AutoNation, Inc. (AN) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to AutoNation Inc.'s Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Derek, please go ahead.

Thanks, Kenneth, and good morning, everyone. Welcome to AutoNation's Second Quarter 2026 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open the call to questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website located at investor.autonation.com. With that, I'll turn the call over to Mike.

Yes. Thank you, Derek, and good morning, everybody. Thank you for joining us today. So as usual, we're going to provide a detailed discussion of our second quarter results, after which we'll take your calls on Q&A. Now once we finish the Q&A session, I'm going to share with you some thoughts on our performance over time and our expectations going forward. So please don't disconnect after the Q&A. . Now Slide 3 is a quick summary of our main messages. We think the industry and consumers are in good shape. The June SAAR is the highest June in 4 years. Consumer sentiment is improving every month. our banking partners are reporting a 20% increase in applications and originations, and their delinquencies continue to improve. After sales was once again solid, in our workshops internal pay was moderately down, broadly in line with our unit volumes. However, customer pay, which for us is a more relevant indication of after sales performance in our market was up, delivering I think that was a coffee, you got me. In our workshops, internal pay was moderately down, but broadly in line with our unit volume. However, customer pay, which for us is a more relevant indication of after sales performance in our market was up delivering a gross profit that increased by 7% in total and 4% on a same-store basis. Now our strategy to grow and develop our parts wholesale is also gaining traction and starting to pay off. Our wholesale businesses saw revenues increase by 16% during the quarter. Now moving to vehicle sales, you will see that unit profitability in both new and used has remained within a tight band over the last 4 quarters, and our customer financial services team once again had an industry-leading quarter. Now we're looking forward to the second half when the volume comparison headwinds from 2025 relating to tariff and EV credits laps. As always, SG&A management is front and center, and you will see meaningful progress in Q2 and a path to our 66% to 67% expectation range by year-end. Automation Finance continues its growth, generating $11 million profit for the quarter. Free cash flow, frankly, has been excellent. We're up 11% year-to-date and continue to deploy our cash in a consistent shareholder-focused way investing $317 million on attractive M&A and $457 million on share repurchases. Now with that opening, let me get into the details by business. Moving to Slide 4. For the quarter, we reported adjusted EPS of $5.56, and which was up from $546 a year ago, marking our sixth consecutive quarter of year-over-year growth. Results were again led by aftersales, which drives half of our profits and delivered record gross profit of $607 million, increasing both sequentially from the first quarter and year-over-year from a very tough comparison. This revenue and income stream is durable, has a recurring nature and is high margin. It's also an important driver of customer engagement and retention. Our repair order volume was strong and customer pay fueled our revenue growth increasing 7% from a year ago. And as I previously mentioned, we had 16% growth in wholesale parts. Overall, aftersales performance reflects disciplined execution as we continue to grow this portion of the business while offsetting lower internal reconditioning activity tied to our used vehicle stocking mix and volume. In Customer Financial Services, the team delivered strong second quarter results with CFS per vehicle profitability of $2,800. This represents a 3% increase from a year ago, even after accounting for increased loan originations from AM Finance, which, as we've discussed before, bring a headwind to CFS profit in the quarter but a significantly improved profit per unit over the term of the loan to AM Finance. And Tom, I know you'll give everyone on the call more details on that of course. Our CFS team continues to run a value-driven customer-focused process that provides our customers with critical products and services. Now once again, customers purchased on average 2 products per vehicle with extended service contracts, again, leading the mix clearly supporting future aftersales revenue and customer retention. Finance penetration also continues to grow from a year ago with roughly 3/4 of units sold with a finance contract. And we continue to see sequential stability in our profit per unit for both new and used vehicles. New vehicle per unit profitability of nearly $2,400 represents the fourth consecutive quarter of stability. As expected, new unit sales were lower versus a year ago, which benefited from tariff-related pull-forward activity and higher bev sales. Bev sales were down by more than 30% year-over-year. Importantly, our market share remained relatively consistent with the first quarter in the markets we serve. In used vehicle sales, we continue to see strength in unit sales for vehicles priced about $40,000. Our volume was slightly impacted by lower mix of vehicles priced below $20,000 than we would like, and we continue to work to improve our accessibility to vehicles priced in this range. Used vehicle profitability remained stable at approximately $1,600 per unit. Total gross margin was just under 18% of revenue for the quarter, which represents consistent top-tier performance for the sector. Now turning to Slide 5. Adjusted free cash flow continues to stand down, including more than $180 million generated in the quarter and $439 million for the first half of the year. The year-to-date conversion rate was 125%. We continue to deploy capital in a disciplined manner. During the first half, we reinvested $443 million in the business through CapEx and acquisitions, and we returned $457 million to shareholders through share repurchases, the acquisitions we made with Toyota of Nuna Georgia, in the Atlanta area and 3 premium luxury stores in the San Francisco Bay area. These will add additional scale to markets where we already have meaningful pros. These acquisitions bring approximately $600 million in annual revenue and around 9,700 in new and used unit sales. AutoNation Finance continued to scale with the portfolio growing to $2.67 billion from $1.76 billion a year ago. funding also continued to improve, with debt funded status increasing to 91% from 83% a year ago. Overall, it was a solid quarter. And as I mentioned, it was the consecutive quarter where we have delivered year-over-year increases in adjusted EPS. Now with that introduction, I'm going to turn you over to Tom for a closer look at the quarter's financial results.

Thanks, Mike. Turning to Slide 6, I'll walk through our quarterly P&L. Total revenue was $6.93 billion, essentially in line with the $6.97 billion in the second quarter last year as after sales growth helped offset tariff and BEV related headwinds. Revenue was also up 6% sequentially and from $6.55 billion in the second quarter. Gross profit was $1.23 billion compared with $1.28 billion a year ago and $1.21 billion in the first quarter, representing 17.8% of revenue and continued top-tier performance. Adjusted SG&A expense was 68.2% of gross profit compared with 66.2% a year ago and 69.8% in the first quarter. reflecting a 160 basis point sequential improvement. We expect SG&A as a percentage of profit of gross profit to reach our 66% to 67% target range on a run rate basis by the end of the year. AutoNation Finance continued to scale with profitability increasing to $11 million in the quarter compared with $9 million in the first quarter and $2 million a year ago. Adjusted operating income was $343 million compared with $369 million in the prior year quarter and $312 million in the first quarter, delivering a consistent operating margin of approximately 5%. Weighted average shares outstanding of 33.8 million were down 4.5 million shares or approximately 12% year-over-year, reflecting our share repurchase activity. Diluted EPS was $1.56 per share compared with $5.46 in the prior year quarter and $4.69 in the first quarter. The year-over-year adjusted EPS growth reflects our continued operating execution and disciplined capital allocation. Moving to Slide 7. After sales remains our largest gross profit contributor and delivered record gross profit in the quarter. After sales revenue increased to $1.26 billion from $1.22 billion a year ago, reflecting continued growth in a durable recurring and high-margin part of the business. Gross margin was 48.1% compared with 49% in the prior quarter with the decline primarily related to the higher mix of wholesale parts, which, as Mike indicated, were up 16% in the quarter. Margin was stable sequentially versus the first quarter. Revenue growth reflected continued strength in customer pay, which increased 7% year-over-year. And as I said, wholesale parts increased 16%, driven by recent commercial wins. Repair order growth was strong in the key customer-facing categories with customer pay repair orders up 5% and warranty up 8%. This more than offsets cyclically lower internal repair orders. Total after-sales gross profit increased $9 million from the second quarter of 2025, including the benefit of acquisitions. This was led by customer pay, which increased 7% year-over-year and wholesale parts, which increased 9%. Warranty increased slightly and internal gross profit was down, reflecting cyclical softness. We remain focused on deploying technology to drive additional volume and productivity and on hiring, developing and retaining technicians. These efforts increase same-store franchise technician head count by more than 2% year-over-year, reflecting improved retention. Growing our technician workforce is key to consistently delivering mid-single-digit growth in after sales gross profit. I'm now on Slide 8, Customer Financial Services. The momentum in CFS continued with Q2 per unit profitability of $2,799,up approximately 3% from $2,712 a year ago, while absorbing an approximately 2% drag from increased AutoNation finance loan originations. Total CFS gross profit was $358 million compared with $368 million in the prior year quarter with lower retail unit volume more than offsetting the stronger per unit profitability I mentioned. Results were supported by continued robust product and finance penetration along with improved service contract and commission profitability. This performance reflects continued execution by the team and the strength of our value-driven customer focused process. Slide 9 provides an update on AutoNation Finance, our captive finance company and its continued solid performance. AutoNation Finance delivered another record quarter, generating $11 million of profit in the second quarter and $20 million for the first half of 2026 compared with $2 million in 2025 as we continue to profitably scale this business. Total interest margin increased $11 million or 35% year-over-year driven primarily by continued portfolio growth. Delinquencies and reserve rates remain stable, reflecting disciplined underwriting and continued portfolio performance. Originations were $485 million for the quarter and AutoNation finance penetration was 11% of our total vehicle sales and 18% of our vehicle sales financed during the quarter. The AutoNation finance portfolio grew to $2.67 billion, up from $1.76 billion a year ago, an increase of approximately 52%, we also closed our third ABS transaction in June 2026 for approximately $550 million, increasing the portfolio to 91% debt funded compared with 83% in the second quarter of 2025, to close on AutoNation Finance, our compelling offerings are driving healthy customer takeup, and we continue to expect attractive returns on equity as profitability grows and equity investment requirements moderate. Slide 10 provides some color on new vehicle performance. New vehicle unit sales were 63,240 units, down 4% from a year ago, principally driven by a decline in sales of battery electric vehicles. As Mike mentioned, our market share performance remained consistent with the first quarter in the markets we serve. By segment, import unit sales increased 1%, partially offset by declines of 12% in domestic and 4% in premium luxury and premium luxury was down 1%, excluding the battery electric vehicle impact. New vehicle gross profit per unit was $2,381, compared with $2,785 in the prior year quarter. reflecting higher vehicle costs. Importantly, new unit profitability has been relatively stable sequentially over the last 4 quarters. Inventory day supply is healthy with domestic at 73 days and luxury at 66 days while import remained at 34 days. Turning to Slide 11. As Mike mentioned, used vehicle supply remains tight for lower-priced units, and the team executed well, balancing sourcing, unit volumes and overall profitability, used retail unit sales were lower year-over-year, but mix remained favorable with units priced above 40,000, up 10%, driving an 8% increase in revenue per unit, the unit profitability in this category is more than double that for the rest of our used business. Used vehicle gross profit was $1,582 and in the second quarter compared with $1,622 in the prior year with unit profitability remaining stable over the last year. Our vehicle supply remains healthy with approximately 90% of used vehicles internally sourced. And we expect the off-lease supply to accelerate meaningfully in the second half. Turning to Slide 12 on free cash flow. Adjusted free cash flow was $439 million for the first half of 2026 and compared with $394 million a year ago, so an 11% increase. Conversion improved to 125% from 100%, reflecting our focus on working capital and cycle times to support robust free cash flow generation. For the full year, we remain on track for approximately $325 million of CapEx. Slide 13. Our consistent cash conversion gives us flexibility to invest in growth and drive shareholder value. Through June 2026, we deployed $900 million of capital compared with $478 million a year ago, including $457 million of share repurchases, $317 million for M&A and $126 million of capital expenditures. The store in the Toyota store in Georgia and 3 premium luxury stores we acquired in the San Francisco Bay Area represent attractive brands have $600 million of combined annual revenue and add to our scale and density in these markets. Adjusted cash from operations was $565 million through June 2026 compared with $548 million in the prior year period, and total capital deployed represented 159% of adjusted cash from operations compared with 87% and a year ago, reflecting significant reinvestment in the business and continued returns to shareholders. Our capital allocation approach remains the same: fund CapEx, which is mostly compulsory maintenance-related spend, pursue selected M&A opportunities that add scale and density, return residual cash flow to investors and maintain our investment-grade rating. Our balance sheet remains strong. covenant leverage remains comfortably within our targeted 2 to 3x EBITDA range. The strength of our balance sheet and robust cash flow generation give us significant flexibility to continue deploying capital, driving shareholder returns and growing earnings per share. At this point, we'll open the lines for your questions.

Kenneth, if you could please remind the participants how to get in queue for the question-and-answer period.

[Operator Instructions] Your first question today comes from the line of Rajat Gupta from JPMorgan.

Operator, can you check his lines open, please?

Sorry, can you hear me now? .

Yes, we can hear you.

Sorry about that. I just wanted to start with parts and services. 3% revenue growth, but flat to close profit growth. It looks like there was a margin mix impact it sounds like from your remarks that the consumer is fine in general. But curious like what's driving the overall gross profit like deceleration? And is this just a temporary phenomena based on some tough comps? When can we expect growth there to recover back to like the mid-single-digit cadence over the next few quarters? And I have a quick followup.

Yes, Rajat, this is Mike. As I said, the I am very, very pleased with the way the after sales team continue to grow customer pay businesses regardless of whether the comps are tough or not comes, I actually look at the penetration in the marketplace and how we're retaining our customers. So within the overall number, obviously, you're picking up a mix issue on internal pay as our mix shifted more towards $20,000, $40,000 cars and less towards under $20,000 cars, which obviously has a different mix of preparation and reconditioning and we saw shifts in warranty mix. We moved much more towards higher volume, lower content per RO in warranty. I think all of those things are just point in time, very temporary. And I look at the underlying performance in what really matters to me which is the penetration in the park and customer pay. And notwithstanding the fact that if you look at the addressable market in the aftersales park, is still working through the COVID hole in the 3- to 10-year park, which for us is obviously prime. So the market our after sales teams have made that up with improved penetration. And I think that's very positive, and that's going to continue. So I would view any temporary drop in terms of internal pay and warranty as a point in time, nothing structural in there, and you should look at the underlying performance with the penetration in the park. We did take time to call out our wholesale performance. Obviously, that's at a lower margin, and therefore, you're going to get an effect of that. But that's all incremental business for us. We're up very, very significantly, and that is share gain in that marketplace. And again, I think that is a result of the work that the team has done. So all in all, encouraged by the performance in aftersales and believe that we can continue that in customer pay, not just in the next half, but also continue it forward.

Got it. That's helpful color. And I just want to follow up also on the SG&A comments. If I heard correctly, I think you mentioned 66% to 67%, excluding the year. That's a pretty meaningful improvement versus the levels today. I know like you've talked about the investments you were making on customer experience. Is it just that some onetime expenses that are more weighted towards the first half and go away that's driving the improvement. Curious on the drivers there. .

Yes. I think what you'll see is the drivers, Rajat, is improved gross profit, a number of productivity initiatives that we have, including those involving the application of we've got some programs around discipline around advertising that we've invested more heavily in, in the first half. I think that begins to moderate. You also saw that we took some portfolio actions, and that will also help the SG&A rate. So a number of orders in the water that are moving in the right direction.

Your next question comes from the line of Mike Ward with Citi Group.

I wonder if you could talk a little bit about variable growth. It looks like it's stabilized in the $4,500 per unit range and it goes up and down whatever, $50 or $100 depending on the quarter and mix, et cetera, is that the new normal? And when I look at it, using new end user down, but F&I is strong? And what could disrupt that trend? What are the things that are really driving that stability, as we look at it.

Yes. Thanks, Mike. Great question. And your question kind of reflects the focus that we have on total unit profitability. So you can pick at whatever you want on individual PVRs and so forth. But for us, it's a total economic equation, including the products and services that we offer from a CFS perspective, and we think our trajectory is very strong. In fact, the last 4 quarters, as we've mentioned, you can look at the new unit profitability, use unit profitability and see it's in a very narrow bandwidth, and we expect that to continue. And you couple that with gross growth in CFS, it was essentially 5% in unit profitability you end up with a pretty attractive performance and expectation going forward. So we're looking at it comprehensively like you do. And think that's the way it should be done.

Yes. Let me also add to that, Mike, if I can. And Tom, I think it was a great answer. But I talked in my opening comments about the importance of CFS to us and the fact that we are really attaching very valuable products for our customers as well as for us. And the main attach rate is in extended service contracts and warranties. And that's very important for us. So as we think about the overall economic balance that you mentioned, Mike and Tom reinforced. Within there, we know we're seeding future customers for our and our service departments, and that's very, very important to us, and the team continues to perform incredibly well. And 1 thing that I don't think is discussed enough is that is a result, which I think is not just in credit industry leading, but it's also a result that reflects temporary headwinds from our AM Finance performance because as Tom has discussed on many occasions, as AM Finance scales, that profit from that business is released over time and not point in time. So notwithstanding the fact that it is a great result in the e itself, if you also add to the fact that AM Finance continues to grow and take that in context as well. Overall, I think it is a very, very strong performance.

Very helpful. Secondly, what percentage do CPO sales represented your used? And I think you mentioned that you're going to start to see lease returns pick up a little bit in late '26, '27. And I assume it seems to me that on the used vehicle side, there is more financing going on. Is that another potential boost for the CFS.

Well, yes. I mean our overall finance rate is something we track very, very carefully, and it's actually been very solid and stable. Our penetration, particularly on used vehicles, Mike, has continued to increase. And we see incremental opportunity there as we go forward with that finance penetration through An Finance. But we have a process in place that really looks to work in partnership with other finance providers for that credit type that frankly is not in our target grouping that we're looking for. And that is holding up very well, and we think that there's incremental opportunity for us to drive that, not just in the second half, but all the way through 2027 as well. Tom, do you have the answer?

Yes. I remember. So Mike, glad you asked that question. CPS or sorry, CPO continues to be moving in the right direction for us, we were roughly 15% last year in the first half. This year, we're closer to 20%. So we're happy with the progress that we're making there. And you had asked about lease returns as well. The progress on or sorry, the trends on lease returns will significantly increase in the second half from the first half, probably upwards of 30% to 40%. And now these are overall relative to the unit sales that we have for a month, it's not like 10% or 10% or anything like that. It's a fairly modest number. But the lease volumes definitely at least return bonds definitely are going to start to trend really strongly in the second half.

Yes. I mean you begin in just we've now passed through the trough of lease returns, we're beginning to see some recovery. It's not back to pre covered levels, but it is going to grow nicely in the second half, Tom, you're quite right. .

Your next question comes from the line of John Babcock with Barclays.

I guess just quickly while we're on the off-fleet side of things. Any thoughts in terms of what percentage of off-lease vehicles are going to be kept by the grounding dealer this time around, just given everything that's going on with residual values and just broadly demand for off lease?

Yes. Well, it's certainly increasing, John, because as you know, when we were going through that period where not just supply was restricted. You also saw significant increase in residual values and a lot of equity in returning leases, which customers quite rightly took advantage of that's obviously beginning to normalize as well. So the number of returns that come back to us that are either returned or bought out, which is our preference as we new vehicle has increased. It's still not back to the levels that it was before, but it's something that we have seen pretty steady progress on -- over the last few quarters. .

Okay. And also, you're not the only deal to report better GPUs on the used side of things. I'm just kind of curious, how sustainable do you think the increase in GPUs was this quarter, recognizing for you, it maybe was a little bit less than some of your peers. But Also, like how sustainable is this at this level? Do you think there are any market factors? Is there anything else that might lead to some pullback in the rest of the year?

Well, so frankly, GPU improvement comes from multiple places. It isn't just average transaction price. But there is a lot of opportunity for us to not just sustain what we're seeing, but also improve it. clearly, mix is going to have an impact on that. But we're finding that our ability to drive our vehicles to market quicker turn them quicker. And if you look at our relative turn rate compared to others in the marketplace, you'll see we see a very healthy turn rate, but it is also around the mix because as we acquiring our vehicles through those channels that we have more control over, trade, for example, off lease that we've just talked about, it impacts our average purchase price of those vehicles. We turn them in what we consider to be a reasonable pace thinking about our ability to replenish those vehicles. So we very much look at return on invested capital in used cars, which is why I think sometimes this maniacal focus purely on used volume actually misses the point. The point is how will we invest in that capital and what return are we getting? And we know that if we're able to replenish vehicles and turn for example, plus $40,000 used cars at a reasonable rate, the actual return on invested capital for that segment is better than sub-$20,000 cards. But often that gets missed in everybody's, as I said, maniacal focus on you use volumes of 2%. And I think people should focus on return on invested capital and cash flow is a better proxy. So it's coming from multiple areas faster to market, good control over reconditioning, reasonable turn rates, so depreciation is not impacting it, some mix. And therefore, I think as a result of that, it's sustainable you're going to get some cyclical times when it's up, somewhat is down, but the key drivers are under control and well managed.

Your next question comes from the line of Bret Jordan with Jefferies.

On the wholesale business, it obviously got some ink in the prepared remarks. How much of parts and service is wholesale. And I guess when you think about the margin of that mix, if we give a little bit for clarity, how big could it be? And where are you taking the share from? And as you think about 2 or 3 years out, is this going to be a material piece of the business.