AutoNation

(AN) - Get Report

keeps finding new ways to break its old records.

The nation's largest automobile retailer slashed costs and ramped up share repurchases to hit profit targets in the latest quarter. But business clearly stalled. Sales declined in nearly every major category, and the company -- known for blowing past Wall Street expectations -- squeaked by with its smallest upside "surprise" in a year.

Excluding special gains, which actually doubled the company's profits, AutoNation reported first-quarter income of $91.7 million, or 28 cents a share. Those results were in the middle of AutoNation's own guidance and a penny better than both last year's figures and Wall Street's expectations.

In a conference call Monday morning, AutoNation CEO Mike Jackson celebrated the company's ability to extend a long streak of delivering record earnings and beating analyst expectations despite an industrywide slump.

"AutoNation's scale, coupled with the resiliency of our business model, allowed our company to perform despite a challenging economy," he said.

The stock surged 4.3% to $14.03 Monday morning, recovering from a dip last week ahead of the earnings report. But analysts withheld any congratulations on the quarter, instead pushing the company for details about how it had hit its target and would it continue to do so in the future. Even the company itself expressed fresh caution, cutting second-quarter guidance to between 29 cents and 31 cents a share, below Wall Street expectations of 32 cents. The company also warned that tax-related interest would drop full-year earnings by 4 cents to between $1.21 and $1.26 a share.

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Nevertheless, Jackson indicated that AutoNation will continue to benefit by running a lean operation.

"We will continue to focus on cost reductions, operational improvements and efficient allocation of our capital ...

because we believe that the automotive retail environment will continue to be challenging," he said.

During the latest quarter, AutoNation managed to overcome a 6% slide in first-quarter sales -- which dropped from $4.75 billion to $4.46 billion -- by cutting expenses by a similar amount. It also boosted EPS with aggressive stock buybacks that reduced the share count by 5%.

But some analysts seemed to question whether such a growth strategy is sustainable. AutoNation has already cut operating expenses two quarters in a row, leaving some to wonder how much cutting room is left. Meanwhile, the company has seen particularly strong business segments -- like parts and service -- suffer along with vehicle sales. The parts and service division weathered its first sales decline in company history, slipping 3% during the first quarter. New and used vehicle sales dropped by 7.2% and 4.1%, respectively. "Other" income fell 14%. Only finance and insurance -- AutoNation's smallest division -- showed any improvement at all, with sales inching up less than 1%.

While the company has seen conditions improve since the end of the first quarter, it's projecting no real growth in the second quarter despite positive seasonal factors. Tax-related interest payments, in particular, are expected to gnaw at the bottom line.

For now, however, AutoNation is profiting from a recent deal with the Internal Revenue Service. The company's net income, including the IRS settlement, more than doubled during the first quarter. Total profits came in at 63 cents a share, up from 28 cents a year earlier. But the company must begin paying the IRS back some $470 million within the next year, and in the meantime make tax-related interest payments that will cut full-year earnings by $20 million.

The company made its first interest payment, totaling $2 million, in the first quarter. It expects to pay out the remaining $18 million over the next three quarters and then follow up with a $350 million payment on the principal roughly one year from now.

Short-sellers, who've included those tax obligations in the company's overall debt load, continue to view the stock as overvalued. AutoNation was sporting a price-to-earnings ratio of 13.4 -- double its competitors' -- even before Monday's surge.