The Wal-Mart of auto sales? AutoNation's Mike Jackson has big plans for the car retailer

Chief Executive, The, July, 2004 by Herbert Shuldiner

Industry analysts foresee a strong future for AutoNation. Merrill Lynch recently rated AutoNation as a buy, with a target price of $20.50. It said the company has a "sustainable EPS growth rate at about 10 percent, driven by modest organic growth and aggressive buybacks." Stephen Girsky of Morgan Stanley, one of the nation's top auto analysts, describes AutoNation's business model as very attractive. Jackson, he says, has made it even more attractive by taking the best practices from around the country and incorporating them into every AutoNation dealership. Girsky also applauds Jackson's focus on profitability rather than growth for growth's sake. "I like the fact that he's very disciplined," he says.

Girsky notes that AutoNation got very big very fast and that Jackson wisely calmed things down. Jackson did a better job of cutting costs than did other major auto retailing consolidators such as United Auto Group and Lithia, Girsky says. "He can potentially cut costs further, but he can't costcut to prosperity forever," the analyst says. For instance, AutoNation can't buy cars any cheaper than it already does. "He needs to buy more dealerships if he wants to grow," Girsky says.

But Jackson says he won't participate in a buying frenzy such as the one that took place in the mid-'90s gold rush, when consolidators were paying an astonishing six to seven times earnings per share. Prices for independent dealerships were one to two times earnings per share. "It was important for us to step out of the [acquisition] market until the irrational period ended," he says. The going price for independent dealerships is three to five times earnings per share today.

Putting acquisitions on the back burner enabled Jackson to concentrate on cutting costs. "There has been a 500-basis-point improvement in cost reduction since I started here," Jackson says. That amounts to $150 million per year in savings. An example of AutoNation's integration strategy is what the company did with its South Florida dealers. They used to have 30 accounting departments that served those dealerships. Now all of that accounting is done at one center, at a Dodge dealership in Pembroke Pines. "We're talking about 30 dealerships that are now one as far as accounting business and technology are concerned," Jackson says.

His goal is to bring the benefits of big-box technology to automotive retailing. "It will take us years to get to the level of Wal-Mart and Home Depot," Jackson acknowledges, but "ultimately, it will be a benefit for the entire car dealer industry." The easy work is over, he says, looking ahead to potential cost savings in other areas such as inventory management.

Tracking Every Customer

Low interest rates and generous inventory allowances from automakers now enable AutoNation to keep a relatively high stock of vehicles. The company's Web site recently reported that AutoNation had about 110,000 cars in inventory. "But we have the automakers carry all of our inventory risks," says John Zimmerman, director of investor relations. He says that when inventories get too high, AutoNation stops ordering.