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AutoNation Inc. (AN), the largest U.S. car dealership chain, said second-quarter profit dropped 29% on continued weak sales, but higher margins and stronger-than-expected core earnings suggest the downturn may be reaching a bottom.

"The second quarter was a pivotal moment for the automotive industry," said Chairman and Chief Executive Michael J. Jackson, referring to a host of recent changes that included "long-awaited volume stabilization."

The company expects "a gradual improvement of new-vehicle sales beginning in the second half of 2009" and will increase its inventory "in a disciplined manner" to meet demand. AutoNation is in "an excellent position to capitalize on dealer consolidation and the gradual recovery in industry volume," he said.

Jackson also expected a boost from the U.S. government's "Cash for Clunkers" program, which has increased car sales in the past week industrywide. The company's dealerships sold more than 3,000 vehicles in the past week through the program.

"It's been a huge success," Jackson said in a brief interview with The Wall Street Journal. "I think there has been a psychological effect and [it has] gotten consumers to start buying cars again."

Confusion continued to swirl Friday on whether the government will provide more funds after the program reportedly ran out of money Thursday night.

During the quarter, AutoNation's profit fell to $36.7 million, or 21 cents a share, from $51.8 million, or 29 cents a share, a year earlier. Excluding divestitures and stock compensation, earnings from continuing operations fell to 29 cents but exceeded a mean analyst estimate of 24 cents a share, according to Thomson Reuters.

Revenue dropped 29% to $2.61 billion.

An epic vehicle-sales slump tied to weak consumer spending has roiled auto dealerships, resulting in job cuts and bankruptcies. But plant shutdowns at General Motors Co. and Chrysler Group LLC as part of government-supported restructuring may have helped tighten inventories and that could help dealers stabilize prices.

New-vehicle sales dropped 35%, while sales of used cars fell 27%. Meanwhile, parts and service sales were down 8.6%.

However, the supply of new cars dropped to 53 days from 83 days at the end of December. The statistic suggests the industry's shift to producing cars based only on demand and not overloading dealer lots is paying off. The change also means auto makers and dealers could better control pricing as sales return.

Wednesday, AutoNation rival Penske Automotive Group Inc. (PAG) said second-quarter income dropped 63% on continued weak sales, but earnings beat expectations.

AutoNation shares recenlty fell 3.4% to $19.91. The stock has doubled this year, making it the best performer of the Standard & Poor's 500-stock index.

-By Jeff Bennett, Dow Jones Newswires; 248-204-5542; jeff.bennett@dowjones.com

(Mike Barris contributed to this report.)