AutoNation to sell its own parts, add used car centres

DETROIT – With U.S. new-car sales levelling off after hitting a record last year, the nation’s largest auto dealership chain is looking for new growth by expanding into stand-alone used car dealers and selling its own brand of replacement parts.

Fort Lauderdale, Florida-based AutoNation announced the new ventures on Friday, with the CEO saying it will invest $500 million in the new businesses because of the new-car sales plateau.

CEO Mike Jackson said new-car sales cycles go in three phases — growth, plateau and decline. He wants the chance to grow no matter what the cycle. New-car retail sales run about 15 million per year, while used car sales are about 40 million, he said. Having its own used-car only stores “will allow us to grow more rapidly in the larger segment,” Jackson said in an interview.

Total new car sales, including fleet sales to rental car companies, hit 17.5 million last year. But in the past few months, sales have started to level off and may not match last year’s record. New-car prices already have started to fall, and there probably won’t be much sales growth for new-car dealers in the next few years.

So AutoNation wanted to go bigger in used cars. It’s already found 25 sites in its existing markets to set up the free-standing used car stores. The sites will compete directly with the CarMax used car chain. Five will open next year. They’ll offer an AutoNation version of certified pre-owned vehicles which will be inspected, repaired and come with warranties. Some will have two years of free maintenance.

In addition, the dealership group started selling its own maintenance and repair parts during the summer with the introduction of AutoNation-brand batteries. Jackson said that could expand to thousands of AutoNation branded parts, allowing the chain to better compete in service and retain customers who are keeping cars for 11 or 12 years. The company’s new-car stores already sell used cars, but Jackson said the market is so large that he doesn’t see the new ventures stealing business from current dealers.

The company also plans to run regional vehicle auctions and add 18 collision repair centres nationwide.

Jackson sees some of the ventures returning immediate profits, but said there might be a short-term hit to earnings as the company invests the $500 million over the next several years. The used-car stores, called AutoNation USA, should become profitable in their second year of operation, he said. “Over time the return on the brand extension efforts is well above our capital threshold,” he said.

Also during the summer, the chain launched a one-price used car sales strategy that includes centralized pricing and used-car appraisals. The single-price strategy will give buyers a transparent and stress-free experience, the company says.

The news came Friday as the 371-store chain reported third-quarter earnings of $107.3 million, missing Wall Street’s expectations.

The company said it had net income of $1.05 per share. Earnings, adjusted for non-recurring costs and to account for discontinued operations, came to $1.11 per share.

The average estimate of 13 analysts surveyed by Zacks Investment Research was for earnings of $1.14 per share.

The auto retailer posted revenue of $5.57 billion in the period, also missing Street forecasts. Fourteen analysts surveyed by Zacks expected $5.62 billion.

AutoNation shares fell $1.48, or 3.2 per cent, to $44.57 in midday trading Friday. The stock has decreased almost 29 per cent in the last 12 months.


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