Despite an agonizingly slow economic recovery, the country’s largest auto retailer, Fort Lauderdale-based AutoNation, is thriving again as demand for vehicles expands.
The company, one of Florida’s largest, is posting increasingly strong profits and revenues. Just last week, in a sign of confidence, Autonation announced a major acquisition — buying six large auto stores in Texas — that will add about 700 employees to its national payroll of 19,400.
In announcing the deal Tuesday, which is expected to provide AutoNation with $575 million in additional revenues next year, the company’s CEO and chairman, Mike Jackson, expressed optimism about the prospects for continued growth in vehicle sales.
“You want to know what I’m thinking, look at what I do,” Jackson told viewers on CNBC’s Squawk Box program.
No information was released on the cost of the transactions, but in recent years auto dealerships sometimes sold for three to five times revenue, which would represent a significant investment for the company.
To be sure, AutoNation has struggled through some tough times. It was battered by the Great Recession, which depressed sales and pushed the company into a $1.2 billion loss four years ago. As sales began to improve in 2010 and 2011, it was blindsided by a shortage of Japanese-made cars last year after the earthquake and tsunami in March 2011 shut down Japanese manufacturers of some essential components.
Since then, however, AutoNation has rebounded. Unit sales, revenues and profits all performed well in the first three quarters of this year, and the company expects new vehicle sales to continue their recovery nationwide, rising to the mid-14 million units this year, up from about 12.7 million in 2011. In the third quarter of 2012, AutoNation’s new car unit sales grew by 21 percent over the same period in 2011, doing better than an estimated 15 percent increase industry wide. November’s sales of new vehicles increased by 21 percent over November 2011 .
The big dealerships acquired sell Audi, Porsche, Volkswagen and Chrysler products in the Houston and Dallas-Fort Worth markets. They are expected to sell 14,000 new and used autos this year, and will add substantially to AutoNation’s future sales.
“We are in the right industry at the right time,” Jackson said during an interview. “The recovery in new vehicle sales is being driven by replacement demand,” added Jackson, who has 42 years of experience in the auto business. “The average age of the light vehicle fleet in the country has increased to 11 years, and even though cars and trucks last longer today, they can’t go on forever. About 12 to 13 million vehicles are scrapped every year and need to be replaced.”
Other factors are contributing to stronger demand for vehicles. “The population is growing, interest rates are low, there is ample credit available and manufacturers are producing a wide range of new models that offer attractive styling, power and greatly improved gas mileage,” said Jackson, who took over as AutoNation’s CEO in 1999. “Auto financing is more available than it has been in recent years. A little known fact is that people are more likely to default on a mortgage than on a vehicle loan.”
People always need transportation to get to work, he added, and while banks often are reluctant to grant home mortgages, consumers can obtain financing for new vehicles.
Some figures demonstrate how AutoNation has been able to take advantage of burgeoning demand for cars and light trucks in recent years. Its sales of new and used vehicles rose steadily from a five-year low of 316,150 in 2009 to 395,128 in 2011. In the first three quarters of 2012, the company sold 332,364 total vehicles, up 13.4 percent from the same period last year.
Revenues and profits have also risen during this period. Revenues grew from $10.7 billion in 2009 to more than $13.8 billion last year. During the first nine months of this year, they reached $11.5 billion, a 13.2 percent improvement over the same three quarters in 2011.
Profits in 2009 were $198 million, one year after the $1.2 billion loss, and reached $281.4 million in 2011. For the first nine months of this year, net earnings were $233.2 million, a 10 percent rise over the same period in 2011.
Other auto retailers in the country’s highly competitive market have also benefited from the buying surge. Large publicly traded competitors like Penske Automotive Group, Group 1 Automotive, Asbury Automotive Group, Sonic Automotive and CarMax (which sells mostly used cars) all have seen increased unit sales. In addition, there are more than 15,500 new car franchises in the United States, around 37,600 used vehicle dealers, as well as online marketplaces, according to estimates.
AutoNation’s size and market presence is far greater than the other publicly traded car retailers. It owns and operates 261 new vehicle franchises selling 32 brands at 221 stores in 15 states.
Along with its size, AutoNation relies on a combination of factors to grow and remain successful. In an interview at a recently upgraded Maroone Chevrolet dealership in Fort Lauderdale, Jackson and Mike Maroone, AutoNation’s president and COO, talked about some of the company’s key strategies, which the two have developed since 1999.
“We have been a team for 13 years and we see the auto industry two, three, five years ahead,” said Jackson. “We’re reaping the benefits of investments and policies made years ago. We know how to manage and we’re working today on what will be done over the next several years.”
AutoNation’s large network is concentrated in Sunbelt states and the company, as it expanded over the years, maintained and strengthened local market brands in each region.
In Florida, for example, AutoNation has 60 stores operating under four well-known local brands: Maroone (South Florida), Courtesy (Orlando area), AutoWay (Tampa Bay area) and Mike Shad (Jacksonville area), as well as other dealerships such as Mercedes-Benz, Lexus and Land Rover.
In northern California, AutoNation stores operate under the AutoWest brand and in southern California and Phoenix, Power dealerships. Other regional brands are AppleWay (Spokane area), Bankston (Dallas), Champion (Houston) and Desert (Las Vegas).
The company is always on the lookout for additional dealerships with good potential in the geographical areas where it already operates.
AutoNation’s concentration of stores in Florida, which accounted for the largest share of total revenue (27 percent) for any state last year, permits consumers to choose from a wide range of brands, models and prices available in their home areas either by searching online or at an AutoNation store, noted Maroone, whose father developed the largest privately held retail auto network in the country before its merger with AutoNation.
Maroone, who began helping out at one of his father’s dealerships when he was a child, pointed out that most potential buyers today search online before they visit a dealership and that the company has invested to make the online experience easy and practical, and to offer customers “one-stop shopping.”
The mix of vehicles offered by AutoNation, dominated in the past by Detroit’s big three, has changed as the company identified what consumers want. Last year, for example, revenue from domestic vehicles (manufactured by GM, Ford and Chrysler) accounted for 34 percent of new car revenue, while imports (Toyota, Honda, Nissan and others) represented 37 percent and the premium luxury segment (Mercedes-Benz, BMW, Lexus and others) accounted for 28 percent. The company, which plans to maintain this mix in the future, also offers to arrange vehicle financing and insurance for customers.
But stores alone don’t sell cars.
“Attracting, developing and retaining the right people, creating the right culture, these are essential for AutoNation,” Maroone said. The two top executives spent years reviewing existing managers, looking for those who had the best skills for operating within the structure of a publicly-owned company. And the company consistently “spends time and money” on developing and training sales and administrative personnel, Maroone added. The company looks for salespeople with a service orientation, drawing them from areas like restaurants, banking or online services. Most of them have no prior experience in auto sales.
AutoNation also invests to modernize and upgrade its dealerships. “We reinvest in our people and our stores and we’re spending about $500 million on dealership upgrades,” Maroone said.
Other initiatives taken by Jackson and Maroone include important investments in technology at the sales and back-office levels to increase productivity, expanded service hours to attract new car buyers to AutoNation maintenance and repair shops and opening premium value outlets, or stores that offer high mileage used luxury cars like Mercedes and Lexus.
Technology investments have paid off. The company set up a shared services center for accounting in Texas that consolidates paperwork for most of its dealerships. AutoNation increased its number of stores from 206 at the end of 2010 to 216 at year-end 2011, but the number of employees only grew by 2 percent, to 19,400 at the end of last year.
The company has 5,800 employees throughout the state, with 2,755 in South Florida.
AutoNation’s stock began 2012 at $35.70, shot to an all-time high of $48.45 in October but has declined to $39.74 as of Dec. 7. B of A Merrill Lynch Global Research in September upgraded AutoNation stock from neutral to buy, citing the “strong pace of new vehicle sales,” and the company’s policy of repurchasing shares. Since 1999, it has repurchased 400 million shares to increase shareholder value.
Equity analysts at KeyBanc Capital Markets and Stifel Nicolaus issued hold recommendations for AutoNation last week. Referring to the Texas acquisitions, KeyBanc said, “We believe investors will view today’s announcement favorably.” The report added that while the acquisitions are “likely accretive to earnings, we continue to believe that AN’s shares remain an expensive outlier in the auto retail space.”
Stifel Nicolaus, also commenting on the Texas deal, said, “While AN has lagged peers in terms of M&A activity post-recession, we believe this is an important next step to drive growth, leverage its industry leading brand and geographic scale.”
Referring to AutoNation’s November sales figures. Stifel Nicolaus added: “For the third consecutive month, AN outperformed the U.S. market across all three segments (domestic vehicles, imports and premium luxury). We believe this helps demonstrate the substantial advantages of consolidated dealers among an industry proliferated by smaller, independent peers.”
According to Thomson/First Call, analysts’ recommendations for the current month are one strong buy, 11 hold, two underperform and one sell.
Major investors in AutoNation include ESL Investments (the investment firm of billionaire Edward Lampert) and Cascade Investment, owned by Bill Gates.
Edmunds.com, the comprehensive auto research and buying guide Website used by millions of consumers, has partnered with AutoNation for several years on different projects, and currently the Fort Lauderdale company subscribes to a program that “tracks hot trends and helps them manage their inventory,” said Seth Berkowitz, president and COO of Edmunds.com.
“AutoNation is an extremely analytical organization and is constantly innovating,” Berkowitz added. “They are always trying to figure out what their consumers are interested in.”
Art Spinella, president of CNW Research in Bandon, Oregon, a leading market research firm that covers the auto industry, ranked AutoNation as “undoubtedly the best run of the public dealership groups.” The company has “incredible focus and attention to detail and is willing to adjust the business plan and marketing to the market. Most of the other public sector groups are slower and less flexible.”
AutoNation has “the ability to read the market today and assess where it’s going in the near term and that is, perhaps its greatest strength,” said Spinella, whose research is widely used in the auto industry. But, he added, the company needs to improve what it is already good at doing. “They need to speed up inventory turns (which are already high) and improve the used car re-sale opportunities by expanding their stores’ area of influence. Again, they’re good at this already, but if the industry’s a six on a 10-point scale, AutoNation is an eight, but has the ability to be a nine,” he said. The CNW president also suggested that there is room for improvement on the digital front.
“Generally, AutoNation is a solid, well-run auto retailer. With as many stores as it has, the core headquarters staff is faced with all of the problems associated with ‘herding cats,’ but does an outstanding job of it,” Spinella said.
While the company’s CEO is optimistic about future auto sales, he is worried about the political gridlock in the nation’s capital. “Washington is dysfunctional at a critical stage of our history,” said Jackson, who is also a member of the board of directors of the Federal Reserve Bank of Atlanta’s Miami Branch. “That’s what keeps me up at night. They [the two major parties] need to define common ground and find solutions as we march toward the fiscal cliff. We need economic growth of three, four or five percent and we’re stuck at around two percent.”
Jackson suggested the government should reduce excessive regulation and focus on developing big national projects like oil and natural gas, which could generate a huge number of jobs.
“These are not green jobs, but they are good-paying jobs,” Jackson said. “North America could become energy independent.”