AutoNation looks outside for next CEO

AutoNation Inc. will pluck a new CEO from outside its own ranks, giving the nation's largest new-vehicle retailer a fresh face at the top for the first time since Mike Jackson joined the company 20 years ago.

Jackson, who announced in September that he'd step down as CEO this year, told Automotive News last week that AutoNation will go with an outside candidate for his replacement.

That person will be named in the next two to three months, though the next chief executive will start at a later date, said Jackson, who will move to a new role as executive chairman once his replacement is in place. The new CEO will guide a leaner organization in the wake of a $50 million cost-cutting and restructuring plan announced last week that includes the departures of four high-level executives, including COO Lance Iserman, and the consolidation of AutoNation's three regions into two.

The reason for the restructuring is twofold: worries about tougher business conditions in 2019 and the determination that AutoNation's next CEO would not come from within.

Last week's announced departures came after "there were aspirations to be either president or CEO that were not going to be realized," said Marc Cannon, chief marketing officer. He didn't comment on who had those aspirations, though Iserman was known to be interested in the CEO job.

When the CEO search was announced, Jackson, who turns 70 next month, said his successor could be a promotion from within or an outside hire. But AutoNation's bench has thinned in recent years following a series of executive departures. Iserman, 53, had been the retailer's third operating chief since 2015.

The restructuring initiative includes job cuts beyond the executive departures, though the number hasn't yet been determined. The cuts will help AutoNation manage what it expects will be a difficult 2019 for the automotive retail business, Jackson said.

"Rising rates and rising prices are definitely a headwind, and I think it's important to be ahead of the storm, not behind it," he said.

Though other dealers often take cues from Jackson, it's not clear that substantial cost cuts will be the next step for auto retailers at large. Jackson said slower retail sales could become an industry problem, but how other retailers cope is up to them.

At least one auto retail analyst, Bret Jordan of Jefferies, said last week that AutoNation's public dealership group peers likely have lower cost overhead than AutoNation and are unlikely to follow with similar restructuring plans. "A lot of AutoNation's operation is different from their peers anyway," Jordan said. "They've got a few more balls in the air."

For example, AutoNation in 2016 launched a $500 million brand-extension strategy designed to keep the company profitable amid tightening new-vehicle margins. The strategy includes standalone AutoNation USA used-vehicle stores, collision centers and branded parts and accessories. AutoNation already had launched branded finance-and-insurance products.

In October, Jackson said AutoNation would invest more heavily in the collision and parts and accessories part of the strategy and had no plans to open AutoNation USA stores in 2019. The retailer continues to operate five AutoNation USA stores that opened shortly after the strategy was announced.

Rick Nelson, an analyst with Stephens Inc., said in a report after the restructuring announcement last week that AutoNation has seen little success with AutoNation USA.

During AutoNation's third-quarter earnings call with analysts, Jackson said the company will let the USA stores "continue to develop" as it invests more heavily in the parts, accessories and collision side of the strategy. "That's where we'll get the highest returns next year with the least incremental investment," he said.

Through the first nine months of 2018, as new-vehicle margins tightened and the company's stock price dropped, AutoNation's revenue inched up 1 percent from the year earlier to $16 billion, and net income rose 7.1 percent to $303 million. Jackson declined to comment on how the year wrapped up for the retailer.

The four departing executives will not be replaced, and AutoNation is handing off their duties to others.

"You cannot exempt the senior level of management if you have the gall to take out that level of cost," Jackson said. "You have to demonstrate to the company that everything has been looked at and you found more effective and efficient ways to go forward."

Iserman, who was appointed COO in May 2017, and Tom Conophy, who became chief technology officer in November 2016, left the company Jan. 7. Donna Parlapiano, 54 and a 20-year AutoNation veteran, retired Jan. 3 as executive vice president of franchise network, merger and acquisitions and corporate real estate. Parlapiano will receive a severance payment of $2.6 million in 54 monthly installments and a separate payment equivalent to the cost of health insurance for 18 months, according to a filing with the Securities and Exchange Commission. The filing also stated that Iserman and Conophy left but did not include any payment details for them.

Dennis Berger, chief human resource officer, will leave the company Jan. 31 after assisting with the restructuring plan.

The CEO search announced in September already has experienced a bump. In December, Michael Larson, AutoNation's lead independent director, who was heading the effort to find Jackson's successor, abruptly stepped down from the board. Larson is chief investment officer for Microsoft co-founder Bill Gates, who is AutoNation's largest shareholder, with a 23 percent stake in the retailer.

Sears Holding Corp. CEO Eddie Lampert also has been a major shareholder in AutoNation, though his stake has declined substantially since 2010, when he owned 54.6 percent. Lampert's investment companies now own 17 percent.

Jackson said he will not appoint a new COO but his successor could. Over the last four years, AutoNation has churned through COOs, putting its succession plan into question.

Jackson's longtime No. 2, Mike Maroone, who sold his family dealership group to AutoNation in 1997, was COO from 1999 to 2015. Several managers left AutoNation in the wake of Maroone's departure. Today, Maroone owns Maroone USA, a four-store dealership group in Colorado Springs, Colo.

Two-decade AutoNation veteran Bill Berman succeeded Maroone as Jackson's second in command in 2015 but abruptly resigned in May 2017, less than four months after he was also named president. Just over a year after his resignation, Berman became president of U.S. operations for AutoCanada.

At the time of Berman's 2017 promotion, AutoNation called him the "engineer" of the brand-extension strategy.

Former eastern region chief Jim Bender, 63, was named executive vice president of sales last week and assumes Iserman's duties and Parlapiano's manufacturer relations role. Bender and Scott Arnold, 60, who continues as executive vice president of customer care and brand extensions, "are equals leading those two divisions," Jackson said last week.

As AutoNation, with about 250 stores nationwide, eliminates its central region, stores in Texas and Colorado join the company's western region while Illinois and Minnesota dealerships become part of the eastern region. The company cut about 20 jobs at its Fort Lauderdale, Fla., headquarters, Cannon said, though it has not yet determined the total jobs cuts happening as part of the restructuring.

The cost savings will help enable AutoNation to further invest in its brand-extension strategy and digital retailing efforts, the company said.

But while the brand extensions are not affected by last week's announced cost cuts, Jackson noted, "No area of the company is being exempt from being examined to find a way to make it more cost-effective."