AutoNation Ending Aftermarket Collision Parts Division - Shrewd or Crude?

AutoNation’s collision parts division is scheduled to be eliminated by the end of 2020, freeing up some cash after the two-year endeavor proved less than profitable.

Former CEO Cheryl Miller had made it clear that one of her main goals for the company was to ramp up services in an attempt to enhance revenue and diversify the business. But this tactic has proven perilous for the automotive industry at large, often offsetting opportunities to make money with sizable financial risks.

Mobility is probably the best example of this, as its broad enough to encompass everything from self-driving vehicles to subscription models and relies on the market maturing into something that will presumably see returns on investment years down the line. However, AutoNation’s diversification was far more traditional. It seemed like a sure thing, since the collision parts business was forecast to grow over the next five years. In fact, despite being the the largest automotive retailer in the United States, the company actually owes 46 percent of its gross profit to parts and service. Selling cars (both new and used) only accounts for 24 percent — with the rest coming from finance and insurance.

That said, vehicle sales remain the largest source of revenue by far, and it would be foolish to scale back on what it’s best known for. But what about a lucrative parts business that arguably stands to become even more useful as consumers hold onto their cars longer, now that COVID-19 has minimized travel and the economic recession seems poised to suppress demand for an indeterminate period?

According to Automotive News, AutoNation’s collision parts unit represented less than 1 percent of its $700.2 million parts-and-service gross profit in the first half of this year. While the pandemic undoubtedly lessened overall demand for accident-born bumper and headlight replacement, the collision business was deemed far less valuable than its Precision Parts sales (which will offer much of the same components and absorb leftover parts).

The outlet seemed to feel the company had made the best decision for itself after enacting cost-cutting measures earlier this year, including the elimination of roughly 3,500 jobs.

From AN:

The division, launched in 2018 as part of AutoNation’s larger brand extension strategy, sources and sells retail and wholesale collision parts, from bumpers to radiators, for more than 30 brands. Customers include retail consumers, dealerships and other collision centers.

Guggenheim Securities analyst Ali Faghri, in a note to investors last week, raised his forecast for AutoNation’s 2021 earnings and his stock price target for the company after the announcement. Faghri called the exit from the collision parts business positive “as it helps focus capital allocation on better-return investments … and will yield meaningful cost-savings benefits into” 2021. He mentioned AutoNation USA, the retailer’s used-vehicle-only store network, as one of those better-return investments.

AutoNation’s current CEO, Mike Jackson, likewise suggested that the collision parts business was in trouble during last month’s Q2 earnings call. “The whole collision business was very challenged during the second quarter with the dramatic reductions in the amount of miles driven,” he explained. “And that business wasn’t profitable even before the marketplace got much more difficult.”

Killing it off will not come without scarifies, however. The company says it will need to close 12 distribution centers as part of cost-cutting measures related to the parts business. While that will undoubtedly lead to staffing reductions, AutoNation’s ultimate goal is to continue building storefronts that can offer sales and servicing while also aiding its burgeoning auction business. That makes these changes more about general restructuring than pulling away from any specific revenue source. In our eyes, collision parts seemed to be a fairly redundant operation in regard to its long-term goals.

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