AutoNation (AN) - Get Report, the nation's largest new-vehicle retailer and a barometer of consumer demand, said first-quarter profit fell 14% because of increased discounts needed to close transactions.
The quarter's results also were hurt by costs associated with hail damage to vehicles in Texas last month, as well as for an accounting change in the company's stock-based compensation.
"It's a particularly challenging environment" for auto sales, Mike Jackson, CEO, told CNBC. Jackson also blamed a downturn in the economies of regions that depended on oil revenue. About a quarter of the company's revenue comes from areas dependent on oil, a commodity that has been hit by depressed prices.
AutoNation operates stores mostly in the Sunbelt. Analysts had been forecasting operating profit of 93 cents a share, higher than the 90 cents the company posted. Without the two special items, hail damage and the accounting change, profit would have been 96 cents a share, the company said.
As the largest retailer of new vehicles, AutoNation's financial results are closely watched because many investors see them as a proxy for consumer demand, which can be difficult to gauge. Since early this year, Jackson has been warning that the U.S. vehicle market is entering a "plateau."
Jackson reiterated Friday that the U.S. auto industry is in that "plateau environment" and noted that retail car and light truck sales for the quarter were flat. He repeated an earlier forecast that total U.S. car and light truck sales will be above 17 million for the year, compared with about 17.4 million last year.
Retailers, who buy cars from automakers, are able to adjust unit sales of vehicles by cutting or raising prices to consumers. Manufacturers can apply discounts as well when demand falls.
AutoNation shares have fallen about 28% in the past year, compared with a 1% loss for the S&P 500. Next week, Penske Automotive Group (PAG) - Get Report and Group 1 Automotive (GPI) - Get Report, two other large retail chains, will be reporting financial results.
In the first quarter, "if there had not been dramatic increases in incentives, there would have been a decline in sales and, by the way, incentives are reaching the danger level of almost 10% of the asking price," Jackson said during an interview on CNBC Friday morning.
Two key metrics that forecasters will be watching are inventories of unsold vehicles and used-vehicle pricing. As inventories rise along with the size of discounts required to complete transactions, manufacturers consider whether to slow production, which has an immediate negative impact on corporate earnings.
Weakening used-car prices, especially for lightly used vehicles recently returned following leases, can attract shoppers away from new vehicles. Used-car prices lately have been falling. According to the National Automobile Dealers Association, first-quarter used car prices in the U.S. marked the first year-over-year decline in about seven years.
Doron Levin is the host of "In the Driver Seat," broadcast on SiriusXM Insight 121, Saturday at noon, encore Sunday at 9 a.m.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.