ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: One of the largest automotive retailers in the U.S., operating 100 franchises (81 dealership locations) across 11 states. The portfolio is weighted 87% toward luxury and mid-line import brands and 13% toward domestic brands. The company also operates 25 collision repair centers.

Key Financial Metrics

Note: Net Income includes a significant gain from discontinued operations. Income from Continuing Operations decreased year-over-year.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 18% ($161.1 million) driven by a 20% increase in new vehicle sales and a 21% increase in used vehicle sales. Same-store new vehicle retail unit sales rose 16%.
• Profitability: While Gross Profit increased 12%, Income from Continuing Operations declined 48% ($4.3 million). This decline was primarily due to a $13.1 million increase in SG&A expenses and an $11.1 million increase in other operating expenses (including legal accruals and executive separation costs).
• Discontinued Operations: Net Income surged 169% primarily due to a $15.2 million net-of-tax gain from the sale of the company's heavy truck business in Atlanta, Georgia (10 franchises).
• Margin Pressure: Total gross profit margin decreased 90 basis points to 16.5%, attributed to a mix shift toward lower-margin new and used vehicle sales. New vehicle gross margin per unit decreased 14%.
• Cash Flow: Net cash used in operating activities increased to $49.6 million, though "adjusted" operating cash flow (including non-trade floor plan activity) improved significantly to a use of $22.7 million compared to $52.6 million in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued improvement in U.S. new vehicle sales, projecting a full-year 2011 SAAR (Seasonally Adjusted Annual Rate) of approximately 12.5 million. They expect the effective income tax rate for 2011 to be between 38% and 40%.
• Japan Earthquake Impact: The company is evaluating the impact of the March 2011 earthquakes in Japan on supply chains. While no significant disruptions have been experienced to date, they anticipate potential temporary reductions in revenue and parts availability. Mitigation strategies include expanding used vehicle inventory and managing inventory across stores.
• Legal Contingencies: The company accrued $9.0 million for probable losses related to a class action lawsuit in Arkansas regarding document preparation fees and interest rate participation. The case was remanded to the circuit court following an April 2011 Supreme Court of Arkansas ruling.
• Capital Allocation: The company has $23.2 million remaining under its stock repurchase authorization. Capital expenditures for 2011 are expected to total approximately $35.0 million, excluding real estate purchases.
• Liquidity: Total available liquidity stands at $271.8 million, comprising cash, credit facility availability, and floor plan offset accounts. No material long-term debt maturities are due until September 2012.

Investor Verification Checklist

• Continuing Operations Performance: Verify the sustainability of earnings excluding the one-time gain from discontinued operations, as core income dropped significantly.
• Legal Accruals: Monitor the Arkansas class action litigation status and the potential for additional losses beyond the $9.0 million accrued.
• Supply Chain Disruption: Assess the actual impact of the Japan earthquake on inventory levels, particularly for Japanese import brands which constitute a large portion of the portfolio.
• Margin Trends: Track new vehicle gross profit per unit, which declined 14% year-over-year, to determine if manufacturer incentives or supply constraints are compressing margins.
• Debt Maturities: Confirm refinancing plans for the $29.5 million 3% Convertible Notes maturing in September 2012.