SAH Sonic Automotive Inc

AutoNation Inc. plans to spend as much as $500 million to expand its footprint in the U.S., as the nation's largest dealership group by sales confronts softening light-vehicle demand and increased earnings pressure.

The Fort Lauderdale, Fla.,-based retailer said Friday that income from continuing operations fell 9% in the third quarter. AutoNation's expansion plan includes the creation of a line of stand-alone used-car stores dubbed "AutoNation USA" that will compete with CarMax Inc. and a crop of internet startups in the hotly contested segment when outlets begin opening next year.

AutoNation also will expand its lucrative parts, service and collision operations in the coming years.

In the third quarter, AutoNation recorded earnings from continuing operations of $108 million, or $1.05 a share, compared with $119 million, or $1.05 a share, a year ago. Revenue rose 4% to $5.6 billion amid continued strength in truck and sport-utility segments.

Analysts expected earnings of $1.15 a share on $5.6 billion in revenue. The company said the continuing Takata Corp. air-bag recall hurt results because about 14% of its used inventory can't be sold until fixed, leading to a $6 million charge.

AutoNation Chief Executive Mike Jackson has been working to offset several headwinds in recent months, including a decline in demand for sedans and small cars because of lower gasoline prices and changing consumer tastes. While U.S. light-vehicle volumes are up for the market as a whole, retail sales to individual customers at dealerships are struggling to keep pace with year-ago levels, forcing auto makers to rely more heavily on fleet sales and leading their dealers to look for other pockets of growth with potential for higher margins.

The company added or acquired four new-car stores and a collision center in the third quarter, representing a potential for nearly $500 million in new revenue.

Used vehicles typically deliver higher margins than new units, however, so the capstone of Mr. Jackson's expansion plan is opening five AutoNation USA pre-owned vehicle sales and service centers in the U.S. next year. The retailer has identified an additional 20 sites in its existing markets in coming years.

Mr. Jackson has complained about certain auto makers employing irrational sales techniques, including offering deep sales incentives that erode brand cache and deplete margins. By opening new businesses not dependent on the sale of new vehicles, AutoNation could lessen its exposure to the cyclical nature of the car business by operating units that do well even when the economy softens.

While CarMax is the best-known company in the used-car dealership business, other major dealer groups, including Sonic Automotive Inc., have expanded with stand-alone used-car stores. Many startups, meanwhile, have abandoned the brick-and-mortar approach and sell only via mobile apps or the internet.

AutoNation's new effort will feature no-haggle pricing by employing salespeople who don't work on commission, a strategy that follows the company's drive to create a timesaving and hassle-free experience for buyers increasingly interested in buying cars online.

Used vehicles sell for about $19,000 on average in the U.S., compared with $33,400 for new vehicles, according to the National Automobile Dealers Association. In the best years, new light-vehicle volumes equal about 17 million, while used volumes exceed 40 million. The supply of good-condition used cars is expected to grow in coming years as new-vehicle leases expire, potentially pressuring margins but also offering more revenue potential for sellers.

AutoNation also plans to open or acquire at least 18 new AutoNation-branded collision centers and open four additional AutoNation-branded auctions over the next two years. In addition, it will offer a line of branded precision parts and automotive accessories.

(END) Dow Jones Newswires

October 28, 2016 08:25 ET (12:25 GMT)

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