Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Operations: One of the largest U.S. automotive retailers, operating 113 franchises (86 dealership locations) across 11 states. The company sells new and used vehicles, parts, and services, and offers financing and insurance products. During Q1 2009, the company relocated its corporate headquarters to Duluth, Georgia, and eliminated its regional management structure to reduce costs.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $838.3 | $1,202.6 |
| Gross Profit | $148.1 | $194.8 |
| Income from Operations | $18.7 | $33.9 |
| Net Income | $0.3 | $10.1 |
| Diluted EPS (Net Income) | $0.01 | $0.31 |
| Cash and Cash Equivalents | $35.7 | $25.7 |
| Working Capital | $175.8 | $165.2 |
| Total Debt (Current + Long-Term) | $1,037.9 | $1,212.5 |
| Operating Cash Flow | $42.1 | ($0.3) |
Note: Total Debt includes Floor plan notes payable (trade and non-trade), current maturities of long-term debt, and long-term debt.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 30% ($364.3 million) year-over-year. New vehicle revenue dropped 36% and used vehicle revenue dropped 30%, driven by a 38% decline in same-store light vehicle retail unit sales due to the economic downturn and tighter lending standards.
- Profitability Compression: Net income plummeted 97% to $0.3 million. Income from continuing operations fell 79% to $2.2 million. Gross profit declined 24% to $148.1 million.
- Margin Mix Shift: Despite lower volumes, the total gross profit margin increased 150 basis points to 17.7%. This was driven by a higher mix of revenue from higher-margin parts, service, and Finance & Insurance (F&I) segments, which comprised a larger percentage of total revenue compared to new vehicle sales.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 21% ($32.4 million) due to restructuring initiatives, including the headquarters relocation and elimination of regional management. However, SG&A as a percentage of gross profit increased to 83.5% due to the de-leveraging effect of lower gross profit.
- Discontinued Operations: The company reported a net loss of $1.9 million from discontinued operations, primarily related to legal and insurance expenses for sold or pending franchises.
Guidance, Outlook, and Risks
- Outlook: Management expects 2009 to remain a "very challenging retail environment" with continued declines in new vehicle, used vehicle, and F&I revenue. They anticipate lower net income for 2009 compared to 2008 (excluding 2008 impairment expenses).
- Covenant Compliance: The company faces significant risk regarding financial covenants. Compliance in 2009 may depend on the ability to repurchase outstanding debt securities at a significant discount to boost EBITDA. The Board has authorized up to $50.0 million for such repurchases. In April 2009, the company obtained a waiver for a store-level covenant violation.
- Manufacturer Risk: The company highlights the risk of bankruptcy among domestic manufacturers (GM, Chrysler, Ford). Exposure includes receivables, inventory valuation, and franchise rights. Bankruptcy could also lead to the termination of floor plan financing by captive finance companies.
- Restructuring: Cost savings from the headquarters relocation and regional management elimination are expected to be fully realized by April and July 2009, respectively.
- Liquidity: As of March 31, 2009, the company had $129.6 million available under its revolving credit facility and $33.8 million under its used vehicle floor plan facility. Management believes liquidity is sufficient for the next 12 months.
Key Facts for Investor Verification
- Covenant Status: Verify the company's ability to maintain compliance with debt covenants (Current Ratio, Fixed Charge Coverage, Leverage Ratios) without further waivers or debt repurchases.
- Inventory Exposure: Review the specific exposure to domestic manufacturers (GM, Chrysler, Ford) regarding inventory and receivables, as bankruptcy risks remain high.
- Debt Repurchase Strategy: Monitor the execution of the authorized $50.0 million debt repurchase program and its impact on EBITDA and covenant compliance.
- Discontinued Operations: Track the resolution of pending dispositions (8 franchises pending as of March 31, 2009) and associated legal costs.
- Sub-prime Lending: Assess the impact of tighter lending standards on used vehicle sales and F&I per vehicle sold, which have declined significantly.