UPDATED: 7/17/14 2:44 pm ET
AutoNation Inc. posted a double-digit gain in second-quarter net income but fell shy of analysts’ profit expectations as digital investment drove expenses higher.
The nation’s largest dealership group said its net profit rose 12 percent, helped by gains in all of its business units. Earnings per share from continuing operations were 83 cents, lower than the consensus forecast by analysts of 87 cents. Expenses increased 6 percent, or $30.5 million for the quarter.
AutoNation’s shares traded sharply lower early Thursday, dropping about 7 percent, before rebounding slightly. At midday, the shares were down about 4 percent from Wednesday’s close, amid a softer overall stock market.
“We’re in an investment period. We’re building our brand -- AutoNation,” CEO Mike Jackson told Automotive News today. “We have a big effort to attract additional customers to our digital sites, and we’re making a big investment in our digital sites.”
AutoNation is investing $100 million on the effort during 2014-15, Jackson said. He first disclosed that investment amount in April.
Analysts called the second-quarter results a surprise miss by AutoNation. In addition to higher expenses, “margins were weak across the board,” Morgan Stanley analyst Ravi Shanker said in a report.
AutoNation reported net income of $100.4 million for the quarter on higher gross profits in all four business categories: new cars, used cars, finance and insurance, and parts and service. Revenue rose 8 percent to $4.79 billion.
Jackson said he believes the industry’s new-vehicle sales gains will continue. AutoNation is looking for an improvement of 3 to 5 percent in industrywide new-vehicle volume this year with total sales topping 16 million vehicles. Through June, the U.S. market is up 4 percent.
Revenue, profit gains
During the quarter, AutoNation’s total vehicle sales rose 5 percent as the company retailed 80,554 new and 52,656 used vehicles. New-vehicle sales rose 8 percent overall, or 6 percent on a same-store basis, in line with the U.S. industry's 7 percent second-quarter increase.
The biggest contributor to AutoNation’s profit boost came from the company’s luxury-vehicle segment, which had an income gain of 13 percent. Income from the domestic-brand segment rose 7 percent, while income from the import-brand segment rose 6 percent.
The retailer’s sales mix was split 49 percent import brands, 33 percent domestic brands and 18 percent luxury brands.
Overall new-vehicle gross profits rose 8 percent on a 10 percent revenue gain. Used-vehicle gross profits rose 6 percent on a 2 percent rise in revenues. Parts and service gross profits and revenues both grew 7 percent. F&I gross profits rose 7 percent, to an average $1,392 per vehicle retailed, on a like 7 percent net revenue increase.
On a same-store basis, new-vehicle revenue rose 8 percent, while new-vehicle gross profit rose 7 percent. Used-vehicle revenue rose 1 percent, as used-vehicle gross profit rose 5 percent. F&I gross profit increased 5 percent, resulting in gross profit per vehicle retailed of $1,398. Parts-and-service revenue and gross profit both rose 6 percent.
For the first half of 2014, AutoNation’s net income rose 13 percent on a 7 percent gain in revenue.
AutoNation also said it bought Roundtree Chrysler Dodge Jeep Ram, of Mobile, Ala., this monthJuly. The store has annual revenue of approximately $95 million.
During the second quarter, AutoNation repurchased 1.1 million shares of common stock for an aggregate purchase price of $64.1 million. As of July 16, the company still had $336 million that the board had authorized for share repurchases. It had 119 million shares outstanding.