AutoNation Reports Stable Margins Despite CDK Outage

AutoNation, the prominent automotive retailer, encountered a difficult second quarter in 2024 primarily due to an outage from CDK, which negatively influenced its earnings by about $1.55 per share. Nevertheless, the company succeeded in maintaining consistent new vehicle margins and experienced a 6% increase in sales of import brands. While total used vehicle sales declined, demand for more affordable vehicles remained strong, and the financial services sector demonstrated resilience with a significant rise in loan originations, resulting in a portfolio balance surpassing $700 million. Additionally, AutoNation executed $350 million in share repurchases during the quarter, underscoring its commitment to capital management.

For the quarter, total revenue remained steady at $6.48 billion, though gross profit experienced a 3% decrease. Adjusted operating income was reported at $319 million, with an adjusted net income of $163 million. New vehicle unit volumes fell by 2% by the end of the quarter, despite tracking 5% growth through May, while used vehicle unit volumes dropped by 8% on a same-store basis. The earnings call indicated an improvement in inventory levels, approaching pre-pandemic figures, along with a positive outlook for regaining market share in the latter half of the year.

### Key Takeaways
– CDK outage resulted in a loss of approximately $1.55 per share in earnings.
– New vehicle margins were stable, and import brand sales rose by 6%.
– Overall used vehicle sales decreased by 8%, but demand for lower-priced vehicles remained robust.
– Financial services showed strength, with increased loan originations and a portfolio balance above $700 million.
– The company repurchased $350 million worth of shares in the second quarter.
– New vehicle inventory levels are close to pre-pandemic levels.
– Total revenue was consistent at $6.48 billion, with a 3% dip in gross profit.
– Adjusted operating income was recorded at $319 million, while adjusted net income was $163 million.
– New vehicle unit volumes decreased by 2%, and used vehicle unit volumes fell by 8%.
– AutoNation Finance originated over $240 million in loans during the quarter.

### Company Outlook
– Anticipation of recovering market share in the latter half of the year.
– New vehicle inventory stands at 47,000 units, equivalent to 67 days of sales.
– Plans to open 4-5 additional AutoNation USA locations this year, at a more measured pace than the previous year.

### Bearish Highlights
– The CDK outage caused significant earnings impacts and operational challenges.
– Used vehicle unit volumes declined by 8% on a same-store basis.
– Gross profit decreased by 3% due to the productivity impact from the outage.

### Bullish Highlights
– There is strong demand for lower-priced used vehicles.
– Recovery in parts and service gross margin, with a 9% same-store growth in April and May.
– Customer Financial Services unit profitability remained within 3% of first quarter levels.

### Misses
– New vehicle unit volumes fell by 2% by quarter end.
– Average selling prices for used vehicles decreased by 5%.

### Q&A Highlights
– Capital allocation remains focused on maximizing shareholder returns, with potential adjustments based on market conditions.
– Increased service effectiveness contributed to higher revenue per repair order.
– The company is investing in backup systems to avoid future outages.
– A restoration of SG&A expenses is expected in Q3, which may impact per vehicle revenue (PVR).
– Attention will be given to product mix and vehicle affordability as key areas of focus.

Despite the challenges faced, AutoNation appears positioned to rebound, bolstered by strategic planning and proactive measures aimed at enhancing shareholder value and customer satisfaction in a changing market landscape.