Notes from yesterday’s AutoNation (AN) earnings call
CEO Mike Jackson said:
“In the third quarter total US industry new vehicle retail sales declined 31% based on CNW research data. In comparison, in the third quarter AutoNation’s new vehicle unit sales declined 24%. This performance relative to the US retail total is attributable to a combination of increased market share as well as the benefit of our geographic and brand mix relative to the total market.”
“We have shifted our capital allocation strategy from share repurchase to debt reduction. So far this year we have repaid $589 million of combined non-vehicle debt and floor plan debt. This was made possible by strong operating cash flow including a significant contribution from working capital improvements. Going forward we have targeted an additional $500 million of total debt reduction.”
“Finally, prior to the third quarter of 2008 we operated as a single operating segment. During the third quarter of 2008 in response to changes in the automotive retail market including the disproportionate decline in revenue and earnings from our domestic franchises relative to our import and premium luxury franchises, we made changes to our management approach and divided our business into three operating and reportable segments: Domestic, import and premium luxury.
Beginning in the third quarter resources are allocated and performances assessed based on financial information from each of these segments. We believe that our segment-related disclosures will improve the transparency of our financial reporting.”
“Despite the impairment charges, we remain in compliance with all the covenants under our debt agreements. Our consolidated leverage ratio at September 30 which measures non-vehicle debt to EBITDA was 2.65 versus the covenant limit of 3.0. Our capitalization ratio which measures floor plan plus non-vehicle debt divided by total book capitalization was 61.5% at September 30 versus the 65% cap. We believe that our aggressive costs and cash-flow management will enable us to continue to reduce debt and remain in compliance with our covenants.”
Other notables:
– Compared to the quarter a year ago, revenue per new vehicle retail of $30,000 was off $530 or 2% primarily driven by a decline in truck pricing that was highly incentivized in a shift in car/truck mix. Same-store gross profit per new vehicle retail of $1,975 was off $184 or 9% impacted by compressed truck margins which were pressured by the liquidat5ion of low demand inventory.
– At September 30 we had a 62-day supply of new vehicle inventory favorable to the industry at 72 days. At 62 days our day supply increased 14 days compared to the quarter a year ago resulting from a slowing of sales in September. Since June 30 we’ve managed our inventory down by 6,600 units ahead of our target for the second half of the year.
– Turning to used vehicles, we retailed just over 45,000 used units in the quarter up 13% compared to a year ago. Same-store revenue per used vehicle retail was down 7% as consumer demand for value or lower-priced vehicles continued to trend upward. Truck pricing remained under pressure but began showing signs of improvement as gas prices started to drop.
– Gross profit per used vehicle retailed was down 8% or $136 with used cars and trucks having approximately the same margin and each accounting for about half of the margin decline.
– As we look at the rest of 2008 we believe the market will remain extremely challenging. We also believe that in 2008 new vehicle sales for the industry will decline to the low 13 million unit level.
– New vehicle sales for 2009, the most conservative industry forecasts are in the range of 12 million new vehicle units. Even at a 12 million unit sales rate, AutoNation will remain profitable and we are confident that we will remain in compliance with our debt covenants.
The key phrase it the bold highlight above…”increased market share”. We know An is not going under and neither is Berkshire’s (BRK.A) Buffett pick in the sector, CarMax (KMX). The key is how strong do they come out of it. I have yet to find any evidence that these dealer groups are not going to be a substantially better position when we come out of this than when they went it.
Since that seems to be true, it is just a matter of buying shares and waiting. It’ll happen..
Disclosure (“none” means no position):Long AN, None
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