Asbury Automotive Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Asbury operated 181 new-vehicle franchises across 138 dealership locations, 32 collision centers, and its Total Care Auto (TCA) business in 14 states.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3,742.5 million | $3,950.1 million | $7,324.8 million | $7,862.0 million |
| Gross profit | $713.1 million | $802.7 million | $1,409.3 million | $1,594.7 million |
| Income from operations | $287.7 million | $335.5 million | $564.2 million | $656.3 million |
| Net income | $196.4 million | $201.4 million | $377.7 million | $439.1 million |
| Diluted EPS | $9.34 | $9.07 | $17.70 | $19.52 |
| Gross margin | 19.1% | 20.3% | 19.2% | 20.3% |
| SG&A as % of gross profit | 57.3% | 55.8% | 57.6% | 56.7% |
Revenue and gross profit drivers: Q2 revenue declined 5% and gross profit declined 11% year over year. Used-vehicle revenue fell 19% and finance and insurance (F&I) revenue fell 18%; higher new-vehicle and parts-and-service revenue partly offset those declines. For the first half, revenue fell 7% and gross profit fell 12%. Parts and service was comparatively resilient, with first-half revenue up 2% and same-store revenue up 9%.
Q2 new-vehicle units sold declined 1%, while gross profit per new vehicle fell 15% to $4,835. Used-vehicle retail units declined 21% and gross profit per retailed vehicle fell 18% to $2,081. Management attributed pressure to easing new-vehicle inventory constraints and lower used-vehicle market prices, alongside limited used inventory. Q2 F&I gross profit declined 12%; F&I per retail vehicle was down 1%.
Diluted EPS increased 3% in Q2 despite lower net income, alongside a reduced weighted-average diluted share count (21.0 million versus 22.2 million). First-half diluted EPS declined 9%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $77.5 million at June 30, 2023, versus $235.3 million at year-end 2022. Management’s liquidity calculation excludes $13.9 million held by TCA and uses $63.6 million of available cash.
- For the first half, operating cash flow was $221.7 million, down from $496.6 million. The company’s non-GAAP adjusted operating cash flow was $418.3 million versus $543.9 million; this measure adjusts for floor-plan financing and related items and is not a substitute for GAAP cash flow.
- Investing activities used $62.5 million, compared with $344.2 million provided in the prior-year period, which included substantially higher divestiture proceeds. Financing activities used $316.9 million, including $220.3 million of treasury-stock purchases.
- Total debt, including current maturities, was $3,240.5 million at June 30, 2023, compared with $3,301.2 million at December 31, 2022. The company prepaid approximately $23.9 million remaining under its 2013 BofA Real Estate Facility during June.
- Management reported $1.59 billion of available liquidity, comprising available cash, floor-plan offset-account funds, revolving-credit availability and used-vehicle floor-plan availability. It stated that covenant compliance did not further restrict facility availability and that the company was in compliance with its debt and lease covenants.
Changes, outlook and risks
- Year-over-year comparisons reflect dealership disposals: Asbury sold one Austin franchise in the first half of 2023; 2022 included 16 divestitures that contributed $683 million of revenue for that full year. The 2023 sale generated a $13.5 million pretax gain, compared with a $4.4 million gain on first-half 2022 divestitures. Q2 2022 included a $28.7 million divestiture loss.
- Management expects approximately $185 million of 2023 capital expenditures for facility upgrades and construction, service capacity, technology and equipment. The filing does not provide formal earnings or revenue guidance.
- Management cited ongoing manufacturer production and parts constraints, uneven vehicle availability by brand and model, limited pre-owned inventory, inflation, rising interest rates, consumer credit availability, and competition and margin pressure as risks. It said used-vehicle inventory was 35 days’ supply, within its targeted 30–35 day range.
- Management expects sufficient liquidity to meet requirements for at least the next 12 months and foreseeable future. This is a forward-looking statement and depends on cash generation, borrowing availability and capital-allocation decisions.
- Asbury repurchased 1,070,126 shares under its program for $210.7 million in the first half and announced a new $250 million authorization in May. The full $250 million remained available at June 30.
- Disclosure controls were not effective because of a previously reported material weakness involving user-access reviews, segregation-of-duties configurations and administrative access at acquired LHM and TCA businesses. Management reported no resulting financial-statement misstatements and expected remediation during 2023, subject to successful testing.
- Known claims and proceedings were not expected by management to materially affect results, but outcomes are uncertain. Manufacturer franchise agreements may require costly capital improvements. The filing also identifies import, regulatory, litigation, cybersecurity and financing risks. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether vehicle and used-inventory availability, vehicle gross profit per unit, and F&I performance continue to weaken or stabilize.
- Whether parts-and-service growth and cost control can offset pressure in vehicle sales and gross profit, particularly as SG&A rose as a percentage of gross profit.
- The drivers of the decline in GAAP and adjusted operating cash flow, including working-capital movements, and whether liquidity remains adequate after repurchases and planned capital spending.
- Debt maturities, interest costs, facility availability and covenant compliance; the filing reports $50.3 million of variable-rate debt exposure and estimates a 100-basis-point rate change could affect annual interest expense by up to $0.5 million.
- Progress and testing results for remediation of the material weakness in internal controls, and whether management concludes the weakness has been fully remediated.
- Execution of the approximately $185 million 2023 capital-spending plan and use of the remaining share-repurchase authorization.