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Autonation, Inc. Response Letter

VIA FACSIMILE & EDGAR

January 30, 2006

Mr. William Choi

Accounting Branch Chief

United States Securities and Exchange Commission

Division of Corporation Finance

450 Fifth Street, NW

Washington, DC 20549

    Re:

    AutoNation, Inc.

Form 10-K For the Fiscal Year Ended December 31, 2004

Filed February 24, 2005

File No. 001-13107

Dear Mr. Choi:

The following is a response to the Commission Staff’s comment letter to AutoNation, Inc. (the
“Company”) dated January 19, 2006. Please note for the convenience of the Staff we have recited
the comments in boldfaced type and provided our responses immediately thereafter.

Form 10-K for the Fiscal Year Ended December 31, 2004:

Financial Statement and Supplementary Data

Consolidated Statements of Cash Flows, page 46

    1.

    We have reviewed your response to comment 1 in our letter dated December 20, 2005.
Given the significance of the error in classification of cash flows please amend your
filing, as well as your Form 10-Q for the quarterly period ended September 30, 2005, to
present cash flows (used)/provided from non-manufacturer lenders in financing activities.
Since Rule 5-02(19)(a) of Regulation S-X requires separate and clear display of amounts
payable to trade creditors and amounts payable for borrowings, please also revise your
balance sheet to reflect non-manufacturer lender payables as borrowings and manufacturer
lender payables as trade creditor payables. In addition, please disclose the change in
classification of cash flows from non-manufacturer lenders as a correction of an error in
accordance with paragraph 37 of APB 20. Further please also revise your footnote
disclosure to further describe the mechanics of your floorplan payable arrangements,
including how cash disbursements are processed and if you have discretion to receive cash
directly from the lenders.

    We respect and understand the Staff’s position and agree to reflect the net cash flows for
floorplan facilities with lenders other than the automotive manufacturers’ captive finance subsidiaries
(“non-trade lenders”) as a component of financing activities. For the reasons discussed
below, the Company believes that the above change to its statement of cash flows should be
treated as a revision rather than a restatement. The Company proposes to reflect the
revision in its 2005 Form 10-K with prior periods revised to conform to the current period
presentation rather than amend the Company’s previous filings. Please see the attached
proposed revisions to our 2004 Consolidated Balance Sheet and the 2004 and 2003 Statements
of Cash Flows as well as our proposed footnote disclosures that would be included in the
Company’s 2005 Form 10-K expected to be filed in mid-February 2006.

    We believe that a revision is appropriate given:

    •

    the immateriality of the change to the Company’s financial statements taken as a
whole and

    •

    the difference between the terms, conditions and structure of the Company’s
floorplan arrangements compared to that of other automotive retail registrants.

    Immateriality:

    Paragraph 38 of APB 20 indicates that a number of factors are relevant in determining the
materiality of accounting changes or corrections of errors as follows:

    a)

    Does the change have a material effect on income before extraordinary items
or net income of the current period?

    The above change has no effect on any line item on the income statement since it only
relates to certain cash flow captions.

    b)

    Does the change have a material effect on the trend of earnings?

    The above change has no effect on the income statement and therefore no impact on any
earnings trends.

    c)

    Could the change have a material effect upon later (i.e., future) earnings
or earnings trends?

    The above change will have no effect on future earnings or earnings trends.

    As it relates to trends or materiality in the Statement of Cash Flows:

    •

    The revision does not have a significant impact on cash flow trends.

    •

    The amounts ($(144.1) million, $(121.2) million and $45.1 million for the
years ended December 31, 2004, 2003 and 2002, respectively) are not material in the
overall context of cash flows for the Company, which has gross cash
inflows and outflows totaling approximately $40 billion each year, but are reflected as net due to the Company’s use of
the indirect method for cash flow reporting.

    •

    The amounts in question are not material to the financial position or results
of operations of the Company, which had revenue of approximately $19 billion in each
of the years ending December 31, 2004, 2003 and 2002, and total assets of
approximately $9 billion as of December 31, 2004 and 2003.

    •

    The Company’s presentation in its previous filings did not overstate
operating cash flows.

Page 2 of 5

    A review of Staff Accounting Bulletin No. 99 (SAB 99), which relates to assessing
materiality, indicates that no additional “qualitative or quantitative measures” would be
impacted by the change to cash flows. In the Company’s situation, neither the revised nor
the original cash flow presentation:

    •

    Masks a change in earnings or other trends

    •

    Hides a failure to meet analysts’ consensus expectations

    •

    Affects the Company’s regulatory compliance

    •

    Affects the Company’s compliance with any financial covenants or other
contractual requirements

    •

    Has an effect on management’s compensation

    •

    Involves concealment of an unlawful transaction

    Further, this revision would not impact any of the significant financial statements
measures commonly used by investors, analysts, rating agencies, financers, or other users
of the Company’s financial statements in evaluating the financial condition or operating
trends of the Company. Management does not believe that the judgment of a person using the
financial statements would have been changed or influenced by the disclosure that a part of
the total floorplan liability was financed by non-trade lenders and should have been
recorded as financing activities as opposed to operating activities in the statement of
cash flows. As discussed below, regardless of the source of non-trade floorplan funding,
all funding arrangements utilized by the Company have the same relevant characteristics and
terms of trade floorplan funding with manufacturers.

    We believe that this required cash flow revision is analogous with the changes required
last year by the Staff related to cash flows from long-term customer receivables. In the
SEC guidance posted on the Commission’s website titled, “Sample Letter Sent to Registrants
Related to the Statement of Cash Flows”, the Staff indicated that it would not object to
disclosures related to the reclassification that did not reference a correction of an error
provided that certain criteria were met. These requirements would be met with the proposed
changes outlined in the attachments to this letter.

    Comparability with Other Automotive Retail Registrants:

    There is broad disparity between floorplan arrangements of the Company and other automotive
retail registrants. Unlike the other automotive retail registrants, the Company does not
have used vehicle floorplan financing facilities and only a very small portion of its
floorplan balances are with non-trade lenders. Non-trade lenders are not a significant
component of the Company’s floorplan financing strategy. The components of the total
vehicle floorplan payable balances as of December 31 are as follows (in millions):

Page 3 of 5

    2004

    2003

    Trade

    $
    2,436.1

    $
    2,516.6

    Non-trade

    81.2

    225.3

    Total vehicle floorplan payable

    $
    2,517.3

    $
    2,741.9

    Percentage of non-trade

    3
    %

    8
    %

    Unlike other automotive retail registrants, which have elected to use floorplan
strategies that incorporate the use of non-trade financial institutions as an integral part
of their overall inventory financing strategy, the Company’s use of non-trade floorplan
funding is an infrequent business practice. Our considerable difference from our peers in
terms of how we fund our inventory is reflected by our ratio of non-trade floorplan payable
to total floorplan payable of 3% in 2004 as compared to the corresponding ratios for other
major automotive retail registrants (i.e. revenues greater than $5 billion) which range from
approximately 25 to 70 percent. Moreover, our use of non-trade floorplan funding has
decreased significantly in recent years, further widening the gap between our practice and
the practices of other automotive retail registrants.

    Another distinction between our peers and us is that, even to the extent we use non-trade
floorplan funding, the relevant terms of such financings mirror traditional trade floorplan
financing terms. Many of the facilities utilized by other automotive retail registrants, on
the other hand, are funded by non-manufacturer financial institutions (i.e. banks and/or
consortiums of banks) through non-traditional floorplan arrangements. The terms of these
arrangements differ from traditional trade floorplan financing facilities in several
important aspects (for example, they may not include requirements pertaining to the
collateralization of specific inventory, repayment on demand and the ability for the
manufacturer to draft directly from the floorplan facilities, among others). In fact, some
of the facilities used by our peers are more similar to revolving credit facilities than
traditional floorplan facilities. As demonstrated below, only a portion of the
Company’s non-trade lender floorplan balance is with
non-manufacturer financial institutions. The remaining
non-trade lender floorplan balance is with manufacturers’
captive finance subsidiaries providing floorplan financing for
dealerships not franchised by such manufacturers (“non-aligned
manufacturers’ captives”). The Company does not utilize revolving credit facilities for floorplan. The sources of the
Company’s vehicle floorplan payable balances as of December 31 are as follows (in millions):

    2004

    %

    2003

    %

    Revolving credit floorplan facilities

    $
    —

    0
    %

    $
    —

    0
    %

    Aligned manufacturers’ captives (trade)

    2,436.1

    97
    %

    2,516.6

    92
    %

    Non-aligned manufacturers’ captives
(non-trade)

    33.0

    1
    %

    127.6

    5
    %

    Other financing institutions (non-trade)

    48.2

    2
    %

    97.7

    3
    %

    Total vehicle floorplan payable

    $
    2,517.3

    100
    %

    $
    2,741.9

    100
    %

Page 4 of 5

    Conclusion:

    Non-trade lenders are an immaterial component of the Company’s floorplan financing
facilities and non-trade cash flows are simply the result of the Company’s further
curtailment of this practice. Restatement of prior filings would put a focus on this
immaterial and declining business practice. We believe that given these factors and the
fact that we expect to file our 2005 Form 10-K in mid-February 2006, the Staff should allow the
Company to present the proposed changes as revisions in its 2005 Form
10-K. We believe that the imminent timing of our filing would provide
timely disclosure to users of our financial statements. This would be
consistent with the changes in the treatment of cash flows for long-term customer
receivables permitted by the Staff last year as discussed above.

    Additionally, we would revise our floorplan disclosure to more fully disclose our floorplan
arrangements, including that the ability to draft directly from the Company’s floorplan
facilities is a requirement of our manufacturers (see proposed footnote disclosures in the
attachment to this letter).

Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows, page 46

    2.

    We have reviewed your response to comment 2 in our letter dated December 20, 2005 and
reissue our comment. Please amend your most recent annual and quarterly filings to comply
with our previous comment regarding the presentation of discontinued operations in your
statements of cash flows.

    Cash flows used in discontinued operations for the years ended December 31, 2004, 2003 and
2002 totaled $21.1 million, $4.7 million and $8.4 million, respectively, all of which were
used in cash flows from operations. The Company does not believe that these amounts are
material consistent with our discussion above. Therefore, we propose incorporation of this
change in our 2005 Form 10-K (see proposed changes incorporated in the attachment to this
letter).

We respectfully request the opportunity to discuss these issues more fully with the Staff prior to
your issuance of a formal response.

Please contact me at (954) 769-3145 or via facsimile at (954) 769-6425 to set up a time to discuss
this matter.

Sincerely,

J. Alexander McAllister

Vice President and Corporate Controller (Principal Accounting Officer)

    cc:

    Michael J. Jackson, Chairman and Chief Executive Officer, AutoNation, Inc.

Craig T. Monaghan, Executive Vice President and Chief Financial Officer, AutoNation, Inc.

Jonathan P. Ferrando, Executive Vice President, General Counsel and Secretary, AutoNation,
Inc.

Phillip R. Smith, KPMG LLP

Jonathan Awner, Esq., Akerman Senterfitt

Page 5 of 5

Attachment (page 1 of 3)

AUTONATION, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31,

(In millions, except share and per share data)

    2005

    2004

    ASSETS

    CURRENT ASSETS:

    Cash and cash equivalents

    $
    107.2

    Receivables, net

    773.2

    Inventory

    2,640.5

    Other current assets

    156.8

    Total Current Assets

    3,677.7

    RESTRICTED ASSETS

    54.0

    PROPERTY AND EQUIPMENT, NET

    1,836.3

    INTANGIBLE ASSETS, NET

    2,976.2

    OTHER ASSETS

    154.7

    Total Assets

    $
    8,698.9

    LIABILITIES AND SHAREHOLDERS’ EQUITY

    CURRENT LIABILITIES:

    Vehicle floorplan payable – trade

    $
    2,436.1

    Vehicle floorplan payable – non-trade

    81.2

    Accounts payable

    180.7

    Notes payable and current maturities of long-term obligations

    14.9

    Other current liabilities

    698.3

    Total Current Liabilities

    3,411.2

    LONG-TERM DEBT, NET OF CURRENT MATURITIES

    797.7

    DEFERRED INCOME TAXES AND OTHER TAX LIABILITIES

    156.7

    OTHER LIABILITIES

    70.2

    COMMITMENTS AND CONTINGENCIES (Note 9)

    SHAREHOLDERS’ EQUITY:

    Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none issued

    —

    Common stock, par value $.01 per share;
1,500,000,000 shares authorized; 273,562,137 shares issued,
including shares held in treasury

    2.7

    Additional paid-in capital

    2,240.0

    Retained earnings

    2,176.0

    Accumulated other comprehensive loss

    (1.5
    )

    Treasury stock, at cost; 9,300,007
shares held

    (154.1
    )

    Total Shareholders’ Equity

    4,263.1

    Total Liabilities and Shareholders’ Equity

    $
    8,698.9

The accompanying notes are an integral part of these statements.

Attachment (page 2 of 3)

AUTONATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

(In millions)

    2005

    2004

    2003

    (As Revised)

    (As Revised)

    CASH PROVIDED BY OPERATING ACTIVITIES:

    Net income

    $
    433.6

    $
    479.2

    Adjustments to reconcile net income to net cash provided by
operating activities:

    Cumulative effect of accounting change

    —

    14.6

    Loss (gain) on discontinued operations

    (37.2
    )

    21.4

    Depreciation

    81.9

    67.7

    Amortization

    1.2

    1.6

    Amortization of debt issue costs and discounts

    6.6

    6.0

    Income taxes

    89.3

    (129.6
    )