AutoNation, Inc. Form 10-Q Summary
Business context and reporting period
AutoNation, Inc. is a U.S. automotive retailer operating 353 new-vehicle franchises across 253 stores as of June 30, 2023, primarily in Sunbelt markets. It also operated collision centers, AutoNation USA used-vehicle stores, auction operations, parts distribution centers, an auto finance company, and RepairSmith, a mobile repair and maintenance business acquired in January 2023. This unaudited filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenue | $6,890.1 million | $6,869.2 million | 0.3% |
| Gross profit | $1,335.3 million | $1,361.7 million | (1.9%) |
| Operating income | $439.2 million | $558.1 million | (21.3%) |
| Net income | $272.5 million | $376.3 million | (27.6%) |
| Diluted EPS | $6.02 | $6.48 | (7.1%) |
| Operating margin | 6.4% | 8.1% | Down 170 bps |
| Gross margin | 19.4% | 19.8% | Down 40 bps |
| Metric | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|
| Total revenue | $13,288.8 million | $13,622.0 million | (2.4%) |
| Gross profit | $2,621.7 million | $2,670.6 million | (1.8%) |
| Operating income | $882.5 million | $1,077.1 million | (18.1%) |
| Net income | $561.2 million | $738.4 million | (24.0%) |
| Diluted EPS | $12.09 | $12.25 | (1.3%) |
| Operating margin | 6.6% | 7.9% | Down 130 bps |
Q2 revenue reflected higher new-vehicle revenue of $3,281.0 million, up 11.8%, and parts and service revenue of $1,145.3 million, up 10.5%, offset by used-vehicle revenue of $2,088.0 million, down 17.2%. Finance and insurance revenue was $369.5 million, up 0.5%.
New-vehicle gross profit declined 18.6% in Q2 to $287.7 million, primarily because improving inventory availability reduced gross profit per vehicle retailed to $4,607 from $6,106. Used-vehicle gross profit declined 14.2% to $134.3 million, while parts and service gross profit increased 12.6% to $542.5 million. Finance and insurance gross profit increased 0.5% to $369.5 million.
SG&A expense increased 11.7% in Q2 to $842.9 million, or 63.1% of gross profit versus 55.4% in the prior-year quarter. The filing attributes the increase to acquisitions, newly opened stores, technology and strategic investments, higher deferred compensation obligations, and $16.5 million of self-insurance losses related to hailstorms and other natural catastrophes. Q2 net income was also adversely affected by an after-tax loss of $12.4 million from hailstorms and other natural catastrophes.
For the six months, net cash provided by operating activities was $507.0 million, compared with $895.0 million in 2022. Investing cash use was $487.5 million, including $199.0 million for property and equipment and $268.9 million for acquisitions. Financing cash use was $29.6 million, including $523.2 million of share repurchases, partly offset by $415.0 million of net commercial paper proceeds and $171.4 million of net proceeds from non-trade vehicle floorplan payable. Ending cash, cash equivalents, and restricted cash was $85.3 million.
Liquidity, debt, and balance sheet
At June 30, 2023, cash and cash equivalents were $63.7 million, inventory was $2,572.5 million, and total assets were $11,079.5 million. Vehicle floorplan payable totaled $2,581.5 million, compared with $2,109.3 million at December 31, 2022. Long-term debt, net of current maturities, was $3,582.5 million, commercial paper was $465.0 million, and non-recourse debt was $262.2 million including current maturities.
The company had approximately $1,799.3 million available under its revolving credit facility and only $0.2 million of additional capacity under secured used-vehicle floorplan facilities. Commercial paper had a weighted-average interest rate of 5.73% and a weighted-average remaining term of five days. A 100-basis-point increase in interest rates would increase estimated annual floorplan interest expense by approximately $25.8 million and commercial paper interest expense by approximately $4.7 million.
On July 18, 2023, after quarter-end, AutoNation amended and restated its unsecured credit agreement. The revolving commitment increased from $1.8 billion to $1.9 billion, maturity extended to July 18, 2028, the leverage covenant may increase to 4.25x for four quarters following a material acquisition, and the capitalization covenant was replaced with a minimum interest coverage covenant. At June 30, the company reported a 1.95x leverage ratio, 62.9% capitalization ratio, and 8.79x interest coverage ratio, and stated that it was in compliance with applicable covenants.
Material changes versus the prior comparable period
- New-vehicle retail unit sales increased 7.9% in Q2 and 2.8% for the six-month period, reflecting improved vehicle availability.
- Used-vehicle retail unit sales declined 10.7% in Q2 and 13.1% for the six-month period, partly because of limited nearly-new vehicle inventory.
- New-vehicle gross profit per vehicle retailed fell 24.5% in Q2 and 20.0% for the six-month period as supply improved and pricing normalized.
- Parts and service gross profit increased 12.6% in Q2 and 11.8% for the six-month period, benefiting from customer-pay service, warranty work, and vehicle preparation.
- Floorplan interest expense increased to $32.8 million in Q2 from $5.8 million and to $59.9 million for the six-month period from $11.0 million, driven by higher rates and larger average floorplan balances.
- Share count declined materially from the prior year due to repurchases. AutoNation repurchased 4.0 million shares for $512.4 million during the first six months of 2023, with $672.0 million remaining under the authorization at June 30.
- Goodwill increased to $1,460.7 million from $1,320.1 million, primarily due to the RepairSmith acquisition. The company reported no goodwill or franchise-rights impairment charges from its April 2023 testing.
Outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that cash, operating cash flow, available revolving credit, commercial paper capacity, and floorplan facilities are expected to be sufficient for foreseeable working capital, debt service, taxes, capital expenditures, and contingencies.
Management highlighted continued supply-chain-related constraints for certain new-vehicle brands and models, rising interest rates, potentially weaker consumer demand, lower availability of nearly-new used vehicles, and normalization of vehicle gross margins. AutoNation is expanding AutoNation USA and had more than 20 stores under development, with a long-term target of more than 130 stores; execution, customer adoption, inventory availability, construction costs, and market conditions could affect that plan.
Key risks include sensitivity to economic conditions and interest rates, dependence on vehicle manufacturers and their incentive programs, manufacturer and geographic concentration, auto-loan credit losses, substantial indebtedness and covenant compliance, cybersecurity and information-system failures, regulatory and legal exposure, natural disasters, and potential impairment of goodwill or franchise rights. The company had $63.1 million of allowance for expected credit losses on auto loans at June 30, 2023, compared with $57.5 million at year-end 2022, and recognized $22.7 million of credit-loss provision during the six-month period.
Legal proceedings are ongoing in the ordinary course. The company stated that no material loss, or additional material loss, was reasonably possible based on information available at June 30, 2023, although unfavorable outcomes remain possible. Controls and procedures were assessed as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether new-vehicle gross profit per vehicle continues to decline as inventory normalizes and manufacturer supply improves.
- Whether used-vehicle unit volumes and inventory availability recover without significant markdowns or additional write-downs.
- The sustainability of parts and service growth and its ability to offset lower vehicle margins.
- The effect of higher interest rates on floorplan expense, commercial paper refinancing, liquidity, and earnings.
- Auto-loan delinquency, write-off, recovery, and allowance trends as the finance portfolio expands.
- Execution and returns from RepairSmith, AutoNation USA expansion, acquisitions, technology investments, and newly opened stores.
- Future share repurchase activity, remaining authorization, and its effect on leverage and per-share results.
- Compliance with the amended credit agreement, including leverage and minimum interest coverage requirements.