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AutoNation, Inc. (NYSE:AN)

Q2 2008 Earnings Call

July 24, 2008, 10:30 am ET

Executives

Mike Jackson - Chairman, Chief Executive Officer

Michael E. Maroone - Director, President and Chief Operating Officer

Michael J. Short - Executive Vice President and Chief Financial Officer

John Zimmerman - Vice President, Investor Relations

Analysts

John Murphy - Merrill Lynch

Matt Nemer - Thomas Weisel Partners

Colin Langan - UBS

Rick Nelson - Stephens

Rick Kwas - Wachovia

Dan Gallatin - Deutsche Bank

Rexford Henderson - Raymond James & Associates

Operator

Welcome to AutoNation’s second quarter earnings conference call. (Operator Instructions). Now, I will turn the call over to AutoNation.

John Zimmerman

Good morning and welcome to AutoNation’s second quarter 2008 earnings conference call. My name is John Zimmerman, AutoNation’s Vice President of Investor Relations. I would like to remind you that this call is being recorded and will be available for replay at 1-888-562-6304 after 2 p.m. eastern time today thru July 31, 2008.

Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Michael Maroone, President and Chief Operating Officer and Mike Short, Chief Financial Officer. At the end of their remarks, we will open the call to question. I will also be available by phone to address any follow-up issues.

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risk which may cause the actual results or performance to differ materially from expectations. Additional discussion of factors that could cause actual results to differ materially are contained in the company’s SEC filing.

Certain non-GAAP financial measure as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations section of AutoNation’s web site at www.autonation.com. And now, I will turn the call over to AutoNation’s Chairman and Chief Executive Officer, Mike Jackson.

Mike Jackson

Good morning, thank you for joining us. Today, we reported second quarter net income from continuing operations of $53 million or $0.29 per share, compared to a year-ago net income from continuing operations of $79 million or $0.38 per share. After adjusting for certain items disclosed in our second quarter financial table, net income from continuing operations for the 2008 second quarter 59 million or $0.33 per share, compared to 76 million or $0.36 per share in the prior year.

Adjusted EPS was down 8% in the second quarter. During the second quarter, U.S. industry retail auto sales declined 16% over the prior year, according CNW Research. AutoNation new unit sales declined 12%. The industry is in the midst of the perfect storm. Now that we have encountered $4.00 a gallon gasoline, on top of the continuing housing depression and credit crisis, which has resulted in customers either postponing the purchase of vehicles or purchasing smaller, more fuel-efficient vehicles.

In spite of this, AutoNation delivered solid profitability in the second quarter. In the second quarter, we saw two major changes. First, we saw a shift in consumer preference to fuel efficiency. Cars now account for 58% of sales, compared to 49% a year ago. AutoNation’s average gross profit per vehicle retail for cars and trucks is about the same. Second, we saw a 30% decline in new vehicle revenue from our domestic franchise.

A continuing response to the ongoing macro-economic and industry challenges, the company is executing a cost-reduction plan with a targeted annualized run rate savings of $100 million. In the first half of the year, we recognized 25 million of this benefit. In the second half of the year, we expected to achieve 50 million of savings for a full year 2008 impact of 75 million. Our targeted annualized SG&A savings include a reduction in advertising spend of 30 million, a reduction of corporate overhead of 20 million, and reduced compensation in other SG&A expense of 50 million, driven primarily by reduction in store personnel to align our store staffing with the current market condition.

For the full year 2008, we anticipate a total reduction of approximately 1300 positions. We are also targeting a reduction in new vehicle inventory of 5,000 by the end of the year. We have also reduced our full year 2008 capital expenditure plan by 50 million, versus prior year.

Additionally, we continue to divest underperforming stores to optimize our portfolio. The divestitures are primarily domestic franchise. However, we will retain our high-volume, core domestic franchises. We expect over time that these domestic franchises will constitute about 20% of our new vehicle revenue.

And currently, we continue to make strategic investments to improve our ability to serve customers and compete effectively in tomorrow’s marketplace. Those investments includes areas such as the shared service center to drive back office and purchasing efficiency as well as E-commerce and customer-facing technologies to enhance our customer experience.

While today’s economic uncertainty might compel potential buyers to put off their purchases decisions until a later date, their needs remain. Once customers begin to sense that their economic situation has stabilized, they will be ready to commit to purchase big-ticket items like vehicles. I would like to turn it over to Mike Short to provide more details on the financial results.

Mike Short

Thank you, Mike. Good morning, ladies and gentleman. As Mike mentioned, we reported adjusted second quarter earnings from continuing operations of $0.33 per share versus $0.36 per share a year ago. Our current operating results were adversely affected by certain accounting adjustments. The aggregate impact of these adjustments was approximately $0.04 per share on earnings from continuing operations. These adjustments included a non-cash stock compensation expense adjustment of 5.3 million that is 3.1 million net of tax in SG&A. This adjustment corrected the amount of expense that should have previously been recognized for retirement-eligible employees.

In addition, we recorded non-cash franchise impairments of 5.1 or 3 million net of tax related to two stores, which is reflected in other expenses in the income statement. The prior year period included favorable tax adjustments of $0.02 per share. Excluding the stock compensation adjustment, SG&A’s percentage of gross profit increased to 74.7% from 71.1% a year ago, reflecting a de-leveraging of our cost structure, partially offset by our cost-savings initiatives.

New vehicle net inventory carrying cost was 6.9 million lower in Q2 versus the prior year period. The favorable variance is primarily a result of lower floor plan interest rates, partially offset by a decrease in floor plan assistance, resulting from lower new vehicle sales.

During Q2 2008, we entered into agreements to form a portion of our used vehicle inventory with various lenders. At June 30, approximately 137 million was outstanding under these agreements. Other interest expense was 4.8 million lower in Q2 versus last year. The favorable variance is a result of lower interest rates on our term loan facility, mortgage facility and floating rate senior notes and the decrease in debt level associated with our revolving credit facility, partially offset by an increase in our mortgage facility debt.

For Q2 2008, we had an effective income tax rate of 41% versus a prior year effective rate of 37.3%. The Q2 2007 rate benefitted from adjustments from the resolution of various tax matters, which is, as I've noted results in an EPS benefit of $0.02. We expect our on-going rate to be about 40%, excluding the impact of any potential tax adjustments in the future.

Also in Q2 2008, we had losses from discontinued operations of 800,000 net of taxes. During the second quarter, we repurchased 1.9 million shares of stock at an average price of $13.90 per share for a total of 26 million. Our future share repurchases are subject to limitations contained in our debt agreements. As of July 1, 2008, our basket capacity for share repurchases is approximately $35 million. Each quarter, we are permitted to add back approximately 50% of our net income after tax and any stock option exercise proceeds.

We re-invested $18 million in the business through capital expenditures during the quarter. We expect full year 2008 capital expenditures to be approximately $75 million. This represents a $35 million reduction versus our previous estimate for 2008 and a $50 million reduction compared to 2007. These amounts are net of asset sales and exclude acquisition-related spending, land purchase for future sites, or lease buy-outs.

At June 30th, our non-vehicle debt was 1.5 billion and we had unused revolving credit ability of approximately 621 million. The availability to borrow under our revolving credit agreement is restricted by the terms of our debt covenants. Our non-vehicle debt to capital ratio was 30%.

Now, let me turn you over to our President, Chief Operating Officer, Michael Maroone.

Michael Maroone

Thanks, Mike and good morning. The auto retail environment deteriorated further in the second quarter, precipitated by the rapid shift in consumer demand for full-efficient small cars as the cost of gas continued to rise. Compounding factors include the housing and credit markets that are still under pressure and lackluster consumer confidence.

Working through this downturn, we continue to focus on the consistent implementation of best practice process and expense control across all stores. We expect to benefit as the economy improves.

In the second quarter, AutoNation retailed 73, 500 new vehicles on a same-store basis, down 13%, compared to the period a year ago. But favorable compared to the industry that, according to CNW Research, was off 16% at retail on the quarter.

We noted pressure on vehicle sales in nearly all of our markets and the sluggish economy kept the marketplace highly competitive. Compared to the quarter a year ago, revenue per new vehicle retail was off 4% in gross profit per new vehicle was off 8%. Buy in was driven primarily by the decline in truck sales and margin was affected by a shift in mix within the luxury segment.

Turning to used vehicles, our performance here was favorable relative to new. We retailed just under 50,000 units in the quarter, 4% compared to a year ago. Contributing factors to the decline were fewer trade-ins due to lower new unit volume, limited availability of high-demand small, fuel-efficient vehicles and a conservative credit environment. Revenue per used vehicle retailed was down by 5%, as consumer demand for value or lower-price cars increased. Gross profit for used vehicle retailed was down 8%, due in large part, to the challenges in truck pricing. Of note, similar to new vehicles, our used car margins compared to used truck margins are approximately the same.

We are working diligently on executing our used vehicle game plan. This includes balancing our inventory mix to match consumer demand, retailing more of our trade-ins, moving inventory to locations that will be the quickest and most profitable sale and growing our certified pre-owned business. In the quarter, we moved 5,400 vehicles to a more optimal location with good success at retail and increased our certified pre-owned business by 10%.

A snapshot of our inventory at June 30th reflects a new vehicle day supply of 62 days. While this represents an increase of seven days compared to a year ago, it reflects the slower sales pace in May and June and compares favorably to the industry at 67 days. Our new vehicle inventory was reduced by about 4,700 units compared to first quarter and for the second half of the year, we are targeting an inventory reduction of 5,000 units. We view our day supply as manageable and are working through the cars/trucks mix issue. Our used vehicle day supply of 42 days is 2 days lower than a year ago.

At 634 million, same-store revenue for service and parts was off 1%. Our customer pay business showed a modest increase of 1% compared to the quarter a year ago, however a 6% decline in warranty more than offset the customer pay gain. Parts and service gross profit of 276 million was off 2% in the quarter.

In this economy it is clear that consumers have modified discretionary spending, with many putting optional service or maintenance work on the back burner. Even so, we are gaining traction on two important customer focus initiatives. Our on-line appointment setting feature and our service sales process. Both drive an improved customer experience as well as the opportunity to grow customer pay revenue.

Turning to finance and insurance, same-store revenue declined 10% on lower volume. Same-store FNI gross profit per vehicle retailed was strong at $1099 and relatively flat year-over year. In the quarter, we noted an increase in charge-backs, which were substantially offset by increased product penetration.

Work continues in optimizing our store portfolio. In the quarter, we divested two franchises and terminated one. The three franchises represented a run rate of 38 million. At June 30th, our stores numbered 242, representing 319 franchises and 39 brands in 15 states. In September, we will open Mercedes-Benz of Del Rey in Del Rey Beach, Florida. This add point brings our Mercedes dealership count to seven in Florida and 14 company-wide.

As we navigate what continues to be a very challenging environment, we remain steadfast in our focus on the cost side of the business and are committed to strategic investments that included training and technology.

In closing, I would like to thank each of our associates for their dedication to delivering great customer service as evidence by our outstanding CSI scores. We believe that we are operationally stronger today than ever before and that we will be well positioned when the industry reaches recovery and with that, I will turn the call back to Mike Jackson.

Mike Jackson

Thanks Mike. As we look at the rest of 2008, we believe that the market will remain very challenging. We also believe that in 2008, new vehicle sales for the industry will decline to the low 14 million unit level. In 2009, the industry should begin to stabilize and recover. AutoNation will to focus on our cost structure while continuing to invest in our business. We are confident in our long-term business strategy and our market.

That concludes our remarks, Operator, please open the call to questions.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions). Mr. Rich Kwas with Wachovia, your line is open.

Richard M. Kwas - Wachovia Securities

Hi, good morning, gentlemen.

Michael Maroone

Good morning, Rich

Richard M. Kwas - Wachovia Securities

Michael Maroone, within the new vehicle mix of inventory or I should say the inventory of new vehicles, what is the mix of trucks and cars and how do you feel about your truck position now?

Michael Maroone

Well, the truck inventory right now is, obviously, the bulk of the inventory. It is about 64% versus 36% car, so traditionally, our sales mix was 60% truck and 40% car. Obviously, that has changed. In the most recent quarter, we were 42% truck and 58% so, we are a little bit out of balance right now.

But frankly, we think there are two things that will help us. One is all the manufacturers have significantly curtailed their truck production and secondly, they have increased their incentives that we believe will help us liquidate that inventory. So, we see ourselves as little bit out of balance, but moving in the right direction and the manufacturers are really helping us.

Richard M. Kwas - Wachovia Securities

How long do you think it will take to get that in balance? Is it going to take the rest of this year or could that seep into early ’09?

Michael Maroone

I do not see it seeping into ’09. I think if the aggressive incentives stay in place and we remain disciplined on the purchase side and the manufacturers remained disciplined on the production side, I think we can clear those inventories out by the middle of fall.

Richard M. Kwas - Wachovia Securities

And then parts and service, customers pay up a little bit, margin went down a little bit, what is happening in terms of the mix of business? Are seeing more--you had mentioned that discretionary purchases, discretionary repairs are being put off--anything in particular, other than that, going on?

Michael Maroone

Our overall customer pay traffic was down about 2% in spite of the fact that our revenue was up one, so we think we did a little better job in the selling process. The real issue is a continued decline in warranty. I think our warranty was off about 5.5% so that kind of offset the good job in the customer paid side. But certainly, consumers are more cautious and seem to be putting off some of their maintenance-type spend, which we obviously believe that we will recover in the future.

Richard M. Kwas -Wachovia Securities

How soon do you think that will recover? Do you think that is in the near-term where it kind of bounces back or it could take a little more downsizing?

Michael Maroone

I think it really goes back to what Mike Jackson talked about, which is the stabilization of housing and people just getting an idea of what their houses are worth and getting adjusted to the revised gasoline prices. It is hard to say how long that will take, but certainly it is not a long-term issue.

Richard M. Kwas - Wachovia Securities

Okay and then, finally, Mike Jackson, in terms of Florida and California, are you seeing any bright spots in the market?

Mike Jackson

I would say California went into the downturn first and we see the first signs of stabilization in California. Florida probably went into it six months behind California, so it is still in the downward stage. What we do see, though, in the numbers is that this big disparity between Florida, California and the rest of the country has mitigated dramatically with the rest of the country now having similar situation to Florida and California, with the one bright spot being the great state of Texas.

Richard M. Kwas - Wachovia Securities

Okay, great, thank you so much.

Operator

Thank you. Mr. Rex Henderson with Raymond James and Associates, your line is open.

Rexford Henderson - Raymond James and Associates

Good morning, I wanted to focus a little bit more on the cost-savings initiatives. I wonder if you could kind of--in looking at that, how much of that is a structural change that will survive this cycle and will continue to be a lower cost base going forward and how much of that is a response to this sales cycle and will rebound when sales get better?

Mike Short

Rex, Mike Short, I would characterize most of it as a structural reduction. We are looking at some of it is from optimizing our spending in areas like advertising to find the most effective model and the balance of it is what I would characterize as structural.

Rexford Henderson - Raymond James and Associates

Okay and has the role of the shared service centers increased? Are you accelerating the shift of the function into the shared service centers and out of dealerships?

Mike Short

I would say we are continuing with the shared service center plan that we had put in place. We now have all of our stores converted to a common DMS, Dealer Management System. We are largely through the roll out of what we called base shared service center with all of our stores. And we will continue on from there.

Rexford Henderson, Raymond James and Associates

Okay. Finally, I wanted to shift over to sales a bit. I think, Michael Maroone, you said that the luxury mix had shifted. What components of luxury are off? Are you seeing a decline in as you say in the Mercedes, are you seeing decline in the C, D, and E classes? Or are you seeing the declines in the S and CL classes?

Mike Jackson

This is Mike Jackson. I think it is just part of the normal product cadence, namely the big launches in this product cycle are the C-class for Mercedes Benz and the 1 Series for BMW. Both have lower price points, which I think for the economy that we are in, it is actually quite fortuitous. So usually, the first two to three years of a product launch, sales are very strong and grosses are excellent and it just happens that these are at the lower price point.

That will begin to rebalance with the launch of the 7 Series at the end of ’08 going into ’09. And I think BMW has really nailed the new 7 Series both from a design and innovation point-of-view. So it is very much a function of the product cadence cycle.

Rex Henderson - Raymond James & Associates

Okay, and finally, are you seeing any new car buyers moving down to late models used? Is there any downshift in that market or are you just seeing new car buyers just declining to come to the stores?

Michael Maroone

Rex, its Mike Maroone. You certainly see a shift from new to used and I would say the place you feel it most is in the certified pre-owned business, where we are up 10% in the quarter. We have made a real effort to increase our CPO inventory and to be very conscious of the price point. So there is a value conscious buyer out there that is clearly recognizing that CPO offers a tremendous warranty and even greater reconditioning package and is the right decision for many people.

Rex Henderson - Raymond James & Associates

Okay, one final question, the 5,000 unit reduction in inventory, is that going to come all out of new cars our is that new and used?

Michael Maroone

That is a new car reduction from roughly 57,000 down to 52,000 by the end of the year.

Rex Henderson - Raymond James & Associates

Okay, alright thank you very much.

Operator

Thank you. Mr. John Murphy with Merrill Lynch, your line is open.

John Murphy - Merrill Lynch

Good morning. I apologize, I joined the call late. I just wanted to find out in the onetime expenses of stock comp and the franchise impairments, if that was all based into the SG&A line?

Michael Maroone

We gave some of the geography on that, John. The stock compensation number is in the SG&A. The franchise impairments are down in other incomes.

John Murphy - Merrill Lynch

Okay, then secondly on the cadence of the savings in the first half of the year from the actions you are taking, you highlighted those at 25 million for the first half. Is the bulk of that in the second quarter or was there some that was in the first quarter also?

Michael Maroone

I would say we began the initiatives in the first quarter so there were some in the first quarter but a disproportionate amount in the second quarter.

John Murphy - Merrill Lynch

Okay, then also on the pressure that we’re seeing on new margins which is abated here from the first quarter then the second quarter, is a lot of that because of the mix shift from trucks towards cars? Or is a lot of that coming from just more competitive pricing environment from the dealers in surrounding areas? I am just trying to understand where the pressure is coming from.

Mike Jackson

This is Mike Jackson. I think there are several factors in play. First, you have the very competitive marketplace when you have declines in volume that is always going to put pressure on front-end margin. Second, in premium luxury, the product cadence is toward the lower end, not the higher end. And also, you have the shift form trucks to cars in the volume segment. But what is interesting is all in, when we look at our front-end growth, whether in the past or today, they are equivalent whether we are selling a car or we are selling a truck.

John Murphy - Merrill Lynch

Okay, and then just lastly on the rationalization of your Detroit three exposure, it sounds like you are working away from that to some extent. Are you doing that in partnership with some of the automakers in their efforts to decrease the dealer base or at least the rooftops? Or is that something that you are able to achieve on your own without any help from the automakers?

Michael Maroone

John, it is Mike Maroone. We are working closely with all three of the domestic manufacturers and it is an effort where at times we are a buyer, at times we are a seller. But we really believe that the whole network is over-dealered and we want to participate aggressively. So, we are on both sides of it but working closely with all three of them and have excellent working relationships.

John Murphy - Merrill Lynch

Great, thank you very much.

Operator

Thank you. Mr. Colin Langan with UBS, your line is open.

Colin Langan - UBS

Okay, thank you for taking my question. Could you just comment on your liquidity situation? Are you concerned about any violating approaching some of your debt covenants? And would that impact maybe how you’d use cash going forward in terms of doing more share repurchases or making more acquisitions?

Mike Short

Colin, it is Mike Short. As I mentioned, we have quite a bit of liquidity notionally available under our revolver. When you consider our leverage ratio constraint, we have over $200 million in availability. In terms of how we manage relative to that ratio going forward, I think the business generates very significant cash flow and we have the ability to manage our liquidity situation within by how we deploy that cash flow.

Colin Langan - UBS

Okay, and in terms of the goodwill impairment charge seemed rather small. I know you amended your credit agreement in March to avoid those charges. Why is it not bigger given I thought one of the criteria was for decline in your markets (inaudible 00:28:22)? Can you give me color on sort of how you look at the goodwill charges?

Mike Jackson

There are two pieces to that. First is the overall goodwill piece, which is testing the goodwill at the corporate level. And second is individual franchises, and so the impairment charges you see there is really into two franchises. We tested the goodwill separately and found that that was not impaired.

Colin Langan - UBS

Okay, so the corporate were good as well and were not impaired, okay.

Mike Jackson

Right.

Colin Langan - UBS

Okay, and could you also provide color as to why F&I per unit was flatter down? I mean that usually has been up for as far as I could see. Is there something going on there? Are people being a little more cautious about what options they pick for their vehicle?

Michael Maroone

Colin, it is Michael Maroone. First of all, on a per vehicle retail basis, it is flat. On a revenue basis it is down ten, so the down ten is reflective of the reductions in new and used volume. I would say the flatness where we had been seeing growth was really related to increased charge back from delinquent loans. It is really more than offset by improvement in product penetration.

Colin Langan - UBS

Okay, and then just to clarify, I know you said earlier the margins on cars and trucks are the same. You do mean percent margins, where obviously with the lower transaction price per unit profit is going to be lower?

Unidentified Company Speaker

That was in dollars, do you have it as--

Michael Maroone

That was in dollars per vehicle retail is what we are referring to.

Colin Langan –UBS

So as of--

Michael Maroone

New and used.

Colin Langan - UBS

So the growth margin on it, right?

Michael Maroone

Right.

Colin Langan - UBS

Is actually as percent of it the same on a car?

Michael Maroone

I am talking about the dollars in gross profit per vehicle retail.

Mike Jackson

We will get it for you as a percent.

Colin Langan - UBS

Okay.

Mike Jackson

Give me a ring back. I will have it tomorrow.

Colin Langan - UBS

Okay, and then just one last one. There were some questions about parts and services earlier, and you say it looks like people are delaying their repairs and sort of it sounds like you were thinking of the economy. I mean how long can a person actually physically delay the repair of their car? Because I thought they take a lot of the more major repairs to a dealer. Can they continue to operate a car for a rather long period of time or should we see by Q4 people have to bring them in to (inaudible 00:30:38)?

Mike Jackson

To put it into context, the customers pay business is basically stable, and part of the falling out is that we are not growing it like we normally do. I want to be clear that we are not going backwards when customers pay. Mike?

Michael Maroone

Well the distinction really is on a mechanical breakdown item you certainly cannot defer that but there are discretionary maintenance things that can be deferred for a period of time. We recognize, and consumers recognize, that if you do not maintain your car you are going to have bigger problems down the road. So we do anticipate that business coming back. But certainly all the factors that Mike Jackson called out earlier have put a lot of pressure on consumer discretionary income.

Colin Langan - UBS

Is there a risk that people are taking those to a cheaper alternative? Like some of the more basic types of repairs.

Michael Maroone

I think that segment of the business is highly competitive and I think we are very aggressive in attacking that both from a marketing point-of-view, from a pricing point-of-view, and from a convenience point-of-view. We fight for that business, but I do not think you are seeing a massive shift to another channel. I think it has always been competitive and will continue to be.

Colin Langan - UBS

Okay, alright, thank you very much.

Operator

Thank you. Matt Nemer with Thomas Weisel Partners, your line is open.

Matt Nemer - Thomas Weisel Partners

Good morning everyone.

Michael Maroone

Good morning.

Matt Nemer - Thomas Weisel Partners

So I just want follow up on the gross profit issue between cars and trucks. Is part of that the mix of vehicles that you’re selling? So in other words, if you look at individual franchises like the domestic stores, does that still hold true or is it that when you add in the Mercedes cars that are in your mix it’s driving the car grosses higher?

Mike Jackson

That is an AutoNation mix issue, kind of like one of our strengths.

Matt Nemer - Thomas Weisel Partners

Okay, and then secondly can you talk to the quality of your used vehicle inventory right now? Are the stores taking cars to auction that need to go there or do you think you are still sitting on some heavy depreciation?

Michael Maroone

Matt, it is Michael Maroone. We are extremely disciplined on the used vehicle side. You will see that we did incur a wholesale loss in the quarter which was to liquidate that truck inventory that maybe became out of balance a little bit but we turn our inventory in a very disciplined way. We are constantly reserving for any inventory that might be off the money. And run our used car operations very prudently, use a lot of technology, and keep those inventories on tremendous scrutiny. I am very comfortable with where we are with our used vehicle inventory.

Matt Nemer - Thomas Weisel Partners

Okay, and then switching to parts and service. I know this has been a trend but the warranty decline in this quarter, is there anything in particular in comparison that may have caused such a sharp decline?

Michael Maroone

Mike Maroone, it has been under pressure for quite some time. And it is really a function on imports or across the business of improved quality and certainly some lower sales over the last year or so. But almost every manufacturer has improved their quality and there is nothing really dramatic in the warranty numbers. They are up 5.5%.

Matt Nemer - Thomas Weisel Partners

Is there any evidence that the good consumers that, even though they are not paying the bill, reluctant to bring their car in when it is under warranty for some reason?

Michael Maroone

I do not think we see our warranty traffic declining any different than it has been in the past. I think it is a quality issue, not a reluctance to business issue from a warranty point-of-view.

Matt Nemer - Thomas Weisel Partners

Okay and then on the stores that are potentially up for sale, what is your sense for the value of those. Do you think some of these still have blue sky or will it be minimal? And if that is the case, is there a feedback loop from that back into your goodwill impairment? Or does that really only happen once a year respective of franchise sales in between?

Mike Jackson

This is Mike Jackson. On divestitures, we either fully recover our money in the real estate or make actually a profit on the real estate. But you are absolutely right as far as blue sky or franchise value, particularly on domestic stores. We still get somewhat nominal in this market and Mr. Short, you want to address any?

Mike Short

Yes, I do not see it filtering back in to the goodwill discussion. We do our testing once a year and then between major test periods, we monitor for triggering events but those bar some fundamental change in the business.

Matt Nemer - Thomas Weisel Partners

Got it. Okay, thanks very much.

Operator

Thank you. Mr. Rick Nelson with Stephens, your line is open.

Rick Nelson - Stephens

Thank you and good morning.

Unidentified Company Speaker

Good morning Rick.

Rick Nelson - Stephens

Mike, could you talk about July sales, sort of what you are seeing today? Is there any changes in the momentum relative to what we saw in June?

Mike Jackson

Rick, we have a rule here. We never comment on the current month. I would love to help you there but we have that rule and serves us well.

Rick Nelson - Stephens

I can appreciate that. Can you talk about acquisition multiples on the luxury side? Are there big changes, I know in the domestic side, obviously lots of pressures there, and are we at a point where acquisitions could possibly take precedence over stock buybacks?

Mike Jackson

Rick, we have not seen a change in pricing on premium luxury stores or the import stores that is really necessary to reflect the cycle. And so you sort of have a standoff in my view between buyers and sellers. There is certainly a backlog of sellers who are standing firm on the price and what is going to happen, I cannot predict. But we have not seen a change in pricing from the sellers that make it interesting.

Rick Nelson - Stephens

Are you seeing an acceleration in store closings among competitors?

Mike Jackson

Yes, on the domestic side, absolutely. And as I said earlier, we have a core group of domestic stores that are great locations with high throughput franchises that as painful as the current environment will be long-term, we will be served well by the shakeout that is going on now.

Rick Nelson - Stephens

Thank you, Mike, my other questions have been asked.

Mike Jackson

Thank you, Rick.

Operator

Thank you. Mr. Rod Leche with Deutsche Bank, your line is now open.

Dan Gallatin - Deutsche Bank

Good morning this is actually Dan Gallatin (ph 00:37:34) for Rob. How are you? I was wondering if progression through the quarter, it terms of June, it appeared that new sales were way off on the industry in June even compared to May. Did you see a corresponding strengthening in used at or was volume off across all the lines?

Mike Jackson

I think your characterization is right. And decades from now when I hang up my shoes from doing this stuff I still will never forget this quarter. We actually began the quarter with a sense that the consumer was somewhat adjusting to dealing with the housing and the credit crisis and all of a sudden the price of gasoline spiked at $4.00 a gallon and the consumer was absolutely shocked. And from one day to the next we had a dramatic impact both on volume and the type of vehicle that a consumer would buy. So it was six weeks of fairly respectable business and six weeks of tumultuous situation.

And so that is what we have had to dealt with. And my view is, all things considered, I absolutely congratulate Mr. Maroone and his team in dealing with a sea change to still be able to deliver solid profitability was quite an accomplishment. And to Mr. Short for continually leading the charge on our cost-effectiveness that is going to see us through this tumultuous period.

Dan Gallatin - Deutsche Bank

I agree, yes, but so used was just as weak in June as new?

Mike Jackson

Yes, in used, we had to deal with the rapid change in value with the values of cars going up and the value of trucks going down and to be on top of that every day managing that was quite something.

Dan Gallatin - Deutsche Bank

And again on the warranty side, I thought that the warranty decreases had been mitigating somewhat. Did the comps get easier in the second half?

Michael Maroone

It is Mike Maroone. The warranty declines have been relatively consistent. They do vary a little bit from period to period, but I do think we are not going to be running at a 5 or 6% pace going forward, but I do not see it as a growth opportunity for us.

Dan Gallatin - Deutsche Bank

Okay, and then finally you talked about getting to a 20% domestic percentage of the business. Is that on a franchise basis or on a revenue basis? And when do you think you can get there?

Mike Jackson

That is on a new car revenue basis and that will evolve over the next couple of years.

Dan Gallatin - Deutsche Bank

Okay, thank you very much.

Mike Jackson

Thank you for your time today, very much appreciated and thank you for calling in.

Operator

Thank you. That concludes today’s conference call. You may disconnect at this time.

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Source: AutoNation, Inc Q2 2008 Earnings Call Transcript
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