UPDATE 3-AutoNation profit up, but shares off on sales miss

* Q2 EPS 49 cents vs Street view 46 cents

* Revenue $3.34 bln vs Street view $3.37 bln

* Gross profit per new vehicle sold up 26 pct

* Shares fall 4 pct (Rewrites first sentence, adds CEO, analyst comments, Lithia results, details, background, byline; updates stock)

By Ben Klayman

DETROIT, July 27 (Reuters) - AutoNation Inc (AN.N), the No. 1 U.S. auto retail group, posted a stronger-than-expected quarterly profit as buyers paid more for new and used vehicles, but its shares fell 4 percent as sales disappointed.

The Japan earthquake and its aftermath in March caused inventories, especially of Japanese vehicles that normally account for about half of AutoNation's sales, to drop off, driving up prices faster than normal. That in turn also boosted used-car prices as some consumers looked elsewhere.

"We faced a big challenge in that we had a dramatic reduction in shipments," AutoNation Chief Executive Officer Mike Jackson said in a telephone interview. "We had to adjust prices to deal with the circumstances."

AutoNation was the latest U.S. dealership group to report a boost in profit margin because of leaner vehicle inventories. Also on Wednesday, Lithia Motors had stronger-than-expected earnings and raised its full-year outlook. [ID:nN1E76P110]

"The dealers are getting really great gross profits on used vehicles," Morningstar analyst David Whiston said. "Also a really good driver for all the firms is the cost cutting they did in the recession and just after.

"The question is how many more quarters of this will we see?" he added. "I think it will moderate a bit, but for the dealer sector it's still a pretty bright story for the next few quarters."

However, AutoNation's sales came up short of expectations and the stock fell as Whiston said the run-up in shares of almost 50 percent since early January had pushed the stock's valuation ahead of its peers and any disappointment would lead to profit taking.

On Tuesday, Group 1 Automotive (GPI.N), Asbury Automotive Group (ABG.N) and Sonic Automotive (SAH.N) all posted stronger-than-expected quarterly profits. Penske Automotive Group (PAG.N) reported the same last week. [ID:nL3E7IQ2OV] [ID:nN1E76K04K]

AutoNation's second-quarter net income rose 52 percent to $71.9 million, or 48 cents a share, from $47.2 million, or 29 cents a share, a year earlier.

Excluding one-time items, AutoNation earned 49 cents a share, 3 cents above what analysts polled by Thomson Reuters I/B/E/S had expected.

Revenue rose about 8 percent to $3.34 billion, below the $3.37 billion analysts had forecast. The Fort Lauderdale, Florida-based company's sales volumes were flat in the quarter, compared with an industry decline of 2 percent.

AutoNation's gross profit jumped $539, or 26 percent, for each new car sold, and $174, or 11 percent, for each used vehicle.

Jackson said supply constraints had begun easing, and profit margins would drop in the third quarter and begin to return to normal levels in the subsequent quarter. He called the recovery by the Japanese automakers "herculean."

AutoNation said shipments from Japanese automakers were about 40 percent below planned levels in the second quarter and by September they will be about 10 percent to 15 percent below planned levels.

Lithia CEO Sid DeBoer said he saw a recovery to normal levels by the first quarter of 2012.

Jackson still anticipates the U.S. auto industry will end the year with about 12.5 million sales. However, he said an extended stalemate on raising the U.S. debt ceiling by Congress and a shutdown of the government would affect the pace of the economic recovery, causing him to change his outlook for the auto market.

"Assuming there's an orderly resolution to the debt situation, I see a very strong close to the year," he said.

Lithia, the No. 9 U.S. dealership group, reported earnings before one-time items of 54 cents a share, easily topping the 35 cents analysts had expected as vehicle sales on a same-store basis rose 24 percent for new cars and 16 percent for used.

The Medford, Oregon-based company also raised it full-year outlook. It now expects earning in the range of $1.67 to $1.73 a share, up from its prior forecast of $1.42 to $1.50. Analysts were expecting $1.48.

Lithia also raised its forecast for 2011 revenue by $100 million to a range of $2.6 billion to $2.7 billion. Analysts were expecting $2.55 billion.

AutoNation's shares fell $1.60, or 4 percent, to $38.51 in early trading on the New York Stock Exchange. Lithia shares were up 3.9 percent, or 85 cents, at $22.58. (Reporting by Ben Klayman; editing by Lisa Von Ahn and Maureen Bavdek)