AutoNation's Retail Secession (News) August 2, 1999


AutoNation's Retail Secession

August 2, 1999

Automobile retailing and renting giant AutoNation (NYSE: AN) joined the increasingly long list of companies looking to simplify the lives of investors today, saying it is examining ways to split off its rental operation, possibly selling or spinning off the division.

Doing so, according to Chairman and Co-CEO H. Wayne Huizenga -- better known as the man who dismantled the 1997 World Series Champion Florida Marlins -- is to "enhance shareholder value by making AutoNation a pure play automotive retailer, enabling the investment community to better recognize and evaluate the strengths and growth prospects of our automotive retail operations."

AutoNation stock was down slightly this morning on the news, perhaps an indication that investors believe the rental operation is more worthy of their attention.

As of June 30, AutoNation owned well over 400 automotive franchises and AutoNation USA megastores, as well as more than 270 websites. The rental operations include Alamo Rent-A-Car, National Car Rental System, and temporary replacement vehicle company CarTemps USA.

The retail operations generate a lot of sales and have come to represent an increasingly large slice of AutoNation's revenue pie over the last three years. It accounted for nearly 79% of sales in 1998, up from about 67% in 1997 and 52% in 1996. Retail revenue growth has been strong on a year-over-year basis as the company has made regular acquisitions, with sales more than doubling year-ago levels in 1998 and 1997.

But retail gross profits haven't been as strong as the rental division's during the same period. While both operations' cost of sales as a percentage of revenue has decreased year-over-year since 1996 despite real-dollar growth caused primarily by acquisitions, the rental division has regularly posted better gross profits and shown broader improvement, thanks in part to rate increases.

And last year's installation of the Global Odyssey operating and revenue management system at National -- the associated costs, predictably, meant a rise in selling, general and administrative expense -- stands to improve inventory management efficiencies particularly with the system coming to Alamo this year, allowing the two companies to better work together.

That's not to mention that the automobile retail industry is huge and fragmented, with tens of thousands of franchised and independent new and used dealerships spread across the country. Renters, on the other hand, have a handful of national brands from which to choose, and Alamo and National are certainly well-known companies.

Stepping in to take some of the responsibility for this brave new AutoNation will be Michael Maroone, president of the company's retail group. He'll replace John Costello as president and COO. Costello, as if you couldn't guess, left for the lure of the Internet venture dollar. Speculation that a replacement for Co-CEO Steven Berrard, who plans to resign, hit the Street as well.

In other corporate news, AutoNation approved a $500 million stock buyback plan, boosting the total currently authorized for repurchase to $1 billion. As of the end of June, $449 million of that had been bought back into the company fold. Second-quarter earnings from continuing operations (the rental division has been classified as a discontinued operation for reporting purposes) were $0.21 per share, a dime better than a year ago.

By Dave Marino-Nachison (TMF Braden) (TMF Braden)

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