AutoNation, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, Kenneth, and good morning, everyone.

Welcome to AutoNation's Third Quarter 2026 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Szlosek, our Chief Financial Officer. Following their remarks, we will open up the call to questions. Before beginning, I would like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website at investors.autonation.com. With that, I will turn the call over to Mike.

Yeah, thanks, Derek. Good morning, everybody, and thank you for joining us today. So as usual, we will begin with an overview of the quarter, followed by Tom's review of the financial and operating results, and then we will take your questions. I am going to begin on slide 3. The central message this quarter is straightforward, I think. It is the strength of our business model, which includes durable earning streams and cash flows and disciplined capital allocation, enabled us to deliver our seventh consecutive quarter of year-over-year adjusted EPS growth. That result reflects our focus on our customers' mobility needs and the value creation drivers per share shown, which contributed strongly to the Q3 results. Specifically, after-sales delivered another record quarter. Customer pay and warranty gross profit each increased 5%, supported by higher traffic, and after-sales again contributed half of our total company gross profit.

Second, our customer financial services platform gives us control over the placement of products and financial services. This enables us to direct the business to our own captive finance company or to one of our preferred partners. We will discuss the hub in a few minutes, but it gives us upfront income as well as long-term earning stream. Under this model, AutoNation Finance continued to scale rapidly and profitably. The portfolio reached approximately $2.9 billion. Quarterly profit increased to $15 million from $2 million a year ago, and return on equity based on Q3 results is approximately 24%. Beyond the financial figures, the business is providing a meaningful platform to drive deeper and ongoing relationships with our customers. Third, cash generation remained, I think, exceptional. Year-to-date adjusted free cash flow was $739 million, representing 141% conversion of adjusted net income.

Fourth, we continue to deploy capital with discipline. Through September, we invested in the business, completed attractive acquisitions, and deployed $620 million to share repurchases, reducing our share count by approximately 12% year over year. Rest assured that we continually evaluate share repurchase and M&A opportunities through the lens of maximizing value per share. Since 2022, that has favored share repurchases, and over that time, we've allocated 88% of our adjusted free cash flow to repurchases, which includes 84% year to date. In current market conditions, our share price is attractive, and given that our capital allocation model focuses on long-term earnings per share growth, we anticipate continuing with share repurchase as a preferred use of incremental capital. Moving to slide 4, this provides a visual on EPS and free cash flow performance.

Adjusted EPS was $5.11, up 2% from $5.01 a year ago. Again, our seventh consecutive quarter of year-over-year adjusted EPS growth. After-sales and AutoNation Finance were the principal operational drivers of EPS growth. We also realized a significant EPS benefit from our share repurchase activities. Year-to-date adjusted free cash flow was $739 million, in line with 2025, and conversion improved to 141% from 128%. As I stated earlier, through the end of September, we have deployed 85% of our free cash flow to share repurchases. Tom will talk more about capital allocation in a separate slide, but our model, as always, will continue to focus on the best use of cash to drive EPS in the long term. With that, I'm going to hand over to Tom.

Thanks, Mike. I'm on slide 5, which gives a little more detail on the EPS growth that Mike mentioned. If I start with Q3 2025, $5.01, and walk it to the $5.11, Q3 '26. First, you'll notice the effect from vehicle sales as anticipated. Vehicle volumes were lower year over year, primarily reflecting the comparison with demand ahead of the September 2025 EV incentive expiration and last year's tariff announcements. This is behind us as we move forward, but it did create a $0.52 per share unfavorable impact in the quarter. On vehicle profitability, we're pleased that we're able to grow year over year in used unit profitability and keep new unit profitability normalization within a reasonable range compared to what we had been experiencing in 2024 and 2025.

The net effects of these factors were $0.28 per share unfavorable. Moving on, the results benefited from the strength of recurring earnings streams we've been discussing. Aftersales contributed $0.38 of earnings per share growth, and AutoNation Finance contributed $0.27 of earnings per share growth. We have more details on each of those coming up. Additionally, share repurchases contributed another $0.64 of earnings per share growth through the reduction in weighted average shares outstanding. All other items were net unfavorable $0.39 per share, which includes the effects of less operating leverage for our SG&A resulting from lower vehicle sales, that was about $0.13, reductions in wholesale vehicle profitability, which was about $0.14, and higher interest expense, which was about $0.08. We have clear actions underway in each of those three areas.

For example, in SG&A, although we screen near the top of our peer group in terms of cost management proficiency, our cost performance in Q3, particularly in July and August, could have been better. We initiated several initiatives in September, which we are confident will deliver meaningful cost productivity for the rest of the year and into 2027. Focus areas include field labor productivity, discretionary local spending for categories like marketing and IT, corporate advertising spending, and corporate commercial sales. Second example is on wholesale vehicle profitability. We didn't have the right mix of used vehicles and held onto some stocks for too long and ended up incurring incremental wholesale losses in the quarter. Used inventory turns over very quickly, which gives us the opportunity to self-correct rapidly, and we have in fact made inventory corrections as well as organizational changes in this used area.

We also had higher general purpose interest expense and floor plan interest expense relating to higher share repurchases and inventory levels. We are comfortable with our used inventory levels. We're a bit higher on new unit inventory levels, and we'll be moderating those over the course of the coming months. The result was adjusted EPS of $5.11, up 2% year-over-year. Slide six highlights the earning streams which anchored our quarter. Starting with aftersales, gross profit reached a record $617 million. This marks the ninth consecutive quarter that we've achieved year-over-year record gross profit in aftersales, and aftersales represents about half of the total company gross profit. Customer pay and warranty gross profit each increased 5%, supported by traffic growth of 5% in customer pay and 13% in warranty. Also, AutoNation Finance also continued to scale.

The portfolio increased to approximately $2.9 billion from $2 billion a year ago, and 91% of the portfolio was funded with non-recourse debt. Year-to-date profit increased to $36 million from $4 million in the prior year, with a 24% return on equity. Customer financial services generated $349 million of gross profit and approximately $2,700 unit profitability. Total retail units declined 4%, and the continued growth of AutoNation Finance shifted a portion of economics from upfront commissions towards recurring finance income. That shift is strategically important as it enables us to convert transaction-based earnings into a recurring earning stream while generating superior earnings and attractive returns on equity. Turning to slide seven, we've historically made and will continue to make capital allocation decisions based upon the relative contributions to earnings per share of every investment alternative over the long term.

As you can imagine, the current environment, that strongly favors share repurchases. Along those lines, you will see that this morning we announced that our board approved an additional $1 billion share repurchase authorization, bringing the total authorization available to approximately $1.4 billion. So far in 2026, share repurchases represented our largest use of capital. We have deployed $620 million year-to-date and repurchased approximately 9% of the shares outstanding during 2026, thereby decreasing the year-over-year share count by 12%. We are on our way to exceeding the 2025 share repurchases total of $785 million. Our acquisitions made during the second quarter added approximately $600 million in annual revenue and increased our scale and density in markets where we have a meaningful presence.