My Interview with AutoNation CEO Mike Jackson: Pt 2.

Please read Part One of AutoNation (AN) CEO Mike Jackson’s interview first.

Todd Sullivan: Have you seen the rate of decline dropping substantially?

Mike Jackson: Let me put it in industry terms, there are a lot of people that are talking about the SAR in August is better than the SAR in July. That’s not enough for me. One month to me doesn’t mean much. I think it takes a couple months to really say supply stocks are going down.

Todd Sullivan: Are you seeing a situation where you have willing buyers walk through the door, but now because of credit conditions can’t get financing for cars?

Mike Jackson: Here is how I would describe it. First we have willing buyers walking through the door with no credit issues who say I’m going to wait, I think I can get it better price down the road. They think some bigger incentive is coming down the road because things are so bad, so they are sitting on the sidelines. Next you have those willing buyers coming through the door who we simply cannot get finances. It’s a combination that their credit position has deteriorated and the credit standards have gone up and in certain segments such as subprime its really difficult to find lending sources. For a committed customer as well as for certain brands you now have to veer them to another store because we can’t offer them an interesting lease offer, so there is no question that credit crisis is impacting buying. By the way that’s not just for us, that’s for housing, that’s for commercial real estate, I talk to my friends all the time and they have projects that are 50,60,70 percent pre-leased, they can’t get the projects funded where you used to be able to get them funded with nothing down.

The pendulum of this swung to far in the other direction and even though we had the rate cuts from the Federal Reserve they are not working like normal because the restriction of credit, it’s not really the cost of money, you can’t get the money. So this combination of this protracted housing situation and credit crisis and the cherry on top it gasoline has brought about the current circumstances that we are in. So it really is the combination that is dragging out what is basically a domestic recession. People say well, GDP grew 3.3%. Well you take out export and its good to have the export and they do support employment and everything, but if you really look at the domestic economy its in a protracted recession and the reason it’s not recovering as fast as everyone would like is the exact issue you’ve touched on Todd, the availability of the credit independent of the price.

Todd Sullivan: Alright, so if we go with that, then you’ve seen a dramatic drop off in demand because of other conditions, now you have willing buyers who are on the sidelines because they think they are going to get a better price and then you have people who want to buy but can’t because of credit. When all that shakes out like it always does, it just depends on when, then on the upside, one would expect a surge of demand, correct?

Mike Jackson: Yes, I would describe it like this. I felt in ’05 and ’06 the incentives were holding sales above trend and that we were pulling business forward and now we are in a period where sales are clearly below trend. I agree with you, when the recovery comes, depending which problem gets solved to which degree there is a substantial postponed purchases and those customers will come back into the marketplace.

Todd Sullivan: So #1 issue, what would you say it is, a lot is said about gas prices……

Mike Jackson: This is how it breaks down. Housing is 75% of the volume issue. Housing has created the credit crisis, when the housing crisis stabilizes and the banks know what all their mortgages are worth, that is going to lead to a stabilization of credit. That needs to come next. Gasoline is, if you look at it as a percentage of household income combined with all these other issues, is the last straw. But it gets a tremendous amount discussion and emotion and certainly when $4.00 gasoline is combined with the first two and in May, you had a breaking point, a structural shift in the mind set of consumers.

Now I would maintain that would if we did not have a housing crisis or if it didn’t have a credit crisis and we just got $4.00 of gasoline, what happened in May would have not happened. We would have had a lot of conversation and a lot of screaming and shouting, which we would have had the stampede to efficiency that occurred. So now the question is, as all that unwinds, how does it play back and the one that we are watching is housing. It’s nice to get the relief on the gasoline prices. I welcomed it considering everything the American consumer is dealing with but at the moment, the key issues would be housing.

Todd Sullivan: You said earlier you’re heading towards the luxury brand, BMW (BMW)/ Mercedes and then Honda (HMC)/Toyota (TM) you like also, is that because BMW/Mercedes brands are most profitable or they are most resistant to the situations we are seeing now?

Mike Jackson: All the above. First, the cars are extremely complex and require extraordinary technical skill to maintain and repair. They have owners who very much care about their vehicle and always want it in top performing condition. So the service and parts business is phenomenal. We brought over 100% fixed coverage in our premium luxury business, which is really marvelous place to be. Second, BMW/Mercedes are a juggernaut on the product innovation side. They really always have something new and exciting coming, so there is always something interesting to talk about. Finally when the market does get difficult, the last segment to go is premium luxury and you put it all that together and it’s a very attractive business.

Todd Sullivan: Do you see yourself going below the 20% of revenue in domestic brands? If people don’t buy them, then you may go below it out of your control, but do you see an intentional shift as you look at the landscape saying you know what, there is not much on the horizon coming out of Detroit for next couple years, should we shift more towards the other brand?

Mike Jackson: The way I think about is this way. I said some years ago that we were headed towards 30% and everybody asked me so what happens when you get to 30% and I said “ask me when we get there”. So now we are headed to 20% and we will probably get there in the next two, three years, and I would say okay call me back and ask me and I will give you the answer. There is a scenario where the domestic situation stabilizes depending on how much of a shake that there is and then it becomes an interesting enough business and we really like the 20% we have. Or, the position could deteriorate further and stores today that we are very happy with could become marginal and then we have to re-look at it.

So it could go either way. What I don’t see though, is that in two or three you would ask me that question I would say to you, you know what Todd, I think we are going to be in 25% or 30% in the next 2-3 years after that. So that I can rule out. I think there is a very good chance we will like the 20% we have, its profitable, or there is a chance of saying well the things developed we have to take another look at it.

Todd Sullivan: How hard or difficult is it when you say you have an existing Chevy or Ford (F) dealership, the physical building with salespeople and management is it possible to say, you know what I’m going to make a Toyota dealership, is there something that’s done?

Mike Jackson: Reallocating real estate is one of the things going on within this move and we are reallocating big domestic sites, moving imports along, and putting the domestics in a smaller site. We are reallocating capital and we are reallocation real estate that we already own towards imports and away from domestics. Within that whole journey is the 20%, which is a very efficient thing to do rather than having to meet the capital demand of the import to for more space in larger facilities and have to do projects from scratch. We already own the real estate and control the real estate in the market, and we simply reallocate it. That’s one of the major reasons why we like owning the real estate. It gives us the flexibility within our footprint to shift things around. Whereas you signed up on these leases, you have to go back to the landlords and negotiate change of use and change of franchise.

You can imagine the landlord, your going to and say, hey listen I have a great deal for you, I’m taking Toyota off this site and I’m putting a GMC dealership and I need your approval to do this. That’s not a fun conversation. Whereas if you own the real estate, like Bernie and I say, that’s what we should do.

Todd Sullivan: What time frame does that happen? If you made the decision today that GMC Buick (GM) dealership in Florida your going to change it to Toyota (TM) , it could take a year, six months?

Mike Jackson: It could take six months to a year. It still needs manufacturer approval, there’s always tweaking involved with the site, signage and all that stuff, but we’ve been doing this for several years too.

End of interview…

Disclosure (“none” means no position):Long AN, None
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