SecProbe.io

CORRESP
1
filename1.htm

Letter to the SEC

AUTONATION, INC.

AutoNation Tower

110 SE Sixth Street

Fort Lauderdale, FL 33301

May 30, 2008

VIA EDGAR SUBMISSION

H. Christopher Owings

Assistant Director

Division of Corporation Finance

Mail Stop 3561

United States Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

          RE:

    AutoNation, Inc.

Form 10-K for Fiscal Year Ended December 31, 2007 Filed February 28, 2008

Definitive Proxy Statement on Schedule 14A Filed March 27, 2008

File No. 001-13107

Dear Mr. Owings:

     This letter responds to the comments that AutoNation, Inc. (the “Company”) received from the
Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated
April 17, 2008. For your convenience, we have set forth each of the Staff’s comments below
followed by our response to each comment.

Form 10-K for Fiscal Year Ended December 31, 2007

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 22

    1.

    We note your discussion in MD&A of the challenges in the automotive retail industry resulting
from the slowing economy and tightening credit markets. To help us and your investors better
understand how recent changes in the economy affect your company, please respond to the
following comments:

    •

    Given that goodwill comprises approximately one-third of your total assets, please
expand your critical accounting policy for goodwill to focus on the assumptions and
uncertainties that underlie your goodwill impairment testing, including better
explaining how you arrive at your estimates of fair value, how accurate such estimates
have been in the past, how much the estimates have changed in the past, and whether
such estimates are reasonably likely to change in the future. You should also quantify
the sensitivity of your estimates to change, based on other outcomes that are
reasonably likely to occur and would have a material effect on your financial
statements. Refer to Section V of our Release No. 33-8350.

    •

    Please consider providing similar expanded disclosures for your franchise rights
assets.

    •

    Given that inventory comprises approximately 27% of your total assets, please tell
us how you considered providing a critical accounting policy on inventory impairment.
In this regard, we assume from your disclosures that you have not incurred any
inventory impairments in the periods presented in your financial statements. Please
confirm our assumption or explain this matter to us in more detail. Please consider
whether your investors would benefit from additional insight as to the likelihood of
inventory impairments resulting from reasonably likely changes in the future.
Additionally, given your disclosure of the days supply of inventory that you maintain,
if your estimate of the amount of inventory needed to cover a certain number of days
has changed significantly, or is reasonably likely to change significantly in the
future, we believe you should consider addressing this in a critical accounting policy.

    •

    We note your discussion of the reserve for chargebacks. Please provide us with a
rollforward of your reserve for each of the three years presented in your financial
statements, and tell us how you considered disclosing this information under Articles
5-04 and 12-09 of Regulation S-X. Please expand your critical accounting policy for
revenue recognition and chargebacks to better explain how accurate such estimates have
been in the past, how much the estimates have changed in the past, including whether
you are seeing a trend of increasing chargebacks resulting from the slowing economy,
and whether such estimates are reasonably likely to change in the future. You should
also quantify the sensitivity of your estimates to change, based on other outcomes that
are reasonably likely to occur and would have a material effect on your financial
statements. In this regard, we note that while your finance and insurance, net revenues
comprise a small percentage of your total revenues, they appear significant to your
gross profit and net income.

    •

    Please describe to us the extent of your use of price reductions or any other
customer incentives that you offer beyond those provided by the manufacturers. To the
extent that you offer such incentives, please tell us how you account for such
incentives, and how you considered disclosing your accounting policy. Additionally, to
the extent that the use of such incentives is more prevalent in certain markets than
others, please address this in your analysis of results of operations as part of
providing your investors with a view of the company through the eyes of management.

    Response:

    Goodwill and Franchise Rights

    Please see Attachments 1 and 2 for examples of revisions we will include, to the extent
applicable, in future filings to our critical accounting policies related to goodwill and
franchise rights to describe the valuation methods and related estimates and assumptions
used in our impairment testing, as well as the sensitivity of significant estimates and
assumptions to changes.

2

    Inventory

    With respect to inventory, we have three categories of inventory: (1) new vehicles, (2) used
vehicles, and (3) parts, accessories, and other. New vehicle inventory comprised 80% of our
total inventory as of December 31, 2007, and 81% of our total inventory as of December 31,
2006. We have generally not experienced losses on the sale of new vehicle inventory, in
part due to incentives provided by manufacturers to promote sales of new vehicles and our
inventory management practices noted below.

    Used vehicle inventory comprised 13% of our inventory at both
December 31, 2007 and 2006. In general, used vehicles that we do
not expect to sell on a retail basis are sold in wholesale auctions. The value of our used vehicle inventory was reduced by
$2.0 million at December 31, 2007 (to $313.1 million) and $1.8 million at December 31, 2006
(to $299.9 million) to reflect estimated losses on used vehicle inventory that we estimated
would be sold in wholesale auctions at a loss.

    Parts, accessories, and other inventory, which totaled $150.8 million at December 31, 2007,
and $148.8 million at December 31, 2006, comprised 6% of our inventory and less than 2% of
our total assets at December 31, 2007 and 2006. Parts, accessories, and other
inventory are carried at the lower of acquisition cost (first-in, first-out method) or
market. The value of our parts, accessories, and other inventory was reduced by $5.8
million at December 31, 2007, and $3.0 million at December 31, 2006, to reflect inventory
write downs.

    With respect to inventory levels, we do not currently anticipate a significant change in the
level of inventory we are required to maintain. Additionally, given our inventory
management practices (such as managing our inventory purchases based on our sales
forecasts), we do not believe the current business climate, including challenges in the
automotive retailing industry resulting from the slowing economy and tightening credit
markets, will increase the likelihood of material impairment charges.

    As a result of our inventory management practices and the level of inventory write-downs
noted above, we do not believe that inventory valuation is a critical accounting policy.

    Chargeback Liabilities

    With respect to chargeback liabilities, the requested rollforward of our estimated liability
for each of the three years presented in our financial statements is as follows (in
millions):

    2007

    2006

    2005

    Balance — January 1

    $
    70.1

    $
    67.7

    $
    65.9

    Add: Provisions

    46.8

    57.2

    57.9

    Deduct: Chargebacks

    (54.4
    )

    (54.8
    )

    (56.1
    )

    Balance — December 31

    $
    62.5

    $
    70.1

    $
    67.7

3

    We believe our estimated liability for chargebacks represents a contingent obligation and,
therefore, is not subject to the requirements of Rule 12-09 of Regulation S-X.

    Please see Attachment 3 for example revisions we will include, to the extent applicable, in
future filings to our critical accounting policy for chargebacks. We will also identify the
effects of the slowing economy on our estimated liability for chargebacks, if significant.

    Price Reductions and Incentives

    With respect to customer incentives and price reductions beyond what is offered by the
various manufacturers, our stores periodically offer various sales promotions and incentives
to drive traffic and sales. We do not have formal company-wide price reduction programs for
our customers. Individual vehicle sales transactions are negotiated with customers on a
transaction-by-transaction basis. The effect of changes in transaction prices is reflected
in changes in our gross margins, which we disclose and discuss in our MD&A.

Liquidity and Capital Resources, page 36

    2.

    We note that you have repurchased a significant amount of your outstanding stock over the
past two years, reducing the number of shares outstanding by approximately 30% over this two
year period. We also note that a significant portion of these repurchases appear to have been
funded by the issuance of debt. Given these significant changes in your capital structure, we
believe you should provide your investors with further insight into management’s decisions
concerning these significant stock repurchases and debt issuances. We remind you that MD&A is
intended to enable your investors to see the company through the eyes of management and to
provide the context within which your financial information should be analyzed. To achieve
these objectives, we believe that your discussion of material changes in your capital
structure should not only explain what changed, but should also analyze the underlying factors
behind these changes, including how these changes fit into management’s overall business plan.
Please refer to our Release No. 33-8350, and tell us how you considered revising your MD&A
narrative to address these concerns.

    Response: In future filings, we will expand our discussion in the Liquidity and
Capital Resources section of MD&A based on the guidance in Release No. 33-8350. The
following example demonstrates how we would consider revising our December 31, 2007
discussion, which will be updated as appropriate in future filings:

    In April 2006, we purchased 50 million shares of our common stock at $23 per
share for a purchase price of $1.15 billion pursuant to our equity tender
offer. After the completion of our equity tender offer, we repurchased an
additional 11.2 million shares of our common stock for a purchase price of
$228.9 million during the remainder of 2006, for a total of
61.2 million shares repurchased for an aggregate purchase price of $1.38 billion in 2006.
During 2007, we repurchased 33.2 million shares of our common stock for an
aggregate purchase price of $645.7 million (average purchase price per share
of $19.43). On a cumulative basis since January 1, 2006 through December
31, 2007, we repurchased approximately 31% of our common shares outstanding
(net of issuances in connection with stock option exercises) for
approximately $2.0 billion and have issued approximately $1.3 billion of new
debt (net of
repayments), in part, to fund these repurchases.

4

    We believe that stock repurchases are consistent with the objective of
returning value to stockholders and increasing long-term stockholder value.
We have completed stock repurchases using available cash and new borrowings
to maintain an appropriate balance between meeting the needs of our business
and delivering value to our stockholders.

    At December 31, 2007, $196.7 million remained available for share
repurchases under the existing repurchase program approved by our Board of
Directors. Future share repurchases are subject to limitations in the
indenture relating to our senior unsecured notes. At January 1, 2008,
approximately $30 million remained available for share repurchases and other
restricted payments under the indenture relating to our senior unsecured
notes. This amount will increase in future periods by 50% of our cumulative
consolidated net income (as defined in the indenture), the net proceeds of
stock option exercises, and certain other items, and decrease by the amount
of future share repurchases and other restricted payments subject to these
limitations.

    While we expect to continue repurchasing shares in the future, the decision
to make additional share repurchases will be based on such factors as the
market price of our common stock versus our view of its intrinsic value, the
potential impact on our capital structure, and the expected return on
competing uses of capital, such as dealership acquisitions, capital
investments in our current business, or pay down / repurchases of our debt.

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Goodwill and Other Intangible Assets, net, page 52

    3.

    We note that you perform your annual goodwill impairment test on an enterprise-wide level.
Please explain to us in reasonable detail how your use of one reporting unit in your goodwill
impairment test is consistent with paragraphs 30 and 31 of SFAS 142. If applicable, please
also tell us why you do not assign goodwill to individual reporting units.

    Response: We operate in a single operating and reporting segment, automotive
retailing. As of December 31, 2007, we operated 322 new vehicle franchises from 244 stores.
Our stores have from time to time been organized into different geographic regions.
Changes to our geographical organizational structure are facilitated by the economic and
operating similarities of our stores. As of December 31, 2007, our stores were organized
into four regions.

    We believe that each of our four regions represent “components,” as defined in paragraph 30
of SFAS 142, since each region meets the definition of a “business” and has separate and
distinct financial information. Additionally, however, these components have similar
economic characteristics and, therefore, should be considered as a single reporting unit as
further described in paragraph 30 of SFAS 142 and in Emerging Issues Task Force (“EITF”)
Abstracts, Topic D-101, “Clarification of Reporting Unit Guidance in Paragraph 30 of FASB
Statement No. 142.”

    We believe all of our regions have similar economic characteristics as a result of several
factors, including:

5

    •

    Our regions have historically exhibited comparable gross profit percentages.

    •

    Each region is comprised of a mix of brands of new vehicle franchises, which
offer similar products and services.

    •

    The stores within our regions use standardized policies and procedures,
including similar finance and insurance products and sales processes.

    •

    Each franchise sells predominantly to end consumers and operates under the same
types of manufacturer and state regulatory environments.

    •

    Our stores share common information technology systems and operate under
standardized accounting policies. In addition, most of our stores utilize a shared
service center for certain accounting and other administrative functions.

    As a result of the foregoing, we have a single reporting unit for the purposes of goodwill
impairment testing, which we believe to be consistent with the requirements of paragraphs 30
and 31 of SFAS 142.

Revenue Recognition, page 55

    4.

    You disclose that you sell and receive a commission, which is recognized upon sale, on
several types of products, including extended service contracts, maintenance programs,
guaranteed auto protection, tire and wheel protection, and theft protection products. You
further indicate that your product offerings include those t