenue growth, margins, and discount rates.
Most important facts for investors to verify
- Whether new-vehicle gross profit per vehicle and overall margins continue to decline as inventory and incentives normalize.
- The pace of used-vehicle unit recovery, used-vehicle inventory write-downs, and residual-value trends.
- Ability to refinance or repay the $450.0 million senior-notes maturity due in November 2024 and manage $440.0 million of commercial paper.
- Changes in variable-rate floorplan and other debt expense, including the impact of a 100-basis-point rate change.
- Cash conversion, working-capital needs, inventory growth, and the funding demands of AutoNation Finance.
- Credit losses and delinquency trends in the captive auto-finance portfolio.
- Returns from AutoNation USA, AutoNation Mobile Service, acquisitions, technology investments, and other strategic initiatives.
- Developments in manufacturer franchise requirements, regulatory proceedings, litigation, cybersecurity, and severe-weather exposure.