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Morningstar | AutoNation's New CEO Is a Key Change for 2019

We believe AutoNation's massive size and economy of scale advantages will allow it to deliver operating margins at times above 4%, though not on an annual basis until its AutoNation USA stand-alone used-vehicle stores are more established. In 2013, the company rebranded all of its 15 regional brands to the AutoNation brand name. A single brand should be more effective for Internet searches, and it lets AutoNation reduce fees to third-party search firms. This branded strategy opens new growth channels in collision centers, parts, and AutoNation USA. The U.S. used-vehicle market is about 40 million retail units a year. More square footage will allow AutoNation to retail more of its used-vehicle trade-ins rather than dump some cars into auctions where it loses money. It also allows the company to recapture service revenue from vehicle owners who no longer go to the dealer for service. The challenge for AutoNation will be in obtaining accurate pricing data so it can effectively source from its exclusive inventory channel of trade-ins from its nearly 250 dealerships. The company mitigates some risks with its sheer size and resulting economy of scale benefits. Selling, general, and administrative expenses excluding rent in the past were often below 70% of gross profit, and AutoNation outperformed the industry average. A superior cost structure allows the company to post above-average operating margins even in weaker economic times. Also noteworthy is the company's sizable dealer network within its large markets, which enables AutoNation to quickly reallocate inventory to better meet demand and helped the firm reach a deal with Waymo to service its autonomous vehicles.New vehicles make up about 55% of AutoNation's sales but only 15% of gross profit. Parts and service was only 16% of 2018 revenue but constituted 46% of gross profit. This significant contribution to profitability is less volatile than new- and used-vehicle sales and will continue to mitigate the cyclical risk of the auto industry. Large dealers like AutoNation are enjoying an increasing competitive advantage for repair work because most automakers require warranty work to be done at a dealer.