The share price of AutoNation (AN +0.12%) revved up early this week after the auto retailer reported second-quarter (Q2) 2021 revenue and earnings, handily outdoing analyst forecasts on Monday, July 19. In fact, the company surpassed all past performance, with CEO Mike Jackson remarking, "we reported all-time record quarterly results" during the Q2 earnings conference call. He also forecasted that the tsunami of profit will continue for at least another year. There are at least four factors suggesting his optimism may be right.
1. AutoNation is growing fast and successfully
"Nothing succeeds like success," according to the old saying, and AutoNation's most recent quarterly metrics offer proof of its business model being able to generate outstanding results. Making good use of current opportunities, it posted double-digit gains over both Q2 2020 and Q2 2019, with its press release highlighting how the rise in revenue and earnings per share (EPS) isn't just rebounding from 2020's COVID-19 trough, but is sustained, swiftly increasing growth continuing from the pre-pandemic days.
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At the top line, same-store revenue rose 33% from Q2 2019 and 54% year over year, setting a new record. According to some sources, revenue was nearly $1 billion higher -- $910 million -- than Wall Street analyst consensus. Bottom-line performance was perhaps even more dazzling. GAAP EPS -- the company notes there were no adjustments in 2021 -- rose 243% from Q2 2020's adjusted EPS, reaching its highest level ever at $4.83 per share.
While market conditions were the main driver of the increases, AutoNation handled its operations in such a way as to deliver these successes. CFO Joe Lower noted during the earnings call that the company's "strong performance continues to be driven by strict cost discipline," among other factors, with reduced interest expense, salaries, and advertising all feeding into the cost-cutting and dramatic EPS boost. SG&A expenses (selling, general, and administrative) dropped from 68.2% to 56.5% of gross profit year over year, or 1,170 basis points, providing an objective snapshot of how well the cost discipline measures cited by Lower worked out.
2. Circumstances are in its favor
Market conditions are providing high-octane fuel to the sales of AutoNation and a host of other car-related companies in 2021. Jackson affirms this when he says, "strong vehicle demand has led to faster inventory turnover and consumers are buying vehicles before they even arrive at our stores." The bottleneck of new vehicle supply made the company's used vehicle sales jump, too, rising 32% from 2019 and 37% from last year.
AutoNation's robust used car channel is likely to prove its worth in the coming months, with the new car shortfall reportedly causing a 14% drop in sales over the entire market in June, Black Book data reported by Yahoo! indicates. Overall car sales were up strongly in 2019 before the pandemic hit, but COVID-19 accelerated purchases even more. With new cars scarce, pre-owned vehicles are now commanding premium prices, up an average of 30% since 2020's beginning, according to Edmunds.com research. Some used cars are selling for more than their original showroom sticker price when new, Jalopnik writes, with Kia Tellurides at the top with prices 8.1% higher.
With both new and used car pipelines shunting product to eager customers, AutoNation is well-positioned for ongoing profit in its chosen market. The company states it expects the current buying frenzy to continue at least into 2022.
3. It's developing the digital side of its business
While it obviously can't dispense with physical showrooms, AutoNation is using "digitalization" to speed up a number of processes in its business, according to Jackson. Rapid digital information and databases are enabling it to move vehicles from purchase to reconditioning, then to sale or delivery much faster, increasing the flow of inventory and sales. Using digital information has also aided efficiency, with Jackson stating it "has taken us to a permanently lower basis on SG&A."
The company's strong internet presence and digital tools for customers are likely also increasing traffic. Approximately 55% of all transactions start through a digital channel, even though most buyers still come to a physical location to complete their transaction.
4. It's investing in making its operations stronger
Underlying AutoNation's impressive EPS metrics is another factor besides plain cost-cutting: An active share buyback program. During the year's first half, the company used its cash flow to repurchase 15% of all its outstanding shares, boosting the value of those remaining in shareholder hands. The total cost for this buyback was approximately $1.2 billion, but AutoNation isn't done with the repurchases yet. Another $1 billion was authorized by the board of directors, meaning the company will soon have bought back somewhere around 25% to 30% of shares.
This is just one facet of the enterprise's internal investments and improvements. Aiming "to capture a larger share of the used vehicle market," it will open four more stores this year, approximately 12 next year, and raise its total to 130 across the U.S. by 2025. These initiatives show the retailer's strategic focus and its determination to make its gains permanent by reinvesting them into the company to build better efficiency, profitability, and customer convenience in the future.
Jackson pointed out during the earnings call that AutoNation's soaring growth isn't a passing phenomenon when he said Q2 2021 "marks AutoNation's fifth consecutive all-time record quarter with stellar performances across all our business sectors." Strong indicators like this point to the company being on a long-term trajectory of success, making it an attractive new investment for anyone investing in automotive stocks or retail stocks, or to increase an existing holding before its stock price climbs even higher.
