The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.
Certain amounts have been reclassified from the previously reported financial statements to conform to the financial statement presentation of the current period.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of June 30, 2009, we owned and operated 264 new vehicle franchises from 210 stores located in major metropolitan markets, predominantly in the Sunbelt region of the United States. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 35 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 98% of the new vehicles that we sold during the six months ended June 30, 2009, are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes, BMW, and Chrysler.
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores.
At June 30, 2009, we had three operating and reportable segments:
(1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes, BMW, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products. Prior period amounts have been reclassified to reflect our operating segment structure at June 30, 2009. For the six months ended June 30, 2009, new vehicle sales accounted for approximately 50% of our total revenue, but approximately 17% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 25% of total revenue for the six months ended June 30, 2009, contributed approximately 68% of our gross profit for the same period. During the three months ended June 30, 2009, we had net income from continuing operations of $54.8 million and diluted earnings per share of $0.31, as compared to net income from continuing operations of $55.5 million and diluted earnings per share of $0.31, during the same period in 2008. During the six months ended June 30, 2009, we had net income from continuing operations of $107.8 million and diluted earnings per share of $0.61, as compared to net income from continuing operations of $110.6 million and diluted earnings per share of $0.62, during the same period in 2008. Results for the three months ended June 30, 2009, were favorably impacted by a net gain on asset sales and dispositions of $5.9 million ($3.7 million after-tax). Results for the six months ended June 30, 2009, were favorably impacted by a gain on senior note repurchases of $12.5 million ($7.7 million after-tax) and a net gain on asset sales and dispositions of $15.5 million ($9.6 million after-tax), partially offset by property impairments of $1.2 million ($0.7 million after-tax). Results for the three and six months ended June 30, 2008, were adversely impacted by a non-cash stock-based compensation expense adjustment of $5.3 million ($3.1 million after-tax).

Market Challenges
Our results of operations for the second quarter of 2009 reflected a challenging automotive retail market impacted by the unfavorable economic conditions in the United States. Although we expect that market conditions will remain challenging, we continue to believe that the rate of new vehicle sales will improve in the second half of 2009, as compared to the first half of 2009. In this environment, we believe that we will be able to manage within the financial covenants contained in our debt agreements. See "Liquidity and Capital Resources - Restrictions and Covenants" below.
Chrysler and General Motors Bankruptcies On April 30, 2009, Chrysler and several of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). In connection with the bankruptcy, Chrysler filed, and the bankruptcy court approved, a dealer consolidation plan to close approximately 789 dealerships, including seven of our Chrysler dealerships. The bankruptcy court also approved the sale of certain Chrysler assets to a new entity that will operate the reorganized Chrysler business. The new Chrysler entity is owned primarily by the autoworkers' union retirement health care trust, Fiat, and the U.S. and Canadian governments. On June 10, 2009, Chrysler completed the sale, and the new Chrysler entity assumed our remaining Chrysler franchise agreements under which we will continue to operate our remaining Chrysler dealerships that were not terminated in the bankruptcy.
On June 1, 2009, General Motors and several of its affiliates also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. In connection with the bankruptcy, we entered into wind-down agreements with General Motors pursuant to which we agreed to close four of our dealerships by October 2010 in exchange for certain wind-down payments. At the same time, we entered into participation agreements under which our remaining General Motors dealerships will continue to operate as franchisees of the new General Motors formed as a result of the bankruptcy. Certain of our dealerships with multiple General Motors franchises entered into a participation agreement as to certain franchises and a wind-down agreement as to other franchises (such as Pontiac, which General Motors is discontinuing as part of the bankruptcy). On July 5, 2009, the bankruptcy court approved General Motors' plan to sell certain assets to a new entity that will operate the reorganized General Motors business, and, on July 10, 2009, General Motors completed the sale. The new General Motors entity is owned primarily by the U.S. and Canadian governments, the autoworkers' union retirement health care trust and certain former bondholders and other creditors of General Motors.
The operating results of the Chrysler dealerships that were closed in connection with the Chrysler bankruptcy and of the General Motors dealerships that we agreed to close in the future were not material to our consolidated financial statements.
Impact of Chrysler and General Motors Bankruptcies During the second quarter of 2009, we classified as discontinued operations five of the seven Chrysler dealerships that were closed in connection with the Chrysler bankruptcy and all of the General Motors dealerships that we agreed to close in the future in connection with the General Motors bankruptcy. The remaining two Chrysler stores that were closed in connection with the Chrysler bankruptcy did not meet the criteria to be classified as discontinued operations due to the expected migration of certain revenues associated with those stores to other stores. For the second quarter of 2009, we recorded in discontinued operations estimated losses associated with the Chrysler and General Motors bankruptcies of approximately $11 million (after-tax), including expected losses on the disposition of real estate. There may be other adverse impacts resulting from the Chrysler and General Motors bankruptcies in the future. For example, the new Chrysler entity and the new General Motors entity are not expected to indemnify us for certain product liability claims.
The seven terminated Chrysler dealerships ceased operations on June 9, 2009, and the four General Motors dealerships that we agreed to terminate are expected to close by June 30, 2010 or earlier.
Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market on our consolidated balance sheets.

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. We reduced our new vehicle inventory to 31,275 units at June 30, 2009, from 50,311 units at December 31, 2008, and 53,733 units at June 30, 2008. Although we focus on managing our inventory levels in accordance with consumer demand, we believe we must maintain a minimum level of inventory at our lower volume stores that is representative of the full line of vehicles offered by manufacturers. This may result in a higher days supply of inventory than would otherwise result if we were in a better economic environment. However, given our inventory management practices (such as managing our inventory purchases based on our sales forecasts and sharing inventory among stores within a local market), we do not believe the current business climate is likely to result in material impairment charges related to new vehicle inventory. We continue to monitor our new vehicle inventory levels closely based on current economic conditions and will adjust them as appropriate.
In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory expected to be liquidated at wholesale auctions at a loss. Our used vehicle inventory balance was net of cumulative write-downs of $0.3 million at June 30, 2009, and $1.7 million at December 31, 2008.
Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount of potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $4.4 million at June 30, 2009, and $6.3 million at December 31, 2008.
Critical Accounting Policies and Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For a complete discussion of our critical and significant accounting policies and estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Goodwill and franchise rights assets are tested for impairment annually on April 30 or more frequently when events or circumstances indicate that impairment may have occurred. As discussed in Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements, during 2008, we recorded $1.61 billion ($1.37 billion after-tax) of non-cash goodwill impairment charges and $146.5 million ($90.8 million after-tax) of non-cash impairment charges related to franchise rights intangible assets.
We completed our annual test for impairment of goodwill on April 30, 2009, and no goodwill impairment charges resulted from the required impairment test. The goodwill impairment analysis is dependent on many variables used to determine the fair value of our reporting units.
As discussed in Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements, we estimate the fair value of our reporting units using an "income" valuation approach, which discounts projected free cash flows (DCF) of the reporting unit at a computed weighted average cost of capital as the discount rate. If our "income" valuation approach had been a hypothetical 10% lower for each of our reporting units as of April 30, 2009, we would have been required to complete the second step of the goodwill impairment test for our domestic reporting unit. For the domestic reporting unit, which has a carrying value of $880.0 million at June 30, 2009, a 7% reduction in its estimated fair value would have resulted in a failure of the first step of the goodwill impairment test. A first step failure would have required us to perform the second step of the goodwill impairment test to measure the amount of implied fair value of goodwill and, if required, the recognition of a non-cash goodwill impairment charge. We would have been in compliance with the financial covenants in our debt agreements even if we had impaired all of the goodwill associated with our domestic reporting unit. The effect of a hypothetical 10% decrease in valuation estimate is not intended to provide a sensitivity analysis of every potential outcome.
We also completed our annual impairment test for intangibles with indefinite lives as of April 30, 2009, and we recorded $1.5 million ($0.9 million, net of tax) of non-cash impairment charges related to rights under an Import store's franchise agreement. Our franchise rights, which related to 20 franchises and totaled approximately $172.4 million at June 30, 2009, are evaluated for impairment on a franchise-by-franchise basis. If the fair value of each of our franchise rights had been determined to be a hypothetical 10% lower as of the valuation date of April 30, 2009, the resulting incremental impairment charge would have been less than $5.0 million.
We will continue to monitor events in future periods to determine if additional asset impairment testing should be performed. We continue to face a challenging automotive retail environment and an uncertain economic environment in general. As a result of these conditions, there can be no assurance that an additional material impairment charge will not occur in a future period.

Reported Operating Data
   Historical operating results include the results of acquired businesses from
the date of acquisition.

                                                 Three Months Ended June 30,                                             Six Months Ended June 30,
($ in millions, except per                                         Variance                                                               Variance
  vehicle data)                                                   Favorable/             %                                               Favorable/             %
                                 2009             2008           (Unfavorable)        Variance          2009             2008           (Unfavorable)        Variance
Revenue:
New vehicle                    $  1,339.1       $  2,062.0       $       (722.9 )         (35.1 )     $  2,524.5       $  4,133.7       $     (1,609.2 )         (38.9 )
Used vehicle                        632.6            868.6               (236.0 )         (27.2 )        1,224.8          1,771.6               (546.8 )         (30.9 )
Parts and service                   537.4            588.2                (50.8 )          (8.6 )        1,075.3          1,191.9               (116.6 )          (9.8 )
Finance and insurance, net           89.0            128.4                (39.4 )         (30.7 )          166.0            265.0                (99.0 )         (37.4 )
Other                                11.5             16.4                 (4.9 )                           24.9             32.9                 (8.0 )

Total revenue                  $  2,609.6       $  3,663.6       $     (1,054.0 )         (28.8 )     $  5,015.5       $  7,395.1       $     (2,379.6 )         (32.2 )

Gross profit:
New vehicle                    $     86.3       $    136.4       $        (50.1 )         (36.7 )     $    160.2       $    274.8       $       (114.6 )         (41.7 )
Used vehicle                         58.3             75.3                (17.0 )         (22.6 )          122.0            153.4                (31.4 )         (20.5 )
Parts and service                   235.9            257.3                (21.4 )          (8.3 )          472.3            520.0                (47.7 )          (9.2 )
Finance and insurance                89.0            128.4                (39.4 )         (30.7 )          166.0            265.0                (99.0 )         (37.4 )
Other                                 7.0              9.0                 (2.0 )                           14.3             18.3                 (4.0 )

Total gross profit                  476.5            606.4               (129.9 )         (21.4 )          934.8          1,231.5               (296.7 )         (24.1 )
Selling, general and
administrative expenses             364.1            451.4                 87.3            19.3            717.6            910.8                193.2            21.2
Depreciation and
amortization                         19.1             20.8                  1.7                             39.0             42.7                  3.7
Franchise impairments                 1.5                -                 (1.5 )                            1.5                -                 (1.5 )
Other expenses (income),
net                                 (10.5 )            0.1                 10.6                            (21.3 )            0.4                 21.7

Operating income                    102.3            134.1                (31.8 )         (23.7 )          198.0            277.6                (79.6 )         (28.7 )

Floorplan interest expense           (9.3 )          (19.7 )               10.4                            (19.1 )          (42.5 )               23.4
Other interest expense              (10.5 )          (21.6 )               11.1                            (22.3 )          (48.4 )               26.1
Gain on senior note
repurchases                           0.6                -                  0.6                             12.5                -                 12.5
Interest income                       0.3              0.3                    -                              0.6              0.8                 (0.2 )
Other gains (losses), net             3.5              1.0                  2.5                              1.8             (0.7 )                2.5

Income from continuing
operations before income
taxes                          $     86.9       $     94.1       $         (7.2 )          (7.7 )     $    171.5       $    186.8       $        (15.3 )          (8.2 )


Retail vehicle unit sales:
New vehicle                        43,512           69,805              (26,293 )         (37.7 )         81,776          137,234              (55,458 )         (40.4 )
Used vehicle                       34,141           45,961              (11,820 )         (25.7 )         68,139           92,514              (24,375 )         (26.3 )

                                   77,653          115,766              (38,113 )         (32.9 )        149,915          229,748              (79,833 )         (34.7 )


Revenue per vehicle
retailed:
New vehicle                    $   30,775       $   29,539       $        1,236             4.2       $   30,871       $   30,122       $          749             2.5
Used vehicle                   $   16,239       $   15,837       $          402             2.5       $   15,854       $   15,958       $         (104 )          (0.7 )

Gross profit per vehicle
retailed:
New vehicle                    $    1,983       $    1,954       $           29             1.5       $    1,959       $    2,002       $          (43 )          (2.1 )
Used vehicle                   $    1,667       $    1,651       $           16             1.0       $    1,742       $    1,667       $           75             4.5
Finance and insurance          $    1,146       $    1,109       $           37             3.3       $    1,107       $    1,153       $          (46 )          (4.0 )

                                              Three Months Ended               Six Months Ended
                                                   June 30,                        June 30,
                                           2009 (%)         2008 (%)       2009 (%)        2008 (%)
Revenue mix percentages:
New vehicle                                     51.3             56.3           50.3            55.9
Used vehicle                                    24.2             23.7           24.4            24.0
Parts and service                               20.6             16.1           21.4            16.1
Finance and insurance, net                       3.4              3.5            3.3             3.6
Other                                            0.5              0.4            0.6             0.4

Total                                          100.0            100.0          100.0           100.0


Gross profit mix percentages:
New vehicle                                     18.1             22.5           17.1            22.3
Used vehicle                                    12.2             12.4           13.1            12.5
Parts and service                               49.5             42.4           50.5            42.2
Finance and insurance                           18.7             21.2           17.8            21.5
Other                                            1.5              1.5            1.5             1.5

Total                                          100.0            100.0          100.0           100.0


Operating items as a percentage of
revenue:
Gross profit:
New vehicle                                      6.4              6.6            6.3             6.6
Used vehicle - retail                           10.3             10.4           11.0            10.4
Parts and service                               43.9             43.7           43.9            43.6
Total                                           18.3             16.6           18.6            16.7
Selling, general and administrative
expenses                                        14.0             12.3           14.3            12.3
Operating income                                 3.9              3.7            3.9             3.8
Operating items as a percentage of
total gross profit:
Selling, general and administrative
expenses                                        76.4             74.4           76.8            74.0
Operating income                                21.5             22.1           21.2            22.5



                                                                      June 30,         June 30,
                                                                        2009             2008
Days supply:
New vehicle (industry standard of selling days, including fleet)        53 days          60 days
Used vehicle (trailing 30 days)                                         35 days          41 days

The following table details net new vehicle inventory carrying benefit
(cost), consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit.

                                   Three Months Ended June 30,                         Six Months Ended June 30,
                             2009             2008           Variance           2009             2008           Variance
($ in millions)
Floorplan assistance        $   11.0         $   18.1         $   (7.1 )       $   21.0         $   37.4         $  (16.4 )
Floorplan interest
expense (new
vehicles)                       (8.1 )          (18.9 )           10.8            (17.3 )          (41.7 )           24.4


Net new vehicle
inventory carrying
benefit (cost)              $    2.9         $   (0.8 )       $    3.7         $    3.7         $   (4.3 )       $    8.0

Same Store Operating Data
   We have presented below our operating results on a same store basis to
reflect our internal performance. The "Same Store" amounts presented below
include the results of dealerships for the identical months in each period
presented in the comparison, commencing with the first full month in which the
dealership was owned by us.

                                                 Three Months Ended June 30,                                             Six Months Ended June 30,
($ in millions, except per                                         Variance                                                               Variance
  vehicle data)                                                   Favorable/             %                                               Favorable/             %
                                 2009             2008           (Unfavorable)        Variance          2009             2008           (Unfavorable)        Variance
Revenue:
New vehicle                    $  1,324.5       $  2,048.4       $       (723.9 )         (35.3 )     $  2,496.4       $  4,103.6       $     (1,607.2 )         (39.2 )
Used vehicle                        624.4            856.4               (232.0 )         (27.1 )        1,207.8          1,745.9               (538.1 )         (30.8 )
Parts and service                   533.4            578.7                (45.3 )          (7.8 )        1,066.0          1,172.3               (106.3 )          (9.1 )
Finance and insurance, net           88.4            127.4                (39.0 )         (30.6 )          164.6            262.7                (98.1 )         (37.3 )
Other                                10.6             15.8                 (5.2 )                           23.3             31.9                 (8.6 )

Total revenue                  $  2,581.3       $  3,626.7       $     (1,045.4 )         (28.8 )     $  4,958.1       $  7,316.4       $     (2,358.3 )         (32.2 )


Gross profit:
New vehicle                    $     85.8       $    135.6       $        (49.8 )         (36.7 )     $    158.7       $    273.1       $       (114.4 )         (41.9 )
Used vehicle                         57.5             74.2                (16.7 )         (22.5 )          120.1            150.8                (30.7 )         (20.4 )
Parts and service                   234.1            254.0                (19.9 )          (7.8 )          468.2            513.4                (45.2 )          (8.8 )
Finance and insurance                88.4            127.4                (39.0 )         (30.6 )          164.6            262.7                (98.1 )         (37.3 )
Other                                 6.8              8.8                 (2.0 )                           13.8             18.2                 (4.4 )
. . .