My Interview with AutoNation’s CEO Mike Jackson: Pt.1

Here is part one of my interview with AutoNation (AN) CEO mike Jackson

Todd Sullivan: Wilbur Ross said recently he didn’t see current pressures on the US consumer ebbing until the end of next year, how do you feel about that?

Mike Jackson: You know it’s hard to say when exactly pressures are going to ease but sometime into 09, certainly no time into 08. The key thing we are watching for is stabilization in housing and we need the price of housing to stop going to down, that would be the first sign of stabilization and that will begin to give the consumer some sense of confidence about their situation. We see some of that in California already because California was the first state that went into the downward spiral and other states came much later. So yes, it’s probably sometime in 09.

Todd Sullivan: The Kiplinger Report estimates that about 1,200 dealerships across the US are going to close this year, mostly domestic brands, do you see that as an accurate assessment or do you see more than the 1,200?

Mike Jackson: I think it could well be more as we’ve hit a tipping point on sustainability. It’s not just going to be small ones, its going to be big ones also. The retail distribution system was never rationalized and the domestic share moved from 70% to 50%, if you look at the number of dealerships that came out that period of time was very minor vs what was done in the manufacturing side and the white collar side. With any decline in industry value with that overcapacity situation, you’ve hit an inflection point that is going to lead to a rapid decline in the number of dealerships out there, particularly domestic.

The situation was sustained with a bond of loyalty that went just beyond just economics with a resilient business model. But that bond has been broken and the business model cannot handle these types of declines with that type of overcapacity. I think its hit an inflection point and you’re going to see massive amounts of automotive real estate be converted over to other business uses. Families that have been in the business 40, 50, 60, and 70 years are going to say “this is it and I’ve had enough, I’m getting out”.

Todd Sullivan: So by default you will be increasing your market share as these close, and it also means there will be properties perhaps on the market at extremely attractive prices. Is the thought process to perhaps grow market share through the acquisition of some of these cheaper properties or to let them go and just let your market share grow through attrition?

Mike Jackson: Yes, we are going to let it grow through attrition. We’ve tried to pre-position our locations to be the best in the market, to be the ones that have great locations and should survive the shakeout, as you say, stronger than when we went into it. But in the mist of it, it’s a very disruptive and difficult environment to do business in, I won’t mislead you on that. We feel we are well positioned and this is something that had to happen, needs to happen, and we should be in a better position when it’s all set and done.

Todd Sullivan: You said recently that you’re going to decrease your exposure to domestic brands (GM (GM), Ford (F)), I think it’s a 29% now to about 20%. Is that mostly going to be done simply because people aren’t buying domestic brands or are you going to divest some of those domestic brands or change them over?

Mike Jackson: It’s definitely a combination Todd. Us divesting a few more marginal stores we have in domestic, and an acceleration in the share shift that is happening for the entire industry from the domestics over to the imports. It’s a combination of our divestiture / acquisition strategy with what’s happening already in the market place.

Todd Sullivan: So in which direction, clearly you won’t be adding domestic dealerships, so which direction do you see yourself going? Would it be more of a Honda / Toyota or a BMW / Mercedes direction? I think BMW (BMW) just actually reported a sales increase earlier this morning (Friday).

Mike Jackson: We really like premium luxury, we’ve bought a lot of BMW/Mercedes stores over the past five years and are definitely on the lookout to acquire more. Whether we will find one at attractive pricing is another story entirely. We like Nissan (NSANY), Toyota (TM) and Honda (HMC). We basically like the thru-put brands in the metro-urban market, we run a high thru-put model to the greatest extent possible. So that’s what we would be looking for. Again, whether we acquire them or not, depends on the pricing. But we have a pretty good position already, we have 10% of the Mercedes market, so that’s a significant position.

Todd Sullivan: You recently announced a cost reduction plan of a $100 million dollars a year and I believe you are halfway there. How confident are you in delivering the extra $50 million throughout the rest of the year?

Mike Jackson: If I wasn’t more that 100% confident I wouldn’t have announced it

Todd Sullivan: Very nice.

Mike Jackson: Well, that’s why it took me six months to announce it. I mean we basically had an internal goal going into ’08. Doing it though, you know to where it didn’t damage the company long term required a lot of effort and a lot of skill. You have to be extremely thoughtful and you may run into some situations you hadn’t anticipated, that means you can’t hit the target. So we are past that point. We got the hard part done.

Todd Sullivan: When you look at the environment right now, there are some real dichotomies out there. You have automakers saying that they are seeing signs of a bottom and that the worst might be over, but you have analysts out there who are lowering some price targets and say from the next 6-8 months things are going to be bad for the auto dealers, like you. There seems to like this contradiction of thought in regards to outlook. What do you say to someone who is an investor with a 2-3 year time frame, who is looking at these 2 areas and is saying I don’t know what I should do? My personal thought is now is when you buy, but there are a lot of people who are unsure.

Mike Jackson: Well, if you look at our performance year to date, we really hit the trifecta as far as cross currents. The housing crisis which we called out years ago as soon as it started and that it would have implications for our industry. We called that out in ’05 and that then rolled into a credit crisis which started again in housing but now has definitely spread to other businesses and to having effects on the marginal buyer not being able to buy an automobile, so that’s affecting volume. We had a spike in May up to $4.00 a gallon for gasoline and we are dealing with a geographic development in Florida and California, being the two worst states.

So just about everything that can go wrong has gone wrong as far as headwinds and yet we are solidly in the black. We are extremely profitable, not what it was before but you have to consider the headwind. At the same time, we’ve clearly continued to invest in the business as far as profit, technology and cost point of view. We clearly stated with these cost savings that there will be a permanent benefit to a certain percentage of it. So ultimately when the mark occurred, we will have achieved our goal which was to come out of the downturn stronger than we went into it both from a market-share point of view and from a capability point of view. I think the records pretty clear that we are achieving that.

Now, what I can’t tell you, I can’t call the exact moment that the market will turn, and I think I have a different definition than what you described Todd. To me when the business stops going down, not necessarily that it’s going back up, but just stops going down, it’s a much better operating environment for us. Where the market is declining, like the types of declines we saw from May into the 3rd quarter, that is really difficult to manage because all kinds of issue come after you. For example, what your doing with your inventory to the standing levels in the store and you really are operating the business with tremendous intensity everyday. As soon as the business stops going down, your in a very different operating mode and your positioning yourself for recovery and how long we will be in that period where we stop going down and what I can predict. But if it stops going down that’s already quite something.

Pt 2 Tomorrow.

Disclosure (“none” means no position):Long AN, None
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