Autonation, Inc. (AN) Q3 2026 Earnings Call

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, automation 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, and 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-day adjusted free cash flow was $739 million, representing a 141% conversion of adjusted net income.

And fourth, we continued 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 over that time, we've 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 four, 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 automation 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 from 141% to 141% from 128%.

As I stated earlier, through the end of September, we have deployed 85% of our pre-cash flow to share repurchases.

And Tom will talk more about capital allocation in a separate side.

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.

Thanks, Mike. I'm on slide five, which gives a little more detail on the EPS growth that Mike mentioned. If I start with Q3 2025, $5.01 and walk it to the $5.11 Q3 26. First, you'll notice the effect from vehicle sales as anticipated. Vehicle volumes were lower year over year, primarily reflecting the comparison with demand ahead of the September 2025 EV incentive expiration.

And last year's tariff

Now, this is behind us as we move forward, but it did create a $0.52 per share unfavorable impact in the quarter. On vehicle profitability, we're pleased that we're able to grow year-over-year in used unit profitability and keep new unit profitability normalization within a reasonable range compared to what we had been experiencing in 2024 and 2025. The net effects of these factors were $0.28 per share unfavorable. Moving on, the results benefited from the strength of the recurring earnings streams we've been discussing after sales contribution.

We have more details on each of those coming up. Additionally, share repurchases contributed another 64 cents of earnings per share growth through the reduction in weighted average shares outstanding.

All other items were net unfavorable, 39 cents per share, which includes the effects of less operating leverage for our SG&A resulting from lower vehicle sales. That was about 13 cents.

Reductions in wholesale vehicle profitability, which was about 14 cents, and higher interest expense, which was about 8 cents. We have clear actions underway in each of those three areas. For example, in SG&A, although we screen near the top of our peer group in terms of cost management proficiency, our cost performance in Q3, particularly in July and August, could have been better.

We initiated several initiatives in September, which we are confident will deliver meaningful cost productivity for the rest of the year and into 2027. Focus areas include field labor productivity, discretionary local spending for categories like marketing and IT, corporate advertising spending, and corporate commercial sales. Second example is on wholesale vehicle profitability. We didn't have the right mix of used vehicles and held onto some stocks for too long and ended up incurring incremental wholesale losses.

losses in the quarter. Used inventory turns over very quickly, which gives us the opportunity to self correct rapidly and we have in fact made inventory corrections as well as organizational changes in this used area. We also had higher general purpose interest expense and floor plan interest expense relating to higher share repurchases and inventory levels. We are comfortable with our used inventory levels. We're a bit higher on new unit inventory levels and we're moderating those over the course of the coming months.

The result was adjusted EPS of $5.11, up 2% year-over-year.

Slide 6 highlights the earning streams which anchored our quarter.

Starting with after-sales gross profit reached a record of $617 million.

This marks the ninth consecutive quarter that we've achieved year-over-year record gross profit in after-sales, and after-sales represents about half of the total company gross profit. Customer pay and warranty gross profit each increased 5%, supported by traffic growth of 5% in customer pay, and 13% in warranty.

Also, AutoNation Finance also continued to scale. The portfolio increased to approximately $2.9 billion from $2 billion a year ago, and 91% of the portfolio was funded with non-recourse debt. Year-to-date profit increased to $36 million from $4 million in the prior year, with a 24% return on equity.

Customer financial services generated $349 million of growth profit and approximately $2,700 unit profitability. Total retail units declined 4% and the continued growth of AutoNation Finance shifted a portion of economics from upfront commissions towards recurring finance income. That shift is strategically important as it enables us to convert transaction-based earnings into a recurring earning stream while generating superior earnings.

and attractive returns on equity. Turning to slide 7, we've historically made and will continue to make capital allocation decisions based upon the relative contributions to earnings per share of every investment alternative over the long term. And as you can imagine, the current environment that strongly favors share repurchases. Along those lines, you will see that this morning, we announced that our board approved an additional $1 billion share repurchase authorization, bringing a total authorization available to approximately one point.

$1.4 billion. So far in 2026, share repurchases represented our largest use of capital. We have deployed $620 million year to date and repurchased approximately 9% of the shares outstanding during 2026, thereby decreasing the year over year share count by 12%. We are on our way to exceeding the 2025 share repurchases total of $785 million.

Our acquisitions made during the second quarter added approximately $600 million in annual revenue and increased our scale and density in markets where we have a meaningful presence. These included three premium luxury stores and one Toyota store, all of which were modeled to generate greater value per share than the share repurchase alternatives.

Leverage remains stable from the second quarter and within our targeted two to three times EBITDA range. We're committed to maintaining our investment grade rating and we're well positioned with our ladder debt profile and our covenant light borrowing arrangements.

Moving to slide eight, I want to add to the points that Mike made on after sale. After sales once again delivered record gross profit and remained our largest gross profit contributor. Revenue increased 5% to $1.29 billion from $1.23 billion a year ago. Growth was led by customer pay revenue up 6% and wholesale parts revenue up 16%.

Gross profit increased 3% to a record $617 million. Customer pay and warranty gross profit each increased 5% supported by increased traffic. Sales and gross profit were lower for internal reconditioning, which was impacted by lower vehicle volumes and for collision.

Roast margin was 47.8% compared with 48.7% in the prior year quarter. The year-over-year change entirely reflected mix, and that is the mix of wholesale parts, which carries a lower margin rate than customer pay and warranty, but is accretive to AutoNation ROI.

The key takeaway is that customer-facing demand remains healthy. We continue to focus on customer retention, repair order content, and productivity enabled by technology to support durable, mid-single-digit growth in this high-margin and recurring part of the business.

Slide 9. With the success of our financing platform, we wanted to provide an end-to-end view of our customer financial services platform and how is delivering meaningful profit in the current period and creating an earnings annuity that results in long-term value per share. Over the last few quarters, we've been rolling out an origination hub across the group that allows us to allocate contracts to product providers and financing providers, including our OEM financing partners, mostly for new vehicles,

Our non-OEM financing partners and AutoNation Finance, based on customer needs, economics, risks, and available capacity.

During the quarter, AutoNation originated approximately $3.9 billion of customer financing across 93,000 units, with finance penetration of approximately 73%.

Approximately $500 million of current period originations were retained by AutoNation Finance, and after amortization and liquidation, the finance portfolio expanded by approximately $200 million during the quarter and ended at approximately $2.9 billion. The platform generated $349 million of CFS gross profit and $15 million of AutoNation Finance operating profit during the quarter.

The current CFS economics remain significant, while the loans originated by AutoNation Finance

build an erring annuity over the life of the portfolio. That combination of current value

and future value is a strategic advantage of this platform. Turn to slide 10. AutoNation Finance itself delivered another record quarter. Operating profit increased to $15 million from $2 million a year ago. Year-to-date profit was $36 million, compared with $4 million a year ago. Net interest margins remain healthy, and they're aligned with our credit risk profile. Delinquencies continue to be modest. Origination terms have been consistent, and

extensions have been minimal. The team is also achieving attractive portfolio growth without having to inject much in terms of incremental SG&A spending. The portfolio increased to approximately $2.9 billion from $2 billion a year ago and was 91% funded with non-recourse debt compared with 86% a year ago.

The cash generation from the portfolio is also becoming meaningful. AutoNation finance generated approximately 33 operating cash flow in the third quarter and $93 million year-to-date. We remain on track for approximately $120 million for full year 2026 and currently see a path to at least $150 million of cash flow in 2027.

Funding execution also remains very strong for the portfolio. Market demand for AutoNation's ABS paper continues to be healthy. We've completed four ABS transactions in the last 18 months, totaling $2.4 billion, and we'll be launching a new ABS transaction next week. Additionally, in October, we closed on a new pre-ABS warehouse facility that provides additional capacity and flexibility.

This single, syndicated warehouse facility replaces our existing multiple bilateral warehouses funding lines, providing better funding rates and a more efficient administrative structure, and we appreciate the support of our lending partners in getting this completed.

The third quarter return on equity for the portfolio was approximately 24%. As the portfolio seasons and funding efficiency continues to improve, AutoNation Finance is scaling into a meaningful high returns annuity while enhancing long-term customer relationships.

I'm on slide 11, customer financial services. CFS gross profit was $349 million in the quarter, compared with $375 million in the prior year, primarily reflecting lower retail unit volume.

Gross profit for vehicle retail was $2,698, compared with $2,775 a year ago, a 2.7% reduction.

Now, that included 3.6% for product terminations and 1% the effective loan originations retained by AutoNation Finance. Offsetting these were incremental platform access fees and commissions earned during the quarter, the effect of which was a 1.8% increase in our CFS unit profitability.

As AutoNation Finance grows, a portion of the economics moves from upfront CFS commissions

towards an annuity of recurring finance income. While that shift modestly reduces current period

CFS profitability, it does increase the lifetime economics of the customer relationship and supports long-term shareholder value. CFS product attachments remain robust, averaging 2.2 products on new sales, or new vehicle sales, and 1.6 products on used vehicles, and pricing remained relatively stable. The CFS team continues to execute a value-driven, customer-focused process, and product penetration remains an important contributor future after sales activity.

Slide 12 covers new and used vehicle sales, the origination events of our business model.

New and used constituted 11% and 9%, respectively, of our total gross profit in the quarter. New vehicle retail unit sales were $63,929, down 3% from $66,189 a year ago, reflecting a 60% decline in battery electric vehicle sales following the September 2025 expiration of the U.S. EV Incentive Program.

Excluding battery electric vehicles, combined internal combustion and hybrid unit sales increased 2%.

By segment, new unit volumes increased for import and premium luxury brands as we benefited from acquisitions, while domestic units decreased.

Market share remains stable with the first half of the year. New vehicle gross profit per unit was $2,176 compared with $2,281 a year ago and continues to remain within the stable range we've seen over the past several quarters. Unit profitability increased slightly from last year for our import brands, while domestic and premium luxury decreased.

Used vehicle retail unit sales were 65,410, down 5% from 68,896 a year ago. Volume remains stronger in the higher priced units. For example, sales of vehicles greater than the $40,000 price point, which is our highest profitability tier, increased 8% year over year. Lower price supply continued to be constrained, while off-least supply is improving, which should create additional sourcing opportunities.

Over time, used gross profit per unit was $1,524, compared with $1,489 a year ago, demonstrating relative stability. And as we mentioned earlier, used wholesale gross profit was lower for the quarter, reflecting corrections to inventory aging and mix. With an improved inventory mix of properly priced, reconditioned, located, and merchandised used inventory, we're confident in restoring volume growth to this business. Across both new and used, we remain focused on balance.

We're focused on balancing volume, profitability inventory, and the customer experience. We expect the typical fourth quarter seasonal benefit from our premium luxury mix and a lower use to new ratio.

Turning to slide 13 on free cash flow. Year-to-date, adjusted free cash flow was $739 million, roughly flat with the prior year when you exclude the $40 million of cyber insurance proceeds we received in 2025. Adjusted free cash flow conversion improved to 141% from 128%, continuing our history of converting more than 100% of adjusted net income to cash.

This reflects continued focus on working capital, inventory, discipline, and cycle times.

As I indicated earlier, AutoNation finance is becoming a more meaningful part of our cash flow generation.

So, for the full year, we now expect approximately $280 million to $290 million in capital expenditures, roughly a $40 million reduction from our original target of $325 million as we sharpen the pencil on investment return requirements.

For the full year, 2026, we're on a path to meet the prior year level of $965 million in adjusted free cash flow, again, excluding the 2025 cyber insurance proceeds.

Our consistent cash conversion provides the capacity to fund the business, support growth

initiatives, maintain balance sheet strength, and return capital to shareholders. I'm going to now turn the call back to Mike.

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, alternation finance, cash generation, and discipline and 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.

Automation 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 the 1st.

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, obviously cyber security, 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. I 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 alternation is a compelling investment. And I think the thesis is relatively simple. We view new and new 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, 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, obviously more personal, and creates long, expected reasons to stay connected. It also provides product and services that support and feed directly into our after

sales business. And that's the second thing, after sales. Not only is it 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 in 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. Great, thanks. Kenneth, if you could please remind people how to get in queue for the Q&A. 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 JP Morgan. Rajat, your line is open. Please go ahead.

Great. Thanks for doing the question. Just wanted to start off with like a two-part question on parts and service. Could you confirm or, you know, give us some color if you're seeing any sort of, you know, pricing pressure in that segment, you know, either on labor rates or parts or just like warranty rates? Just curious if you could give us the latest there.

And then if I look at just the overall growth profit growth of 1%, I understand customer pay is tracking higher than that. But curious, you know, if you have any visibility on just the overall growth profit dollar growth, you know, reaccelerating in parking services. Thanks.

Very nice, Mike. I'll start on 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 obviously 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 teams 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 then 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 part particularly the part that yields the most labour 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 recognised 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 maybe have defected to a different service provider or doing the maintenance and sales 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 in 2027 as a direct reflection of our understanding of that offset that 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. Just a quick follow-up 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 growth before it normalizes? Just curious to get a thought when we get to a more normalized new front-end level. Thanks.

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 data 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 day 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 what 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 have to discount.

Thank you. And good luck. Your next question comes from the line of Joseph Spack with UBS. Joseph, your line is open, please go ahead.

Hey team, this is Rob Saltzman on for Joe today. Just to follow up on parts and service side, you know, how do you think you can work to take share from independence 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?

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 the value, of course, is a big element of its price, but it is 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 elements.

We're balancing that because we understand, I think, with a large, we understand enough about the value per repair order of ageing 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 to 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.

Thanks, Jeff. 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 going to be eating some more of those higher costs to help the affordability side of the equation and maybe drive volumes?

Yeah, 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 the 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 the external noise, the portfolio is being well-managed, and it's showing up in the results, $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.

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 get tracked. 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 the additional products and services that we sell.

What we want to 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.

Thanks, Dean. Really appreciate the time today.

Your next question comes from the line of John Babcock with Barclays. John, please go ahead.

All right, thanks. Just on new GPUs, I guess in the last couple of quarters, you've talked about scene stability there, and this quarter, there was a bit of a drop-off. 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?

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 premium luxury.

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.

Yeah, I mean, so firstly, obviously, you hear a huge amount about productivity driven through technology, particularly around AI. And like everybody else under 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-cell basis.

But the way that I think about the work that we've been doing, it started before Ravi was with us, but we'll 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 Alternation 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 interface.

That physical network that I talked about. So, short answer to your question.

Your next question comes from the line of Alex Perry with Bank of America.

Alex, your line is open.

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 dock fee state, which you have some decent exposure to. Has that enforcement had any impact on new GPUs?

Well, firstly, I think the guidance from the FTC actually 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 dock fees are prevalent or you're in a state where dock 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 and don't need them anymore because it's 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.

That is super helpful. And as a quick follow-up, used GPUs held up well and were up sequentially in 3Q, even with same-story units down. How are you balancing volume versus GPUs from here, especially with awfully supply-improving and higher new vehicle prices, potentially pushing more buyers into use? Thank you.

Yeah, that's a great question because I've said in the past, we're going to get to $2,000 a unit. And I can tell you something that when you break down the drivers of used vehicle margin, whether it's acquisition cost, reconditioning, how long you've had in 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, you know, 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 guidelines 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.

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 – I don't want to be constrained by a fixed used car margin because I think that, frankly, that 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 supplier vehicles as well, which for me really completes the circle and 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.

Your next question comes from the line of Jeff Lick with Stevens. Jeff, please go ahead.

Good morning. Thanks for taking my question. Mike, you're interested in the last question about, you know, no real reason, you know, 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 with the higher performing stores are doing? And then just to build on that, also curious, you guys are very focused on units and operation and the lifetime

And 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 into the service line?

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 that 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 2000 really just works on those other elements that will

We'll 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.