I mean, it been a few days since he bought some.
Sears (SHLD) Chairman Eddie Lampert bought another 44k shares of AutoZone (AZO) at between $103 and $104 a share. He now has 23.4m shares.
How long before AutoZone, Sears and AutoNation (AN) tie up? Lampert either own over 50% or is just about there in all three.
Disclosure (“none” means no position):Long SHLD, AN, none
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We are underway is a vicious shakeout. Who survives, will be far stronger in the end.
A recent study by consulting firm Grant Thornton showed that for average dealer sales to match last year’s average, about 2,000 dealers need to close. With sales imploding, the firm has raised the number to 3,800. About 600 of the 2000 new car dealership in the US have closed to this point. In September alone, that number was 61.
Paul Melville, a partner at Grant Thornton, says they “badly need retail consolidation” to have healthy dealers. “Significant consolidation is necessary, especially among Ford (F), General Motors (GM) and Chrysler retailers,” he says, “because U.S. sales already have declined more than 1 million units this year.”
The domestic automakers want their dealer numbers to be more like those of Toyota (TM) or Honda (HMC). Toyota has fewer than 2,000 U.S. dealers while Ford has almost 4,000. That means your typical Toyota dealer sold 1,628 vehicles in 2007 while Ford stores averaged 236. GM dealers averaged 202. The average for all new car dealers was 322.
Domestic manufacturers want their store counts and revenue counts to look like Toyota and Honda, because many less dealerships means selling more per dealership.
“The business model of huge, irrational inventories and huge, irrational marketing budgets with razor-thin margins, à la the Bill Heard model, is obsolete,” says Mike Jackson, CEO of AutoNation (AN), the USA’s largest chain of dealerships. “It’s dead. It will not survive this downturn.” Bill Heard, which sold over 7% of Chevy’s nationwide recently closed.
Jackson says the future of car sales — coming soon — will be fewer dealerships having less need to wheel and deal. They can hold the line on price, pumping up the profit per car, and focus on customer service.
“At the dealer level, a shakeout needed to happen,” he says. “It will be painful. It will be ugly. But it is also long overdue.”
This would explain why Berkshire’s (BRK.A) Warren Buffett and Sears (SHLD) Eddie Lampert are buying shares of both AutoNation and CarMax (KMX). It is clear both will be left standing after the shakeout is over and both will have substantially increased market share through the attrition of rival dealers.
In my interview with AutoNation’s Jackson recently he said he was content to sit back and watch the industry shakeout happen as it “was necessary”.
When will things begin to turn? Clearly late 2009, perhaps into 2010 for the industry as a whole. But, as Jackson also said, when it happens there will be “significant postponed demand for autos”. What that means is that fewer dealers will be selling cars for higher profit to a surge of car buyers.
That means Jackson and his shareholders stand to profit handsomely.
Disclosure (“none” means no position):Long AN, none
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AutoNation’s (AN) Mike Jackson did the following interview yesterday on PBS
JEFF YASTINE: Earlier today, I spoke with Michael Jackson, CEO of AutoNation, the largest chain of auto dealerships in the country. I began by asking him how soon his business will feel the impact of the plan and when his customers will be able to get loans.
MICHAEL JACKSON, CEO, AUTONATION: As far as I`m concerned, the sooner the better, but it is going to be tough to predict exactly when it is going to happen. The banks have been saying no, looking for every excuse to say no, and they`re saying no to good costumers with good credit, with business that is very good for them. So clearly the banks are out of money to lend, and hopefully with the Treasury`s initiatives here, they can be back in business as soon as possible.
YASTINE: Now you`re the nation`s largest auto retailer, how bad is business, really?
JACKSON: Well, you know, it is a difficult economy to begin with. We`ve been struggling with it for the past two years, and we had the gasoline crisis in May, and by August, our business had stabilized from that. But then the credit squeeze turned into a credit crisis and a credit panic in the month of September, and it has impacted business by another 10 to 15 percent.
YASTINE: Do you think this bailout is enough boost consumer confidence, and restore trust in the financial system again?
JACKSON: It was — it is an absolute essential step on the journey back. Without it, there is no chance. But with this, I think that you`ll gradually rebuild trust and confidence, both with the banks and customers, and at least we can get the credit panic behind us. But we still, then, have to deal with the fundamentals of a weak economy, which are going to take more time to get through.
YASTINE: What are you telling your dealers at a time like this?
JACKSON: Just keep the visibility, and tell everybody it is not them, it is the environment. And we will get through this. We`re still solidly in the black and we`ll manage through this.
YASTINE: You know, one of the big Chevy dealers in the Southeast went under, went bankrupt last week. Will you be forced to close dealerships in a similar fashion, closing them in this environment?
JACKSON: Well, our business model is very different than what is happening — what happened to that Chevy dealer and some of our other competitors. They ran a business model of huge inventories with huge marketing budgets, high pressure tactics with razor thin margins. And that business model, with overcapacity and a dramatic decline in the business simply will not work.
YASTINE: You know, Mike, do you think we`re actually in a recession, and if so, the crystal ball question, of course, how long will it last?
JACKSON: I think the third quarter will show negative growth, and that`s even before the credit crisis and the credit panic really took off at the end of the quarter. So the economy is in serious trouble. What you cannot have, though, is a weak economy combined with a credit crisis/credit panic. You know, you have to go back to 1900 or 1930 to find similar circumstances. But when business is already weak and credit availability dries up, and by the way, the other shoe to drop will be that interest costs actually go up. If you look at the spread rates on LIBOR, because of the credit crisis, they`ve expanded by 200 basis points. So that`s a toxic combination that simply cannot exist for long or you do tremendous damage to the economy. Thank goodness Congress has acted and given the resources to Mr. Bernanke and Mr. Paulson, who are fighting this battle for our economy. And hopefully they take these new resources and apply them effectively to the market place and we can get things moving again as soon as possible.
YASTINE: Mike, thanks for your time on the program.
JACKSON: Thank you. My pleasure.
YASTINE: Our guest, Michael Jackson, CEO of AutoNation.
Original Post
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AutoNation’s (AN) Mike Jackson gives some real world examples of the current credit situation. It’s not good…
Watch this, he is talking about 3,000 MORE dealerships closing in 2008-2009. AutoNation will pick up huge market share through this process.
My interview with Mike Jackson
Disclosure (“none” means no position):Long AN
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There is a backlog of buyers waiting to buy cars.
Disclosure (“none” means no position):Long AN
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Just days after Bill Heard announced the closing of 13 Central Florida dealerships, today comes news more are closing.
Courtesy Pontiac Buick GMC in Longwood, Fla. is closing its doors, a spokesman for the dealership’s owner said Thursday.
The spokesman said that it is part of a strategy to reduce the number of dealers of these auto lines and not because of economic problems for the company. Since Auto Nation (AN) has other locations and other dealers sell similar cars and trucks, the Longwood dealerhship needed to close because of a shrinking market. It is the only Courtesy dealership closing.
Here is a video on the Bill Heard closing:
AutoNation is capturing market share without spending a single penny to do so. This is precisely the scenario Auto/nation CEO Mike Jackson predicted in my interview with him.
When things turn, Jackson may just be the last guy standing selling cars to people..
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Here is a video interview with AutoNation CEO Mike Jackson at the opening of an AutoNation BMW dealership in Las Vegas. AutoNation sells 10% of all Mercedes and 5% of all BMW’s (BMW) in the US.
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Remember my interview with AutoNation CEO mike Jackson? His words today seem prophetic..
Here was the exchange:
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”.
Full Interview
Today this news:
Bill Heard Enterprises, the country’s top Chevrolet dealer group, is closing the doors at all of its 13 dealerships at the end of business today, according to a person with knowledge of the situation.
Bill Heard Enterprises, of Columbus, Ga., ranks No. 13 on the Automotive News list of the top 125 U.S. dealership groups, with 2007 group revenue of $2.13 billion.
AutoNation is going to pick up market share “through attrition” as Jackson said in the interview. As the things Jackson said in the interview begin to come to fruition, one has to also look at what he said about his own company.
“Significant postponed demand” were the three words that stick with me. Cars are still aging and still need to be replaced. When the current credit condition ends, and it will, Jackson and AutoNation will be in the pre-eminent position to caputre that “postponed demand”.
Got to give it to the guy, he really called this one…
Disclosure (“none” means no position):Long AN
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Let’s look at this because it really is……well…..odd at best/
First the details:
Standard & Poor’s put AutoNation (AN) on credit watch, citing the U.S. economy and falling auto sales. AutoNation ranks No. 1 on the Automotive News list of top 125 U.S. dealership groups selling over 325,000 new vehicles last year.
Currently AutoNation has a BBB- investment grade from S&P, one step above a junk. The credit watch status, issued Friday by New York analyst Nancy Messer, reflects “conditions that could pressure already weak credit measures well into 2009” and “increased uncertainty” about the length of the auto industry’s downturn and U.S. economic woes.
AutoNation’s corporate credit rating dropped to BBB- in April 2006. S&P changed the company’s outlook last November , from “stable” to “negative,” which indicates a one in three chance S&P will lower the credit rating in the future and the decision to put the company on “credit watch” indicates a 50-50 chance S&P will decrease the credit rating after credit rating officials meet with AutoNation executives in the next 90 days to discuss financial plans.
As of June 30, AutoNation had total balance sheet debt of $1.5 billion, not including floorplan debt, the memo said. In the second quarter of 2008, AutoNation reported the number of new vehicles sold in individual dealerships dropped 12.8 percent from the same quarter in 2007, to 73,545 units.
Now, let’s look sat it. AutoNation has, by far, the industry’s nest numbers and is solidly profitable. Sure profits has deteriorated (they would be expected to) but this company is by no means at risk of losing money.
This is in the face large dealerships across the country closing their doors, which, will increase AutoNations markets share. In the face of this they are opening Mercedes dealerships in Las Vegas, Orlando and a BMW dealership in_______.
Why wasn’t this action done in May? In May CEO Mike Jackson said the auto industry had been “turned upside down” by both high gas and contracting credit conditions, yet S&P was silent.
Now, for the first time in over a year we have some clarity out there that credit conditions may begin to relax as a result of the Treasury’s plan.
What is the worst happens? What if the S&P does take action and downgrade AutoNation to junk? Does it effect any debt covenants that could cause a liquidity issue? No. None of AutoNation’s debt covenants are tied to their debt rating.
Wouldn’t it have made more sense for S&P to have taken this action in May, and now that their is a bit of clarity in credit conditions (In May there was absolutely none) upgrade them from “negative” to “stable”? It seems that S$P is about 6 months behind the curve here. Although, if you have been alive the last year, this ought not be a surprise to anyone.
The bottom line here is the credit agencies are scrambling. They are publicly taking a fair amount of the blame for the current situation were are in and are now going into full “CYA” mode. Rather than looking at company’s individually, they are just painting entire industries with the same brush. This action follows similar ones at Ford(F) and GM(GM) and an expected one at Toyota (TM). This is a bit like saying Wells Fargo (WFC) and Washington Mutual (WM) are in the same boat. They clearly aren’t. If on looks at Berkshire (BRK.a) Buffett investment #2 CarMax’s (KMX) recent results, AutoNation’s are still superior.
Aren’t we talking about “risk of default” with the ratings anyway? How can they say a company like AutoNation is at a higher risk of default now? The company is very profitable and very cash flow positive. It is without question the cream of the crop in its industry. Think about it this way. If the #1 retailer is at risk of being “junk” then every automaker and every other retailer ought to already be. You can’t have #1 rated below those who trail it.
Disclosure (“none” means no position):Long AN, none
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So, all last year CNBC has been running stories about Sears Holdings (SHLD) Chairman Eddie Lampert and saying he has “lost it”, or word to that effect. Yet, AutoZone (AZO), which Lampert will soon own about 50% of is trading just off an all-time high. The silence from the boob tube is deafening.
AutoZone, which is the largest U.S. auto-parts retailer, reported a 12.2% rise in quarterly profit on Monday.
Net income rose to $243.7 million, or $3.88 per share, in its fiscal fourth quarter that ended August 30, from $217.2 million, or $3.23 per share, a year earlier. Net sales increased 10.4 percent to $2.2 billion and same-store sales, rose 0.6 percent in the quarter.
Now, I still say that something is in the cards for AutoZone (AZO), AutoNation (AN) and Sears Auto. Lampert has controlling stakes in all of them and has friendly Boards to deal with.
Maybe not now, but there are just too many things pointing to it to ignore.
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What would a rate cut solve?
The Federal Reserve will cut its target overnight borrowing rate by a half percentage point to 1.50% at its meeting tomorrow, said Merrill Lynch economists David Rosenberg and Drew Matus in a note Monday. “In the current environment, the Fed may feel the need to get in front of the situation with a more aggressive move” instead of the standard quarter-point reduction, they said. Merrill (MER 19.30), one of the 19 primary security dealers that trade directly with the New York Fed, was bought by another dealer, Bank of America (BAC) overnight. “Recent events suggest a large deleveraging of the banking system is picking up steam and suggests the risks to the economy are entirely concentrated in the growth outlook,” Rosenberg and Matus said. Merrill analysts had previously expected the Fed to reduce rates in the first quarter as inflation subsided. “Inflation concerns will take a backseat, or move to the trunk,” they said. The Fed may also remind markets that the discount window and other liquidity facilities are available.
The problem out there is not the cost of credit (rates) but the availability of it. Bernanke could lower rates to 1% and it would not matter in any way other than causing inflation to spike and the dollar to fall.
In my recent interview with AutoNation (AN) CEO Mike Jackson he comment that “Fed rate cuts are not working like they have in the past”. Jackson said that is isn’t a question of the rate at which banks will lend at, it is a matter of them holding on to their liquidity (cash) and just not lending it at all. Typically lower rates spur demand for lending from consumers and businesses. There is plenty of demand for loans out there, banks are just not parting with the money they have.
Lower rates are insignificant here…
The only thing a rate cut would do is give a mental boost to the markets for a day. Then reason sets in and people realize the only thing another rate cut will accomplish is inflate prices, depress the dollar, and allow American’s to once again watch the price or oil rise going into winter.
There are times that the best things to do is nothing…this is one of those times.
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So, if Bear Sterns (BSC) is gone and Lehman (LEH) appears to be next, doesn’t that make Goldman Sachs (GS), Merrill Lynch (MER) and Morgan Stanley (MS) stronger in the end?
As regional banks fail and it looks like either Wachovia (WB) or Washington Mutual (WM) or both may also, doesn’t that make JP Morgan (JPM), Wells Fargo (WFC) and Citigroup (C) that much stronger after the carnage ends (it will)?
In my recent interview with AutoNation (AN) CEO Mike Jackson, we spoke of this very scenario. He said scores of auto dealerships in the US will disappear this year. I asked him if he would try to acquire these then very cheap properties or just let his market share grow through attrition. He simply stated “we will let it grow through attrition”.
In any business as competitors fall by the wayside, those left standing are left in a superior position than they were before the events that lead to the fallout began. Jackson said that there is “significant postponed purchases” of autos out there and once the credit environment resolves itself, those people will return. Because his company will be one of the ones left standing, more of that hoard will be buying from him.
The same holds true with investment banks and depository banks. The number of deals that will get done over time will grow and the numbers of services people will want from banks will also. The main beneficiary of the current malaise is those who are left standing as the increasing demand for those services is met with fewer options.
Now, the “when” is debatable, but not the “if”. This is the natural “cleansing of capitalism”. Those who took disproportionate risk and had seriously flawed business models face a day of reckoning as their flaws are exposed by the system. As those businesses are weeded out, those left with durable models survive and prosper.
Financials may very well get crushed again today, if Goldman goes below the $150’s or Wells Fargo dips below $30, it will be hard not to nibble at them again….
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Here is the complete transcript
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.
Todd Sullivan: Have you seen the rate of decline dropping substantially?
Mike Jackson: Let me put it in industry terms, there are a lot of people that are talking about the SAR in August is better than the SAR in July. That’s not enough for me. One month to me doesn’t mean much. I think it takes a couple months to really say supply stocks are going down.
Todd Sullivan: Are you seeing a situation where you have willing buyers walk through the door, but now because of credit conditions can’t get financing for cars?
Mike Jackson: Here is how I would describe it. First we have willing buyers walking through the door with no credit issues who say I’m going to wait, I think I can get it better price down the road. They think some bigger incentive is coming down the road because things are so bad, so they are sitting on the sidelines. Next you have those willing buyers coming through the door who we simply cannot get finances. It’s a combination that their credit position has deteriorated and the credit standards have gone up and in certain segments such as subprime its really difficult to find lending sources. For a committed customer as well as for certain brands you now have to veer them to another store because we can’t offer them an interesting lease offer, so there is no question that credit crisis is impacting buying. By the way that’s not just for us, that’s for housing, that’s for commercial real estate, I talk to my friends all the time and they have projects that are 50,60,70 percent pre-leased, they can’t get the projects funded where you used to be able to get them funded with nothing down.
The pendulum of this swung to far in the other direction and even though we had the rate cuts from the Federal Reserve they are not working like normal because the restriction of credit, it’s not really the cost of money, you can’t get the money. So this combination of this protracted housing situation and credit crisis and the cherry on top it gasoline has brought about the current circumstances that we are in. So it really is the combination that is dragging out what is basically a domestic recession. People say well, GDP grew 3.3%. Well you take out export and its good to have the export and they do support employment and everything, but if you really look at the domestic economy its in a protracted recession and the reason it’s not recovering as fast as everyone would like is the exact issue you’ve touched on Todd, the availability of the credit independent of the price.
Todd Sullivan: Alright, so if we go with that, then you’ve seen a dramatic drop off in demand because of other conditions, now you have willing buyers who are on the sidelines because they think they are going to get a better price and then you have people who want to buy but can’t because of credit. When all that shakes out like it always does, it just depends on when, then on the upside, one would expect a surge of demand, correct?
Mike Jackson: Yes, I would describe it like this. I felt in ’05 and ’06 the incentives were holding sales above trend and that we were pulling business forward and now we are in a period where sales are clearly below trend. I agree with you, when the recovery comes, depending which problem gets solved to which degree there is a substantial postponed purchases and those customers will come back into the marketplace.
Todd Sullivan: So #1 issue, what would you say it is, a lot is said about gas prices……
Mike Jackson: This is how it breaks down. Housing is 75% of the volume issue. Housing has created the credit crisis, when the housing crisis stabilizes and the banks know what all their mortgages are worth, that is going to lead to a stabilization of credit. That needs to come next. Gasoline is, if you look at it as a percentage of household income combined with all these other issues, is the last straw. But it gets a tremendous amount discussion and emotion and certainly when $4.00 gasoline is combined with the first two and in May, you had a breaking point, a structural shift in the mind set of consumers.
Now I would maintain that would if we did not have a housing crisis or if it didn’t have a credit crisis and we just got $4.00 of gasoline, what happened in May would have not happened. We would have had a lot of conversation and a lot of screaming and shouting, which we would have had the stampede to efficiency that occurred. So now the question is, as all that unwinds, how does it play back and the one that we are watching is housing. It’s nice to get the relief on the gasoline prices. I welcomed it considering everything the American consumer is dealing with but at the moment, the key issues would be housing.
Todd Sullivan: You said earlier you’re heading towards the luxury brand, BMW (BMW)/ Mercedes and then Honda (HMC)/Toyota (TM) you like also, is that because BMW/Mercedes brands are most profitable or they are most resistant to the situations we are seeing now?
Mike Jackson: All the above. First, the cars are extremely complex and require extraordinary technical skill to maintain and repair. They have owners who very much care about their vehicle and always want it in top performing condition. So the service and parts business is phenomenal. We brought over 100% fixed coverage in our premium luxury business, which is really marvelous place to be. Second, BMW/Mercedes are a juggernaut on the product innovation side. They really always have something new and exciting coming, so there is always something interesting to talk about. Finally when the market does get difficult, the last segment to go is premium luxury and you put it all that together and it’s a very attractive business.
Todd Sullivan: Do you see yourself going below the 20% of revenue in domestic brands? If people don’t buy them, then you may go below it out of your control, but do you see an intentional shift as you look at the landscape saying you know what, there is not much on the horizon coming out of Detroit for next couple years, should we shift more towards the other brand?
Mike Jackson: The way I think about is this way. I said some years ago that we were headed towards 30% and everybody asked me so what happens when you get to 30% and I said “ask me when we get there”. So now we are headed to 20% and we will probably get there in the next two, three years, and I would say okay call me back and ask me and I will give you the answer. There is a scenario where the domestic situation stabilizes depending on how much of a shake that there is and then it becomes an interesting enough business and we really like the 20% we have. Or, the position could deteriorate further and stores today that we are very happy with could become marginal and then we have to re-look at it.
So it could go either way. What I don’t see though, is that in two or three you would ask me that question I would say to you, you know what Todd, I think we are going to be in 25% or 30% in the next 2-3 years after that. So that I can rule out. I think there is a very good chance we will like the 20% we have, its profitable, or there is a chance of saying well the things developed we have to take another look at it.
Todd Sullivan: How hard or difficult is it when you say you have an existing Chevy or Ford (F) dealership, the physical building with salespeople and management is it possible to say, you know what I’m going to make a Toyota dealership, is there something that’s done?
Mike Jackson: Reallocating real estate is one of the things going on within this move and we are reallocating big domestic sites, moving imports along, and putting the domestics in a smaller site. We are reallocating capital and we are reallocation real estate that we already own towards imports and away from domestics. Within that whole journey is the 20%, which is a very efficient thing to do rather than having to meet the capital demand of the import to for more space in larger facilities and have to do projects from scratch. We already own the real estate and control the real estate in the market, and we simply reallocate it. That’s one of the major reasons why we like owning the real estate. It gives us the flexibility within our footprint to shift things around. Whereas you signed up on these leases, you have to go back to the landlords and negotiate change of use and change of franchise.
You can imagine the landlord, your going to and say, hey listen I have a great deal for you, I’m taking Toyota off this site and I’m putting a GMC dealership and I need your approval to do this. That’s not a fun conversation. Whereas if you own the real estate, like Bernie and I say, that’s what we should do.
Todd Sullivan: What time frame does that happen? If you made the decision today that GMC Buick (GM) dealership in Florida your going to change it to Toyota (TM) , it could take a year, six months?
Mike Jackson: It could take six months to a year. It still needs manufacturer approval, there’s always tweaking involved with the site, signage and all that stuff, but we’ve been doing this for several years too.
Disclosure (“none” means no position):Long AN, none
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Please read Part One of AutoNation (AN) CEO Mike Jackson’s interview first.
Todd Sullivan: Have you seen the rate of decline dropping substantially?
Mike Jackson: Let me put it in industry terms, there are a lot of people that are talking about the SAR in August is better than the SAR in July. That’s not enough for me. One month to me doesn’t mean much. I think it takes a couple months to really say supply stocks are going down.
Todd Sullivan: Are you seeing a situation where you have willing buyers walk through the door, but now because of credit conditions can’t get financing for cars?
Mike Jackson: Here is how I would describe it. First we have willing buyers walking through the door with no credit issues who say I’m going to wait, I think I can get it better price down the road. They think some bigger incentive is coming down the road because things are so bad, so they are sitting on the sidelines. Next you have those willing buyers coming through the door who we simply cannot get finances. It’s a combination that their credit position has deteriorated and the credit standards have gone up and in certain segments such as subprime its really difficult to find lending sources. For a committed customer as well as for certain brands you now have to veer them to another store because we can’t offer them an interesting lease offer, so there is no question that credit crisis is impacting buying. By the way that’s not just for us, that’s for housing, that’s for commercial real estate, I talk to my friends all the time and they have projects that are 50,60,70 percent pre-leased, they can’t get the projects funded where you used to be able to get them funded with nothing down.
The pendulum of this swung to far in the other direction and even though we had the rate cuts from the Federal Reserve they are not working like normal because the restriction of credit, it’s not really the cost of money, you can’t get the money. So this combination of this protracted housing situation and credit crisis and the cherry on top it gasoline has brought about the current circumstances that we are in. So it really is the combination that is dragging out what is basically a domestic recession. People say well, GDP grew 3.3%. Well you take out export and its good to have the export and they do support employment and everything, but if you really look at the domestic economy its in a protracted recession and the reason it’s not recovering as fast as everyone would like is the exact issue you’ve touched on Todd, the availability of the credit independent of the price.
Todd Sullivan: Alright, so if we go with that, then you’ve seen a dramatic drop off in demand because of other conditions, now you have willing buyers who are on the sidelines because they think they are going to get a better price and then you have people who want to buy but can’t because of credit. When all that shakes out like it always does, it just depends on when, then on the upside, one would expect a surge of demand, correct?
Mike Jackson: Yes, I would describe it like this. I felt in ’05 and ’06 the incentives were holding sales above trend and that we were pulling business forward and now we are in a period where sales are clearly below trend. I agree with you, when the recovery comes, depending which problem gets solved to which degree there is a substantial postponed purchases and those customers will come back into the marketplace.
Todd Sullivan: So #1 issue, what would you say it is, a lot is said about gas prices……
Mike Jackson: This is how it breaks down. Housing is 75% of the volume issue. Housing has created the credit crisis, when the housing crisis stabilizes and the banks know what all their mortgages are worth, that is going to lead to a stabilization of credit. That needs to come next. Gasoline is, if you look at it as a percentage of household income combined with all these other issues, is the last straw. But it gets a tremendous amount discussion and emotion and certainly when $4.00 gasoline is combined with the first two and in May, you had a breaking point, a structural shift in the mind set of consumers.
Now I would maintain that would if we did not have a housing crisis or if it didn’t have a credit crisis and we just got $4.00 of gasoline, what happened in May would have not happened. We would have had a lot of conversation and a lot of screaming and shouting, which we would have had the stampede to efficiency that occurred. So now the question is, as all that unwinds, how does it play back and the one that we are watching is housing. It’s nice to get the relief on the gasoline prices. I welcomed it considering everything the American consumer is dealing with but at the moment, the key issues would be housing.
Todd Sullivan: You said earlier you’re heading towards the luxury brand, BMW (BMW)/ Mercedes and then Honda (HMC)/Toyota (TM) you like also, is that because BMW/Mercedes brands are most profitable or they are most resistant to the situations we are seeing now?
Mike Jackson: All the above. First, the cars are extremely complex and require extraordinary technical skill to maintain and repair. They have owners who very much care about their vehicle and always want it in top performing condition. So the service and parts business is phenomenal. We brought over 100% fixed coverage in our premium luxury business, which is really marvelous place to be. Second, BMW/Mercedes are a juggernaut on the product innovation side. They really always have something new and exciting coming, so there is always something interesting to talk about. Finally when the market does get difficult, the last segment to go is premium luxury and you put it all that together and it’s a very attractive business.
Todd Sullivan: Do you see yourself going below the 20% of revenue in domestic brands? If people don’t buy them, then you may go below it out of your control, but do you see an intentional shift as you look at the landscape saying you know what, there is not much on the horizon coming out of Detroit for next couple years, should we shift more towards the other brand?
Mike Jackson: The way I think about is this way. I said some years ago that we were headed towards 30% and everybody asked me so what happens when you get to 30% and I said “ask me when we get there”. So now we are headed to 20% and we will probably get there in the next two, three years, and I would say okay call me back and ask me and I will give you the answer. There is a scenario where the domestic situation stabilizes depending on how much of a shake that there is and then it becomes an interesting enough business and we really like the 20% we have. Or, the position could deteriorate further and stores today that we are very happy with could become marginal and then we have to re-look at it.
So it could go either way. What I don’t see though, is that in two or three you would ask me that question I would say to you, you know what Todd, I think we are going to be in 25% or 30% in the next 2-3 years after that. So that I can rule out. I think there is a very good chance we will like the 20% we have, its profitable, or there is a chance of saying well the things developed we have to take another look at it.
Todd Sullivan: How hard or difficult is it when you say you have an existing Chevy or Ford (F) dealership, the physical building with salespeople and management is it possible to say, you know what I’m going to make a Toyota dealership, is there something that’s done?
Mike Jackson: Reallocating real estate is one of the things going on within this move and we are reallocating big domestic sites, moving imports along, and putting the domestics in a smaller site. We are reallocating capital and we are reallocation real estate that we already own towards imports and away from domestics. Within that whole journey is the 20%, which is a very efficient thing to do rather than having to meet the capital demand of the import to for more space in larger facilities and have to do projects from scratch. We already own the real estate and control the real estate in the market, and we simply reallocate it. That’s one of the major reasons why we like owning the real estate. It gives us the flexibility within our footprint to shift things around. Whereas you signed up on these leases, you have to go back to the landlords and negotiate change of use and change of franchise.
You can imagine the landlord, your going to and say, hey listen I have a great deal for you, I’m taking Toyota off this site and I’m putting a GMC dealership and I need your approval to do this. That’s not a fun conversation. Whereas if you own the real estate, like Bernie and I say, that’s what we should do.
Todd Sullivan: What time frame does that happen? If you made the decision today that GMC Buick (GM) dealership in Florida your going to change it to Toyota (TM) , it could take a year, six months?
Mike Jackson: It could take six months to a year. It still needs manufacturer approval, there’s always tweaking involved with the site, signage and all that stuff, but we’ve been doing this for several years too.
End of interview…
Disclosure (“none” means no position):Long AN, None
Visit the ValuePlays Bookstore for Great Investing Books
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
Visit the ValuePlays Bookstore for Great Investing Books