This summary is based on the second quarter fiscal 2008 earnings call conducted by AutoNation, Inc. (AN) on July 24, 2008.
Management:
Chairman, Chief Executive Officer: Mike Jackson
Director, President and Chief Operating Officer: Michael E. Maroone
Executive Vice President and Chief Financial Officer: Michael J. Short
Vice President, Investor Relations: John Zimmerman
Key Investors Issues
- EPS were 29 cents a share compared to 37 cents a share last year.
- Net income fell to $51.8 million from $77.3 million in the year-earlier period.
- Revenue fell to $3.91 billion from $4.48 billion a year ago.
Second Quarter Highlights
Net income from continuing operations of $53 million, or 29 cent per share, compared to a year-ago net income from continuing operations of $79 million, or 38 cents per share.
- After adjusting for certain items, net income from continuing operations was $59 million or 33 cents per share, compared to $76 million or 36 cents per share in the prior year. Current operating results were adversely affected by certain accounting adjustments. The aggregate impact of these adjustments was approximately 4 cents per share on earnings from continuing operations. These adjustments included a non-cash stock compensation expense adjustment of $5.3 million that is $3.1 million net of tax in SG&A. This adjustment corrected the amount of expense that should have previously been recognized for retirement-eligible employees.
- In addition, the company recorded non-cash franchise impairments of $5.1 million or $3 million net of tax related to two stores. The prior year period included favorable tax adjustments of 2 cents per share. Excluding the stock compensation adjustment, SG&A’s percentage of gross profit increased to 74.7% from 71.1% a year ago, reflecting a de-leveraging of cost structure, partially offset by cost-savings initiatives.
- Adjusted EPS was down 8%. U.S. industry retail auto sales declined 16% over the prior year, according CNW Research.
- AutoNation new unit sales declined 12%. The industry is in the midst of the perfect storm. The company has encountered $4 a gallon gasoline, on top of the continuing housing depression and credit crisis, which has resulted in customers either postponing the purchase of vehicles or purchasing smaller, more fuel-efficient vehicles.
- In spite of this, AutoNation delivered solid profitability.
- The company saw two major changes. First, the company saw a shift in consumer preference to fuel efficiency. Cars now account for 58% of sales, compared to 49% a year ago. AutoNation’s average gross profit per vehicle retail for cars and trucks is about the same. Second, the company saw a 30% decline in new vehicle revenue from domestic franchise.
- In the first half of the year, the company recognized 25 million of this benefit.
New vehicle net inventory carrying cost was $6.9 million lower versus the prior year period.
- The favorable variance is primarily a result of lower floor plan interest rates, partially offset by a decrease in floor plan assistance, resulting from lower new vehicle sales.
- The company entered into agreements to form a portion of used vehicle inventory with various lenders. At June 30, approximately $137 million was outstanding under these agreements. Other interest expense was $4.8 million lower versus last year. The favorable variance is a result of lower interest rates on term loan facility, mortgage facility and floating rate senior notes and the decrease in debt level associated with revolving credit facility, partially offset by an increase in mortgage facility debt.
- The company had an effective income tax rate of 41% versus a prior year effective rate of 37.3%. The se second quarter 2007 rate benefitted from adjustments from the resolution of various tax matters, which is an EPS benefit of 2 cents.
- The company had losses from discontinued operations of $800,000 net of taxes.
- The company repurchased 1.9 million shares of stock at an average price of $13.90 per share for a total of $26 million. Future share repurchases are subject to limitations contained in debt agreements. As of July 1, 2008, basket capacity for share repurchases is approximately $35 million. Each quarter, the company is permitted to add back approximately 50% of net income after tax and any stock option exercise proceeds.
- The company re-invested $18 million in the business through capital expenditures.
- At June 30th, non-vehicle debt was $1.5 billion and the company had unused revolving credit ability of approximately 621 million. The availability to borrow under revolving credit agreement is restricted by the terms of debt covenants. Non-vehicle debt to capital ratio was 30%.
- The auto retail environment deteriorated further, precipitated by the rapid shift in consumer demand for full-efficient small cars as the cost of gas continued to rise. Compounding factors include the housing and credit markets that are still under pressure and lackluster consumer confidence.
AutoNation retailed 73, 500 new vehicles on a same-store basis, down 13%, compared to the period a year ago.
- But favorable compared to the industry that, according to CNW Research, was off 16% at retail.
- Compared to the quarter a year ago, revenue per new vehicle retail was off 4% in gross profit per new vehicle was off 8%. Buy in was driven primarily by the decline in truck sales and margin was affected by a shift in mix within the luxury segment.
- Used vehicles retailed were fewer than 50,000 units, 4% compared to a year ago. Contributing factors to the decline were fewer trade-ins due to lower new unit volume, limited availability of high-demand small, fuel-efficient vehicles and a conservative credit environment. Revenue per used vehicle retailed was down by 5%, as consumer demand for value or lower-price cars increased. Gross profit for used vehicle retailed was down 8%, due in large part, to the challenges in truck pricing.
- A new vehicle day supply was 62 days. While this represents an increase of seven days compared to a year ago, it reflects the slower sales pace in May and June and compares favorably to the industry at 67 days. New vehicle inventory was reduced by about 4,700 units compared to first quarter and for the second half of the year, the company is targeting an inventory reduction of 5,000 units. Used vehicle day supply of 42 days is 2 days lower than a year ago.
- At $634 million, same-store revenue for service and parts was off 1%. Customer pay business showed increase of 1% compared to the quarter a year ago, however a 6% decline in warranty more than offset the customer pay gain. Parts and service gross profit of $276 million was off 2%.
- Same-store revenue declined 10% on lower volume. Same-store FNI gross profit per vehicle retailed was strong at $1099 and relatively flat year-over year. The company noted an increase in charge-backs, which were substantially offset by increased product penetration.
- Work continues in optimizing store portfolio. The company divested two franchises and terminated one. The three franchises represented a run rate of $38 million.
- Stores numbered 242, representing 319 franchises and 39 brands in 15 states. In September, the company will open Mercedes-Benz of Del Rey in Del Rey Beach, Florida. This adds point brings Mercedes dealership count to seven in Florida and 14 company-wide.
