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Investors were cautious heading into AutoNation's (NYSE: AN) third-quarter conference call last week. After all, the auto retailer generates a little more than half of its revenue from new-vehicle sales, which are plateauing in America. On top of this, AutoNation has had to deal with complications from the Takata airbag recall, which cost the company about $0.06 per share.
Let's dig into the numbers to get a better feel for the third-quarter results and identify some important takeaways.
By the numbers
On AutoNation's top line, revenue increased 4% to $5.6 billion during the third quarter. AutoNation's bottom-line earnings per share were flat year over year, checking in at $1.05 -- below analysts' estimates of $1.15 per share. The company noted that about 14% of its used-vehicle inventory was on hold because of the Takata airbag debacle -- the retailer won't sell a vehicle that has an open recall.
Mike Jackson, AutoNation's outspoken CEO, also had this to say in the press release, in regard to third-quarter headwinds: "Certain manufacturers continued disruptive marketing and sales incentives, which resulted in multi-tier pricing and were unfair for consumers as well as retailers. In the third quarter, these incentives had a significant negative impact on new vehicle volume and gross profit per new vehicle retailed."
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Show me the money!
Despite the headwinds during the third quarter, the auto retailer is still pushing to expand via acquisitions. It also made a big announcement that it has acquired three premium luxury franchises, three premium luxury franchise add-points, and a collision center. Luxury vehicles generate a premium price tag over mainstream vehicles, so this is good news for AutoNation investors. Those acquisitions should generate an additional $430 million annually, once fully operational.
As America's demand for new vehicles wanes, bulking up the luxury store count is a way to offset profit headwinds. AutoNation now owns 96 premium luxury franchises, spanning from coast to coast.
Expansion strategy accelerates
It wasn't just acquisitions that helped boost investor excitement, though. AutoNation also announced its next step toward plans to roll out AutoNation USA, a concept that focuses on standalone used-vehicle sales. It's also opening service centers, offering AutoNation-branded parts and accessories, and creating AutoNation-branded standalone collision centers. It's even expanding its branded AutoNation Auto Auctions.
The first part of that entire strategy, AutoNation USA, will have five stores opening in 2017 and another 20 in all existing markets over the next few years. With new-vehicle sales plateauing and used retailers such as CarMax having success, it's a good moveto focus on expanding used-car sales. In addition, CarMax is essentially the only large auto retailer in the used-car industry, so there was an obvious opportunity for AutoNation to use its existing size and leverage.
This is really an expansion of its entire branding strategy that started in 2013, when it plastered its AutoNation brand on every store, rather than allowing its acquisitions to carry the names they had before they were bought. That was, and still is, a no-brainer move. The dealership industry is highly fragmented, and few brands have the size necessary to leverage their brand -- but AutoNation is definitely capable.
The company's competitors have done well with no-haggle pricing, and that's becoming a key attribute of AutoNation USA. The "One Price" strategy it launched in a few markets last quarter will expand to all existing locations by the end of the second quarter of 2017.
Ultimately, while AutoNation didn't have a great quarter thanks to recall and manufacturing pricing headwinds, there was a lot for investors to get excited about. As the retailer continues to build its brand, grow sales in new channels, and acquire valuable franchises, it's setting up to be a solid ride over the next few years, even with new-vehicle sales plateauing.
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Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.