Will Huizenga's Latest U Turn Work For Auto Nation?

He refocuses on new cars and fixed prices

For all his storied successes in trash-hauling and video rental, H. Wayne Huizenga has found the auto business a bumpy ride. In the past three years, he has shifted the focus of his Fort Lauderdale-based AutoNation Inc. from used-car megastores to rentals to new-car dealerships, with disappointing results. After an extraordinary runup two years ago, to nearly 45, AutoNation's stock remains stuck in a ditch at around 15.

Now, Huizenga is making another U-turn. On Aug. 2, he announced he will jettison his auto-rental businesses. He plans to refocus AutoNation back toward new-car sales--co-branding nearly 400 franchises in 23 states with the AutoNation name by Oct. 1. And within a year, he plans to implement a "no-haggle" pricing policy across the entire chain. Taken together, he says, the moves will reinvent auto retailing. "We haven't been able to get all cylinders running at one time," concedes Huizenga. "But now, we think we have the business model."

POTHOLES AHEAD. To succeed, he knows he needs more auto expertise. So Huizenga and longtime colleague Steven R. Berrard will soon step down as co-CEOs in favor of a car veteran. "We've done a good job," Huizenga says, "but we need to bring in some fresh talent to take it to the next step." Two weeks ago, John H. Costello--a former Sears, Roebuck & Co. executive who served just eight months as AutoNation's president--was replaced by Michael E. Maroone, a second-generation car dealer.

Even with the turnover, some observers think Huizenga's latest plan may hit more potholes along the way. "This business is much more complex than anything Huizenga's done in the past," notes Tom Thomson, an auto-retail analyst at First Union Capital Markets. And Jeremy P. Anwyl, president of auto consultant Marketec Systems Inc., says the rebranding effort and shift to fixed pricing will hurt short-term profitability. Huizenga has bought the best franchises in many cities, Anwyl says, but by changing both the management style and dealership's name, he'll wipe out much of the original commercial value. No-haggle pricing also leaves room for other retailers to undercut the chain. "If you don't mind doing a little bit of arm-wrestling with a dealer, you're going to get a better deal," says Anwyl.

Still, Huizenga remains confident. Since December, AutoNation has been testing the rebranding strategy and no-haggle pricing in Denver. There, the company consolidated its 17 dealerships under the "John Elway AutoNation" name, after retired Broncos quarterback John Elway, who owned six of the stores. So far, unit sales in Denver are up 40%, and AutoNation has boosted its market share in brands it sells to 34% from 24%, the company says.

That success, though, came at the expense of the bottom line. AutoNation slashed prices to levels that cut pretax margins in Denver below 2%--lower than the industry average of 2.5%. Huizenga says the company should be able to raise prices enough to bring margins above 3% by yearend.

Given Huizenga's track record, many investors are eager to see him redeem himself. Following his proven formula of using a lofty stock price to fund acquisitions, he has done a remarkable job of building revenues. Dealership sales have grown, along with the number of AutoNation outlets, from $2.9 billion in '96 to a projected $19.5 billion this year. Today, AutoNation is more than six times the size of its closest competitor. "If you look out two to three years, a single, well-branded nationwide auto dealer can make a nice living," says Christopher Grisanti, research director at investment managers Spears Benzak Salomon & Farrell, which owns nearly 4 million shares. Even rivals are impressed: "They're bold and creative," says Scott Smith, president of Sonic Automotive Inc., with 78 dealerships.

Despite the fall-off in its stock price, AutoNation still trades at about 16 times expected 2000 revenues, analysts note, vs. 11 times for other auto retailers. That signals that Wall Street thinks AutoNation is on to something good. But it also means AutoNation has that much further to fall if Huizenga fails to reinvent auto retailing as promised.