Executive Summary / Key Takeaways

• AutoNation delivered a strong start to 2025, with Q1 results demonstrating resilience and operational execution despite a moderating new vehicle margin environment.
• Growth was primarily fueled by the higher-margin After-Sales (parts and service) and Finance & Insurance (F&I) segments, which together contributed over 75% of total gross profit in Q1 2025.
• AutoNation Finance (ANF), the captive finance arm, achieved profitability in Q1 2025 ahead of expectations, driven by portfolio growth, improved credit quality, and operational efficiencies, positioning it as a significant future profit contributor.
• Disciplined capital allocation remains a core focus, with solid cash generation supporting share repurchases and accretive acquisitions aimed at increasing market density and shareholder value.
• While new vehicle margins face continued moderation and potential impacts from tariffs introduce uncertainty, AutoNation's diversified business model and focus on controllable, higher-margin areas provide a degree of resilience and strategic flexibility.

Setting the Scene: A Diversified Retailer in a Dynamic Market

AutoNation, Inc. stands as one of the largest and most established automotive retailers in the United States, pioneering the modern dealership group model. Operating predominantly in the high-growth Sunbelt region, the company's footprint includes 322 new vehicle franchises across 244 stores, complemented by a growing network of 26 AutoNation USA used vehicle stores, collision centers, parts distribution, auction operations, and a mobile repair business. This diversified model, spanning new and used vehicle sales, parts and service (After-Sales), and finance and insurance (F&I), positions AutoNation to capture value across the entire vehicle ownership lifecycle. The company's core new vehicle portfolio is concentrated among major global manufacturers, representing approximately 88% of new vehicle sales in Q1 2025, including brands from Toyota, Honda, Ford, General Motors, Mercedes-Benz, BMW, Stellantis, and Volkswagen.

The automotive retail landscape is intensely competitive, populated by other large publicly traded groups like Group 1 Automotive (GPI), Lithia Motors (LAD), and Penske Automotive (PAG), as well as used-vehicle specialists like CarMax (KMX) and emerging online platforms. While competitors like LAD have pursued aggressive acquisition strategies for scale and KMX has focused on omnichannel used vehicle retail, AutoNation's strategy emphasizes operational excellence, density in key markets, and building out its higher-margin businesses. The company leverages its scale to drive efficiencies and its established brand presence to attract customers. Its operational technology, while not a proprietary manufacturing process, includes internal systems and processes designed to enhance efficiency, such as proprietary credit scoring models within AutoNation Finance and technology innovations in After-Sales aimed at improving service effectiveness and customer communication. These systems support data-driven decision-making and operational improvements, contributing to the company's ability to manage inventory, optimize pricing, and enhance customer interactions.

The broader industry environment continues to evolve. U.S. retail new vehicle sales saw an approximate 8% increase in Q1 2025 year-over-year, supported by higher manufacturer production and increased incentives. However, this has also led to rising new vehicle inventory levels and moderating new vehicle profitability from recent elevated levels. The used vehicle market faces challenges from lower availability of late-model vehicles due to past new vehicle production constraints, though demand for lower-priced vehicles remains resilient. High interest rates continue to impact vehicle affordability, influencing consumer purchasing decisions and potentially affecting loan performance. A new factor is the U.S. government's announcement of tariffs on imported vehicles and parts, which introduces uncertainty regarding future inventory availability, pricing, and demand patterns across different brands and segments.

Operational Strength and Financial Performance

AutoNation's Q1 2025 results underscore the strength of its diversified model in navigating these market dynamics. Total revenue increased to $6.69 billion, up 3.2% from $6.49 billion in Q1 2024, driven by a 9% increase in new vehicle revenue and a 5.3% increase in Finance and Insurance revenue, partially offset by a 3.7% decrease in used vehicle revenue and a slight dip in parts and service revenue.

Despite a challenging environment for new vehicle margins, which saw gross profit decrease by 10.7% year-over-year to $174.9 million, the company's total gross profit increased by 1.8% to $1.22 billion. This was primarily due to robust performance in its higher-margin segments: Finance and Insurance gross profit rose 5.3% to $352.5 million, and Used Vehicle gross profit increased 11.7% to $124.5 million, benefiting from better inventory alignment and improved PVR ($1,662 in Q1 2025 vs $1,473 in Q1 2024). Parts and Service gross profit also saw a modest 2.1% increase to $567.7 million, reaching a record level. These segments collectively contributed approximately 75% of the total gross profit in the quarter, highlighting their critical role in the company's profitability structure.

Selling, general, and administrative (SGA) expenses increased by 3.6% to $821.9 million, primarily due to higher performance-driven compensation and increased advertising. As a percentage of total gross profit, SGA increased to 67.4% from 66.2% in Q1 2024. Operating income saw a slight decrease of 1.3% to $336.0 million. However, after accounting for interest expenses and other non-operating items, income before income taxes was $234.0 million, down 7.6% year-over-year. Net income for the quarter was $175.5 million, resulting in diluted earnings per share of $4.45, compared to $190.1 million and $4.49, respectively, in Q1 2024. Adjusted EPS, which accounts for certain items, saw a 4% increase year-over-year, marking the first such increase in eight quarters and indicating a moderation in post-COVID profit normalization trends.

Strategic Pillars: AutoNation Finance and After-Sales

A central element of AutoNation's strategy is the growth of its captive finance company, AutoNation Finance (ANF), introduced in late 2022. ANF provides indirect financing exclusively to AutoNation customers, focusing on building a prime credit portfolio. This strategic shift is designed to capture the full lifetime value of the loan, which management estimates to be 2.5 to 3 times more profitable than traditional third-party finance offerings, despite a near-term dilutive effect on traditional F&I PVR and cash flow.

ANF achieved a significant milestone in Q1 2025 by crossing over into profitability, reporting income of $0.1 million compared to a $5.0 million loss in the prior-year period. This was ahead of prior expectations for full-year 2025 profitability. The business saw strong origination growth, reaching $460.4 million in Q1 2025. The portfolio quality continues to improve, with the weighted average FICO score on originations rising to 695 in Q1 2025, and delinquency rates standing at a solid 2.0%, reflecting the focus on higher credit quality and the strategic sale of legacy third-party receivables. As the portfolio scales, ANF is realizing operational efficiencies, reducing direct expenses as a percentage of managed receivables. The company is actively preparing for its inaugural asset-backed securitization (ABS) funding program, expected to close in the next couple of quarters, which will further increase non-recourse funding (74% in Q1 2025) and free up capital.

The After-Sales business (parts and service) remains a cornerstone of AutoNation's profitability and customer retention strategy. Contributing 46.5% of total gross profit in Q1 2025, this segment achieved a record gross profit of $567.7 million. Same-store gross profit increased 4.0% year-over-year, with margin expanding by 40 basis points to 48.8%. Growth was driven by an increase in warranty service revenue and gross profit, benefiting from higher repair order volume (partly due to manufacturer recalls), improved labor rates, and higher value repair orders. The company continues to invest in its technician workforce, with headcount increasing by 3 in Q1 2025, and focuses on improving technician efficiency and productivity. Management expects the After-Sales business to grow roughly mid-single digits each year, leveraging opportunities in vehicle park penetration, particularly in the zero to seven-year-old segments.

Financial Health and Capital Allocation

AutoNation maintains a solid financial position, providing flexibility for strategic initiatives and shareholder returns. At March 31, 2025, the company had $70.5 million in cash and cash equivalents and significant available borrowing capacity under its revolving credit facility ($1.86 billion, limited by leverage ratio) and secured used vehicle floorplan facilities. Total debt stood at $8.65 billion, primarily consisting of vehicle floorplan payable ($3.56 billion) and non-vehicle long-term debt ($3.64 billion). The company successfully issued $500 million of 5.89% Senior Notes due 2035 in Q1 2025, enhancing its long-term debt structure.

The company remains in compliance with its debt covenants, with a leverage ratio of 2.56x against a requirement of <= 3.75x and an interest coverage ratio of 4.33x against a requirement of >= 3.00x.

Cash flow generation in Q1 2025 saw a shift compared to the prior year. Net cash used in operating activities was $52.6 million, compared to net cash provided of $294.5 million in Q1 2024. This change was primarily driven by a $215.9 million increase in AutoNation Finance auto loans receivable as the portfolio grows and a build-up in accounts receivable due to the accelerated pace of vehicle sales in late March following tariff-related announcements. Net cash used in investing activities increased to $136.1 million, reflecting $69.6 million cash paid for business acquisitions (two stores in Denver) and decreased collections on third-party auto loans. Net cash provided by financing activities was $214.6 million, influenced by the senior note issuance, commercial paper payments, non-recourse debt activity, and share repurchases.

Capital allocation remains focused on driving long-term value per share. In Q1 2025, AutoNation repurchased 1.4 million shares for $224.8 million, with an additional $28.9 million repurchased in April 2025. As of April 23, 2025, $607.0 million remained available under the stock repurchase authorization. The company continues to evaluate M&A opportunities, such as the recent Denver acquisitions, based on expected returns and strategic fit, particularly those that add density to existing markets and offer scale synergies.

Outlook and Risks

Management anticipates continued dynamic market conditions throughout 2025. They expect new vehicle unit profitability may continue to moderate, potentially influenced by tariffs, but believe it will eventually stabilize above historical levels. Used vehicle profitability is expected to remain stable, supported by inventory management efforts. The After-Sales business is projected for mid-single-digit annual growth, and AutoNation Finance is expected to be profitable for the full year 2025, with funding efficiency improving through ABS securitization. The company targets SG&A as a percentage of gross profit to be between 66% and 67% for the full year, reflecting ongoing operational efficiency efforts. Healthy free cash flow conversion is expected for the full year, although Q2 is typically the lowest quarter due to seasonal tax payments.

The potential impact of tariffs on imported vehicles and parts is a key uncertainty. While management believes some of the projected market declines may be cushioned by cross-shopping between brands and models, the ultimate effect on new unit availability, pricing, and demand remains fluid and depends on various factors, including OEM and consumer responses. Economic sensitivity, particularly changes in interest rates and consumer confidence, continues to pose a risk to vehicle sales and ANF loan performance. Concentration risk exists with major manufacturers and IT service providers, as highlighted by the impact of the 2024 CDK outage (for which insurance claims have been filed, though recovery is uncertain). Legal proceedings are ongoing, but management does not currently anticipate a material adverse effect beyond accrued amounts.

Conclusion

AutoNation's Q1 2025 performance demonstrates the effectiveness of its strategy to lean into higher-margin, controllable areas of the business while navigating a complex vehicle sales environment. The record After-Sales gross profit and the early profitability of AutoNation Finance are significant milestones that underscore the value of diversification and strategic investment. While challenges such as moderating new vehicle margins and tariff-related uncertainties persist, the company's solid financial health, disciplined capital allocation approach, and focus on operational efficiency provide a foundation for resilience. The continued scaling of ANF and consistent growth in After-Sales are key drivers for long-term value creation, positioning AutoNation to generate shareholder returns even amidst fluctuating market conditions. Investors should monitor the trajectory of new vehicle margins, the impact of tariffs, and the successful execution of the ANF funding strategy as critical factors influencing the company's performance in the coming quarters.