CARY, N.C. -

Lithia Motors & Driveway and AutoNation respectively announced record third-quarter earnings in October, with both retailers crediting their used-vehicle business for helping them address supply issues.

“Our operational teams executed our best-in-class used inventory procurement model to source and recondition a large volume of used vehicles in a highly cost-effective manner,” Bryan DeBoer, Lithia & Driveway president and chief executive officer, said during the company’s earnings call on Oct. 20.

AutoNation’s Mike Jackson, who transitioned out of the chief executive officer’s role on Monday, said during last month’s call that the period marked the company’s sixth consecutive all-time record quarter.

“In our used-vehicle business, our strong self-sourcing capability, digital tools and customer-focused sales processes are a competitive advantage that has allowed us to outperform our peers and the broader used-vehicle market,” Jackson said during AutoNation’s earnings call on Oct. 21.

Supply chain issues were a main theme during the earnings calls for both companies as Lithia and AutoNation leaders said those issues could continue as a factor into 2022 — or beyond.

AutoNation: Supply issues could stretch to ’23

AutoNation announced all-time record quarterly results with earnings per share of $5.12. That is a 115% increase compared to adjusted EPS of $2.38 for the third quarter of last year.

The retailer’s all-time record quarter was driven by strong performance across variable and fixed operations, Jackson said.

That performance comes despite consumer demand continuing to outpace supply. A main cause of that is consumer desire for personal transportation and ongoing manufacturer supply chain disruption, Jackson said.

“We expect this to continue well into 2022,” Jackson said. “New-vehicle sales are currently constrained by reduced production volume, low inventory levels, leading to even more pent-up demand and should support sales for the foreseeable future.”

Later during the Q&A portion of the earnings call, Jackson said he expected to see more demand than supply possibly even into 2023.

Discussing the company’s used-vehicle business, Jackson elaborated on AutoNation’s self-sourcing capability, noting that the company self-sourced 90% of its pre-owned vehicle retail sales in the third quarter. Its same-store used-vehicle revenue increased 53% year-over-year.

The company sees additional opportunity to capture used-vehicle market share through its AutoNation USA expansion.

Jackson also provided detail on that expansion during, noting that the company had opened its eighth AutoNation USA store and its second store in the Denver market. The company expects to open two additional stores in Phoenix and Charlotte, N.C., by the end of the year. AutoNation plans 12 additional stores for 2022 and more than 130 USA stores total by the end of 2026.

Also, Jackson mentioned that AutoNation had announced an agreement to acquire Priority 1 Automotive Group, which adds $420 million in annual revenue. Together with its earlier acquisitions from Peacock Automotive Group, AutoNation has announced $800 million in annual revenue from acquisitions this year.

AutoNation executive vice president and chief financial officer Joe Lower said during the earnings call that its 11% decline in new units “was more than offset” by used unit growth of 20%.

Lower said consumer demand for personal transportation was strong, but new-vehicle inventory levels were at “historically low” levels.

“In this environment, we continue to focus on optimizing new-vehicle margins and procuring used-vehicle inventory to support sales,” he said.

Jackson also addressed how consumers are feeling during the current environment of supply disruptions and high used-vehicle values. An analyst during the Q&A period of the earnings call asked Jackson about the strength of the consumer during these times.

Jackson said the boost in pre-owned values is “a huge win for consumers,” and said that is a reason why business is strong.

“Customers just are thrilled that what they bought is worth so much some years ago, and it gives them confidence in the brand and confidence that they’re making good decisions, and most of them are looking at a trade-in value here for the difference between what their vehicle is worth and what they’re buying as the key component,” Jackson said.

He said consumers are feeling smart because their vehicle is worth more than what they thought it would be and that they believe they can possibly trade it for “a reasonable difference” on something that is a bit newer with lower mileage or completely new.

“So, once you see that in the behavior of the consumers and the attitude of the consumer, it’s a positive for the business in total,” Jackson said.

He said at the end of his comments that it was an honor to serve in AutoNation leadership for 22 years, and he welcomed Mike Manley as the company’s next CEO.

“We’ve built an exceptional brand,” Jackson said.

He continued, “We are America’s most admired and respected automotive retailer. We provide a peerless customer experience from coast to coast. And we have made a difference in people’s lives with DRIVE PINK and our efforts to beat cancer. I am forever grateful to all the associates of AutoNation for these achievements and thank them for all their efforts, especially through this pandemic.”

Lithia: 74% of vehicles sourced direct from consumer

DeBoer of Lithia opened his remarks during the earnings call by reporting the highest adjusted third-quarter earnings in company history at $11.21 per share, which was 63% over last year’s results.

“Record revenues of $6.2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses,” DeBoer said. He reported that total revenue grew 70% during the quarter, and total gross profit increased 83%.

On a same-store basis, used vehicles led the company’s revenue growth at 40%. That was followed by a 22% increase in F&I income, a 7% increase in service, body and parts revenues, and a 3% decrease in new-vehicle revenues, which he described as “relatively modest.” Same-store gross profit increased 23%.

DeBoer said strong third-quarter customer demand came as a result of high levels of household savings, government subsidies, lower interest rates, and increased equity in trade-ins. Strong demand could continue into the next few quarters because of those factors, along with tight new-vehicle supply and increased miles driven as consumers return to work and continue with vehicle travel, he said.

DeBoer addressed the industry’s trend toward electrification and what he described as more convenient and empowered mobility solutions, noting that Lithia & Driveway will anticipate and adapt to execute and proactively lead this change. The company’s designed its 2025 Plan — an initiative to reach $50 billion in revenue and exceed $50 in EPS by the year 2025 — with those and other consumer trends in mind.

Lithia chief operating officer Chris Holzshu said that although the new-vehicle supply environment was challenging, the company’s 58-day supply of used-vehicle inventory at the end of June positioned it well for the third quarter, in which the company saw a 40% increase in revenue on a 13% increase in units.

“Our 1,000-plus procurement personnel did excellent work sourcing vehicles, enabling us to offer customers a wide spectrum of vehicles, meaning all levels of affordability,” Holzshu said. “We currently sit at a 48-days supply of used units and anticipate we will be able to continue to mitigate pressure on the new-vehicle supply by maintaining solid used-car comps and strong profitability.”

Lithia in the third quarter sourced 74% of its used vehicles direct from consumers in areas such as trade-ins and off-lease. The company procured only 26% of its vehicles from other channels such as auctions, other dealers or wholesalers.

DeBoer said during Q&A period of the call that the 74% number was an all-time high for the company and added that Lithia acquired 58% of its vehicles through trade-in. Another 6% came from off-lease, and 10% came from private parties.

“And probably, the most important thing that we look at is, we also had a low-ever in-auction procurement, which is only 13% of our mix,” DeBoer said.

For Lithia, every channel and adjacency is ahead of plan, DeBoer said.

“We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible revenue and margin available to us in this market,” he said.