Asbury Automotive Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to Q1 2022 unless noted. Asbury operated 184 new-vehicle franchises across 139 dealership locations, 32 collision centers, and its TCA finance-and-insurance business in 14 states.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $3,582.3 million | $3,911.8 million | Down 8% |
| Gross profit | $696.2 million | $792.0 million | Down 12% |
| Gross margin | 19.4% | 20.2% | Down 0.8 percentage points |
| Income from operations | $276.5 million | $320.8 million | Down 14% |
| Net income | $181.4 million | $237.7 million | Down 24% |
| Diluted EPS | $8.37 | $10.38 | Down 19% |
| Operating cash flow | $171.7 million | $409.0 million | Down $237.3 million |
Revenue declines were led by used vehicles (down 17%) and finance and insurance (down 15%); parts and service revenue increased 3%. Gross profit fell in new vehicles (20%), used vehicles (22%) and F&I (18%), while parts and service gross profit rose 2%. SG&A decreased 12% to $403.0 million, but SG&A as a share of gross profit increased to 57.9% from 57.5%. The prior-year quarter included a $33.1 million dealership divestiture gain; there was no comparable gain in Q1 2023.
Balance sheet, liquidity and capital allocation
- At March 31, 2023, cash and cash equivalents were $296.8 million, total assets $8.18 billion, and shareholders’ equity $3.05 billion. Total debt, including current maturities, was $3.28 billion, down from $3.30 billion at December 31, 2022.
- Management reported total available liquidity of $1.72 billion, comprising $275.5 million of cash excluding TCA-held cash, $775.2 million in floor-plan offset accounts, $437.5 million of revolving-credit availability and $234.8 million of used-vehicle floor-plan availability. Capacity is subject to borrowing-base limits and covenants.
- Current assets were $2.05 billion versus current liabilities of $1.07 billion. Inventory increased to $1.08 billion from $959.2 million at year-end, primarily reflecting higher new-vehicle inventory.
- Net cash used in investing activities was $55.2 million; capital expenditures excluding real estate were $15.2 million. Net cash used in financing activities was $55.0 million. Cash increased $61.5 million to $296.8 million.
- Adjusted operating cash flow, a non-GAAP measure, was $243.9 million versus $405.5 million. Management attributed the decline mainly to lower accounts payable and accrued liabilities, lower net income and non-cash adjustments, and changes in other current assets.
- The company repurchased 110,323 shares for $20.7 million under its repurchase program. It also repurchased employee shares for net settlement for $10.9 million. The program had $190.1 million remaining at quarter-end; the company repurchased an additional 149,765 shares for $28.7 million through April 27.
Changes, outlook and notable items
- Management said lower consolidated revenue and gross profit were primarily affected by 16 dealership divestitures completed during 2022. Same-store results also reflected lower vehicle volumes and per-unit profitability.
- Same-store new-vehicle revenue rose 3%, but new-vehicle gross profit fell 14%; same-store new-vehicle gross margin declined to 10.1% from 12.1% as inventory constraints eased somewhat. Management still cited semiconductor, parts and component shortages and historically low inventory.
- Same-store used-vehicle retail gross profit declined 20%, with gross profit per vehicle down 15%, reflecting lower used-vehicle market prices and affordability pressure from inflation and higher interest rates. Same-store parts and service revenue increased 12%, supported by customer-pay and warranty work.
- Management expects approximately $200 million of 2023 capital expenditures for facility upgrades, construction, service capacity, technology and equipment. It stated that liquidity should be sufficient for at least the next 12 months. The filing provides no earnings or revenue guidance.
- Interest-rate exposure includes $81.7 million of variable-rate debt; a 100-basis-point rate change could affect annual interest expense by up to $0.8 million. Seven interest-rate swaps are in place. Floor-plan assistance reduced new-vehicle cost of sales by $20.8 million in Q1 2023, but future assistance is uncertain.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness involving user-access reviews, segregation-of-duties configurations and administrative access at acquired LHM and TCA businesses. No resulting financial-statement misstatements were identified; management expected remediation in 2023 after controls operate and are tested.
- Risks include vehicle and parts supply disruptions, consumer demand and credit availability, inflation and interest rates, competition and margin pressure, manufacturer relationships and requirements, debt covenants, cybersecurity, and legal or regulatory matters. The company reported covenant compliance and no known claims expected to materially adversely affect it, while noting outcomes remain uncertain. It had $12.5 million of letters of credit and a $17.4 million surety-bond line outstanding/maintained as off-balance-sheet arrangements.
Key facts for investors to verify
- How much of the year-over-year decline reflects 2022 dealership divestitures versus underlying same-store volume and margin trends.
- Whether new-vehicle supply improves and whether lower new- and used-vehicle gross profit per unit persists.
- Operating cash flow and working-capital movements, including the composition and availability of reported floor-plan offset liquidity.
- Execution of the approximately $200 million capital-spending plan, share repurchases, and debt and covenant capacity.
- Progress and testing evidence for remediation of the LHM/TCA internal-control material weakness.