Expanding supply means lower used prices. And with a new flow of off-lease vehicles expected to hit the market in the coming years, many in the industry are wary of the impact on used-vehicle retail sales.

But AutoNation, who just experienced a 7.5-percent boost in  third-quarter used-vehicle retail sales, as well as a successful overall quarter, has a different outlook.

Mike Jackson, chairman and chief executive officer of AutoNation, explained during the company’s conference call to discuss third quarter results that he has a “contrarian view” on this issue.

“If I look at the great crash of ‘08, ‘09, and ‘10, when new sales collapsed, then for the last few years, there has been an extreme shortage of used cars — which has inflated used-car values to record levels —  has pushed pricing for used cars right up against new cars,” Jackson explained.

The executive pointed out this trend seen in the years following the Great Recession has caused considerable debate on the showroom floor between the price of a used car and the price of a new car.

In many cases, Jackson said, the company has had to discount the prices of used cars to “keep them away” from new values.

“That’s a unusual circumstance to have acquisition costs that high. Now, the table is turning. Used-car availability it going to be significantly higher over the next few years. I expect valuations to fall,” Jackson said.

With greater supply and lower acquisition costs, and used and new values heading back toward “normal”, company management expects higher volumes and margins in their used business.

“There could be a tactical adjustment in any given quarter with inventories moving … but if I look over the next several years, it makes me more optimistic about the used-car business,” Jackson concluded. “Regarding recent discussion on used vehicles, we view the improved supply and lower acquisition cost of used cars as a positive development. We believe volume and improvement for gross opportunities will exists in the used business due to increasing supply of used cars and lower acquisition costs.”

In fact, the company has already made big moves to increase used inventory, and the dealer group reaped these rewards.

Mike Maroone, president and chief operating officer of AutoNation, explained the company redoubled their used efforts during the quarter, the result of which was a solid performance.

“We great our used-vehicle inventory from Q2 to position ourselves for growth in Q3, and it paid off. We are working hard to increase sourcing used vehicles from trades to optimize our mix of used vehicles and to price each and every used vehicle to the market,” Maroone said. 

In the third quarter, the company’s used-vehicle days’ supply was at 32, compared to 31 a year ago.

“At this level, we feel we are well-positioned heading into the new year,” Maroone said.

Interestingly, though more inventory at an industry level means lower prices, during the Q&A portion of the call, the company was asked why their revenue and gross profit on used vehicles continues to rise.

The company sold 56,584 used vehicles in Q3, with an average revenue per used vehicle retailed of $18,489 in Q3, up from $17,718 during the same period last year. Gross profit per used vehicle retailed came in at $1,620 during Q3, up from $1,528 a year ago. 

Maroone explained this increase is due largely in part to a 16-percent spike in certified pre-owned sales.

“We consciously moved our used inventory levels up by 4,400 units, and we sold 3,400 more and still ended the quarter with a days’ supply of 32,” said Maroone. “So, we are really pleased with the effort, and we expanded margins. The aggressive move to stock more worked out well. And the CPO market continues to be a strong part of the business.”

As far as when the company expects used prices to begin dropping at a more rapid pace, Jackson pointed out the move has already begun.

“The index was at 125 right near the beginning of the year, and right now it is about 120, on a downward trend line. So it is a very manageable transition,” said Jackson. “We look at the lease rates of years ago and can calculate the return rate that is coming in the next year or two, and it is a substantial increase in availability over the next several years, and I expect this inflated index to continue on a gradual downward decline.”

Another hot topic in vehicle pricing these days touched on during the call — for both new and used — that was no-haggle pricing.

In light of Edmunds.com Lot Buddy offering as well as Sonic Automotive's new no-haggle True Pricing methodology, AutoNation was asked whether a similar move was in the works.

Though the company thinks a “lower intensity” of negotiation is what the consumer desires and transparency is key these days, management sees the ever-changing pricing world of manufacturer incentives as a “barrier” to a strict no-haggle policy.

That said, no-haggle pricing may have a place in the digital strategy of the company.

In late summer, AutoNation announced it was investing $100 million, over the course of 2014 and 2015, into a digital sales effort, aiming at making the AutoNation website transactional by the end of 2014. 

“In our digital effort, though not underneath the AutoNation brand flag, we will launch SmartChoice pricing starting in the South Florida market in December when we go transactional. That will be very close to a no-haggle pricing. We think that’s where you need to be in the marketplace,” Jackson concluded.