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Morningstar | Asbury's SG&A Management Offsets Gross Profit Headwinds in 2Q Results

Asbury Automotive Group reported a good second quarter and we are increasing our fair value estimate to $58 from $50 to account for a lower cost of debt than previously modeled. Strong adjusted operating margin including floorplan interest of 4.1% (flat year over year) suggests to us that our midcycle operating margin including floorplan interest of 3.5% (to reflect our expectation of 3% or less in bad times to 4.5% in good times) remains reasonable. Adjusted diluted EPS rose 32% year over year to a second quarter record of $2.08 and we calculate EPS of $2.03 excluding $20 million of share buybacks during the quarter. EPS also easily beat consensus of $1.92 while 6% revenue growth, to $1.72 billion, beat consensus of $1.67 billion. Same-store revenue grew 4%.

Asbury successfully managed its SG&A spending to overcome gross profit per unit headwinds, especially from import brands. Every segment except finance and insurance and luxury vehicles posted a GPU headwind. Imports' decline was severe at a 14% plunge, to only $808 a unit, compared to a 5% decline in domestic brands to $1,740. Import brands made up 47% of Asbury's new vehicle revenue for the quarter with Honda the largest contributor at 20%. Import pricing has been very competitive for a long time in the U.S. market as these brands sell more sedan models than light truck models compared to the Detroit Three. Light truck models are now making up about 68% of the U.S. industry sales each month. Another dealer, Sonic Automotive, recently called out Honda for declining factory incentives to dealers, but Asbury did not comment on this issue. We suspect the lower incentives played at least a small role in Asbury's import performance. SG&A as a percentage of gross profit fell by 90 basis points to 68.6%, which helped the firm keep operating margin flat.

Tariff threats loom for the U.S. auto industry and Asbury would suffer given the Detroit Three are only about 20% of new vehicle revenue, but long-term the firm should remain a large player in a gradually consolidating industry.

Asbury's management is participating at the Management Behind the Moat conference held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.