AutoNation Inc. (AN) Chief Executive Mike Jackson on Thursday
said there is "more potential on the upside" for U.S. vehicle
demand as short-term interest rates and gasoline prices remain
stable, but intensified competition among car makers is putting
pressure on new-car profit margins.
The largest U.S. automotive dealership operator by stores
earlier Thursday reported second-quarter earnings from continuing
operations rose 14% from a year earlier to $90.1 million, or 73
cents a share, in line with most analysts' expectations. Revenue
for the quarter rose 13% to $4.4 billion.
New vehicle sales rose by 7% on a same-store basis, the company
said.
Mr. Jackson, in an interview with The Wall Street Journal, said
he expects U.S. light-vehicle sales will finish 2013 in the "mid-15
million" range, and added there is "more potential on the upside"
of that forecast. While new-vehicle demand should remain strong,
Mr. Jackson said competition, particularly in the high-volume
midsized-car segment, is putting pressure on dealer profit
margins.
"New vehicle margins are under pressure," Mr. Jackson said.
"It's with the Japanese products. It's the mainstream, midsize
sedans--Camry, Accord and Altima."
Those high-volume models from Toyota Motor Corp. (TM, 7203.TO),
Honda Motor Co. (HMC, 7267.TO) and Nissan Motor Co. (NSANY,
7201.TO) are facing tougher challenges by new models from Detroit
rivals Ford Motor Co. (F), General Motors Co. (GM)and Chrysler
Group LLC, as well as Korean brands Hyundai Motor Co. (005380.SE)
and Kia Motors Corp. (000270.SE).
Some analysts in notes Thursday expressed concern about the
decline in AutoNation's gross profit margins on new- and
used-vehicle sales. The company said gross profit per new vehicle
sold fell in the second quarter to $2,007, or about 6% of revenue,
from $2,172, or about 6.6%, a year ago.
Goldman Sachs analyst Patrick Archambault said new-vehicle
margins for the quarter came in below his estimate of 6.3%.
Mr. Jackson, addressing another concern among analysts, said
AutoNation's selling, general and administrative expenses for the
second quarter were higher by 6 cents a share because of costs
related to the company's nationwide re-branding strategy.
AutoNation earlier this year began bringing all of its mainstream
brand stores under the AutoNation name, eliminating local brands
acquired over the years.
Now, Mr. Jackson said, spending for the re-branding project is
done.
"We had a non-recurring event. That's the once in a lifetime
coast-to-coast rebranding. We had one-time costs of six cents in
(the second quarter) and 3 cents (in the first quarter,)" Mr.
Jackson said. That "was an incremental spend that's now completed
and will not reoccur."
AutoNation President Mike Maroone added the company is working
to expand its high-margin service business, which had 42.7% gross
profit margins in the latest quarter, up from 42.1% a year
earlier.
The number of vehicles on the road, or "units in operation"--a
proxy for the pool of potential AutoNation service customers--is
just starting to grow from the recession trough, Mr. Maroone
said.
Mr. Jackson said new-vehicle demand should continue to be
sustained by consumers looking to replace older cars nursed through
the recession. That replacement demand is a "multi-year driver" for
new vehicle sales, he said.
Interest rates also don't appear to be a problem, Mr. Jackson
said. "Auto retail is primarily on the short end of the yield
curve, zero to five years," he said.
Citing Federal Reserve Chairman Ben Bernanke's comments earlier
this week, Mr. Jackson said "on the short end of the yield curve,
we are going to be at these low rates for several years. It's hard
to be pessimistic."
Write to Joseph B. White at Joseph.White@wsj.com
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