AutoNation’s 2009 Q4 Conference Call
Operational observations for the 2009 Q4 Conference Call, AutoNation (NYSE:AN).
AutoNation’s fourth quarter revenue was up 8%, $2.8 Billion vs. $2.6 billion, from the same period a year ago. Gross profit also improved $21.2 million for the quarter. While it is evident that AN is improving operationally, it is still difficult to get meaningful same store, year over year analysis, due to the extreme nature of the retail car industry in Q4 2008.
This conference call provided several operational highlights, including:
· Mike Jackson, Chairman and CEO, estimated the impact of the Toyota, TM, recall on Q1 2010 EPS will be less than a penny. This is due to service and parts revenue offsetting the decrease in unit sales.
· President Michael Maroone commented that during Q4, AN “experienced the lowest associate turnover in the history of the company.” In an industry known for high turnover, this is a profound statement. However, we are still unclear as to the reasons behind this. Perhaps AN is managing and motivating their work force better. Perhaps this is merely an effect caused by 10% unemployment and the elimination of dealership jobs across the country.
· AN also attained their highest customer satisfaction levels for both sales and service in the 4th quarter, which is also quite an accomplishment.
· New vehicle supplies are down to 54 days from 83 days.
· On the F & I side, AR turn is down, and customers are able to be financed. Even some subprime customers received financing. Their financing is obviously more challenging, but a few sub-prime deals are being completed, which is a positive for the industry and AN.
A large portion of this conference call dealt with the ongoing Toyota recall situation, which will be a common conference call theme for all of the publicly traded automotive dealership companies. For the time being, the situation appears stable. However, more negative headline risks originating from Toyota remain.
One of the most interesting moments of the conference call was when Mr. Maroone described the treatment of AutoNation’s Toyota recall service customers. Mr. Maroone correctly stated that typically, recalls are an excellent opportunity to upsell in the service drive. However, due to the severity of this problem and the customer’s concern for safety, AN is skipping any attempts to upsell and solely focusing on servicing the recall. Mr. Maroone is an excellent operator, and his instincts are exactly correct in this instance. I only hope that this directive was effectively communicated throughout AN’s vast dealer network.
Used Vehicle Sourcing Will Remain Challenging
AN reported that used vehicle gross profits were $1,485, which is an increase of 1% from a quarter ago. However, used days saleable have increased from 30 days to 41 days. Mr Maroone said the increase in AN’s supply was “inflated by increased trades at the end of December.” There are fewer participants and only a limited number of auctions operating at the end of the calendar year, which makes wholesale liquidation difficult. With auction prices remaining high, it should be relatively easy for AN to decrease their days saleable throughout Q1.
Mr. Maroone also commented a few times that AN was conservative in their used car sourcing this past quarter due to historic weakness in the used car market. This winter, AN was caught off guard (as were most dealerships, private and public) by higher than normal wholesale prices. However, their decision was prudent, based on historical trends, and the proper decision to make at the time. This situation further highlights the used car shortages that will be facing AN, and the rest of the automotive retail industry going forward.
When asked about the current shortage of used car inventory Mr. Maroone responded that AN will “have to get more creative with their sourcing methods.” I strongly agree with Mr. Maroone about the importance of this issue. However, then Mr. Maroone used two words that caught me by surprise. He said, moving forward AN would be implementing a more “centralized buying” approach.
No other details were given by Mr. Maroone, and no additional information was requested, leaving us to ponder what “centralized buying” means. Whenever new purchasing details emerge from the new car side of the business, the analysts are always very thorough in their questioning. This is due to the more exact nature of new car purchasing. However, in this instance, Mr Maroone just offered that his company was going to source their used vehicles in a different manner, and no one seemed to notice.
· Does it mean AN will also be pursuing a “centralized reconditioning” strategy?
· Does it mean AN will be implementing regional buying staffs again?
· Does it mean auction decisions and responsibilities will be handled at the regional level and not at the store level again?
Historically, attempts at central buying and central reconditioning have proven unsuccessful by the publically traded retail dealerships. However, we are entering a new environment in which used car sourcing will remain challenging for some time. This could be AN’s way of getting ahead of that issue. However, with no specifics, we are left to our best guesses and judgments.
The Toyota recall was the 500 pound gorilla in the room during this conference call. It was apparent that AN navigated this crisis exceptionally well, proving their operational skill. However, this situation will remain fluid for some time. For example, since this conference call, steering concerns about the Toyota Corolla have emerged. Toyota’s struggles will continue to play out in the court of public opinion over an extended period of time. Diminishment of the Toyota brand and it’s ramifications on dealership’s profits will be the subject of speculation for months to come. For now, it is simply too early to forecast.
Although the Toyota recall rightfully consumed much of the allotted time during this conference call, there are other macro hurdles facing AN and the rest of the publicly traded dealerships. For example, a disturbance in the credit system may result from sovereign defaults in the Euro Zone or merely the fear of sovereign defaults in the upcoming quarter.
Operationally, AN is running their business better. This should translate into increases in market share as the retail car industry continues to heal and to improve. However, unemployment remains high, and any disturbance to the credit markets will act as severe headwinds for AN in the upcoming quarter. In other words, no matter how well dealerships perform operationally, their business model will suffer severely if there is another credit seizure. Credit seizure is not a term that should be used lightly, but when sovereign debt is in the news daily, contagion is always a risk.
For the complete Q4 transcript at Seeking Alpha, click here.
Disclosure: No Positions in stocks mentioned