AutoNation’s net income from continuing operations rose 11 percent to $97.4 million in its second quarter, aided by its used-vehicle operations, the company reported.

AutoNation CEO Mike Jackson credited the record number of “nearly new” off-lease vehicles returning to the market with underpinning used-vehicle sales at AutoNation and other dealership groups.

 “You have 4 million nearly new vehicles coming off lease, a big percentage of which are eligible for extended warranties from the manufacturers through a certified pre-owned program,” Jackson said during AutoNation’s Aug. 1 earnings call with analysts.

“The consumer is coming in, and they have brand new to choose from, nearly new to choose from and pre-owned. This nearly new category is dominated by the franchise dealers. Therefore, we get the first look at this opportunity, and we’re ready for it and have seized it as forecasted several years ago.”

AutoNation USA, the company’s standalone used-vehicle store business, is performing “as expected,” and its “trendline toward profitability is positive,” but the company will wait another quarter before giving a detailed update about its performance, Jackson said.

No additional USA stores this year

“We do not expect to break ground on any additional USA stores this year,” he added.

In the quarter that ended June 30, there were two AutoNation USA stores in the Houston market, one in the Corpus Christi, Texas market and one each in the Phoenix and Las Vegas markets.

For the quarter, AutoNation generated revenue of $5.4 billion, a 2-percent increase over the same period last year.

In the same period, AutoNation’s used unit retail sales increased 3.1 percent to 60,081, and its retail gross profit per used vehicle retailed was up 14.0 percent to $1,448.

Assisted by AutoNation’s one-price strategy and on a same-store basis, used-vehicle gross profit was $87.5 million, up 21.9 percent compared to the year-ago quarter. In the same period, the company’s peers’ same-store average used-vehicle gross profit was up 5 percent, according to AutoNation executive vice president for sales and COO, Lance Iserman, who was also on the call.

AutoNation improved its same-store used unit retail sales by 4.7 percent to 58,542 and generated a gross profit per used vehicle retailed of $1,455.  That is “an increase of $180 or 14 percent, while our peers’ average was down 2 percent compared to the second quarter of 2017,” Iserman said.

‘Significant margin pressure’

As reported by other publicly held dealership groups, AutoNation had “significant margin pressure” on its new-car sales, resulting from “disruptive marketing and sales incentives,” Iserman said.

New vehicles sold at AutoNation’s BMW, Honda and Nissan dealerships accounted for “probably 70 percent” of the margin erosion experienced by the group, and “we expect to see continued pressure for the balance of the year,” Iserman said.

Gross margins on new vehicles sold at AutoNation’s domestic brand dealerships are “basically flat for us, slightly up,” he added.

Jackson said BMW has a “product cycle issue”, and AutoNation should be in a better position when new BMW products are launched next year.

AutoNation’s new unit retail sales on a non-same store basis, decreased 1 percent to 79,054, and its new-vehicle gross profit per vehicle retailed dropped 8.7 percent to $1,579.

Finance and insurance gross profit per vehicle retailed rose 7.5 percent to $1,781.

Growing consumer acceptance of AutoNation’s branded F&I products is helping bolster the company’s F&I gross profits, Jackson said.

“The improvement is primarily driven by more customers choosing to get a product from us rather than us getting more from each customer we already have,” he said.

More with Waymo

During the call, Jackson said AutoNation expanded its relationship with Waymo, a self-driving vehicle technology company. The deal now allows AutoNation customers to get around in Waymo vehicles while their personal vehicles are being serviced at AutoNation dealerships in Phoenix.

Last November, AutoNation announced that it would provide mechanical and cosmetic repairs to maintain Waymo’s self-driving fleet. Waymo is a subsidiary of Alphabet which also owns Google.

Waymo and AutoNation have a “strategic relationship” and AutoNation wants to grow with Waymo wherever it makes sense, Jackson said. But he also cautioned that “as far as profits, well, that’s something down the road.”

“This is at the beginning of a journey, and it’s important for learning and to partner and to go from there. But with the most recent announcement, it says the relationship is working; it’s working well, and I expect it to continue to grow.”

Acquisitions

AutoNation also announced that it:

* Acquired Shelley BMW in Southern California, which is expected to generate approximately $140 million in annual revenue and retail approximately 2,600 new and used vehicles. It is the company’s seventh BMW store in California and its 17th BMW store nationally.

* Signed an agreement to acquire a collision center located in its Dallas market. It is the company’s 81st collision center nationally.

* Is on pace to earn approximately $100 million of incremental gross profit from its branded parts initiative in 2018.