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Car Dealers Can Keep Rolling After Supply Crunch

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Despite fears of car supply availability, auto dealers aren’t running into any speed bumps just yet.

Both

Lithia Motors

LAD 5.03%

and

AutoNation

AN 2.76%

—dealers selling new and used vehicles—reported record revenue and profits last quarter. Lithia Motors said on Wednesday morning that its second quarter sales surged 118% compared with a year earlier; AutoNation’s sales jumped 54% in the same period.

New vehicle shipments seem to be catching up: They were down just 6% last quarter compared with 2019 levels, AutoNation noted on its earnings call on Monday. Demand still far outpaces supply, however. At AutoNation, there were just 14 days’ worth of inventory available for new vehicles; Lithia had 23 days’ worth. Dealers typically have 50 days or more worth of new car inventory on hand.

That mismatch between supply and demand comes with all kinds of perks for the dealers: Not only are they commanding higher prices, but they have also been paying less interest on floor-plan loans, which are typically used to finance floor inventory.

With more cars immediately sold off lots, AutoNation said it paid less than half in floor-plan interest expenses last quarter compared with a year earlier. Thanks to those favorable economics, net income at Lithia almost quadrupled last quarter compared with a year earlier, while profit at AutoNation—excluding discontinued operations—tripled.

Investors seem to believe the dealers can ride the wave a bit longer: AutoNation and Lithia Motors gained 3.1% and 5.4%, respectively, by Wednesday afternoon.

Today’s supply crunch doesn’t seem like a reason to bet on car dealers. AutoNation and Lithia Motors’ shares are already up 73% and 33% year to date, respectively. Directionally, favorable trends are reversing already: American auto production has increased in April and May, while total vehicle sales peaked in April and has declined in the two consecutive months, according to data from the Bureau of Economic Analysis.

Consider, though, how the industry might have been transformed by the pandemic. Both AutoNation and Lithia Motors are working with less operational overhead going forward (they permanently reduced head count by 14% and 20%, respectively) as they began relying more on digital tools to help consumers.

Additionally, AutoNation’s Chief Executive Officer

Mike Jackson

said Monday that there is a “very healthy discussion going on within the industry” of re-evaluating a system that pushed out too many cars on dealer lots as car manufacturers themselves start seeing better profits with low inventory. “I don’t think it’s going back to the old ways of a massive overproduction push system,” he said.

Lithia Motors’ Chief Executive Officer

Bryan DeBoer

was a bit more skeptical, noting that American consumers seem to like the idea of having a lot of choices on dealer lots.

A stronger bull case for car sellers lies not with today’s bumper profits but with how last year’s constraints transformed them.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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