AutoNation ramps up plans for used-only stores

Auto retail giant AutoNation Inc. wants to nearly double its combined new- and used-vehicle sales to 1 million annually and plans to add at least 95 used-only AutoNation USA stores to help reach that goal.

The company announced the plans last week as part of the release of its third-quarter earnings in which net income soared on higher gross profits for new and used vehicles and lower expenses. The Fort Lauderdale, Fla., company did not specify when it aims to reach 1 million sales — up from almost 529,000 last year — beyond calling it a "long-term" target.

AutoNation, which has five standalone AutoNation USA stores that opened in 2017 and 2018, said last week it will add five more by the end of next year, grow to 30 by the end of 2023 and to at least 55 by the end of 2025. The nation's largest new-vehicle retailer wants to have at least 100 AutoNation USA stores by 2030.

New outlets are planned for 2021 in San Antonio and Austin, Texas, CEO Mike Jackson told investors and analysts last week.

The company, which aims to grow its used-vehicle market share and expand into new markets through AutoNation USA, said in July that it planned to build 20 or more of the stores within three years. Jackson said last week the five AutoNation USA stores were profitable in the third quarter and the average selling price of a vehicle sold through those stores is about $20,000.

To reach 100 or more stores, AutoNation could spend more than $1 billion on the AutoNation USA expansion. Each one is expected to cost up to $11 million to open, and financial results would reach breakeven in about a year, the company said in a presentation to investors.

CFO Joseph Lower told analysts and investors on a call last week that each AutoNation USA store is expected to generate $2.4 million in annualized revenue when it reaches an "initial run rate," which was described in slides as 200 vehicle sales a month, achieved 18 months after opening.

"It's an outstanding internal rate of return and one of the best investments we can make in the company leveraging on our brand, our pre-owned, one-price process," Jackson said on the call. "The way we think of these USA stores is very much as point-of-sale delivery centers and speed-to-market reconditioning centers. It's very cost effective rather than moving everything around and doing the reconditioning centrally."

Guggenheim Securities analyst Ali Faghri, in a note to investors last week, estimated that the 50 AutoNation USA outlets planned by 2025 could boost earnings by $1 per share. The company said it had about 87.9 million shares outstanding as of Monday, Oct. 19.

"We are positive on AutoNation's decision to ramp up expansion of their standalone used storefront as the results from their five-store pilot highlight strong return metrics," analyst Stephanie Benjamin of Truist Securities Inc. said in a note to investors last week in which she raised the stock's price target.