AutoNation’s Jackson Urges Other Lenders to Follow Honda Financial’s Lead

FT. LAUDERDALE, Fla. — AutoNation CEO Mike Jackson reiterated his support for Honda Financial Services’ reduced cap on dealer participation during the company’s second quarter investor call. But he acknowledged that the current regulatory environment is putting a lot of pressure on dealers, particularly smaller operations.

Last week, Honda Financial Services announced that it is lowering its cap on dealer markups from 2.25% to 1.25% above the buy rate for auto loans with terms of five years or less, and from 2% to 1% on loans with longer terms. The move was part of an agreement the captive made with the Consumer Financial Protection Bureau and the U.S. Department of Justice to settle charges that its dealer markup policy resulted in minority buyers paying higher interest rates than white borrowers on auto loans.

“So AutoNation is publicly supporting this direction. We will work with Honda closely on working on any bugs in the system to make sure we achieve this goal,” Jackson said. “And we urge other lenders to take a close look at this as a template for a solution, and we pledge to those lenders if they go in this direction, they will have AutoNation’s support.”

As for the impact on smaller operations, Jackson said, “… It’s a regulatory burden for smaller companies. In principle, there are a large number of dealers who have not narrowed their bandwidth on their finance reserve, have not installed disciplined caps, and so they have much further to go to get to a solution like Honda.”

In the second quarter, AutoNation’s Customer Financial Services posted total gross profit of $212 million, up $28 million from a year ago. As for F&I profit per retail unit, the group’s F&I operations averaged $1,528, a $133 increase from a year ago. And according to William Berman, AutoNation’s COO and executive vice president, about two-thirds of that average was made up of F&I product sales — the remaining coming from finance reserve.

Now the group is doubling-down on its financial services operations. In the second quarter, AutoNation rolled out its first AutoNation-branded product, the AutoNation Protection Plan (VPP), to stores in its central region.

“The initial launch of VPP has been well received by our associates in the marketplace,” Berman said. “By the end of the third quarter, the program will be rolled out nationwide to our remaining domestic and import stores.

“Over the remainder of the year, we will also pilot additional AutoNation-branded products,” he added. “We continue to see opportunity in Customer Financial Services as we drive store-level execution and offer product that delivers customer value and drive loyalty.”

For the second quarter, AutoNation posted all-time records in total gross profit, used-vehicle revenue, customer care revenue and customer care gross profit. It also set records in operating income and net income from continuing operations. The quarter also marked its 19th consecutive quarter of double-digit earnings per share group.

On a same-store basis, total gross profit from variable operations was $459 million, up 6% from a year ago. Total variable gross on a same-store basis was $3,307 on a per-vehicle basis, a 1% increase. New and used same-store unit volume was up 5%.

New-vehicle sales totaled 83,000 units, a 4% increase from a year ago. New-vehicle revenue was $2.9 billion, a $144 million increase from a year ago. New-vehicle gross profit was $1,905 on a per-vehicle basis, a 5% decrease from a year ago.

“We continue to experience new-car PVR (profit per vehicle retailed) pressure in the import segment, increased stair-step incentives as well as growth in entry-level premium luxury models,” Berman noted. “However, our focus remains on the total variable operation.”

As for used, the group sold 55,800 units, up 7% from a year ago. Used-vehicle revenue totaled $1.1 billion, a 9% increase from a year ago. Used-vehicle gross profit was $1,590 on a per vehicle retail basis, a 6% increase from a year ago.

Jackson wasn’t sure how Honda Financial’s new dealer compensation policy would impact F&I performance on used-vehicle sales, noting that Honda is in the midst of a series of meeting across the country where it’s rolling out its new policy. “I think the detailed questions are still unanswered and there could be some changes,” he said. “So I don’t want to get too deep into the weeds on exactly how it all is going to work. But I can tell you, I’ve looked at it, and I’ve spoken to Honda, I’ve spoken to the CFPB. I believe this is a very workable concept, and, with a little movement here and there on some details, it’s going to work.”

The executive acknowledged that he wouldn’t be so supportive of Honda Financial’s new policy if it had capped dealer discretion alone. But because it has built in additional compensation into the base rate, Jackson said “this gets us … back to where we are and addresses the CFPB issues, and I think it’s workable for the lenders.”

But he acknowledged today’s regulatory pressure is making it more difficult to do business in America. “… This is still very controversial within the total dealer organization, and you saw both the [National Automobile Dealers Association] and the [America International Automobile Dealers Association] come out with strong statements opposing this,” Jackson noted. “I think for smaller dealers, it’s a regulatory burden. Now I can’t begin to tell you whether that’s going to change the acquisition environment.

“I will tell you that there’s this regulatory burden and difficulty of doing business and the complexity of the demands from the OEMS. You need a PhD to keep track of these incentive programs,” he added. “It is making the world much more difficult and you need a certain size, a certain structure and a certain discipline to be able to manage it all. So I think the willing sellers are going to be standing there for quite some time.”