Move to Flats Unlikely in 2014, Says AutoNation’s Jackson

FORT LAUDERDALE, Fla. — During the company’s investor call this week to discuss fourth-quarter and full-year performance, AutoNation executives made a few predictions for 2014. Officials said they expect industry sales to rise 3% to 5% this year to more than 16 million units. As for the pressure the Consumer Financial Protection Bureau is putting on finance sources to eliminate rate participation, the company’s chief executive said: “… I don’t expect a structural change in the business model.”

Michael Jackson, AutoNation’s chairman and CEO, noted that the company’s F&I operations averaged $1,378 in profit per vehicle retailed, and added that about $500 of that average consisted of compensation from finance sources. He also noted that a few of the company’s 228 stores are testing a compensation model proposed by the National Automobile Dealers Association, a model that calls for management to sign off on all mark downs.

“I call it the Pacifico model,” Jackson said. “I think at the end of the day, though, the [current] business model serves the marketplace, the lenders and us extremely well."

As for his outlook for vehicle sales this year, Jackson said: “We believe that replacement demand, attractive products and strong consumer credit will continue to support sales as we return to the normal selling rate of 16 million units.”

In the fourth quarter, AutoNation posted total revenue of $4.5 billion, an 8% year-over-year increase. Operating income increased 20% to $203 million. For the full year, revenue was up 12% vs. 2012 to $17.5 billion, while operating income increased 15% year over year to $740 million.

“And we grew revenue, gross profit and margins across all business sectors,” noted Michael Maroone, the dealer group’s COO. “We're very proud of this performance.”

AutoNation’s net income for the fourth quarter increased 28% to $102.7 million, with sales of premium luxury new vehicles accounting for 46% of that total. “I’ll note that on a total store basis, our premium luxury segment income increased 28% compared to a year ago, due in part to a lift from new product launches and the resulting shift in mix within the segment,” Maroone said.

Same-store new-vehicle revenue increased $55 million to $2.5 billion. In total, the dealer group retailed 71,149 new vehicles in the fourth quarter, an increase of 465 vehicles. The dealer group also grew new-vehicle gross profit by $9 million to $163 million, while gross profit per new vehicle retailed increased $105 to $2,292.

The dealer group also retailed 47,174 used vehicles in the fourth quarter, up 4,300 units from the year-ago period. “We saw a nice lift in certified pre-owned vehicles retailed in the quarter and continue to work aggressively to acquire used inventory, both internally through increasing appraisals and winning more trades, and externally through our we-buy-your-car guarantee offer program, as well as various third-party partnerships,” Maroone said, adding that used-vehicle revenue totaled $872 million for the quarter, while retail gross profit and gross profit per used vehicle sold increased 12% to $75 million and $27 to $1,598, respectively.

Maroone also noted a name change for the company’s F&I operations, which, as of the fourth quarter, is now referred to as customer financial services. The rebranded department increased its gross profit per vehicle retailed by $71, or 5 %, with total gross profit increasing $15 million to $163 million.

“We continue to be extremely pleased with our performance here,” Maroone said. “That’s driven by a combination of our preferred lender network, OEM service contract alliances, store-level execution, product penetration and the customer experience, where we believe full transparency is a differentiator and value added products help drive long-term customer retention.”

Maroone also noted that about 67% of F&I’s per-copy average consists of F&I product sales, adding that the dealer group places a lot of emphasis on the sale of vehicle service contracts and prepaid maintenance. “And we’ve dramatically improved our penetration there,” Moroone added. “… Our pay plans are driven toward those two products and they drive people into our service drive and really make a different in customer retention.

“So the whole organization’s focused on providing value-added products there and I think we’re doing a very good job.”

Jackson also responded to a question about how the dealer group is reacting to the CFPB’s scrutiny of rate participation, and whether it is considering the adoption of rate caps or a move to flats. “Everybody’s trying to find common ground where the amount of discretion at the store level can be restricted to the point that the CFPB feels much more comfortable that the possibility of discrimination has been restricted,” he said. “Whether that leads to more caps, I don’t see flats or a solution like [what] the NADA proposed, which we’re trying in a few stores.

“There’s a reason 80% of auto loans are originated through dealers; it’s because we’re very good at it with a lot of added value,” he added. “It saves the customer a lot of money … So I don’t know the end of the story yet, and I think it will be an ongoing story.”

Originally posted on F&I and Showroom