Asbury Automotive Group (ABG) Q4 2023: Used Retail Revenue Drops 12% as Inventory Sourcing Tightens
Asbury Automotive Group’s Q4 revealed a pronounced split between resilient new vehicle sales and a constrained used vehicle business, with leadership signaling a pivot toward more aggressive inventory acquisition in 2024. Elevated CapEx and integration costs weighed on margins, but management remains committed to disciplined capital allocation and operational upgrades, including a major DMS overhaul. Investors should watch for execution on inventory, technology rollout, and integration tailwinds as ABG navigates a shifting auto retail landscape.
Summary
- Used Vehicle Headwinds Intensify: Sourcing constraints and falling volumes pressured used retail revenue and margins.
- Operational Integration in Focus: Technology upgrades and store conversions drive near-term cost but promise future efficiency.
- Capital Deployment Remains Opportunistic: M&A appetite and buybacks persist amid disciplined leverage targets.
Business Overview
Asbury Automotive Group (ABG) is a leading U.S. auto retailer, operating franchised dealerships that sell new and used vehicles, provide parts and service, and offer F&I (finance and insurance) products. The company’s revenue streams are diversified across new vehicles, used vehicles, parts and service, and F&I, with recent growth driven by acquisitions such as Kuhn’s and the integration of digital retailing via Clicklane, ABG’s proprietary omnichannel sales platform.
Performance Analysis
Q4 results highlighted a resilient new vehicle segment, with same-store new vehicle revenue up 10% and unit volume up 7%. However, used retail revenue fell 12% on a 10% decline in unit volume, reflecting industry-wide sourcing challenges and a limited pool of quality pre-owned vehicles. Gross profit per used vehicle dropped to $1,666, underscoring margin compression in the used segment.
F&I performance softened, with per-vehicle revenue down year-over-year, pressured by higher interest rates and a growing deferred revenue headwind from Total Care Auto (TCA), ABG’s vehicle service contract business. Parts and service revenue held steady, but integration-related disruptions at recently acquired stores offset growth at legacy locations. Clicklane, ABG’s digital retailing tool, posted 32% unit growth year-over-year, with new vehicle penetration rising to 51% of Clicklane sales, signaling ongoing channel shift.
- Used Sourcing Bottleneck: Constrained supply of lease returns and fleet vehicles limited used inventory, impacting volume and gross profit.
- SG&A Uptick Driven by Discretionary Spend: Higher advertising and loaner vehicle expenses elevated SG&A as a percentage of gross profit beyond management’s target range.
- CapEx and Integration Costs Rise: Elevated capital expenditures and technology investments are expected to persist through 2026 as ABG integrates recent M&A and upgrades infrastructure.
Overall, cash flow and liquidity remain solid, supporting continued buybacks and M&A, but operational execution in used vehicles and technology integration is critical for future margin recovery.
Executive Commentary
"We have strong convictions for this vision of smart growth. This vision acts as a strategic framework for how we think about our business, serving to inform our decision-making along the path to $30 billion or greater in revenue."
David Holt, President and Chief Executive Officer
"We anticipate bringing leverage back to approximately two times by the end of 2024. That said, we will remain opportunistic with capital allocation, including share buybacks and acquisitions."
Michael Welch, Senior Vice President and Chief Financial Officer
Strategic Positioning
1. Aggressive Used Vehicle Sourcing
Management acknowledged an overly conservative stance on used inventory acquisition in 2023, prioritizing gross profit over volume. With industry supply remaining tight, ABG plans to shift toward more aggressive sourcing in 2024 to recapture lost volume, recognizing the downstream benefits in reconditioning, F&I, and customer retention.
2. Technology Modernization and DMS Rollout
ABG is investing in a major transition to Techion’s cloud-based DMS (dealer management system), aiming to eliminate 70% to 75% of legacy software bolt-ons and enable a unified customer profile across stores. This move is expected to drive future SG&A efficiency, employee productivity, and a more seamless guest experience, though most savings will not materialize until 2025-2026.
3. Integration and Store Conversion
Recent acquisitions, including the large-scale Larry H. Miller and Kuhn’s deals, have required extensive integration, particularly in technology and process alignment. Leadership noted that integration pain points have begun to subside, with January showing improved results in parts and service as stores adapt to new systems and standards.
4. Digital Retailing Expansion
Clicklane, ABG’s digital sales platform, continues to gain traction, especially in new vehicles, but faces headwinds as the industry returns to price negotiation and normalization post-pandemic. Management remains committed to omnichannel growth, emphasizing Clicklane’s role in attracting high-credit customers and improving transaction speed.
5. Disciplined Capital Allocation and M&A
ABG maintains a flexible approach to capital deployment, balancing deleveraging with opportunistic acquisitions and share repurchases. The company targets leverage below two times in the near term but is willing to increase leverage for high-quality M&A or buyback opportunities.
Key Considerations
ABG’s Q4 performance underscores the complexity of scaling in a volatile auto retail environment, where operational agility, technology adoption, and capital discipline are all critical levers.
Key Considerations:
- Used Vehicle Volume Recovery: Success in more aggressive sourcing will determine whether ABG regains lost used volume and associated margin in 2024.
- SG&A Control Amid Investment: Elevated advertising and loaner expenses are flagged as controllable, but persistent CapEx and integration costs will pressure near-term margins.
- Clicklane’s Channel Evolution: Digital retailing adoption is shifting, with penetration strongest in new vehicles and high-credit buyers; normalization of pricing may cap further gains.
- DMS Rollout Execution: Techion integration promises substantial long-term efficiency, but disruption risk and upfront costs bear monitoring through 2025.
- Liquidity for Opportunistic Growth: Ample cash flow supports continued M&A and buybacks, but leverage tolerance is calibrated to market and acquisition quality.
Risks
Persistent sourcing constraints in used vehicles, a prolonged normalization of new vehicle margins, and execution risk on large-scale technology rollouts all represent material risks. Deferred revenue headwinds from TCA will weigh on F&I through 2025. Elevated CapEx and integration costs may compress near-term margins, while macroeconomic uncertainty and OEM inventory swings could further disrupt segment performance.
Forward Outlook
For Q1 2024, ABG expects:
- Continued headwinds in used vehicle sourcing and margin as supply remains tight.
- Parts and service revenue to rebound as integration challenges subside.
For full-year 2024, management maintained guidance:
- TCA pre-tax income expected to fall to $20–40 million, with deferred revenue headwinds peaking in 2024-2025.
- CapEx of approximately $250 million, reflecting integration and facility upgrades.
Management emphasized that SG&A efficiency gains from technology upgrades will be back-end loaded, with most benefits realized from 2025 onward. Leverage is targeted to return to two times by year-end, barring major acquisitions or buybacks.
- Used vehicle inventory sourcing and normalization of new vehicle margins are key watchpoints.
- Technology and integration execution will be critical for margin recovery and operational leverage.
Takeaways
ABG’s Q4 results reveal a business at a crossroads, balancing the need for operational discipline with the imperative to invest in technology and scale. The company’s ability to execute on used vehicle sourcing, digital transformation, and integration will determine its ability to sustain growth and margin in a challenging market.
- Used Segment Under Strain: Sourcing and margin challenges require a strategic shift toward volume, with execution risk as supply remains tight across the industry.
- Technology and Integration Are Central: The DMS transition and Clicklane’s evolution are long-term levers for productivity and guest experience, but require near-term investment and change management.
- Capital Flexibility Remains a Differentiator: ABG’s balance sheet supports opportunistic M&A and buybacks, but leverage and cost discipline will be closely watched as the company pursues its $30 billion revenue ambition.
Conclusion
Asbury Automotive Group enters 2024 with clear operational challenges in used vehicles and integration, but a well-articulated strategy to drive efficiency and scale through technology and disciplined capital allocation. Execution on sourcing, integration, and digital retailing will be the key determinants of ABG’s ability to deliver on its long-term growth vision.
Industry Read-Through
ABG’s results reinforce several sector-wide realities for auto retail: Used vehicle sourcing remains a structural headwind, with supply constraints unlikely to ease in the near term, pressuring margins and volume across the industry. Digital retailing is shifting from COVID-driven acceleration to a more nuanced omnichannel model, with adoption strongest among new vehicle buyers and high-credit consumers. Technology modernization, particularly the transition to cloud-based DMS platforms, is emerging as a critical lever for operational efficiency and guest experience, but carries disruption risk and requires careful change management. Dealers with strong balance sheets and capital discipline are best positioned to capitalize on M&A and withstand cyclical volatility.