AutoNation Pay Freeze as Company Excels Shows No Inflation: Cars

Mike Jackson, chief executive officer of AutoNation Inc. (AN), says the largest U.S. auto dealer is stronger than ever. What’s not strong in his view is the U.S. economy, and that’s why he’s telling workers they won’t see higher paychecks anytime soon.

“We have a fragile recovery that’s under way, which means if you introduce anything into it that’s disruptive, it’s going to knock it off its pace,” Jackson, 62, said in an Aug. 3 interview, hours before reprising his commentary for local Federal Reserve economists.

Jackson has seen all manner of recoveries in his 37 years in the industry, and this one is languishing. Light-vehicle sales rose less than 1 percent in July, researcher Autodata Corp. said last week, spurring JPMorgan Chase & Co. to reduce estimates for 2011 and 2012 by a combined 700,000 vehicle sales.

It’s telling of the bind the U.S. economy is in that AutoNation, which earned an investment-grade rating from Standard & Poor’s last month, isn’t ready to reinstate pay raises or 401(k) matches that were stopped as emergency measures during the slide. Companies and consumers are each waiting for the other to start spending, keeping growth at a stall speed.

“You’re seeing wage gains, you’re seeing job growth, but it’s all very muted simply because there’s not a lot of demand out there,” said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp., which oversees $340.8 billion in assets. “Businesses can hire if there’s more demand, but there can’t be more demand unless businesses hire.”

‘Ugly Again’

The CEO’s comments came during a session with employees at the Atlanta Buckhead Marriott. At the end, responding to a worker who asked about pay, Jackson said that with new-car demand still at a “depression level,” the company has to stay prepared in case things “get ugly again.”

Jackson, who started his auto career as a technician for Mercedes-Benz USA, was named to the board of the Federal Reserve Bank of Atlanta’s Miami branch in January. He told the workers he brings “a dose of the real world” to Fed meetings.

“Sometimes the data lags or doesn’t really tell you the truth,” Jackson said.

Concern that the economy may relapse has done to AutoNation and other car-dealing chains what the March 11 earthquake in Japan couldn’t: push down the company’s shares. They closed at a record $39.97 on July 26, and have dropped 18 percent to $32.71 at 4 p.m. in New York Stock Exchange trading. Peers Penske Automotive Group Inc. (PAG) and Group 1 Automotive Inc. (GPI) also have since declined since reaching early-2007 levels last month.

Japan Automakers

Japanese automakers, which lost output of more than 2.3 million vehicles to the March 11 earthquake and tsunami, built more than half of the new vehicles sold last year by AutoNation.

The retailer, which is more than 72 percent held by billionaires Edward Lampert and Bill Gates and their affiliated funds, raised prices, built inventory of used cars and emphasized parts and services to counter lower supply of Toyota Motor Corp. (7203) and Honda Motor Co. cars and trucks.

“A decline in new-vehicle sales effectively gives you, as a dealer, the opportunity to generate more parts-and-service revenue because consumers aren’t purchasing new vehicles,” Brian Sponheimer, an analyst with Gabelli & Co. in Rye, New York, said in a phone interview. “Dealer groups are built to withstand moves in consumer spending because of this.”

AutoNation’s second-quarter net income climbed 52 percent to $71.9 million from $47.2 million a year earlier, the company said July 27. Profit excluding some items was a record 49 cents a share, topping the 45 cent average of 11 analysts’ estimates compiled by Bloomberg.

Atlanta Region

The post-Japan operating plan was followed in Atlanta, where Jackson and Chief Operating Officer Michael Maroone last week reached the halfway point of a summer tour of AutoNation’s outlets from Seattle to South Florida.

Atlanta-region sales during the quarter plunged 24 percent, compared with a 4 percent drop in new-vehicle deliveries for the entire company. Store profit still improved 23 percent in the three months, exceeding the parent’s 18 percent gain as used sales and profit per new vehicle sold increased.

Jeff Sawyer, general manager of Georgia’s largest Toyota dealership, said inventory on his lot slipped to as few as 250 new vehicles from the usual stock of as much as 600.

“It’s starting to come back in the other direction,” said Sawyer, an AutoNation dealer whose Team Toyota Mall of Georgia is in Buford, about 35 miles northeast of Atlanta.

Better-selling models such as the Prius hybrid have less than a month’s worth of supply, while Tundra pickup stocks have climbed to 136 days, Sawyer said last week. That balance will improve by September or October, he said.

Inventories Improving

Improved inventories will help the seasonally adjusted annual rate for U.S. light-vehicle sales get back to 13 million in the late months of 2011, AutoNation projects. That will help the industry reach about 12.6 million deliveries this year, according to the company, up from 11.6 million in 2010.

“I still believe we’re going to have a nice solid close to the year, but August will be a little bit difficult and probably early September as we refill inventories,” Maroone, the COO, said in an interview. “As soon as those are full, you’ll see a different posture on incentives and marketing” by automakers.

AutoNation’s full-year sales forecast, which was lowered after the Japan tsunami, is lower than the projections given by General Motors Co. (GM) and Ford Motor Co., the two largest U.S. automakers. They say there could be 13 million new vehicles sold this year, including medium- and heavy-duty trucks.

“What the trajectory is going into 2012 it’s still too early to say, but I still think it will be upward for our industry,” Jackson said in an interview.

Jackson said he hopes the Fed won’t need to arrange a third round of quantitative easing, known as QE3, to help stimulate the economy and avoid a second phase of recession.

“You can’t take it off the table, but I hope it doesn’t come to it,” he said. “They should really only go to it if clearly there’s going to be a double dip. How many more bullets are there? It’s the limits of what can be done -- we’re approaching that line.”

To contact the reporter on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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