GM General Motors Company

By Jeff Bennett 

AutoNation Inc., the largest operator of automotive dealerships in the U.S., reported a 14% drop in its first-quarter profit as a slight uptick in incentives and costs associated with hail damage weighed on results.

Chief Executive Mike Jackson said automotive retail sales have plateaued as new vehicle purchases by consumers remained flat year-over-year during the quarter despite auto makers boosting their incentives by 14% compared with the same period a year earlier.

Dealers have called on auto makers to take more proactive steps to reduce small car production or face an incentive war that could undermine the entire industry at a time when consumers are paying more to buy higher-end sport-utility vehicles and pickup trucks. General Motors Co. posted a $1.95 billion first-quarter profit on Thursday in part because of sales of pickup trucks and SUVs in the U.S.

"We have plateaued and there is nothing wrong with that but the auto makers have to accept it and adjust their production because going to the next level in sales will be very costly," Mr. Jackson said. "If they aren't more disciplined, especially when it comes to cars, then they will begin to offer incentives and we all get hurt."

Investors sent shares up as much as 4.4%, or $2.10, to $50.07 in Friday afternoon trading after Mr. Jackson vowed to keep inventory levels tight and cut his new vehicle orders for a second consecutive quarter. Orders could be reduced by as much as 15% based on the manufacturer.

For the quarter, AutoNation said net income dropped to $96 million, or 89 cents a share, compared with $112 million, or 97 cents a share, a year earlier.

The company's operating profit of 90 cents a share trailed analyst expectations of 93 cents but included a 3-cent charge for hail damage caused by storms in Texas and a 3-cent stock-based compensation expense. Excluding those costs, the company generated 96 cents a share.

Two severe hail storms struck Texas in March, resulting in billions of dollars in damage. Insurance provider The Allstate Corp. put its estimated catastrophe losses for March at $638 million with $425 million coming from the Texas storms.

Revenue during the period came in at $5.12 billion, a 3.6% increase over the same period a year earlier but trailed analyst expectations of $5.29 billion.

AutoNation dealers handed out more manufacturer incentives, driving costs of new vehicle sales up 2% to $2.65 billion. As a result, the gross profit per new vehicle sold slipped 8% to $1,888.

Separately, the company said it repurchased 7.9 million shares of common stock for an aggregate purchase price of $371 million. The company has $175 million remaining on its share repurchasing authorization.

Industry forecasters still expect overall U.S. auto sales to reach 17.8 million for 2016, marking a new milestone and breaking last year's record of 17.5 million. The new level will be reached by auto makers selling more of their vehicles to fleet operators.

A fuller picture of the health of the automotive industry will come into focus over the next week with Penske Automotive Group Inc. set to deliver its results on Tuesday followed by Group 1 Automotive Inc. reporting sales on Wednesday.

Write to Jeff Bennett at jeff.bennett@wsj.com

(END) Dow Jones Newswires

April 22, 2016 14:53 ET (18:53 GMT)

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