Car-seller AutoNation (NYSE:AN) reports Q4 and full-year 2006 earnings results Wednesday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? A baker's dozen of analysts follow AutoNation, where buyers outnumber holders seven to six.
  • Revenues. On average, they're looking for 7% quarterly sales growth, to $4.62 billion.
  • Earnings. Profits are predicted to rise 10%, to $0.34 per share.

What management says:
It seems that America's largest automotive retailer got even bigger last quarter, market share-wise. According to management, total "new vehicle retail unit sales declined 11% in the U.S. and were down 16% in California." In comparison, "AutoNation new vehicle retail unit sales were down 8% in total and 12% in California." With AutoNation suffering less of a unit decline than the industry generally, it stands to reason that a greater percentage of what few sales were made last quarter, were made by AutoNation.

Even so, management apparently misjudged consumer demand somewhat, advising that because it had "higher inventories" in the quarter, it incurred higher "floor plan interest expense." Increased debt levels also cost the firm more in interest payments. The good news: by buying back 19% of its shares in Q2, it concentrated its profits among fewer shares, bolstering earnings per share.

What management does:
Pun alert. Unless you're one of those investors who rubbernecks at crash sites, you might want to avert your eyes from the following: AutoNation seems to be having trouble downshifting its gross margin improvements deeper into its income statement. Although the rolling gross numbers motor steadily upwards, operating margins have been stuck in neutral for the past year. Worse, the net continues to lose traction.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Blame the higher interest payments for the deteriorating net margin. Operating income in quarters two and three of 2006 came very close to what the firm earned in Q2 and Q3 2005. The higher interest on its debt and "floor plan" made the bulk of the difference on the bottom line.

That said, the operating margin is itself coming under some pressure. While both revenues and cost of goods sold declined less than 1% year over year in the last two quarters, selling, general, and administrative costs headed the other way, rising 2%. If that trend continues, I expect we'll begin to see operating margins begin to follow the path blazed by net margins over the last several quarters.

Investors should scan Wednesday's news for evidence that operating cost trends will begin to align better with sales growth. And addressing the inventory situation, we'd like to see growth there moderate as well. In the period discussed, inventories rose 7% on average, versus the equivalent period from the previous year. Fewer inventories should help to ease the interest cost pressures that are currently doing the most to depress margins.


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Got a feel for AutoNation now? Next, kick the tires at a few of its competitors:

Fool contributor Rich Smith does not own shares of any company named above.CarMax is a Motley Fool Inside Value pick. The Fool has a disclosure policy.