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 September 30, 2009, we owned and operated 245 new vehicle franchises from 203 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 34 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 96% of the new vehicles that we sold during the nine months ended September 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 September 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.

For the nine months ended September 30, 2009, new vehicle sales accounted for approximately 52% of our total revenue, but approximately 19% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 24% of total revenue for the nine months ended September 30, 2009, contributed approximately 67% of our gross profit for the same period.

During the three months ended September 30, 2009, we had net income from continuing operations of $64.8 million and diluted earnings per share of $0.36, as compared to net loss from continuing operations of $1.40 billion and diluted loss per share of $7.90, during the same period in 2008. During the nine months ended September 30, 2009, we had net income from continuing operations of $171.8 million and diluted earnings per share of $0.96, as compared to net loss from continuing operations of $1.29 billion and diluted loss per share of $7.22, during the same period in 2008.

Results for the nine months ended September 30, 2009, were favorably impacted by a gain on senior note repurchases of $13.0 million ($8.1 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 months ended September 30, 2008, were impacted by a non-cash goodwill impairment charge of $1.61 billion ($1.37 billion after-tax), non-cash franchise impairments of $127.4 million ($79.0 million after-tax), and a gain on senior note repurchases of $12.1 million ($7.4 million after-tax).

Results for the nine months ended September 30, 2008, were impacted by the non-cash goodwill impairment charge of $1.61 billion ($1.37 billion after-tax), non-cash franchise impairments of $127.4 million ($79.1 million after-tax), the gain on senior note repurchases of $12.1 million ($7.3 million after-tax), as well as a non-cash stock-based compensation expense adjustment of $5.3 million ($3.2 million after-tax).

Market Conditions

While the automotive retail market remained challenging, due primarily to the unfavorable economic conditions in the United States, our results of operations for the third quarter of 2009 were favorably impacted by the Consumer Assistance to Recycle and Save Act of 2009, commonly referred to as "cash for clunkers," that was signed into law by President Obama at the end of June 2009. Under the cash for clunkers program, which officially began in July 2009, certain new vehicle buyers who traded in less fuel-efficient vehicles were eligible for a credit of up to $4,500 from the federal government.

Cash for clunkers stimulated consumer demand for new vehicles, and we sold approximately 12,500 new vehicles under the program. Since new vehicles with a manufacturer's suggested retail price above $45,000 did not qualify under the program, and since each new vehicle sold had to be more fuel-efficient than the related trade-in vehicle, cash for clunkers disproportionately benefited sales of smaller, more fuel-efficient vehicles, primarily in our Domestic and Import segments. Cash for clunkers officially ended on August 24, 2009. As of September 30, 2009, we had received substantially all of the amounts due to us from the federal government under the program.

In September 2009, new vehicle sales returned to pre-cash for clunkers levels, due in part to lower inventory levels. For September 2009, the seasonally adjusted annual rate ("SAAR") of new vehicle sales in the United States was 9.2 million, as compared to 9.6 million for the second quarter of 2009. We expect that the automotive retail market will remain challenging throughout the remainder of 2009 with a gradual recovery beginning in 2010. While we anticipate an improvement next year, we believe that new vehicle sales will remain near historically low levels in 2010.

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. During the third quarter of 2009, we closed all four General Motors dealerships referenced above.

The operating results of the Chrysler and General Motors dealerships that were closed in connection with the bankruptcies were not material to our consolidated financial statements. See "Discontinued Operations" below for a discussion of estimated losses associated with the Chrysler and General Motors bankruptcies that we recorded in discontinued operations.

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 25,326 units at September 30, 2009, from 50,585 units at December 31, 2008, and 47,657 units at September 30, 2008.

Although we focus on managing our inventory levels in accordance with consumer demand, we believe that 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. At September 30, 2009, our days supply of new vehicle inventory was 47 days, as compared to 52 days at June 30, 2009. As noted above under "Market Conditions," the federal cash for clunkers program stimulated consumer demand for new vehicles during the third quarter of 2009, which impacted our supply of new vehicles. Additionally, the reduced production levels of certain automotive manufacturers during the second quarter of 2009, including the factory shut-downs by General Motors and Chrysler, led to a lower supply of new vehicles in the market generally in the third quarter of 2009. During the third quarter of 2009, we increased our orders for new vehicles to increase our inventory for the fourth quarter of 2009.

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 $0.4 million at September 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 September 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 not have been required to complete the second step of the goodwill impairment test for our Import and Premium Luxury reporting units. For the Domestic reporting unit, which had a carrying value of $880.0 million at April 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 $173.4 million at September 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.



($ in millions, except per
  vehicle data)                              Three Months Ended September 30,                                  Nine Months Ended September 30,
                                                                    Variance                                                         Variance
                                                                   Favorable /         %                                            Favorable /         %
                                   2009             2008          (Unfavorable)     Variance        2009             2008          (Unfavorable)     Variance
Revenue:
New vehicle                     $   1,628.1      $   1,891.2      $     (263.1)       (13.9)     $   4,158.6      $   6,039.6      $   (1,881.0)       (31.1)
Used vehicle                          642.2            768.4            (126.2)       (16.4)         1,869.5          2,546.2            (676.7)       (26.6)
Parts and service                     537.9            570.9             (33.0)        (5.8)         1,616.0          1,765.9            (149.9)        (8.5)
Finance and insurance, net             95.7            113.9             (18.2)       (16.0)           261.9            379.6            (117.7)       (31.0)
Other                                  11.8             14.9              (3.1)                         36.8             48.1             (11.3)

Total revenue                   $   2,915.7      $   3,359.3      $     (443.6)       (13.2)     $   7,942.8      $  10,779.4      $   (2,836.6)       (26.3)

Gross profit:
New vehicle                     $     119.7      $     125.2      $       (5.5)        (4.4)     $     279.8      $     400.8      $     (121.0)       (30.2)
Used vehicle                           59.7             64.2              (4.5)        (7.0)           181.9            218.0             (36.1)       (16.6)
Parts and service                     233.8            248.1             (14.3)        (5.8)           707.4            769.4             (62.0)        (8.1)
Finance and insurance                  95.7            113.9             (18.2)       (16.0)           261.9            379.6            (117.7)       (31.0)
Other                                   6.1              8.4              (2.3)                         20.5             26.9              (6.4)

Total gross profit                    515.0            559.8             (44.8)        (8.0)         1,451.5          1,794.7            (343.2)       (19.1)
Selling, general and
administrative expenses               380.1            423.3               43.2        10.2          1,099.9          1,338.2              238.3        17.8
Depreciation and
amortization                           19.4             21.3                1.9                         58.5             64.0                5.5
Goodwill impairment                      -           1,610.0            1,610.0                           -           1,610.0            1,610.0
Franchise rights impairment              -             127.4              127.4                          1.5            127.4              125.9
Other expenses (income),
net                                   (3.1)              2.5                5.6                       (23.6)              2.9               26.5

Operating income                      118.6        (1,624.7)            1,743.3                        315.2        (1,347.8)            1,663.0

Floorplan interest expense            (7.6)           (18.3)               10.7                       (26.7)           (61.1)               34.4
Other interest expense               (10.2)           (20.9)               10.7                       (32.5)           (69.3)               36.8
Gain on senior note
repurchases                             0.5             12.1             (11.6)                         13.0             12.1                0.9
Interest income                         0.3              0.7              (0.4)                          0.9              1.5              (0.6)
Other gains (losses), net               2.2            (2.2)                4.4                          4.0            (2.9)                6.9

Income (loss) from
continuing operations
before income taxes             $     103.8      $ (1,653.3)      $     1,757.1                  $     273.9      $ (1,467.5)      $     1,741.4

Retail vehicle unit sales:
New vehicle                          54,839           62,834            (7,995)       (12.7)         136,840          200,574           (63,734)       (31.8)
Used vehicle                         34,484           42,457            (7,973)       (18.8)         102,774          135,300           (32,526)       (24.0)

                                     89,323          105,291           (15,968)       (15.2)         239,614          335,874           (96,260)       (28.7)

Revenue per vehicle
retailed:
New vehicle                     $    29,689      $    30,098      $       (409)        (1.4)     $    30,390      $    30,112      $         278         0.9
Used vehicle                    $    16,335      $    15,263      $       1,072         7.0      $    16,013      $    15,738      $         275         1.7

Gross profit per vehicle
retailed:
New vehicle                     $     2,183      $     1,993      $         190         9.5      $     2,045      $     1,998      $          47         2.4
Used vehicle                    $     1,673      $     1,566      $         107         6.8      $     1,717      $     1,633      $          84         5.1
Finance and insurance           $     1,071      $     1,082      $        (11)        (1.0)     $     1,093      $     1,130      $        (37)        (3.3)

                                           Three Months Ended        Nine Months Ended
                                             September 30,             September 30,
                                         2009 (%)     2008 (%)     2009 (%)     2008 (%)
Revenue mix percentages:
New vehicle                                  55.8         56.3         52.4         56.0
Used vehicle                                 22.0         22.9         23.5         23.6
Parts and service                            18.4         17.0         20.3         16.4
Finance and insurance, net                    3.3          3.4          3.3          3.5
Other                                         0.5          0.4          0.5          0.5

Total                                       100.0        100.0        100.0        100.0

Gross profit mix percentages:
New vehicle                                  23.2         22.4         19.3         22.3
Used vehicle                                 11.6         11.5         12.5         12.1
Parts and service                            45.4         44.3         48.7         42.9
Finance and insurance                        18.6         20.3         18.0         21.2
Other                                         1.2          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                                   7.4          6.6          6.7          6.6
Used vehicle - retail                        10.2         10.3         10.7         10.4
Parts and service                            43.5         43.5         43.8         43.6
Total                                        17.7         16.7         18.3         16.6
Selling, general and administrative
expenses                                     13.0         12.6         13.8         12.4
Operating income                              4.1           NM          4.0           NM
Operating items as a percentage of
total gross profit:
Selling, general and administrative
expenses                                     73.8         75.6         75.8         74.6
Operating income                             23.0           NM         21.7           NM

NM = Not Meaningful




                                                     September 30,         September 30,
                                                         2009                  2008
Days supply:
New vehicle (industry standard of selling
days, including fleet)                                     47 days               60 days
Used vehicle (trailing 30 days)                            48 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                      Nine Months Ended
                                                September 30,                          September 30,
                                       2009         2008       Variance        2009         2008       Variance
($ in millions)
Floorplan assistance                 $   13.8     $   16.8     $   (3.0)     $   34.9     $   54.3     $ (19.4)
Floorplan interest expense (new
vehicles)                               (7.1)       (17.0)           9.9       (25.2)       (58.9)         33.7

Net new vehicle inventory
carrying benefit (cost)              $    6.7     $  (0.2)     $     6.9     $    9.7     $  (4.6)     $   14.3

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.



($ in millions,
except per
  vehicle data)                       Three Months Ended September 30,                               Nine Months Ended September 30,
                                                            Variance                                                      Variance
                                                           Favorable /         %                                        Favorable /         %
                             2009            2008         (Unfavorable)     Variance       2009            2008        (Unfavorable)     Variance
Revenue:
New vehicle               $   1,622.0      $ 1,877.7      $     (255.7)       (13.6)     $ 4,124.5      $  5,996.1      $  (1,871.6)       (31.2)
Used vehicle                    639.2          757.3            (118.1)       (15.6)       1,849.5         2,509.5           (660.0)       (26.3)
Parts and service               536.5          561.6             (25.1)        (4.5)       1,605.3         1,737.1           (131.8)        (7.6)
Finance and
. . .