America's largest automotive retailer, aptly named AutoNation (NYSE:AN), closed out a mixed bag of a year on Thursday. Although its total annual net profits declined by more than 9%, fourth-quarter profits more than doubled over the previous year's final quarter. Indeed, Q4 profits made up nearly 40% of the entire year's profits. Wall Street chose to accentuate the positive, driving the company's share price up 4% on Thursday.

The company has markedly improved its inventory management, as measured by its inventory turns, or the number of times AutoNation was able to sell its lots bare, fill them back up, and do it all over again (hypothetically, of course) within a given period. Over the course of 2004, inventory turns improved from last year's 5.5, to 6.2 times. Similarly, quarter-on-quarter, Q4 inventory turns improved from 1.3 to 1.5 times.

That improved selling efficiency also showed up in the auto industry's -- and AutoNation's -- own preferred metric: "days supply," or the amount of inventory AutoNation keeps on the lot, as measured by how long it takes to sell the cars. Last year, AutoNation was keeping about 71 days' worth of new cars, and 43 days' worth of used cars, sitting around on its lots -- eating up space but generating no revenue until sold. By the end of 2004, the company had pared both of those numbers back, by 25% and 14%, respectively.

Improving the speed and efficiency of its operations is what saved AutoNation this year. Pricing of new and used cars both remained under pressure in 2004, and as a result, AutoNation's gross margins didn't budge from last year's 15.5%. Operating margins did improve -- by a whopping two (count 'em, two) basis points. And if unable to boost its margins, a retailer like AutoNation has only three options to keep its profits growing: volume, volume, and volume.

There is, however, one more option by way of which a shareholder-friendly company can boost profits for its shareholders: buy back shares. AutoNation did that, too, and in 2004, its share count shrank by 2%.

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Fool contributor Rich Smith has no position in AutoNation.