AutoNation Shuts 23 Sites; 1,800 Laid Off

By JOHN O’DELL

Dec. 14, 1999 12 AM PT

TIMES STAFF WRITER

Car retailing giant AutoNation Inc. abruptly closed 23 of its used-car superstores and laid off 1,800 workers Monday, acknowledging what its critics have been saying for months--that the environment is simply too competitive and margins too slim to make its brand of high-service, high-overhead retailing profitable in the late-model used-vehicle market.

All five of the company’s Southern California used-car stores were shut down at 1 p.m. Monday and their roughly 450 employees sent home. The stores--in Irvine, Long Beach, Torrance, Oxnard and Rancho Cucamonga--were all built during the last two years.

AutoNation, by far the country’s largest auto retailer, will take a fourth-quarter charge of $430 million to $490 million to pay for the job cuts and store closings, said Michael Jackson, the former Mercedes-Benz USA chief executive hired in September to shepherd AutoNation’s fortunes.

The pullback marks a major change to the blueprint that company founder H. Wayne Huizenga mapped out for the company. The billionaire businessman’s aggressive plans first brought AutoNation’s used-car megastore to Southern California nearly two years ago with the construction of the Irvine facility.

But by 3 p.m. Monday, the Irvine location was nearly deserted. Two hours earlier, employees had been told they no longer had jobs and they went home. Those still on the large lot were security guards, management or corporate representatives who declined to comment. Each store has about 90 employees.

The closing of the Irvine superstore should not have any impact on neighboring shops in the Irvine Spectrum Center, said Michael Piazzola, the center’s general manager.

Jackson said the poor performance of the used-car superstores was a major reason AutoNation expects fourth-quarter earnings, before the charge, to dip to about 10 cents a share, almost 50% below analysts’ estimates of 19 cents.

AutoNation shares fell almost 14.5% to close at $8.50, down $1.44 for the day in heavy New York Stock Exchange trading. The closing price was less than half the stock’s 52-week high of $18.38 in late June.

Jackson said he expects AutoNation’s warning of a poor fourth quarter to drag on the already anemic stock price for a while but that ultimately “major analysts will agree with this step.”

One analyst, David Healy of Burnham Securities, said AutoNation “discovered that the used-car business is a tough one, oversupplied with a lot of smart competitors. It is no easy way to make a buck.”

The decision to get out of that part of the market--AutoNation still sells used cars through its 409 new-car franchises--was a wise one, said Chris Denove, an industry consultant with J.D. Power & Associates, the market research firm in Agoura Hills.

“They realized that we are in a record new-car market, with manufacturers fighting tooth and nail for market share, and doing it by dumping large incentives into the new-car marketplace,” he said. “That moves the real cost of new cars these days down to where many late-model used cars are selling, so consumers who were open to late-model used are buying new. That makes it hard on AutoNation or anyone else focused on the nearly new segment of the used-car market.”

AutoNation rival CarMax, a unit of Circuit City Stores Inc., said it will continue to build and operate giant used-car stores. Monday’s events “are great news for CarMax from a competitive standpoint,” said spokesman Val Brown. But the Virginia-based originator of the used-car superstore concept is nonetheless delaying the roll-out of several new locations in the Los Angeles Basin by 12 to 24 months for many of the same reasons driving AutoNation’s retreat.

Among other things, CarMax has found that consumers in metropolitan markets are not willing to drive long distances to shop for used vehicles. Brown this summer said the company planned to modify its strategy to include smaller, less costly facilities in major markets.

Jackson said Monday’s move will not affect AutoNation’s new-car dealerships or its Internet auto retailing operations. AutoNation owns 67 new-car franchises in Southern California. It plans to sell the closed used-car superstores as soon as possible.

Many industry analysts have held from the start that AutoNation’s experiment in refurbishing late-model used cars and marketing them in a new-car showroom environment with warranties, on-site service departments and even custom-parts boutiques was doomed to failure because consumers would not pay the premium prices the strategy demanded.

Indeed, citing an unfavorable cost structure, the company early on cut back on the effort it put into cleaning up the used vehicles that it bought at car auctions--largely 2- to 3-year-old vehicles coming back into the market after being leased to consumers or used in rental or corporate fleets.

Jackson said the store closures are part of a cost-cutting program designed “to ensure the long-term success of AutoNation.” Last month, the company laid off 225 employees at its headquarters in Fort Lauderdale, Fla., and instituted other economies that Jackson said would trim $60 million a year from its operating budget. The company also plans next month to spin off its rental-car operations, which own the National, Alamo and CarTemps USA brands.

The decision to shutter the used-car facilities--huge and highly visible car lots typically located alongside freeways and designed to resemble festive, flag-bedecked circus encampments--”was difficult but important,” Jackson said.

“We’re a $20-billion enterprise with only $1 billion coming from the megastores, which are the most difficult to run and have the highest cost structure in the entire company. It is a marginal business, and the vast majority of our used-car sales [now] are done through our new-car facilities.”

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Stuck in Reverse

AutoNation’s stock soared to more than $40 a share after the company went public in 1997, but the story since then has mostly been bleak. Monthly closes and latest on the New York Stock Exchange:

Monday: $8.50

Source: Bloomberg News *

Times staff writers Greg Hernandez and Leslie Earnest contributed to this story.