AutoNation cost cuts hit collision parts unit

AutoNation Inc. is opting to close its unprofitable aftermarket collision parts unit by the end of 2020, two years after launching it as a startup.

Growing the business unit's revenue stream was among former CEO Cheryl Miller's goals when she was named to lead the company in July 2019.

But the auto retail giant last week said it would shutter its collision parts arm, which includes 12 distribution centers, as part of a cost-cutting and efficiency move.

The division, launched in 2018 as part of AutoNation's larger brand extension strategy, sources and sells retail and wholesale collision parts, from bumpers to radiators, for more than 30 brands. Customers include retail consumers, dealerships and other collision centers.

Guggenheim Securities analyst Ali Faghri, in a note to investors last week, raised his forecast for AutoNation's 2021 earnings and his stock price target for the company after the announcement. Faghri called the exit from the collision parts business positive "as it helps focus capital allocation on better-return investments ... and will yield meaningful cost-savings benefits into" 2021. He mentioned AutoNation USA, the retailer's used-vehicle-only store network, as one of those better-return investments.

The collision parts unit represented less than 1 percent of AutoNation's $700.2 million parts-and-service gross profit in the first half of this year.

It isn't clear how many employees will be affected by the closure. AutoNation did not respond to questions from Automotive News.

AutoNation CEO Mike Jackson, named to that post again after Miller opted last month not to return from a medical leave of absence, indicated on the company's second-quarter earnings call in July that the collision parts business was struggling and called it "an area of concern."

"The whole collision business was very challenged during the second quarter with the dramatic reductions in the amount of miles driven," Jackson said. And the collision parts business "wasn't profitable even before the marketplace got much more difficult."

At the end of June, the collision parts division had about $35 million in parts inventory, according to AutoNation's second-quarter regulatory filing. The nation's largest new-vehicle retailer said in the filing that several of its parts distribution centers operate under multiyear logistics agreements with a third-party company and are subject to early-termination penalties.

AutoNation said last week that it expects to incur about $52 million in charges in the second half of the year, including $12 million in cash, related to the unit's closing. The total is made up of about $28 million for writing down inventory, about $8 million in contract terminations and $16 million in other costs such as depreciation, severance and closing fees, according to a regulatory filing. AutoNation said it expects to spend another $9 million in cash related to contract obligations after the closure.

The retailer said it will continue its profitable AutoNation Precision Parts business, which sells branded maintenance and repair parts.

The aftermarket collision parts business was among the pillars of the company's efforts to extend the AutoNation brand into new products and services. Other key elements of the strategy include branded finance and insurance products, accessories, collision centers, auto auctions and the AutoNation USA stores.

The company last week named Steve Kwak as AutoNation USA president. Kwak, who has overseen the AutoNation USA outlets the past two years, will retain his position as AutoNation's Western region president.

AutoNation last month said it plans to add 20 or more AutoNation USA stores over the next three years, up from five stores today.