Executive Summary / Key Takeaways

• Asbury Automotive Group is strategically transforming its business through targeted acquisitions, portfolio optimization, and significant technology investments, aiming to enhance operational efficiency and guest experience.
• The company's high-margin Parts and Service segment continues to demonstrate robust growth, underpinned by an aging vehicle parc and increasing vehicle complexity, providing a stable and growing profit stream.
• Recent financial performance reflects a dynamic market, with growth in new vehicle volume and parts/service offsetting declines in used vehicle gross profit, while the company manages external headwinds like potential tariffs and internal challenges like DMS transitions.
• Following the anticipated Herb Chambers acquisition, ABG is prioritizing deleveraging over the next 18-24 months, supported by strong operating cash flow and proceeds from planned divestitures.
• Key initiatives like the Tekion DMS rollout and the integration of TCA into recent acquisitions are expected to drive long-term efficiency gains and unlock future earnings potential, despite near-term non-cash deferral headwinds from TCA expansion.

Setting the Scene: A Retailer's Evolution in a Dynamic Market

Asbury Automotive Group, Inc. stands as one of the largest automotive retailers in the United States, operating a diversified portfolio of new vehicle franchises, dealership locations, and collision centers across 14 states. Organized in 2002, Asbury's journey has been marked by strategic expansion, notably through the significant acquisitions of Larry H. Miller dealerships in 2021 and the Jim Koons Automotive Companies in late 2023. These deals substantially increased the company's scale and geographic reach, integrating key assets like the Total Care Auto (TCA) finance and insurance product provider, which now operates as a distinct reportable segment alongside the core Dealerships business.

The automotive retail landscape is intensely competitive, characterized by large public dealership groups like AutoNation (AN), Lithia Motors (LAD), Group 1 Automotive (GPI), and Penske Automotive Group (PAG), alongside numerous private operators and increasingly influential online platforms. Competition spans new and used vehicle sales, financing, insurance products, and crucial aftermarket services. While competitors like AN and LAD have emphasized rapid digital integration and aggressive acquisition strategies, respectively, ABG has carved out a position focused on operational efficiency, a balanced business model, and a commitment to enhancing the guest experience. ABG's gross margins, at approximately 17% TTM, compare favorably to peers like AN (18%), LAD (15%), GPI (16%), and PAG (16%), suggesting a relative strength in profitability capture per dollar of revenue. Its operating margins (4.7% TTM) and net margins (2.4% TTM) are more in line with or slightly below some peers, reflecting ongoing integration costs and investments.

The industry operates within a macroeconomic environment influenced by consumer confidence, interest rates, fuel prices, and employment levels. Recent periods have seen fluctuations in new vehicle supply, shifts in used vehicle market dynamics, and the emergence of potential new external factors like tariffs on imported vehicles and parts, which could impact pricing and demand. Despite these variables, underlying trends such as the increasing average age of the U.S. vehicle parc (currently 12.5-13 years) and the growing complexity of modern vehicles underpin a robust long-term demand for parts and service.

ABG's strategy is built upon a balanced approach to automotive retailing and service, leveraging its expanded footprint and diversified brand mix (30% luxury, 41% imports, 30% domestic in Q1 2025) to capture market opportunities. The company actively manages its portfolio through targeted divestitures, such as the recent sales of Nissan (NSANY) and Volvo (VLVLY) franchises in Q1 2025, to optimize its brand and geographic mix. A core pillar of its strategy is disciplined capital allocation, balancing investments in organic growth and technology with opportunistic share repurchases and strategic acquisitions.

Technological Edge and Operational Efficiency: The Foundation for Future Performance

A critical component of Asbury's strategy and a key differentiator in the competitive landscape is its investment in technology aimed at driving operational efficiency and improving the guest experience. The cornerstone of this effort is the implementation of the Tekion Dealer Management System (DMS). Following a pilot program launched in Q4 2024, the company is progressing with the broader rollout of this cloud-based platform, with the transition of the acquired Koons Group expected to be completed before the end of Q3 2025. The goal is to convert all stores by the end of 2026 or early 2027.

Tekion offers several tangible benefits over traditional DMS systems. It is designed to consolidate numerous disparate software applications, potentially reducing the reliance on and cost associated with third-party bolt-ons and their integration fees. The system features a unified customer profile across all dealerships and a single CRM for all departments (sales, service, parts, collision), enabling better communication, more efficient marketing, and increased transparency for both team members and guests. While specific quantitative metrics from the pilot are limited to early signs of improved productivity and guest experience, management anticipates that over time, the enhanced efficiency will lead to a reduction in headcount relative to volume, thereby increasing income per employee. This improved productivity per employee and per service advisor is a key expected outcome.

Complementing the DMS is Asbury's ClickLane omni-channel platform. While often perceived as an online-only tool, ClickLane's showroom app functionality is integral to facilitating in-store transactions. This capability proved particularly valuable during the significant CDK (CDK) outage in Q2 2024, serving as a primary transactional tool when the traditional DMS was unavailable. ClickLane's ability to handle transactions, including financing and signatures, and its differentiating capability to sell new vehicles online (accounting for 47% of ClickLane sales in Q1 2025) underscore its importance in providing a seamless and resilient sales process.

For investors, these technology investments represent a strategic moat. The expected reduction in SG&A costs due to lower software expenses and increased employee productivity is a direct lever for margin expansion. Management anticipates SG&A as a percentage of gross profit to be in the mid-60s in the near term, with the potential to fall below that range in the long term as Tekion is fully implemented and efficiencies are realized. Furthermore, the enhanced transparency and efficiency offered by Tekion and ClickLane are intended to build greater trust with customers, potentially leading to higher retention rates and increased capture of aftermarket business, particularly as vehicles become more technologically complex and require specialized servicing. This focus on technology positions ABG to potentially improve its operational efficiency metrics relative to peers over time, complementing its existing profitability strengths.

Performance and Prospects: Navigating Market Shifts and Strategic Growth

Asbury's recent financial performance reflects a business adapting to evolving market conditions while executing its strategic plan. In the first quarter of 2025, consolidated revenue decreased slightly to $4.15 billion compared to $4.20 billion in Q1 2024. This was primarily driven by a 9% decrease in used vehicle revenue, partially offset by a 4% increase in new vehicle revenue. Consolidated gross profit saw a modest decline to $724.2 million from $750.0 million year-over-year, mainly attributable to lower gross profit per vehicle in both new and used segments as margins normalize from historical highs. However, this was partially mitigated by a 3% increase in parts and service gross profit.

The Dealerships segment remains the primary revenue driver, contributing $4.06 billion in external revenue in Q1 2025. New vehicle unit sales increased by 2% overall (4% same-store), while gross profit per new vehicle declined by 14% to $3,448, reflecting easing inventory constraints. Used vehicle retail units decreased by 10% overall (8% same-store), and gross profit per used vehicle retailed fell by 4% to $1,587, influenced by tighter market conditions and lower market prices. In response to these dynamics, Asbury has strategically prioritized used vehicle profitability over volume since mid-2024, a stance it maintains.

The Parts and Service segment continues to be a standout performer and a key source of stable, high-margin revenue. Gross profit increased by 3% overall (5% same-store) in Q1 2025, reaching $342.7 million, with the gross margin expanding by 1.7 percentage points to 58.3%. This growth is fueled by increased customer pay and warranty volumes, aligning with the trend of an aging vehicle parc. Management highlighted a remarkable 97% increase in customer pay gross profit over the past decade (2014-2024) in a subset of its stores, underscoring the long-term growth trajectory of this business line.

The TCA segment generated $84.1 million in external revenue and $21.1 million in segment operating income in Q1 2025. While F&I net revenue saw a slight decrease, the F&I PVR remained relatively stable at $2,261. The expansion of TCA into the recently acquired Florida and Koons markets is a strategic priority, though it is expected to create a non-cash deferral headwind to reported pre-tax income in 2025 (estimated at $8 million pre-tax income with a $62 million or $2.35 EPS non-cash deferral hit for the full year) and peaking in 2026, before becoming a tailwind from 2027 onwards.

Looking ahead, management anticipates the new vehicle gross profit per vehicle to settle into a "new normal" range of $2,500 to $3,000, likely reaching this level in mid-to-late 2025 or early 2026. Parts and service gross profit is expected to continue its strong trajectory, potentially achieving high-single-digit growth. Capital expenditures are planned at approximately $260.3 million in 2025 and around $250 million in 2025/2026, supporting facility upgrades, service capacity expansion, and technology investments.

Strategic Capital Allocation and Risk Considerations

Asbury's capital allocation strategy is entering a new phase following the pending acquisition of the Herb Chambers Automotive Group, expected to close in Q2 2025 for approximately $1.34 billion (including $750 million for goodwill and $590 million for real estate). This acquisition is strategically important, providing entry into the resilient Boston market and enhancing ABG's luxury brand mix. To finance this, the company amended its credit facility in April 2025, increasing revolving credit and new vehicle floor plan commitments, contingent on the deal closing.

Post-acquisition, the company's primary capital allocation focus will shift to deleveraging over the subsequent eighteen to twenty-four months. The transaction-adjusted net leverage ratio stood at 2.75 times at the end of March 2025 and is expected to be near the higher end of the target range by next year. Net proceeds from planned divestitures, estimated between $250 million and $275 million, are earmarked to contribute meaningfully to debt reduction efforts. Share repurchases remain an opportunistic tool, with $275.9 million remaining on the current authorization as of March 31, 2025.

While the outlook is positive, several risks warrant investor attention. Macroeconomic conditions, including interest rates, inflation, and consumer confidence, can impact vehicle demand and affordability, potentially exacerbating negative equity situations for consumers. Supply chain disruptions, while less severe than recent years, could still affect inventory availability and costs. Manufacturer relations are crucial, as agreements can influence operations and require potentially costly facility upgrades.

Competition remains intense, with peers actively pursuing growth and efficiency initiatives. ABG's ability to execute its Tekion rollout and realize the anticipated efficiency gains is key to maintaining its competitive edge, particularly against rivals with strong digital platforms or scale advantages. The material weakness identified related to the Koons DMS vendor highlights the importance of successful technology integration and control remediation.

External factors like potential tariffs on imported vehicles and parts introduce uncertainty regarding future pricing, demand, and OEM responses. While ABG believes its portfolio is relatively insulated (with 56% of Q1 2025 new units being US-produced), persistent tariffs could impact volumes and margins, potentially leading to adjustments in capital spending and SG&A.

Furthermore, the company is involved in ongoing legal and regulatory matters, including an FTC investigation and administrative proceeding regarding add-on products. While the company disputes the allegations and is pursuing litigation against the FTC, the outcome is uncertain and could result in costs or reputational harm. Natural disasters and cybersecurity threats, as evidenced by the recent hurricane impacts and the CDK outage, also pose operational and financial risks.

Conclusion

Asbury Automotive Group is executing a deliberate strategy focused on expanding its market presence through accretive acquisitions, optimizing its operational footprint, and investing in technology to drive efficiency and enhance the guest experience. The pending Herb Chambers acquisition represents a significant step in this growth trajectory, particularly strengthening its position in the luxury segment and a resilient geographic market. Following this, the company's clear focus on deleveraging, supported by robust cash flow generation and strategic divestitures, provides a clear path to strengthen the balance sheet.

The core investment thesis is underpinned by the consistent strength and growth potential of the high-margin Parts and Service business, which benefits from favorable industry trends like the aging vehicle parc. Technological initiatives like the Tekion DMS rollout are poised to unlock significant long-term operational efficiencies and cost reductions, further enhancing profitability. While near-term headwinds from TCA expansion and potential external factors like tariffs introduce some uncertainty, management's guidance and strategic priorities signal a focus on navigating these challenges while building a more efficient and diversified business. Investors should monitor the successful integration of the Herb Chambers acquisition, progress on deleveraging, the execution of the Tekion rollout, and the impact of evolving market dynamics, including potential tariffs and manufacturer strategies, as key indicators of Asbury's ability to deliver long-term value.