Business Context and Reporting Period
Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Operations: One of the largest U.S. automotive retailers, operating 110 franchises (84 locations) across 11 states. The portfolio includes new and used vehicle sales, parts and service, and finance and insurance (F&I).
Market Environment: The company operates in a severely depressed market with U.S. new vehicle sales dropping to a seasonally adjusted annual rate (SAAR) of approximately 9.6 million in the first half of 2009, down from over 16.0 million in prior years. Tighter lending standards and manufacturer bankruptcies (Chrysler and General Motors) have significantly impacted operations.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) | Change |
|---|---|---|---|
| Total Revenues | $1,774.6 million | $2,435.7 million | (27%) |
| Gross Profit | $302.7 million | $392.6 million | (23%) |
| Net Income | $5.8 million | $20.5 million | (72%) |
| Diluted EPS (Net Income) | $0.18 | $0.64 | (72%) |
| Cash and Cash Equivalents | $41.9 million | $91.6 million (Dec 31, 2008) | N/A |
| Working Capital | $194.8 million | N/A | N/A |
| Total Debt (Long-term + Current) | $636.5 million | $658.5 million (Dec 31, 2008) | N/A |
| Operating Cash Flow | $29.1 million | $106.1 million | (72%) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased $661.1 million (27%) year-over-year. New vehicle revenue fell 33% ($480.1 million) and used vehicle revenue fell 23% ($136.4 million) due to a 35% drop in same-store light vehicle retail unit sales.
- Margin Pressure: While total gross profit margin improved 100 basis points to 17.1% due to a mix shift toward higher-margin parts and service, gross profit dollars declined across all segments. New vehicle gross profit dropped 36%.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased $61.4 million (20%) to $249.7 million, driven by restructuring initiatives, reduced advertising, and lower sales commissions. However, SG&A as a percentage of gross profit increased to 82.5% from 79.2% due to the sharper decline in gross profit.
- Discontinued Operations: The company reported a net loss of $2.0 million from discontinued operations, primarily due to operating losses from franchises pending disposition and lease termination costs, partially offset by gains on the sale of three franchises.
Guidance, Outlook, and Risks
Management Outlook:
- Management expects the remainder of 2009 to remain a "very challenging retail environment" with continued negative impacts on new vehicle, used vehicle, and F&I revenue.
- Net income for 2009 is expected to be lower than 2008, excluding 2008 impairment expenses, due to lower unit sales, margin pressure, and financing difficulties for consumers.
- Restructuring plans (relocation of HQ, elimination of regional management) are expected to deliver full annualized savings of approximately $14.5 million by September 2009.
- Dividend payments have been suspended, and acquisition strategies have been temporarily halted.
- Manufacturer Bankruptcies: Chrysler and General Motors filed for Chapter 11. Chrysler terminated one franchise; GM notified the company it would not renew two franchises. The company received consent to close two GM dealerships in Q3 2009. Risks include supply chain disruptions and reduced incentives.
- Liquidity and Covenants: The company amended its credit facilities to remove the total leverage ratio covenant but agreed to reduced credit availability (BofA facility reduced from $175M to $150M) and higher interest rates. Compliance with remaining covenants (Current Ratio, Fixed Charge Coverage) is critical.
- Financing Environment: Tighter lending standards and lower loan-to-value ratios are reducing consumer purchasing power and F&I revenue per vehicle.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to maintain the Fixed Charge Coverage Ratio (1.63 to 1 as of June 30) and Current Ratio (1.53 to 1) under the amended credit agreements.
- GM/Chrysler Franchise Status: Monitor the execution of the closure of the two GM dealerships and the impact on inventory and receivables from the "New GM" and "New Chrysler" entities.
- Inventory Levels: Assess the "days sales in inventory" metric (38 days for used vehicles as of June 30) to ensure alignment with consumer demand in a low-volume market.
- Cash Flow Sustainability: Review the "Adjusted Cash Provided by Operating Activities" ($1.5 million for the six months ended June 30, 2009) to gauge true operational liquidity after accounting for floor plan financing mechanics.
- Restructuring Savings: Confirm the realization of the projected $14.5 million in annualized cost savings from the elimination of the regional management structure and HQ relocation.