Asbury Automotive: Driving Efficiency and Strategic Growth in a Shifting Market (NYSE:ABG) - ABG Stock Research Report

## Executive Summary / Key Takeaways * Asbury Automotive Group (ABG) is strategically transforming its business through disciplined acquisitions, portfolio optimization, and a significant technological overhaul, aiming for long-term operational efficiency and enhanced shareholder returns. * The company's core strength lies in its resilient Parts and Service (P&S) segment, consistently delivering mid-single-digit gross profit growth, supported by an aging vehicle fleet and increasing vehicle complexity. * ABG is implementing Tekion, a new Dealer Management System (DMS), which is expected to materially reduce Selling, General, and Administrative (SG&A) expenses by late 2026/2027 through software consolidation and improved employee productivity. * The recent acquisition of Herb Chambers Companies significantly expands ABG's presence in the stable Northeast luxury market, though it will lead to a temporary increase in leverage, which the company plans to reduce over the next 12-18 months. * While new vehicle gross profit per unit (GPU) is normalizing and the Total Care Auto (TCA) segment faces short-term non-cash deferral headwinds, ABG's strategic focus on profitability over volume in used vehicles and its long-term vision for TCA position it favorably. ## A Foundation of Efficiency and Strategic Expansion Asbury Automotive Group, established in 2002, has evolved into one of the largest automotive retailers in the United States, distinguished by its consistent leadership in operational efficiency among public operators. Since 2017, ABG has maintained the lowest adjusted SG&A as a percentage of gross profit and a leading adjusted operating margin, a testament to its disciplined approach to business management. This foundational strength underpins its overarching strategy: to generate robust, long-term results for shareholders through a balanced approach of strategic acquisitions, continuous portfolio optimization, and significant technological investment.

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The automotive retail industry is currently navigating a dynamic landscape marked by evolving consumer preferences, technological advancements, and macroeconomic shifts. Broad industry trends, such as the increasing average age of vehicles (12.8 years in 2025, with passenger cars at 14.5 years and trucks at nearly 12 years), underscore a growing demand for maintenance and repair services. Additionally, the industry is adapting to the complexities of new vehicle technologies, including electric vehicles (EVs), which present both challenges and opportunities for service departments. ABG's strategic responses, including its focus on high-margin parts and service, its disciplined approach to inventory, and its investment in advanced technology, are designed to capitalize on these trends. ## Technological Edge: The Tekion Transformation A cornerstone of Asbury's long-term strategy and a key differentiator is its ongoing transition to the Tekion Dealer Management System (DMS). This technological overhaul is not merely an upgrade but a fundamental shift designed to enhance efficiency, improve the guest experience, and materially reduce long-term operating costs. The company launched a 4-store pilot in October 2024, and by June 2025, its acquired Koons stores were 100% converted to the new DMS, with full company-wide conversion targeted by the end of 2026 or early 2027. The benefits of Tekion are tangible and quantifiable. The system's simplicity allows ABG to unplug approximately two-thirds of its existing third-party software applications, eliminating associated monthly fees and integration costs. This consolidation is expected to yield significant expense savings. Furthermore, Tekion is designed to boost employee productivity; for instance, the onboarding time for a service advisor has reportedly decreased from five days to just one. This increased efficiency per employee across sales and service departments is anticipated to lower personnel costs and increase income per employee. Tekion also offers a "one customer profile" and a "one CRM for all departments," enabling better communication, more efficient marketing, and enhanced transparency for consumers. This integrated approach is expected to build trust and capture more business, further contributing to revenue growth and operational leverage. The strategic intent behind this investment is clear: to build a competitive moat through superior operational execution and a seamless customer experience, ultimately driving higher profitability and supporting ABG's long-term growth trajectory. The company anticipates material SG&A savings, potentially bringing SG&A as a percentage of gross profit into the 50s by late 2026 or 2027, once the system is fully integrated and optimized. ## Financial Performance and Operational Discipline Asbury's financial performance in the second quarter of 2025 reflects a company adept at managing a complex market while executing strategic initiatives. Consolidated revenue reached $4.4 billion, a 3% increase year-over-year, driven by a 6% rise in new vehicle revenue to $2.3 billion. Despite this, consolidated gross profit saw a marginal decrease to $752 million, with a gross profit margin of 17.2%. Adjusted operating margin stood at 5.8%, and adjusted earnings per share was $7.43.

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The new vehicle segment experienced a 1% decline in gross profit per unit (GPU) to $3,601 in Q2 2025, as easing inventory constraints softened historically high margins. Management anticipates new vehicle GPUs to normalize towards the $2,500 to $3,000 range over time, with optimism for the higher end. The seasonally adjusted annual rate (SAAR) for new vehicle sales in the U.S. improved to 16.1 million in Q2 2025, up from 15.6 million in Q2 2024, reflecting increased inventory supply. In contrast, the used vehicle segment saw a 2% decrease in revenue to $1.29 billion, with unit volumes down 6%. However, used retail GPU surged by 18% to $1,720, marking the fourth consecutive quarter of sequential growth. This reflects ABG's strategic pivot in mid-2024 to prioritize profitability over volume, a response to the constrained supply of used vehicles, particularly those with lower mileage. This disciplined approach has allowed ABG to maintain strong margins in a tighter market. The Parts and Service (P&S) business continues to be a standout performer, demonstrating stable and consistent growth. Q2 2025 P&S revenue increased by 4% to $601.5 million, with gross profit also up 4% to $354.8 million. Same-store P&S gross profit grew by a robust 7%, driven by a 7% increase in customer pay gross profit and a 16% rise in warranty gross profit. The fixed absorption rate exceeded 100%, highlighting the segment's efficiency. This performance is bolstered by the aging car park, with the average vehicle age at 12.8 years, creating a sustained demand for maintenance and repair. ABG's historical data shows a 97% increase in customer pay gross profit over a ten-year period (2014-2024) for a consistent cohort of stores, underscoring the segment's long-term growth potential. The Finance and Insurance (F&I) segment, while contributing $182 million in revenue, experienced a 5% decline in Q2 2025, with F&I PVR at $2,084. This was primarily due to the non-cash deferral of commission revenue from ABG's proprietary Total Care Auto (TCA) products, which are recognized over the contract term, unlike immediate recognition for third-party products. Operational efficiency remains a core focus, with adjusted SG&A as a percentage of gross profit improving to 63.6% (63.2% on a same-store basis) in Q2 2025. This improvement was driven by cost discipline, including a $5 million insurance recovery, and higher gross profits. ## Strategic Capital Allocation and Outlook ABG's capital allocation strategy is disciplined, balancing transformative acquisitions with portfolio optimization and leverage reduction. On July 21, 2025, the company completed the acquisition of The Herb Chambers Companies for approximately $1.82 billion. This strategic move significantly expands ABG's footprint in the resilient Northeast market, adding 33 dealerships and 52 franchises, and further balancing its brand portfolio with a strong luxury mix. To partially offset this investment and reduce leverage, ABG divested 9 stores with annualized revenue of $619 million since the start of Q2 2025, generating $250 million to $270 million in net proceeds.

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Post-Herb Chambers acquisition, ABG's transaction-adjusted net leverage ratio is expected to be above its target range. The company intends to prioritize leverage reduction over the next 12 to 18 months, aiming to be below the higher end of its target range by mid-to-late 2026. Despite this focus, share repurchases remain an important, opportunistic component of its capital allocation strategy, with $275.9 million remaining on its authorization as of June 30, 2025. Capital expenditures are projected at approximately $250 million for both 2025 and 2026, subject to tariff policy impacts. The outlook for the second half of 2025 is heavily dependent on how tariff decisions translate into consumer pricing. ABG anticipates its 2025 effective tax rate to be 25.5%. The TCA segment is expected to be a non-cash deferral headwind to F&I PVR and EPS in 2025 and 2026, with the peak deferral anticipated in 2026 as TCA rolls out to Koons stores (early Q4 2025) and Herb Chambers stores (starting 2026). However, management views TCA as a significant long-term tailwind, projecting a substantial positive impact on EPS from 2027 onwards as these deferrals reverse. ## Competitive Positioning and Risks Asbury Automotive Group operates in a highly competitive landscape against other large public dealership groups such as AutoNation (TICKER:AN), Group 1 Automotive (TICKER:GPI), and Lithia Motors (TICKER:LAD), as well as used vehicle specialists like CarMax (TICKER:KMX). ABG's competitive advantages stem from its extensive dealership network, strong brand relationships with manufacturers, and a relentless focus on operational efficiency. Since 2017, ABG has consistently led its public peers in adjusted SG&A as a percentage of gross profit, demonstrating superior cost control. For instance, ABG's TTM Gross Profit Margin of 17.04% is competitive with AN's 18% and GPI's 16%, while notably higher than LAD's 15% and KMX's 11%. Its TTM Net Profit Margin of 2.52% is in line with or slightly above peers like GPI (2%), LAD (2%), and KMX (2%), though slightly below AN (3%).

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\ ABG's strategic pivot to prioritize profitability over volume in used vehicles, driven by supply constraints, contrasts with some competitors who may chase market share. The company's investment in Tekion is a critical move to close any historical gaps in digital innovation compared to peers like AutoNation, aiming to enhance customer experience and internal efficiencies. The improvement of TCA's AM Best rating from A- to A under ABG's ownership further strengthens its competitive standing in the F&I space. However, ABG faces several risks. The ongoing uncertainty surrounding tariffs and trade policies could impact vehicle pricing and demand. While the CDK Global cyber-incident in Q2 2024 had a negative impact, it was a temporary disruption. The company is also managing a material weakness in internal controls at its Koons dealerships related to a third-party DMS vendor, with remediation efforts underway. Negative equity in used vehicle trade-ins, particularly for domestic brands, remains a slight concern, though strong credit scores and lending support mitigate this. Furthermore, the company's reliance on specific manufacturers and their agreements, including potential requirements for costly capital improvements, presents a risk. ## Conclusion Asbury Automotive Group is executing a clear and compelling investment thesis centered on operational excellence, strategic growth, and technological leadership. By consistently prioritizing efficiency, as evidenced by its industry-leading SG&A metrics, ABG is building a resilient business model capable of adapting to market shifts. The strategic acquisition of Herb Chambers Companies, coupled with ongoing portfolio optimization, strengthens its market position and brand mix. The company's significant investment in the Tekion DMS represents a forward-looking move to drive long-term cost savings and enhance the customer experience, providing a tangible competitive advantage. While short-term headwinds from new vehicle GPU normalization and TCA deferrals are expected, ABG's disciplined approach to used vehicle profitability and the long-term tailwind from TCA position it for sustained profitability. Despite industry-wide challenges like tariff uncertainty and supply constraints, ABG's proven ability to manage costs, its robust Parts and Service business, and its strategic technological roadmap underscore its potential for continued value creation for investors.