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Morningstar | AutoNation's Restructuring Hits 4Q; New CEO Brings Outside Operations Expertise

We are not changing our fair value estimate for AutoNation after the dealer reported a challenging fourth quarter. We will reassess our assumptions in March when we process the 10-K, but we continue to believe the stock offers good value, trading in the $30s. However, we also think that overhangs on the stock will linger for some time. As we wrote in our Jan. 8 note, the company started a restructuring program in the fourth quarter that seeks to cut $50 million in costs. Fourth-quarter diluted EPS from continuing operations of $1.02, which missed consensus of $1.15, includes $9 million, or $0.08 per share, of restructuring costs. Management expects first-quarter 2019 restructuring costs to be less than the fourth quarter's.

The fourth quarter suffered from a tough comparable with fourth-quarter 2017 following Hurricane Harvey recovery sales in Houston. November 2018 California wildfires also hurt volume. Revenue fell year over year by 4.8% to $5.4 billion, which missed consensus of $5.6 billion. Same-store revenue fell by 3.8%, mostly from a 7% fall in new-vehicle revenue. For all stores, new-vehicle unit volume declined by 10.2%, while used volume fell by 1.7%. Although finance and insurance, a 100% gross profit business, posted a record in same-store gross profit per unit of $1,851, the large fall in volume along with restructuring led to selling, general, and administrative deleveraging and operating margins contracted 40 basis points to 3.6%.

Another overhang is the retirement of CEO and President Mike Jackson, 70, a legend in the dealer space. AutoNation announced that Carl Liebert, 53, will become CEO and president on March 11 under a three-year contract. Liebert is currently COO of USAA, but he also has retail experience at Circuit City, as CEO of 24-Hour Fitness, and as executive vice president of stores for Home Depot. Liebert's operation and supply chain knowledge should help AutoNation in its turnaround efforts.

Even though Liebert has no auto dealer experience, we think his prior roles can fit into the dealer space, and since Jackson will become executive chairman, he'll be available for consultation if needed. We think the challenge will be whether Liebert has enough autonomy from the influence of Jackson, who has led AutoNation since 1999, to do his job effectively. We think Jackson is smart enough to know when to get out of the way, but only time will tell. Liebert is a former U.S. Navy officer and a graduate of the Naval Academy, so we doubt he will be OK with a domineering chairman. Liebert also holds an MBA from Vanderbilt.

Liebert was on the earnings call and sounded very excited about AutoNation's broad geographic reach and ability to scale. We look forward to hearing more specifics from him in 2019 about his plans for the company, especially his plans for geographic expansion and the five AutoNation USA stand-alone used-vehicle stores. Jackson said on the call that there will be no new USA stores this year due to a challenging auto retail environment and because AutoNation is still learning the stand-alone used business.