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Morningstar | AutoNation's Record 2Q Overshadowed by Departure of New CEO Liebert

AutoNation reported record second-quarter diluted EPS of $1.12, easily beating consensus of $1.06. Same-store revenue declined 0.5% year over year as strength in used vehicles and service mostly offset declines in new-vehicle revenue. We like that the company isn't chasing used-vehicle volume over profit. New-vehicle unit sales fell 10.8%, but new-vehicle gross profit per unit increased 12.7% to $1,780, and total new-vehicle gross profit grew 0.6%. We expect this trend to continue this year due to high off-lease supply bringing more consumers into the used market over new vehicles. We are raising our fair value estimate to $51 per share from $49 on the time value of money.

The good quarter took a backseat to the announcement the evening of July 22 that CEO Carl Liebert, who joined AutoNation from USAA four months ago, will leave in 30 days. CFO Cheryl Miller, 47, is now CEO and president and joins the board. CAO Chris Cade will serve as interim CFO, and sales head Jim Bender was promoted to COO. We think highly of Miller, who had been a CEO finalist, and her nearly 20 years of auto industry experience, including 10 years at AutoNation, leave us with no fears of a leadership void at the company.

We are very disappointed that the board spent considerable time and money searching for a replacement for Mike Jackson, who retired earlier this year to the executive chairman role after 20 years as CEO, and picked the wrong person. Jackson during the call and on CNBC the morning of July 23 said there is no back story to Liebert's departure and he just was not a good fit for automotive retail. Jackson is synonymous with AutoNation but at least publicly keeps saying the right things--that Liebert and now Miller is the CEO--so we can't say he is interfering with new leadership. The dealer sector has unusual relationships with the automakers, especially around new vehicles, and it is possible that once Liebert got more familiar with that he felt he was not the right person.

It's too early to say whether Miller will bring a new strategy to the company, but given that she is an AutoNation veteran, we don't expect radical changes around e-commerce or the AutoNation USA stand-alone used-vehicle stores. Those five stores broke even for the quarter for the first time, and some were even profitable. Management seems to want to keep doing more testing of the process before resuming USA store expansion, so no new stores will be built this year.