ABG

Business Context and Reporting Period

Company: Asbury Automotive Group, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Asbury is one of the largest automotive retailers in the U.S., operating 114 franchises across 87 dealership locations in 21 metropolitan markets. The company sells new and used vehicles, provides maintenance and repair services, and arranges financing and insurance. Its portfolio is heavily weighted toward luxury and mid-line import brands (73% of new retail revenue).

Key Financial Metrics

Revenue Mix (2006): New vehicles (60%), Used vehicles (25%), Parts/Service/Collision (12%), Finance & Insurance (3%).
Profit Contribution: Fixed operations (Parts/Service) contributed 39% of total gross profit despite being only 12% of revenue.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 6% ($335 million) driven by a 10% increase in used vehicle revenue and a 5% increase in new vehicle revenue. Heavy truck revenue surged 43% due to pre-regulation demand.
• Profitability: While Net Income declined slightly (1%) due to discontinued operations, Income from Continuing Operations rose 15%. Adjusted Income from Continuing Operations increased 18% to $69.4 million.
• Interest Expense: Floor plan interest expense increased 47% ($13.1 million) primarily due to a 170 basis point rise in short-term interest rates.
• Discontinued Operations: The company reported a net loss of $6.4 million from discontinued operations in 2006, compared to income of $2.8 million in 2005. This included the sale of franchises and losses from closed locations.
• SG&A Efficiency: Adjusted SG&A expenses as a percentage of adjusted gross profit improved by 170 basis points to 76.1%, reflecting expense control initiatives.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Brand Strategy: Management expects continued market share gains for luxury and mid-line import brands, which are viewed as more resilient to economic downturns.
• Heavy Trucks: Significant decrease in heavy truck sales is expected in 2007 due to new emission laws increasing vehicle costs, though the company mitigated this by stocking 2006 models.
• Capital Allocation: The company plans to spend $50–$100 million on acquisitions in 2007 and expects capital expenditures of $70–$80 million. A 1.3 million share repurchase program was approved in February 2007.
• Dividends: A $0.20 per share quarterly dividend was declared, marking the third consecutive quarter of this payment.

Risks and Contingencies:

• Manufacturer Dependence: Operations are subject to manufacturer franchise agreements which can be terminated or non-renewed based on performance or capitalization requirements. The company is at franchise ceilings with Toyota, Lexus, and Jaguar.
• Interest Rate Sensitivity: A 1% increase in interest rates would increase annual interest expense by approximately $5.9 million.
• Sub-prime Lending: Tightening credit standards in the sub-prime market could adversely affect used vehicle sales.
• Legal Proceedings: The company is defending a breach of contract action in Arkansas seeking damages in excess of $23.0 million related to a discontinued "Price 1" program.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent of the $6.4 million loss from discontinued operations and the status of the two franchises pending disposition as of year-end.
• Heavy Truck Exposure: Assess the magnitude of the expected 2007 decline in heavy truck revenue and the sufficiency of the 2006 model year inventory buffer.
• Interest Rate Hedging: Review the effectiveness of the $150 million interest rate swap entered in November 2006 against rising floor plan costs.
• Acquisition Pipeline: Confirm the status of the two pending acquisitions under contract (approx. $15 million) and the feasibility of the $50–$100 million acquisition target for 2007.
• Share Repurchase Authority: Monitor the execution of the 1.3 million share repurchase program approved in February 2007.