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AutoNation CEO on chip shortage: ‘I’ve never seen a more unpredictable situation’

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Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland speak with AutoNation CEO Mike Jackson about the company’s most recent quarter, 2021 outlook, and what accepting Bitcoin as payments would do for the auto industry.

Video Transcript

JULIE HYMAN: Brian Sozzi, got to talk some earnings here this morning.

BRIAN SOZZI: Yes we do Julie. And a big quarter out of auto retailer AutoNation this morning, guys. The company beat earnings estimates by $0.42 on the back of strong new and used car sales. AutoNation also revealed a new $1 billion stock buyback plan and said it fully exited its position in online car seller room. Let's welcome in AutoNation CEO Mike Jackson for more.

Mike, good to see you this morning. Big quarter out of AutoNation this morning. But some numbers that stood out to me here. The gross profit on new cars up 50% year over year. On used cars, up 9%. Really strong gains. How much pricing power do you have right now in this pandemic?

MIKE JACKSON: Well, good morning. It's delightful to see both of you and it was our best quarter in the history of the company. And we see a significant increase in demand for personal transportation across the all price points from $5,000 to $400,000. So while there is a terrific economic pain out there for America, there's been a prioritization around personal transportation rather than shared transportation.

You combine that with very attractive interest rates, very affordable gasoline, and fiscal incentives that are coming, the demand is exceptional. But AutoNation is even outperforming on that with our brand, our great customer experience, our digital capability, and we increased our preowned revenue by 12% in the quarter even though the preowned business where the industry did not significantly increase.

Now, on the new vehicle side, there is no question there is far more demand than there is supply. Production is disrupted not only now by the pandemic but a knock on effect of the pandemic that chips are very-- electronic chips are in very short supply with the demand in consumer electronics competing with automobile manufacturing.

So supply constraints are going to continue into this year. And it's really opaque as to when all that will get resolved. But the headline is, demand is strong across the board and AutoNation is outperforming in this very positive environment, hence our confidence. We repurchased 7% of our outstanding shares in the last 90 days. And as you said, announced authorization for an additional $1 billion with the share buyback today. And we continue our investment in the preowned business. We're completing five AutoNation USA stores this year and announced another 10 for next year.

JULIE HYMAN: Hey Mike, I want to delve a little bit more. I know we're going to delve a little bit more into the chip shortage situation, but I do want to follow up on Brian's question about pricing. So just break it down for me. If I'm a car buyer this year and I come into an AutoNation, how much can I expect auto prices on average to go up this year?

MIKE JACKSON: Well, I think our average new vehicle price at the moment is around $40,000 preowned. Averages out to around $20,000. Now, the consumer is very focused-- there's two other things that go in to the answer to that question, both of which are very positive for consumers. One, their trade ins are very valuable.

So it's really the difference between what they're trading and buying that they're paying. So that's a positive. And most of our customers are financing what they buy and the interest rates are very attractive. So while the price point is higher and there are supply constraints when the consumer does the entire equation, there is a compelling reason to buy and to buy now.

And you combine that with this streak of independence that the American people have and are saying, I want to-- and they missed it this pandemic and what it's going to be like in the future. I want my personal transportation. I really don't want shared transportation at the moment. Hence, the demand is extraordinary and there will be supply constraints on the new vehicles side well into this year.

MYLES UDLAND: Hey Mike, it's Myles here you mentioned that there's some opaqueness around just exactly what the chip issue is. The chip shortage. But we've heard from every major OEM that it is pressuring their supply line. What is, in your estimation, the lead time on when that starts to show up on a dealer's lot where they don't have the inventory they thought they're going to have because we've seen these extended shortages and shutdowns of plants. And so on.

MIKE JACKSON: So we have been contending with this issue of production disruption for almost a year now. And what the manufacturers did when back when plants first shut down because of the pandemic and then resumed, they might not have had all the parts. So they built the vehicles and parked them and waited for additional-- the final parts to arrive.

This turned into a logistical nightmare. We had certain vehicles that were finished and we were told they were ours that didn't show up for eight months until they could finally be completed. So the manufacturers have really stopped that practice now and they really wait until they have all the parts before they produce a vehicle.

But I have never in my entire career seen a more unpredictable situation as to what will be made when and when it will be shipped to us. So we've stopped telling customers with certainty when their vehicle will arrive. It's like when it's on a truck on its way to us, that's when we believe it. Before that, it can either be canceled, postponed, parked someplace. And I don't even think the manufacturers-- it's not that they're misleading us. It's like, nobody really knows what's going to be available when. Because you know, it's a very complex global supply chain that's now been disrupted with two factors simultaneously.

And they're sort of interrelated, because people are investing more in their home and want more consumer electronics, so you have this competition for the chips and the demand can't be met. So there's not much clarity. So the only thing I can tell you with certainty is it's unclear and it's going to be unpredictable. And that's the position now to be forthright with our customers that we have taken.

BRIAN SOZZI: Mike, I've always viewed you as a forward thinking executive. And to that point, is AutoNation ready or discussing to start accepting Bitcoin for its cars? I'm sure you have seen what Tesla has said. Do you think that causes a ripple effect about the auto industry?

MIKE JACKSON: Listen. I will concede that I could absolutely be positively wrong. And I would note that I served the Federal Reserve System with pride and honor for nine years ending up as chairman of the Federal Reserve for Atlanta. And listen, I am absolutely astounded and amazed what Bitcoin is worth today. And I don't know where it's going and what it all means. So I can't help you there other than to say, look what I do. I don't anticipate us accepting Bitcoin. And we really haven't had hardly any customers suggest that we accept Bitcoins so we're good with the US currency.

JULIE HYMAN: Fair enough, Mike. Finally, just quickly, wanted to ask you about Texas. I know you guys have a number dealerships down there. We know a lot of people without power down there. I imagine some of your dealerships are affected. What's the status of your spots down there and is that going to have any effect on this quarter's earnings?

MIKE JACKSON: So Texas is one of my favorite states. And if I had life to live over, I might spend it in the Great state of Texas. I love the can do, entrepreneurial spirit of Texas. And it's a very welcoming state. It's like, you go down there and say, look, we're having so much fun, why don't you move here. That's the attitude in Texas. I don't encounter that in all states. And I think the two states that I have put at the top of my list with bright futures are Texas and Florida. Very pro-business, very dynamic, very entrepreneurial.

So listen, I've seen-- I've walked the streets of Texas after Hurricane Harvey and the flooding. It was just horrific. But the way they rolled up their sleeves and helped each other out as neighbors was truly something remarkable. And the diversity in Texas and how they reached out every which way. So I'm sure we have no significant disruption with this storm compared to some of the other things that happen have happened in Texas. And they will work through this. No question.

JULIE HYMAN: Mike Jackson, it's always great to see you. AutoNation CEO. Next time we see you--

MIKE JACKSON: Great to see you.

JULIE HYMAN: --maybe you'll have a 10 gallon hat on your head, repping for the state of Texas.

MIKE JACKSON: Could be. Could be.

JULIE HYMAN: Could be.

MIKE JACKSON: It would be fine with me.

JULIE HYMAN: Sounds like that would be more likely than accepting Bitcoin at this point, Mike. Thanks so much.

MIKE JACKSON: Exactly. That's a good call.

JULIE HYMAN: Appreciate it.

MIKE JACKSON: You got me there.