Jul. 31--Fort Lauderdale-based AutoNation, the country's largest auto retailer, Friday posted better-than-expected earnings and forecast a "gradual recovery" for the second half in the worst auto market in decades.

The company said profits dropped 29 percent to $36.7 million and revenues fell 28 percent to $2.6 billion in the quarter ended June 30 from a year earlier.

But the sharp drop in sales sparked by the credit crunch last autumn has finally ended, with sales of new vehicles up 2 percent from the first quarter this year.

"The market has stabilized," AutoNation Chief Executive Mike Jackson said in an interview. "And we think it will gradually return to 13 million to 14 million in new vehicles sold over the next several years."

New vehicle sales nationwide have been tracking at less than 10 million a year through June.

For the just-ended quarter, AutoNation posted profits of 29 cents a share from continuing operations, excluding one-time charges, beating analysts expectations by 5 cents a share.

Executives linked stronger results to a $200 million cost-cutting program announced last year and tight inventory controls. The company had about 53 days worth of new vehicle inventory on hand, down from 60 days a year ago and far below the industry's average of 80 days. Less inventory generally means lower overhead costs.

Analysts cheered AutoNation's able management during the crisis, news of sales gains from the government's "Cash for Clunkers" program and forecasts for market improvement.

"They're the best at managing their overhead expenses," Morningstar analyst David Whiston told The Associated Press, "and in a recession, that really comes through in a positive way."

For the second half, Jackson said the "Cash for Clunkers" program has increased showroom traffic by 36 percent and likely will lift sales for July by 10 percent.

Yet challenges remain for the retailer that as of June 30, had 210 locations and 264 franchises in 15 states.

While credit has loosened a bit for car buyer since last fall, lending remains tight, throttling sales, executives said.

Some automakers may cut incentives on cars, now that GM and Chrysler have emerged from bankruptcy, lifting prices on vehicles, analysts warn.

In addition, a continuing consolidation among dealers nationwide portends greater competition. AutoNation said it closed seven Chrysler dealerships in early June and is closing several GM units to end up with 10 Chrysler and 36 GM franchises after the shutdowns.

The company does not expect any expect any major closures or sell-offs in the near future, thanks to strong cash balances and limited debt. AutoNation shares closed at $20.68 up 0.05 cents in trading Friday.

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