AutoNation (NYSE:AN) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
AutoNation Inc. reported its seventh consecutive quarter of year-over-year adjusted EPS growth, with Q3 EPS at $5.11, up from $5.01 the previous year.
The company’s After-Sales division delivered a record quarter, contributing significantly to gross profits, while AutoNation Finance scaled rapidly, increasing its profit from $2 million to $15 million year over year.
Adjusted free cash flow year-to-date was $739 million, with 85% allocated to share repurchases, which reduced the share count by approximately 12% year over year.
The company is focusing on leveraging technology and AI to enhance customer experience and operational efficiency, with a new Chief Technology and AI Officer, Ravi Simham Batlad, joining the team.
Management highlighted ongoing strategic initiatives to improve SG&A performance, particularly through technology-driven efficiencies, while maintaining a strong commitment to share repurchases amidst favorable market conditions.
Full Transcript
Kenneth (Operator)
My name is Kenneth and I’ll be your operator today. All lines are currently in listen-only mode, and there will be an opportunity for Q&A after management’s prepared remarks. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Derek Fiebig, Vice President of Investor Relations. Please go ahead.
Derek Fiebig (Vice President of Investor Relations)
Thank you, Kenneth, and good morning, everyone. Welcome to AutoNation’s third quarter 2026 conference call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Slozczyk, our Chief Financial Officer. Following their remarks, we’ll open up the call to questions. Before beginning, I’d like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements.
Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations are provided in our materials and on our website at investor.autonation.com. With that, I’ll turn the call over to Mike.
Mike Manley (Chief Executive Officer)
Yeah, thanks, Derek. Good morning, everybody, and thank you for joining us today. So as usual, we’ll begin with an overview of the quarter, followed by Tom’s review of the financial and operating results, and then we will take your questions. So I’m going to begin on slide 3. The central message this quarter is straightforward. I think it’s the strength of our business model, which includes durable earnings streams and cash flows, and disciplined capital allocation enabled us to deliver our seventh consecutive quarter of year-over-year adjusted EPS growth.
Now that result reflects our focus on our customers’ mobility needs and the value creation drivers per share shown, which contributed strongly to the Q3 results. Specifically, After-Sales delivered another record quarter; customer pay and warranty gross profit each increased 5%, supported by higher traffic, and After-Sales again contributed half of our total company gross profit. Second, our customer financial services platform gives us control over the placement of products and financial services.
This enables us to direct the business to our own captive finance company or to one of our preferred partners. We will discuss the hub in a few minutes, but it gives us upfront income as well as long-term earnings stream. Under this model, AutoNation Finance continued to scale rapidly and profitably. The portfolio reached approximately $2.9 billion. Quarterly profit increased to $15 million from $2 million a year ago. Return on equity based on Q3 results is approximately 24% now.
Beyond the financial figures, the business is providing a meaningful platform to drive deeper and ongoing relationships with our customers. Third, cash generation remained, I think, exceptional. Year to date, adjusted free cash flow was $739 million, representing 141% conversion of adjusted net income. And fourth, we continue to deploy capital with discipline. Through September we invested in the business, completed attractive acquisitions, and deployed $620 million to share repurchases, reducing our share count by approximately 12% year over year. Now rest assured that we continually evaluate share repurchase and M&A opportunities through the lens of maximizing value per share, and since 2022 that has favored share repurchases.
And we have allocated 88% of our adjusted free cash flow to repurchases, which includes 84% year to date, and in current market conditions our share price is attractive, and given that our capital allocation model focuses on long-term earnings per share growth, we anticipate continuing with share repurchase as a preferred use of incremental capital. Now moving to slide 4. This provides a visual on EPS and free cash flow performance. Adjusted EPS was $5.11, up 2 from $5.01 a year ago. Again, our seventh consecutive quarter of year-over-year adjusted EPS growth. After-Sales and AutoNation Finance were the principal operational drivers of EPS growth. We also realized a significant EPS benefit from our share repurchase activities. Year to date, adjusted free cash flow was $739 million, in line with 2025, and conversion improved to 141% from 128%.
Now, as I stated earlier, through the end of September we have deployed 85% of that free cash flow to share repurchases, and Tom will talk more about capital allocation in a separate slide. But our model, as always, will continue to focus on the best use of cash to drive EPS in the long term. And with that, I’m going to hand over to Tom. Yeah, thank you, Tom. Let me close by returning to the central message of the quarter, and that is that we continue to perform in a sluggish environment. Vehicle demand was softer, but after-sales, AutoNation Finance, cash generation, and discipline in capital allocation enabled us to deliver our seventh consecutive quarter of year-over-year adjusted EPS growth. After-sales, as we mentioned, contributes over half of our gross profit. Customer pay and warranty traffic remain healthy, and we continue to see a durable path of growth through customer retention, repair order content, productivity-enabled technology, and wholesale parts expansion.
AutoNation Finance is emerging as a meaningful earnings engine. The portfolio is approaching 3 billion, profitability continues to scale, and the business generated a 24% return on equity over time. AutoNation Finance converts transaction-based earnings into recurring income while deepening our customer relationships. Now, in customer financial services, our product attachment and pricing remain solid. The growth of AutoNation Finance is changing the timing and mix in earnings, but it is increasing the long-term value created from each finance transaction.
Cash generation continues to exceed earnings, and our investment-grade balance sheet provides funding efficiency as well as strategic flexibility. Our capital allocation priorities remain clear. We will invest in the business where shareholder value can be meaningfully created. Now, at this point, as I mentioned, share repurchases remain our preferred use of incremental capital. Lastly, I wanted to acknowledge the clear opportunity that lies before us to make every customer experience simpler, more connected, and more trusted while giving our associates better tools and support to do their best work. Doing so will also lead to better standard adherence, less friction and leakage, lower costs, and ultimately more sales. Technology and AI are and will continue to play a key role in this transformation, and I’m excited to have Ravi Simham Batlad join us as Chief Technology and AI Officer.
He started on October 1. Ravi is leading our technology and digital agenda, helping us modernize the capabilities that strengthen the customer experience, support our associates, and accelerate our long-term growth. Ravi brings more than 30 years of experience spanning technology, digital transformation, product innovation, customer experience, cybersecurity, but also will significantly enhance our data, artificial intelligence, and how we use technology and data together to drive our business forward.
It’s a critical leadership position in our transformation. So welcome, Ravi. Just want to move on to slide 14, and I’m going to return to the shareholder value slide because I want to look beyond the strong third-quarter results and explain why AutoNation is a compelling investment. I think the thesis is relatively simple. We view new and used sales as the origination event that creates long-lived relationships that drive strong annuity streams captured by our customer financial service platforms and our after-sales business.
And we have a fantastic business that creates a lot of these origination events. Two core capabilities then drive the earnings annuity and deepen our customer relationships. The first is customer financial services platform. Our origination hub coordinates financing across our product partners, financing partners, and our captive finance business. It generates upfront access fees and product commissions along with long-term captive portfolio earnings. Our captive portfolio already delivers high returns on equity, but it also strengthens customer relationships, making them deeper, more personal, and creates long-expected reasons to stay connected.
It also provides products and services that support and feed directly into our after-sales business. Now that’s the second thing: after-sales. Not only is it a durable, consistent, high-margin business, but that again also strengthens customer relationships and helps generate future new and used vehicle sales. You may see short-term consumer pressures that could delay or temporarily reduce miles driven, but ultimately that profit opportunity is generally deferred, not lost. Our focus is to grow a large, active customer base, increase lifetime value, retain customers longer, and build family and household loyalty.
And our unmatched physical footprint supports that effort, enhanced by technology, infrastructure and processes, an efficient balance sheet and working capital structure. Low capital expenditure and streamlined operations support this model. Together they generate significant free cash flow. We invest that cash with a relentless focus on shareholder value and EPS growth. As we have discussed many times, that is what makes AutoNation a compelling investment opportunity in my view.
Now with that, Derek, I think we’ll be happy to take questions from everybody on the call.
Derek Fiebig (Vice President of Investor Relations)
Great. Thanks, Kenneth. If you could please remind people how to get in queue for the Q&A.
OPERATOR
Thank you, Derek. We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one. To raise your hand to withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.
Your first question comes from the line of Rajat Gupta with J.P. Morgan. Rajat, your line is open. Please go ahead.
Rajat Gupta (Analyst at J.P. Morgan)
Great. Thanks for taking the question. Just wanted to start off with a two-part question on parts and service. Could you confirm or give us some color if you’re seeing any sort of pricing pressure in that segment, either on labor rates or parts or just warranty rates? Just curious if you could give us the latest there. And then if I look at just the overall gross profit growth of 1%, I understand customer pay is tracking higher than that, but curious if you have any visibility on just the overall gross profit dollar growth re-accelerating in parts and services.
Mike Manley (Chief Executive Officer)
There we go. It’s Mike. I’ll start, and Tom, you can comment. I think pricing pressure manifests itself in different ways, doesn’t it? What I would tell you is that the traffic in terms of repair orders to our businesses from customer pay are up, and that, frankly, was the engine of the overall growth that we posted, and I was very, very pleased to see that. But where you do see pricing pressure, I think, in the marketplace is the level of deferred work and the actual hours per RO, which is a direct reflection quite often of the upsell potential that you have once a car is in your workshop.
And we are seeing higher levels of deferred work, and we are seeing less total hours per RO, which I think is where you may be seeing price pressure in the marketplace. It isn’t necessarily competitive price pressure on our labor rates. I think that we are positioned fairly and well in that area. I think it is just general economic pressure on the consumers. And I think that we will continue to price in line with our markets that we operate in, but also I think that will reflect inflation as we go forward.
That deferred work is not lost work. Most of it reaches a critical point, and then I would expect the majority of it to come back into our service departments, because obviously we are tracking that deferred work and staying very closely in touch with our customers, because some of these issues may well be safety issues as well. So I think the story we have is that the content per RO was down, both on hours per RO. There was some very slight pressure on retail pricing, but it was very minor in the context.
But that was compensated for by increased traffic through the workshops. In terms of the outlook, I think we can continue to grow. And, frankly, I think in the current environment, I think our service and parts team did a good job. I think growing our customer pay business in that environment, with the pressures that are clearly out there, really reflected their focus on customer. Where we didn’t see growth—and really I think if you look at the total number—was on our internal pay. And that, frankly, just reflects our performance on new and used vehicle sales.
And I expect, particularly around used, for that to improve as we get into Q4. So, hopefully, that will be back. But my outlook is—and something you and I have discussed and I think is very well known—is that the vehicle park, particularly the park that yields the most labor and parts content for us, is suffering some headwind because of COVID. Now, the peak of that is in 2027, and then it starts to recover from there. So we’ve obviously got a series of initiatives that have recognized that’s coming towards us and are in play at the moment that we think can actually provide us some clear offsets to that headwind.
And it is a headwind because the park, as you know, materially shrinks. And, as I said, 2027 is the low point. And I think in those offsets, some of it really is around the fact that we still penetrate the vehicle market somewhere in the area of 40% to 50% in those areas, and we can put together packages that we can provide as franchise dealerships that offer our customers that may have defected to a different service provider or doing the maintenance themselves some compelling reasons to come back into our workshops.
And I think we’ve got a great program that will progressively get rolled out in the coming months and will stay in place for when we see the park begin to recover. So I think it will continue to be under pressure, but I think we can continue to grow.
OPERATOR
That’s very helpful. Caller, did you have another question?
Rajat Gupta (Analyst at J.P. Morgan)
Yeah, just a quick follow-up. Just on the new vehicle side, I think you mentioned maybe inventory levels were a little higher than you would like and you’re working on moderating that. Would that mean you see some continued pressure here on the front-end gross before it normalizes? Just curious to get a thought on when we get to a more normalized new front-end level. Thanks.
Mike Manley (Chief Executive Officer)
I think Tom talked about his view in terms of margin, and my perspective on this is that our inventory levels have grown. I have a strong view of where we should kind of end the year in terms of our inventory levels. And we know that because of the mix of our brands, we’re going into a period of time when looking at our absolute days of supply right now is probably not the best metric. And when we reflect back on Q4 with a seasonal high that we expect to see in December, I think you’ll see our actual days’ supply will be normalized.
But some of that will need and will require us just to moderate the amount of production that we take from our manufacturers. I think that is something that is manageable within normal course, and I don’t think that it will require excessive discounting to move volume. But I’ll return to something that I said before, and that is we view new and used vehicle sales largely as the initiation event for us that will create another customer and an ongoing stream of profit through the lifetime of that relationship. So we want to be competitive in the marketplace. And the marketplace itself we know will probably continue to be very competitive in Q4. And I think some of the things we’re seeing around agentic search will keep that pressure on there.
But from an inventory point of view, that won’t be a reason, I think, for us to have to after discount. Tom,
Rajat Gupta (Analyst at J.P. Morgan)
Thank you, and good luck.
OPERATOR
You’re welcome. Your next question comes from the line of Joseph Spack with UBS. Joseph, your line is open. Please go ahead.
Rob Saltzman (Analyst at UBS)
Hey team, this is Rob Saltzman on for Joe today. Just a follow-up on parts and service side. You know, how do you think you can work to take share from independents and bring some of these customers back to the dealership for service? You mentioned working on some new products, but is it primarily pricing more competitively? And if so, how do you think about balancing volume versus margins within parts and service?
Mike Manley (Chief Executive Officer)
You’re absolutely right. None of this business is going to be easy to get. And it’s all largely going to be conquest business. And the way to win conquest business is on the value that we provide. And that value, of course, a big element of it is price, but it’s also the warranties that we give. It is also the convenience that we can offer because of the large amount of loaner fleets that we have. And remember that we can also now increasingly provide other solutions for where they want their vehicle serviced.
So the packages that we are looking at do include some price element. We’re balancing that because we understand, I think, with a large, we understand enough about the value per repair order of aging vehicles to make sure that whatever we put in place that it still has a very, very significant return for us. We also clearly want to make sure that we manage it as a reflection of the age of the vehicle so that it is really targeted and contained in increasing the relationship time with our customers so we don’t see them using other services as they drop off when the cars reach between four and seven years old, as well as attract new vehicles to us. But it will be a package. There will be some price elements in there, but there will certainly be some convenience and warranty that add value to those customers.
And we’ve started on that work. It will accelerate as we close the year out, but I think most of it will be well communicated as we get into Q1 next year.
Rob Saltzman (Analyst at UBS)
Thanks a lot. And just one follow-up for me, just on the AutoNation Finance side. So, you know, with rates moving higher and funding costs for AutoNation Finance likely moving higher with it, how do you think about balancing pushing some of these higher funding costs through to customers and perhaps maybe eating some more of those higher costs to help the affordability side of the equation and maybe drive volumes?
Dean
Thanks. Good question, Rob. When you look at the AutoNation results, the net interest margin has been pretty strong when you consider both the funding costs as well as the borrowing rates. We’re pretty careful in monitoring that. Yeah, there are occasional exceptions, but I think generally speaking the team has a really good process for pricing that gives consideration to the changes in the funding costs. I think we’ve kept up with that pretty well.
Could that change? Perhaps. But I think overall the consumer has been very strong in that business. I mean, our delinquencies are very low, lower than what we had modeled when we first purchased the company. The average tenor on loans originated is very stable. We’re seeing very little in terms of incremental extensions and the FICO scores continue to improve. So I’d say overall, despite, you know, the external noise, the portfolio is being, you know, well managed and, you know, it’s showing up in the results. You know, $15 million of income in the quarter and we’re really encouraged about the trajectory of the business. So I think that can be managed.
Mike Manley (Chief Executive Officer)
And I also think you have to be realistic about the level of subsidy a retail group can provide. There are certain things that we can add value and make sure that our customers are getting competitive finance rates. But when you think about a 60-month term or a longer term, the amount of subsidy we can provide over that period is important, but maybe not materially enough to move the needle. OEMs are the only people that can really subsidize that on a long-term basis to that extent.
But I think the question of affordability is something that we track through our contact conversion rates, and we look very, very closely at a number of things that are very, very important to us. Not just the finance penetration that we have, but obviously the underlying curve that we think someone will return into equity and additional products and services that we sell. What we want is to start that relationship with the customer so that we can, as I said, maximize that over their lifetime. And if that means that we have to use price very flexibly on the front end to do that, we will do that because we know that the lifetime value will significantly exceed maybe an incremental subsidy to get that transaction done. But we want to do it in a way that really is around the value proposition for our customers. So that’s kind of how I would also answer that question.
Rob Saltzman (Analyst at UBS)
Thanks, Dean, really appreciate the time today.
OPERATOR
Your next question comes from the line of John Babcock with Barclays. John, please go ahead.
John Babcock (Analyst at Barclays)
All right, thanks. Just on new GPUs earlier, I guess in the last couple of quarters you’ve talked about seeing stability there and this quarter there was a bit of a drop-off. And I just want to get your latest view on that. I mean, do you still expect new vehicle GPUs to be relatively stable or is there something that’s changed? And if so, what has changed?
Mike Manley (Chief Executive Officer)
Yeah, great question, John. When we look at the performance in Q3, certainly you go back two years, 2024, 2025, we’re seeing measurable, meaningful declines across all of the segments. And I think for the last year or so that has narrowed down, maybe picked up a little bit in Q3 for domestic brands. I think that has all to do with inventory levels. And I think we have some opportunity there. I think we’re pleased with how important premium luxury came out and I do expect us to get a reasonable uplift in the fourth quarter from that, from premium luxury.
John Babcock (Analyst at Barclays)
Thank you. And then you did briefly talk about Ravi’s role as the Chief Technology Officer. I was wondering if you could just talk a bit more about what he’s going to be doing on whether the focus is going to be on internal efforts, customer-facing efforts, or if there’s anything else you can share in terms of what the goal is there.
Mike Manley (Chief Executive Officer)
Yeah, I mean, so firstly, obviously you hear a huge amount about productivity driven through technology, particularly around AI, and like everybody else, and the technology team prior to Ravi joining, I think we’ve made some really good progress in that area, reducing a number of costs on a per sale basis. But the way that I think about the work that we’ve been doing, it started before Ravi was with us, but will accelerate now that he’s here, is really around how you combine a fantastic, dense physical infrastructure that has all of the things you need to develop a lifetime service relationship with your customers that is incredibly difficult for anybody to replicate today and would take decades today.
How do you make sure that you put a digital layer on top of that that really does present a very transparent firm price, trade, finance, and also can make sure that the fulfillment of that is done seamlessly, is the massive opportunity for our organization and we’ve done a lot of work in that area to really combine those huge, often overlooked benefits of the network that AutoNation has been able to build, now using technology, which of course has significantly compressed the development time on that digital layer that can sit on top of it.
And I think you’ll see a lot of work in the coming months from him and his team in that area, and that will be supported by a number of things we’re doing on that physical interface as well that will also enable us to really lean into some of the changes that we see will advantage us and what we have to offer to customers going forward by the combination of, I think, a much, much more future-equipped, if you like, digital infrastructure allied to that physical network that I talked about.
So, short answer to your question.
John Babcock (Analyst at Barclays)
Thank you, appreciate it.
OPERATOR
Your next question comes from the line of Alex Perry with Bank of America. Alex, your line is open.
Jack Joyce (Analyst at Bank of America)
Hi, this is Jack Joyce on for Alex Perry. Thanks for taking our questions. First one, how has the recent FTC enforcement impacted your business? Florida appears to be a pretty high doc fee state which you have some decent exposure to. Has that enforcement had any impact on new GPUs?
Mike Manley (Chief Executive Officer)
Well, firstly, I think, you know, the guidance from the FTC actually has just formalized a shift that was inevitable anyway and was well underway before. The guidance, technology has already made real price the only price and we’ve been very, very aware of that in the marketplace. So whether you’re in a state where doc fees are prevalent or you’re in a state where doc fees are not prevalent, I think we’ve always tried to make sure that our all-in pricing has been transparent, has been competitive in the marketplace.
So I don’t see any impact on our business from the FTC’s guidance at all. In fact, as I said, I just think it was a formalization of a shift that was well underway, driven by technology. I view it being beneficial to us because it means that from a consumer perspective those that are not using agentic tools to search don’t need them anymore because it is now very, very apparent on third-party sites. I like that because we’re incredibly competitive and we offer a lot more value than some of our competitors in the used vehicle field. And it also enables us, of course, to make sure that we can constantly use that information to provide the best value to our customers.
Jack Joyce (Analyst at Bank of America)
That is super helpful. And as a quick follow-up, used GPUs held up well and were up sequentially in 3Q even with same-store units down. How are you balancing volume versus GPUs from here? Especially with off-lease supply improving and higher new vehicle prices potentially pushing more buyers into used. Thank you.
Mike Manley (Chief Executive Officer)
Yeah, that’s a great question. Because you know, I’ve said in the past, you know, we’re going to get to $2,000 a unit and I can tell you something that when you look at the break, when you break down the drivers of used vehicle margin, whether it’s acquisition cost, reconditioning, how long you had an inventory, your pricing, there is an absolute clear path to around 2,000 and above per unit in today’s market. The challenge in used vehicle margin is definitely not the math; it’s executing consistently across a large, dispersed network of stores like we have. So what we’re doing at the moment is really, we’ve looked at this for some time, by the way, and now you’ll find that we are doing more centralization and putting tighter guidewires into the field. We need to do that for a couple of reasons, frankly. Firstly, we want to do that because we think we can grow our volume and secondly, by doing that we can absolutely make the experience that the customer has from a pricing perspective and other things that we’re working on much, much more consistent.
So we’re working on that instead. But I would tell you that my view on this really is more a dynamic return on capital model that frankly, with the tools that are available and the things that we’re developing, is going to enable us to balance a number of things to get the best result based on the capital we’ve invested in that used car inventory. And I don’t think that I’m going to be that core. I don’t want to be constrained by a fixed used car margin because I think that, frankly, lives in the past and should live in the past.
What I really want us to do, and we’re moving very rapidly to it, is to move much more towards a return on capital model which has to take into account not just the marketplace and how we’re selling vehicles, but it has to take the velocity of supply of vehicles as well, which for me really completes the circle and is something that we’re now able to do by using technology and some of the other things that we have done in our processes. So you’ll probably hear me talk less about GPU. Obviously I’ll respond to the questions about GPU, I know it’s important, and we’ll talk more about how we’re turning our inventory, how we’re thinking about that from a return on investment, velocity of money perspective, but increasingly more about customer lifetime value going forward and the fact that it’s a great initiation event to generate long-term service loyalty and hopefully a repeat customer.
OPERATOR
Your next question comes from the line of Jeff Lick with Stevens. Jeff, please go ahead.
Jeff Lick (Analyst at Stevens)
Good morning. Thanks for taking my question. Mike, your interest to the last question about, you know, no real reason economically why used margins can’t get to 2,000, you know, imply, you know, and that it’s process driven or execution driven. Just curious, the lower performing stores, what is it that they aren’t doing that the higher performing stores are doing? And then just to build on that, also curious, you guys are very focused on units in operation and the lifetime value.
Could you give us a little bit of just relative to new how you guys think about a used unit? And do you see, you know, does that influence your decision in terms of GPU because you’re going to get some used customers back in the service line, right?
Mike Manley (Chief Executive Officer)
Right? So remember, the $2,000 is an average. So there’s always been dealers that we have in our group that perform above that and there’s always been dealers that perform below that. But typically what you see is once you remove the mix element, because for example, our domestic stores will have a very different mix to our premium luxury stores. And mix does have an impact, even though quite often not as much as people think. But once you remove the mix element, there are a couple of things that for me we now know with certainty that we’re working on very hard.
We know that stores that price the vehicle right the first time and are very, very focused on doing the right level of reconditioning and they do it at pace in a very disciplined manner on a factory-like basis yield a higher margin, higher stock turn. And you’re quite right, the math to get you to 2,000 really just works on those other elements that will get you to that position. Frankly, it’s not always about discipline, it’s not always about sloppy execution, because most of these vehicles are processed within a workshop that is also looking for customer pay and to expand its work there. So what we’re now doing is much more dynamically thinking about where we can process these vehicles to remove some of the processing time, if that’s the blockage. We’re making sure that our certification process and quality of reconditioning is very, very well known, documented, and very clear, not just to the people doing the work, which obviously is vital, but it also enables us to be incredibly transparent with our customers.
And that becomes increasingly important going forward because that is what customers want to know, particularly in the world of agentic search that we’re going into. So there’s a number of elements and it’s never always the same thing, dealership to dealership. But we can and are now doing some things that will improve some of that consistency. But I would tell you, as I said before, I’m not that focused on GPU. Important? Yes. I would never say it is not important, but it is an initiation event for me to get a customer into our workshops. And there is a difference between the lifetime value of a used car buyer and a new car buyer.
Some of that is driven by the age of the vehicle and what is the normal migration time of that service work out of our workshops. So we want to address that, which was part of the earlier answer I gave to a question about how do you penetrate the park? And secondly, a new car sale yields a different ratio of a used car to retail than a used car sale. So when you take all of those things into account, new cars typically have a longer activation period, a higher lifetime value than used cars.
But that doesn’t mean to say that’s always the case. It is just the average answer to your question. Every customer is different and every customer is the relationship that we want. And now with technology, we’re moving much, much more closely to being able to make that relationship super personal to them. And that will, I think, extend their relationship with us and will change those dynamics. So even though I’m talking about average, we actually work on a customer-by-customer basis.
Jeff Lick (Analyst at Stevens)
And just a real quick follow-up on slide 12, you have a bullet that says gross per unit up sequentially in both August and September. Does that imply that the 8.6% sequential gross degradation in Q3 was all observed in July and it was up in August and September, or am I misreading that?
Mike Manley (Chief Executive Officer)
No, we just had declines from June to July and then you had sequential improvement from July to August and August to September.
Jeff Lick (Analyst at Stevens)
Okay, thank you very much. Best of luck in Q4.
OPERATOR
Your next question comes from John Sager with Evercore ISI. John, please go ahead.
John Sager (Analyst at Evercore ISI)
Hey guys, thanks for taking my call. I wanted to ask a little bit more about the used market. We’ve seen pretty significant share gains from Carvana over the last year and I wanted to get your feelings on that. Obviously you’re both still a very small fraction of the overall market, but it’s clear they are taking fairly significant share. Just published more than 200,000 units this last quarter. So are you seeing any impact from them head to head and are you concerned going forward that they’re going to sort of continue to grow and that may impact your ability to bring those customers into that flywheel which does drive all of the profit from the parts and service or F&I. So could you talk a little bit about their impact and then maybe any of the initiatives that you have in place to try to drive same-store outperformance going forward and when you might see that start to happen?
Mike Manley (Chief Executive Officer)
Yeah, I think the answer to your question is no determinable impact on us. And part of that is because tiny market shares, right, and still remain tiny market shares. And the opportunity to grow is also our opportunity as well as it is their opportunity. And congrats to them for the growth that they have, for the growth that they have posted. I think for us we have a very clear path in terms of how we think we can grow our business. And it is that unique and beautiful combination of both the digital infrastructure we can put in place that will provide to our customers a much, much improved, lower-friction interface with us, but can actually combine it with a dense physical network that provides a lot of the service that customers still want, still value, and still appreciate that will also ultimately maintain our ability to keep loyalty and grow loyalty with those customers going forward.
And I think it is the combination of those things that will progressively unlock volume for us. And we see used car growth as being a big driver of our performance going forward. And as I said, we’ve got initiatives in place to do that.
John Sager (Analyst at Evercore ISI)
Thank you, appreciate the answer. When do you think we might start to see that outperformance? Is this like, you know, are these initiatives a two-quarter thing, three-quarter thing, or could it be more immediate than that?
Mike Manley (Chief Executive Officer)
Well, the good news, I don’t think it’s a switch. And the things we are doing will progressively improve our performance. And I think you’re going to see some of that in Q4. But for sure, as we begin to get into Q1 and we get into some traction and we begin to roll out some of the other things that we are working on. As I said, I alluded to, for example, on used vehicles, that the model that we have built that will be progressively deployed in ’27 will really dynamically look at used vehicle velocity and return on capital in a very, very different way.
Because for the first time, it will take in other elements that are vital, such as your supply chain and how you’re able to replenish inventory, as well as lifetime value of the customer. And what that will do is help us determine where we should push. So it won’t be just a maniacal chase for volume, but it will, I think, balance all of the different elements that hopefully will focus on how effectively and efficiently we are using capital across the entire lifetime we have that customer relationship with us, and that’s progressively going to get rolled out in ’27.
But I don’t think you’ll see a switch or a step change. What I anticipate is that you will see progressive improvements in terms of the things that we are deploying. Some of the things will work well and some of the things will not work as well as we want. Some of those things will require some culture change and therefore they may be bumpy at the beginning. I’m sure no one will understand that who’s never managed culture change in a business. But those people who have will recognize that sometimes it will be really good news and sometimes we will be learning.
But I think that all of these things ultimately are going to create a really powerful balance between that physical, dense network that we have, as well as the ability to have a very powerful digital environment for our customers, whether they want to shop digitally or physically in our businesses.
John Sager (Analyst at Evercore ISI)
I appreciate that. Thank you for the answer. And I do look forward to learning more about how you look at the customer holistically going forward. So thanks.
OPERATOR
Your next question comes from the line Daniela Hagian with Morgan Stanley. Daniela, your line is open. Please go ahead.
Daniela Hagian (Analyst at Morgan Stanley)
Great, thank you. I wanted to double click on this theme of the paradigm shift into lifetime value rather than optimizing for a vehicle GPU as it relates to SG&A. As you know, SG&A as a percentage of gross profit is a key metric that investors do track. And as AutoNation Finance continues to scale and more of those economics shift from upfront CFS gross profit into this recurring finance income, is that metric just less representative of underlying operating leverage? And how should investors start to think about the kind of holistic profitability of the business? Thank you.
Tom
Yeah, thanks, Daniela. I would say that our thinking on SG&A hasn’t really changed. I think when you look at operating margin performance, which does reflect AutoNation Finance, you do see that we are at or near the top of the peer group. So you can pick apart where SG&A is and isn’t. In fact, our SG&A numbers do not include AutoNation Finance, but if they did, you would have a more favorable number. So with that said, we’ll continue both short term and long term on managing our costs.
For Q3, the total dollars were essentially flat. When you exclude the impact of M&A, we have some categories short term that, you know, we’re working on. I mentioned, you know, several of them in the prepared remarks. So we’re focused on delivering good short-term outcomes when it comes to our cost structure. I also think Mike was commenting on, you know, the areas where Robbie will have, and his team will have, an impact. I mean, as we change the way we’re transacting with customers and improve the digital experience and remove friction and tighten up processes, you will see a residual effect will be a better structural SG&A outcome.
So we look forward to that. So it’s on our screen both short term, long term, and we’ll continue to manage that. But I think when you look at the operating income holistically, you can appreciate the focus that we have on it.
Mike Manley (Chief Executive Officer)
I also want to comment as well because this isn’t… The framing of the question suggests that you have an SG&A model that’s going to suffer because what’s going to happen is your margins are going to compress. That may not happen at all. Our margins may not compress. Our margins may actually expand because there are a number of dynamics that will be put really into focus that for us are going to determine how we want to be priced in the marketplace and the velocity of sales that we want to make.
So it doesn’t necessarily result in, and frankly I don’t expect it to result in, a collapse in margin at all. You have to remember that the first time we will be able to predict much more accurately our ability to replenish inventory. That in and of itself is a constraint because replenishing used car inventory is a difficult thing to do. We’re fortunate that we have a massive new car machine that absolutely helps with replenishment of inventory, but you have to have that inventory to sell it.
And you will find that our balance will be a highly predictive inventory replenishment cycle, enabling us to truly understand what is the dynamic of the sale period, the cycle, and the margin, so that we’re trying to balance both the upstream and downstream supply chain. Because that, I think, is the important thing to note. It isn’t just get a customer into our relationship with AutoNation at any cost at all. That’s far from what I’m talking about.
What I’m talking about may well expand margins in some periods. It may well compress them. It may well be reflective of what the competition is—definitely reflective of what the competition is doing. And we add a lot of value beyond price, and we will be making sure that that is part of the customer consideration going forward. So you shouldn’t interpret it as used car margins are going to be under massive pressure. That would be the wrong interpretation.
I think you should take a much more balanced view of what I’m saying.
Daniela Hagian (Analyst at Morgan Stanley)
Thanks, Mike. No, I don’t want that question to be misconstrued. I more so meant the SG&A leverage might not be the, you know, shouldn’t necessarily be that myopic focus from… But, anyway, thank you. I’ll leave it there. And thanks for all the color.
Mike Manley (Chief Executive Officer)
Yeah. But I’m going to come back on one thing because I do think that’s a really important question on SG&A leverage. I mean, we’ve seen the benefit of that in our FinCo and that’s going to continue, and that’s a big driver of profitability. It’s already at 24% ROE. But what I would tell you is one of the things that we have got, and Christian and his team are phenomenally focused at this, is if you think about the costs in a dealership, given the powerhouse of aftersales.
We always measure aftersales absorption of fixed cost because everybody looks at the installed base that we’ve had—or has historically looked at the installed base that we’ve had—and say, hey, this is a big anchor around their neck. Look at all that capital that they’ve got invested that we can remove all of this capital and, hey, everything’s going to be rosy. The reality is the back-end engine of what we operate—and dealers operate—actually absorbs the vast majority, if not all, of that cost.
And that enables you to think more different, enables you to have more options than people who don’t understand the power of the aftersales dynamic on the business in terms of how you can price, how you can be competitive. Our installed base with the brands that we have and the density we have in the marketplace are a key strength of us, and that’s not easily replicated. Thank you.
OPERATOR
Thank you. Our final question comes from Brett Jordan with Jefferies. Brett, your line is open.
Brett Jordan (Analyst at Jefferies)
Morning, guys. Could you talk about what you’re seeing in the wholesale parts business? Obviously +16 is much larger than the total demand for auto parts in the aftermarket, and I guess, sort of, what’s the margin profile of…
Tom
Yeah, happy to handle that, Brett. And it’s been a great business for us. With very minimal incremental investment either in inventory or capex, we’ve been able to drive consistent double-digit growth, and it’s really capitalizing on the presence that we have already in our dealerships. It has been double-digit growth the last several quarters. And I would say that, you know, the margins themselves, if you look at a distribution business, are, you know, not—obviously we don’t have labor; we don’t have parts margins like we do on the franchise side, but it is levering existing investment, you know, without any incremental, and the returns on it are, you know, very attractive for us. So we’ll continue to do that. Gives us incremental profitability on existing base, and I think the prospects continue to be good for it.
Mike Manley (Chief Executive Officer)
Yeah, I’m just going to add in there: the margins are nowhere near the margins you get in your service shops. Obviously the margins are more under pressure now because, obviously, we’re picking up significant fuel costs and we’re going to bear those in the short term to make sure that we protect our customer base. But what actually helps to drive this really is the group approach, the density approach that we’ve been talking about. In markets where we have a substantial presence with multiple brands, we’re now able to set up a multi-brand wholesale approach to that market where we can not only increase the frequency of servicing of our customers, we can offer the complete portfolio of a very, very large number of brands.
And what that gives us is a powerhouse in terms of our ability to service customers as a one-stop shop. It enables us to put in common milk runs—the typical name, as you know, for parts deliveries. They really leverage the cost of those milk runs, but it means we can increase the frequency for the same cost prior to it. We can coordinate now much more effectively across all of our dealerships in a given market, and we put one central point of contact for all of those wholesale customers, so they’re not talking to five different dealerships as they’re buying Ford parts, GM parts, Mercedes parts.
And that’s been a good body of work that has been done by Gianluca and his team in our business that is beginning to bear fruit for us. And it is low margin, but we see it have other benefits, as Tom suggested, because what it also helps for us to do is to make sure that we can be incredible partners for our OEMs because they’re benefiting from it. And we’re often displacing non-franchise parts with those people we’re selling parts to because of the convenience.
So low margin, it’s good growth. We’re still working on various elements, but it’s facilitated by the way we’ve thought about density in markets.
Brett Jordan (Analyst at Jefferies)
Okay, great. And then a question on new units. Domestics—I guess GM, on a percentage basis, was down the most in volume, but is it still fair to think that Stellantis is where the bigger GPU problem is, or is it someplace else in the D3?
Tom
I think we’ve seen pressure across the segment. I wouldn’t single out any individual brand, and I think it’s for the factors that Mike and I have talked about.
Brett Jordan (Analyst at Jefferies)
Great. Thank you.
OPERATOR
There are no further questions at this time. I will now turn the call back to Mike Manley for closing remarks.
Mike Manley (Chief Executive Officer)
Okay, again, thank you everyone for joining us and thank you for your questions. I think Tom and I enjoy the discussions with you and we actually learn a lot because your questions are invariably thoughtful and make us really think through some of the things that we’re working on. And as always, some of the things we’ve talked about today will work well and some of the things will need to constantly be worked on so that they impact the market. But I’m super excited about the coming years for the industry and how technology will really reshape that for us.
And I think AutoNation is really well positioned, as I mentioned, with regard to a great investment. So thank you for your time. I know there are lots of things that are also reporting today, but I’m glad you were with us for the call. Thanks.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
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