ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: One of the largest automotive retailers in the U.S., operating 122 franchises (90 dealership locations) across 11 states. The company sells new and used vehicles, parts, and services, and offers financing and insurance products. The portfolio is heavily weighted toward luxury and mid-line import brands.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($18.9M) + Long-term debt ($608.9M) + Floor plan notes payable ($188.9M + $470.8M).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 11% ($164.2M) for the quarter and 10% ($278.7M) for the six months compared to the prior year periods. This was driven by a 11% drop in new vehicle revenue and a 19% drop in used vehicle revenue.
• Profitability Pressure: Net income for the quarter fell 47% to $10.9M. However, for the six-month period, net income increased slightly by 2% to $21.4M, primarily due to a reduction in losses from discontinued operations.
• Margin Mix Shift: Despite lower vehicle sales, total gross profit margin increased 70 basis points to 16.1% for the quarter, driven by a higher mix of parts, service, and finance & insurance (F&I) revenue.
• Expense De-leveraging: Selling, General, and Administrative (SG&A) expenses as a percentage of gross profit increased to 79.4% for the quarter (from 74.5% in 2007) due to lower sales volumes.
• Real Estate Acquisition: In Q2 2008, the company purchased 33 previously leased properties for $207.9 million, financed largely through new mortgage borrowings ($151.1M).

Guidance, Outlook, and Risks

• Outlook: Management expects the retail environment to remain challenging for the remainder of 2008, with potential continued year-over-year declines in net income. Risks include a new vehicle SAAR dropping below 14.0 million, further margin compression, or rising interest rates.
• Restructuring: In July 2008, the company initiated a phased restructuring plan, including shutting down New York and Stamford offices and moving headquarters to Atlanta, targeting a 20% reduction in corporate personnel expenses.
• Goodwill Impairment Risk: Due to declines in earnings and market capitalization, there is a significant risk of goodwill and franchise rights impairment. Management noted that if an impairment test triggers a write-down, it could be material and non-cash, potentially affecting the ability to pay dividends or repurchase shares.
• Liquidity: The company maintains $65.0M available under its Committed Credit Facility and $49.2M in used vehicle borrowing capacity. It remains in compliance with all debt covenants.
• Subsequent Events: A $0.225 per share dividend was declared in July 2008. One franchise was sold in July 2008 for $1.7M.

Investor Verification Checklist

• Goodwill Valuation: Verify the sensitivity of the goodwill impairment test given the decline in market cap and earnings; assess the potential magnitude of a non-cash write-down.
• Inventory Levels: Confirm the alignment of used vehicle inventory with current consumer demand, noting the 8% reduction in Q2 2008.
• Debt Covenants: Monitor the Fixed Charge Coverage Ratio and Total Leverage Ratio to ensure continued compliance, especially if earnings decline further.
• Real Estate Leverage: Review the impact of the $151.1M in new mortgage debt on future interest expense and cash flow.
• Sub-prime Exposure: Assess the impact of tightening lending standards on used vehicle sales and F&I chargeback reserves.