Is AutoNation jumping back into the used car biz?

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 withCarMax 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.

Read More