AutoNation’s profit triples amid chip shortage

AutoNation, Inc., one of the largest automotive retailers in the US, reported earlier this week that its quarterly adjusted profit nearly tripled from this time last year. AutoNation’s Chief Executive Officer Mike Jackson told shareholders that these “outstanding results were driven by strong performance in new, used and customer financial services and disciplined expense management.” The current state of supply and demand in the auto industry also bolstered profits and led to “another impressive and record-breaking quarter,” according to Jackson.

The company reported that its gross profit per new vehicle raised to $2,739, which is a 61% increase from Q1 2020. Its gross profit per used vehicle raised to $1,744, which is 17% over the last year. AutoNation saw gains in each segment, including domestic (+24.5%), import (+29.9%), and premium luxury (+30.1%).

In AutoNation’s Q1 2021 Earnings Call, Jackson said that, “Demand continues to exceed supply for new vehicles, and we expect this to continue throughout 2021, in part due to the production disruption.” He remained optimistic, though, stating that the disruption is “nothing like closing the plants down in the second quarter” and predicting that AutoNation’s shipments “will be double this year than they were when the plants were closed for six weeks.”

Effects of chip shortage

Of course, the COVID-19 pandemic is a major factor in the price increase due to stymied production, disrupted supply chains, and parts shortages. This includes a notable semiconductor chip shortage, which has been crippling inventory and production for several months. As technology expands, newer vehicles require even more of these and the shortage has certainly raised demand and therefore upped prices.

When asked if shortages of inventory were hurting AutoNation’s sales, Jackson stated that vehicles at their stores are instead “going right out the door” and automakers are “cutting production of slow-selling vehicles” to make up for the shortages. AutoNation has also been taking devout measures to keep costs down, which has paid off throughout the past 12 months. Jackson reported that overhead costs decreased by 11.2% compared to a year ago and stated that AutoNation continues to “leverage [its] digital capabilities to drive cost reductions and increase efficiency.”

Jackson told Reuters that he “expects more consolidation among US auto dealers as more vehicle purchases move online,” adding that “you’re going to see quite a number of acquisitions…not just by us.” AutoNation increased its annual revenue by $380 million when it bought 11 stores from Peacock Automotive Group in Q1, and it is reportedly aiming to expand to more than 130 US AutoNation stores by the end of 2026.

Acquisitions will likely be heavily influenced by various company’s abilities to build and maintain proprietary digital tools that will allow auto retailers to stay afloat in the never-ending digital boom. As digital marketing and sales continue to become more prominent in the economy, including the automotive industry, auto retailers will need to be able to keep up, which may mean completing acquisitions to cross-share tools and technologies.

Viewing the auto industry as a whole, new and used car sales have been recovering since the plummet at the beginning of the pandemic, partially because consumers are leaning towards private transportation as opposed to public transportation and shared rides. Consumers also appear to be taking advantage of currently lower interest rates that may help them get more affordable payments. Demand is likely to stay high and, as shortages of semiconductor chips and inventory continue, we can expect prices to remain high for the near future as well.

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