UPDATE 2-Group 1 profit tops expectations on cost cuts

* Cost-cutting, lower inventory costs bolstered profit

* Dealership chain says auto market has stabilized

* 2009 EPS outlook $1.25 to $1.35

* Shares fall 3.2 pct

DETROIT, July 28 (Reuters) - Dealership Group 1 Automotive Inc (GPI.N) posted a better-than-expected second-quarter profit on Tuesday on cost cutting and lower inventory costs and said the U.S. auto market had stabilized after a sharp contraction that began last year.

Group 1 forecast 2009 earnings of $1.25 to $1.35 per share, on the assumption that U.S. auto sales would bottom out near 10 million vehicles this year. The company had not previously provided a profit outlook, citing market uncertainty.

The company, which operates 98 car dealerships, cut recurring costs by $44.2 million in the quarter from a year earlier.

Group 1 is targeting full-year cost reductions of $120 million. Through the end of June, it cut $86.1 million in recurring costs by eliminating jobs and through other measures.

Net earnings fell 37 percent to $10 million, or 43 cents per share, from $16 million, or 71 cents per share, a year earlier.

Excluding one-time items, earnings from continuing operations were 44 cents per share. On that basis, analysts on average had forecast 33 cents, according to Reuters Estimates.

Revenue dropped 30 percent to $1.1 billion.

Houston-based Group 1 drew most of its sales in the quarter from Texas, Massachusetts and California, with the largest share of its new car sales coming from Japanese automakers Toyota Motor Corp (7203.T), Honda Motor Co (7267.T) and Nissan Motor Co (7201.T).

Revenue from new car sales dropped 37 percent, while used-car sales were off 16 percent. Revenue from parts and repairs were down 5 percent.

With U.S. consumer confidence still under pressure because of weak housing and job losses, many Americans have opted to drive their cars longer and to spend more on repairs, or to consider a used vehicle instead of a new replacement.

U.S. auto sales fell to about 13.2 million vehicles in 2008 from 16.1 million in 2007, plunging late last year as credit tightened.

In recent weeks, automakers and dealer executives have said that there are early signs -- including customer traffic in showrooms -- that industrywide sales have stopped declining after hitting their lowest level since the early 1980s.

Group 1 shares, which have almost tripled since the start of the year, were down 3.2 percent at $27.53 in morning New York Stock Exchange trade. (Reporting by Soyoung Kim and Kevin Krolicki; Editing by Derek Caney and Lisa Von Ahn)