What happened 

Shares of auto retailer AutoNation (AN 0.22%) rose 8.6% this week through the close of trading on Thursday. The move came in a week when the company cheered investors with its third-quarter earnings release. 

As for the earnings, investors had cause for concern. After all, consumer discretionary spending is being crimped by inflation, a slow economy is creating job concerns, and rising interest rates are making it more expensive to service debt. So everything points to a weakening consumer sector, and that's not traditionally good news for auto retailers. 

Expand

NYSE: AN

AutoNation

Today's Change

(-0.22%) $-0.42

Current Price

$187.72

Key Data Points

Market Cap

$6.3B

Day's Range

$185.13 - $189.67

52wk Range

$176.62 - $228.92

Volume

294.1K

Avg Vol

402.9K

Gross Margin

17.05%

That said, the auto industry has a unique set of dynamics around it right now whereby the supply of new vehicles continues to be hurt by production difficulties from ongoing supply chain problems. That's caused vehicle prices to rise. 

These dynamics can be seen in AutoNation's latest earnings, which were positive enough to encourage investors to buy the stock. 

• The lack of supply caused vehicle unit sales to decline in the third quarter -- new vehicle unit sales were down 5% to 55,565, and used vehicle unit sales fell 3% year over year to 75,355.
• Revenue per vehicle increased, with new vehicles now at $51,451, up 9.1% year over year, and used vehicles now at $29,900, up 7.4% year over year.
• The result was a 4.5% increase in total revenue and a 3.3% increase in gross profit.

So what

The results were enough to soothe concerned investors. However, the question now turns to what's in store for the industry in 2023. It's a complex set of dynamics. For example, automakers are trying to increase production to overcome well-documented supply chain woes and meet underlying demand. However, at the same time, that same demand is likely to weaken if the economy continues to slow. 

Now what

Weakening demand plus too much supply coming online in 2023 equals trouble for AutoNation. On the other hand, demand (as evidenced by rising prices) remains solid, supply remains tight, and AutoNation CEO Mike Manley believes automakers recognize the need to keep inventory balanced. That's something investors will hope for in 2023.