Executive Summary / Key Takeaways

• Strategic Expansion and Portfolio Optimization: Asbury Automotive Group is strategically expanding its footprint, notably through the transformative Herb Chambers acquisition, while actively optimizing its portfolio via targeted divestitures to enhance market positioning and financial stability.
• Robust Parts and Service Segment: The company's Parts and Service division consistently delivers strong, high-margin growth, driven by an aging vehicle fleet and ongoing investments in technology and training, providing a resilient revenue stream.
• Digital Transformation with Tekion: Asbury's aggressive rollout of the Tekion Dealer Management System (DMS) is a key technological differentiator, promising significant long-term SG&A savings, enhanced operational efficiency, and a superior customer experience, despite initial transition costs.
• Disciplined Capital Allocation: Following major acquisitions, Asbury is prioritizing deleveraging its balance sheet over the next 12-18 months, complemented by opportunistic share repurchases, reflecting a balanced approach to shareholder value creation.
• Evolving Market Dynamics and TCA Impact: While new vehicle gross profit per unit (GPU) is normalizing and used vehicle supply remains constrained, Asbury's Total Care Auto (TCA) segment is positioned for long-term EPS accretion, albeit with near-term non-cash deferral headwinds influenced by revised SAAR projections.

A New Era of Automotive Retail: Asbury's Strategic Drive

Asbury Automotive Group, Inc. ($ABG), established in 2002, has evolved into one of the largest automotive retailers in the United States, operating 230 new vehicle franchises across 175 dealership locations and 39 collision centers in 15 states as of September 30, 2025. The company's overarching strategy is to drive growth through transformative acquisitions, optimize its portfolio, and enhance operational efficiency through technological innovation. This approach has been foundational to its success, with a subset of its stores demonstrating a 97% increase in customer pay gross profit between 2014 and 2024.

The automotive retail industry is a dynamic landscape, heavily influenced by macroeconomic conditions such as interest rates, inflation, consumer confidence, and credit availability. ABG operates within a highly competitive environment, facing direct rivals like AutoNation (AN), Group 1 Automotive (GPI), Lithia Motors (LAD), and Penske Automotive (PAG). ABG's strategic positioning emphasizes a balanced brand mix—31% luxury, 41% imports, and 29% domestic for the nine months ended September 30, 2025—and a strong focus on comprehensive service offerings. While competitors like AutoNation leverage extensive national presence for scale, and Lithia prioritizes digital innovation, ABG differentiates itself through localized customer relationships, a wide range of brands, and a deep commitment to its fixed operations business. The company's ability to maintain a leading position in adjusted SG&A as a percentage of gross profit and adjusted operating margin since 2017 underscores its operational discipline.

Technological Edge: Tekion and the Future of Dealership Operations

A cornerstone of Asbury's strategy and a significant competitive differentiator is its aggressive adoption of the Tekion Dealer Management System (DMS). This transition is not merely an IT upgrade; it is a fundamental transformation of how Asbury sells and services vehicles, aiming to deliver a superior guest experience. The company's litigation with CDK (CDK) has reached a point where it can continue migrating stores onto the new DMS. The rollout of Tekion to all Koons stores was completed by the second quarter of 2025, addressing a previously reported material weakness in IT general controls. The full conversion of all Asbury stores is anticipated by the end of 2026 or early 2027, with efficiency gains expected to materialize by the first quarter of 2027.

Tekion offers several tangible benefits over traditional DMS platforms. It significantly reduces the reliance on numerous third-party software applications and eliminates associated integration fees, leading to "material savings" in SG&A costs. Furthermore, Tekion's cloud-based, intuitive design is expected to enhance employee productivity. Management notes that new hires adapt to the software "extremely fast," while long-term employees may take 6-7 months to become fully efficient. The system's "one customer profile" and "one CRM for all departments" (sales, service, parts, collision) improve internal communication, streamline marketing efforts, and foster greater transparency with customers. This integrated approach is expected to boost sales units per salesperson and productivity per service advisor, ultimately leading to a "flatter organization" and a higher quality employee base. For investors, this technological roadmap translates into a clear path for sustained SG&A leverage, improved operating margins, and enhanced customer loyalty, strengthening Asbury's competitive moat against rivals still reliant on legacy systems.

Strategic Expansion and Portfolio Optimization

Asbury's commitment to strategic growth was underscored by the completion of the Herb Chambers Automotive Group acquisition on July 21, 2025, for approximately $1.78 billion in cash. This acquisition significantly expanded Asbury's geographic presence into the resilient Northeast region, adding 33 dealerships, 52 franchises, and three collision centers. The Herb Chambers portfolio, with its heavier weighting towards luxury brands, is expected to be accretive to both new and used vehicle gross profit per unit (GPU) and provide greater stability to Asbury's overall brand mix. The transaction also recognized $290.10 million in goodwill, primarily attributed to anticipated synergies and the acquired workforce.

Concurrently, Asbury is actively optimizing its portfolio through targeted divestitures. During the nine months ended September 30, 2025, the company sold several franchises across various states, generating a pre-tax gain of $45.80 million. This includes the divestiture of nine stores with annualized revenue of $619 million in the second quarter of 2025, yielding $250-$270 million in net proceeds used for leverage reduction. This disciplined approach to portfolio management ensures capital is deployed to its highest and best use, focusing on desirable markets and brands that align with Asbury's long-term strategic objectives.

Financial Performance and Operational Strength

Asbury's financial performance for the nine months ended September 30, 2025, reflects the impact of its strategic initiatives and operational focus. Total revenue increased to $13.32 billion, up 5% from $12.68 billion in the prior year. This growth was primarily driven by an increase in new vehicle units sold and robust parts and service volume, partially offset by a decrease in used vehicle units. Gross profit for the period rose to $2.28 billion, an increase of 4% from $2.20 billion, mainly due to growth in parts and services gross profit and an increase in used vehicle GPU.

In the third quarter of 2025, Asbury generated a record $4.8 billion in revenue, with a gross profit of $803 million and a gross profit margin of 16.7%. Adjusted operating margin stood at 5.5%, and adjusted earnings per share (EPS) was $7.17.

• New Vehicle Sales: New vehicle revenue for Q3 2025 increased by 17% to $2.53 billion, with units sold up 13% to 48,070. The new average gross profit per vehicle was $3,188, slightly impacted by the lower profit per vehicle retailed (PVR) profile of increased EV sales. New vehicle gross profit margins have seen a decrease due to the easing of inventory constraints.
• Used Vehicle Sales: Used vehicle revenue for Q3 2025 increased by 9% to $1.41 billion, though unit volume was down 4% year-over-year. Used retail GPU was $1,551, a slight increase over the prior year, driven by higher market prices due to tight inventory. The company continues to prioritize profitability over volume in this segment.
• Parts and Service: This segment remains a consistent strength, with Q3 2025 revenue up 11% to $659.40 million and gross profit increasing 15% to $389.10 million. Same-store parts and service gross profit was up 7%, with customer pay gross profit rising 8%. The gross profit margin for parts and service expanded by 172 basis points to 58.8%. The fixed absorption rate exceeded 100%, indicating robust business health. This performance is supported by the historically high average age of vehicles (12.80 years) and increasing average miles on serviced cars (over 71,000 miles).
• Finance and Insurance (F&I): F&I net revenue for Q3 2025 increased 8% to $200.30 million. The F&I PVR was $2,175, which would have been $2,239 (higher by $64) without the noncash deferral impact of Total Care Auto (TCA).
• SG&A Efficiency: Asbury maintains a strong focus on cost discipline. For Q3 2025, same-store SG&A as a percentage of gross profit decreased by 32 basis points to 63.6%. On a total company basis, SG&A as a percentage of gross profit increased to 65.7% due to higher personnel expenses and transaction costs related to the Herb Chambers acquisition.

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Liquidity and Capital Allocation Strategy

As of September 30, 2025, Asbury reported total available liquidity of $686.90 million, including cash and cash equivalents, floor plan offset accounts, and revolving credit facility availability. The company believes it possesses sufficient liquidity to meet its financial obligations and strategic initiatives for the foreseeable future.

Following the significant Herb Chambers acquisition, which was financed through a combination of credit facility funding, a new $546.50 million real estate facility, and existing cash, Asbury's transaction-adjusted net leverage ratio stood at 3.2x. Management's capital allocation priorities are now focused on deleveraging the balance sheet over the next 12 to 18 months, with an expectation to bring the leverage ratio below the higher end of its target range by mid-to-late 2026.

The company also maintains a share repurchase authorization with $225.90 million remaining as of September 30, 2025, and repurchased $50 million in shares during the nine months ended September 30, 2025. The pace of future share repurchases will be opportunistic, balancing against debt reduction depending on share price levels and other investment opportunities.

Outlook and Key Assumptions

Asbury's outlook is shaped by evolving market dynamics and its strategic roadmap. The company estimates its effective tax rate for the year ended December 31, 2025, to be 25.50%. Capital expenditures for 2025 are projected to be approximately $175 million, allocated to facility upgrades, new constructions, service capacity expansion, and technology investments.

New vehicle GPU is expected to normalize, settling into an estimated range of $2,500 to $3,000 over time. However, the exact trajectory and timing of this normalization remain sensitive to macro elements. Management anticipates new vehicle margins to hold up well in Q4 2025, particularly benefiting from strong luxury sales. Used vehicle inventory challenges are expected to persist through 2025, with supply recovery anticipated from 2026 to 2028. The parts and service segment is projected to sustain mid-single-digit growth in customer pay.

The Total Care Auto (TCA) segment faces a near-term non-cash deferral headwind, with a projected pre-tax income of approximately $8 million for 2025, including a $62 million non-cash deferral hit ($2.35 per diluted share). This deferral impact is expected to peak in 2026. The revised outlook for TCA, which delays the achievement of higher EPS targets, is primarily due to updated SAAR estimates, now projected in the high 15 million to low 16 million range, rather than the initial 17 million. To reach the higher EPS accretion targets (e.g., $5 per share), a return to a 17 million SAAR level or additional acquisitions would be necessary. The rollout of TCA products to Herb Chambers stores is slated to begin in 2026.

Risks and Challenges

Despite a compelling investment thesis, Asbury faces several risks. The automotive retail industry is highly sensitive to general economic conditions, including inflation, interest rates, and consumer confidence. Disruptions in vehicle and parts production from manufacturers, often due to supply shortages, can impact inventory levels and sales. The ongoing transition to the Tekion DMS, while strategically beneficial, carries implementation risks, including potential "snafus" and a longer-than-expected efficiency curve for some employees.

Tariffs and trade restrictions pose a significant threat, particularly given the substantial portion of the business involving imported vehicles and parts. While Asbury believes its portfolio is "comparatively insulated" with approximately 56% of Q1 2025 new vehicle units produced in America, potential tariffs could increase inventory costs and impact demand. The company is also involved in an administrative proceeding with the Federal Trade Commission (FTC) regarding the sale of add-on products, with an uncertain outcome. Finally, high levels of competition across all segments could exert pressure on pricing and margins.

Conclusion

Asbury Automotive Group is executing a clear and compelling strategy to enhance shareholder value through disciplined growth, operational excellence, and technological leadership. The transformative Herb Chambers acquisition significantly bolsters its market presence and luxury brand mix, while ongoing portfolio optimization ensures capital efficiency. The company's robust Parts and Service segment provides a stable, high-margin foundation, further strengthened by an aging vehicle fleet and strategic investments. Crucially, the rollout of the Tekion DMS represents a significant technological differentiator, promising long-term SG&A savings and a superior customer experience that will solidify Asbury's competitive standing.

While the company navigates near-term headwinds such as normalizing new vehicle GPUs, constrained used vehicle supply, and the non-cash deferral impact from TCA, its disciplined capital allocation strategy, focused on deleveraging and opportunistic share repurchases, positions it for sustained financial health. The long-term EPS accretion potential from TCA, coupled with the efficiency gains from Tekion, underscores a bright future. Despite industry-wide risks like economic sensitivity and potential tariff impacts, Asbury's resilient business model, strategic foresight, and commitment to operational efficiency make it a compelling investment opportunity poised for continued success in the evolving automotive retail landscape.