I think Peter Siris of Guerrilla Capital Management summed up Ken Gilman when he said:
When you (non automotive) guys first came out everyone kept saying how can this retailer from the Limited know anything about the car business... Well, you proved them all wrong!
I should point out, that includes me (because I was once one of Asbury's biggest critics).
And while I'd love to go on and on about how Ken Gilman proved all of us wrong (maybe on a slower day), I think the company's: 1) nine consecutive quarters of year over year expense improvement (as measured by selling, general and administrative expenses as a percent of gross profits), 2) industry leading (among the peer group) same-store sales in multiple categories, and 3) double digit (comparable) year-over-year earnings from continuing operations improvements over the last three years really speaks for itself.
Charles Oglesby to be new CEO
Charles Oglesby, who was promoted to Chief Operating Officer in September, is now going to be the new CEO. Mr. Gilman said that Charles was his first hire when he came on board, and that he has been working closely ("mentoring") him over the last nine months. Now when Charles Oglesby was first promoted, I said:
We've never met him, but it looks like a good move to put in a real dealer operator in the COO slot. This proved highly effective at AutoNation (AN), where the company had an auto exec at the top balancing off an engineer (systems and process focused) CFO with a people (a dealers dealer) COO. Gordon Smith comes from GE and brings the systems and process focus. Ken Gilman brings the retail expertise and could likely serve the same balancing role Mr. Jackson did at AutoNation. Perhaps the promotion of Mr. Oglesby will prove the final piece of the puzzle in rounding out this management team. Only time will tell.
And while one could look back at Asbury's move as being a predictable way to transition investors (and the company itself) for new leadership, clearly my thinking about Mr. Oglesby as being "the final piece of the puzzle" was mistaken. Instead, it was the Board of Director's positioning Asbury for its next stage of growth.
Now whenever you see things going well at a company, and a key management member (particularly someone like Ken Gilman that really put the vision at Asbury in place) leave, you should get a little nervous. When AutoNation's CFO departed, the next day I took the company out of the elite 5 because I felt the risks had increased. And over the next several months continued to sour on the story as I began to see more visible signs that the company had "gotten off track." So is this going to happen to Asbury?
Right now, the risks have clearly increased. But, in what direction? I think the risk for things to get even better at Asbury (as tough as that may seem) is just as likely with Charles Oglesby taking the helm, as are the risks of things getting worse. You see when AutoNation's CFO departed, we were already beginning to see some deterioration in the company's financial results. And they were in the midst of an important (but controversial) roll out of a shared services center (that was being spearheaded by AutoNation's departing CFO).
In Asbury's case, the company's financial results (particularly relative to its peers), and strategy has been becoming clearer. And while it is tough for an outsider (like myself) to tell, it really just seems like there is growing enthusiasm throughout the organization. I am not sure if it is just a correlation or a causation that this seems to have happened simultaneous to Charles Oglesby moving up and taking more of a leadership role of Asbury.
However, it does suggest that Mr. Oglesby is someone that is inspiring and getting a tremendous amount of "buy in" from the dealers to implement and develop new systems and processes. Perhaps it has something to do with that notion of productivity improvement (versus just expense reduction) that I said Asbury's management seems intensely focused on after having breakfast with senior management a few weeks ago. But the bottom line is that all of this suggests that things may even get better as Mr. Oglesby takes Mr. Gilman's vision to the next level.
Now all of that sounds nice, and I am sure it will make management happy. But remember, my mission is to deliver insights (understanding) more efficiently to the stakeholders. Not to keep management teams happy. So on the other side of the coin, I will emphasize, when you have something that seems to be working, and you change it, the risk (that things could get worse) becomes a distinct possibility. I think CFO Gordon Smith staying on brings some assurance of stability. Although I think you lose some of that balance (I discussed above) when you put a leader like Charles Oglesby in charge. Mr. Oglesby has some 30 years of experience in the automotive industry and so my biggest concern is that they lose the company's constant drive for improvement.
In hindsight, I think Ken Gilman's lack of automotive experience was actually one of the best aspects of his leadership (and the Asbury story). He was never able to take anything (or anyone) for granted. He was constantly doubted (by many of us outsiders), and so I think he had to go above and beyond to demonstrate respect for his employees and constantly try to learn as much as he could about the business (like a new tire balancing system at the National Auto Dealers Convention).
When I first met Roger Penske (and frankly knew nothing about the industry), to just about every other time we have met to discuss his company's growth prospects since (and most management members of United Auto Group), I notice he (and they) probably ask as many questions as they are being asked. They never take anything for granted. And this is what I think has made Mr. Penske and United Auto Group (UAG) so successful over the years. So despite Charles Oglesby's vast amount of automotive experience, I hope the one characteristic (that has been clearly present in Asbury's leadership) is this sense of humility, of constantly trying to learn.
The industry is changing dramatically and taking things for granted (because that is what you have always known) I think is the biggest risk for any management team, but particularly when such an experienced professional takes the reigns of an organization. This is the risk. But as I said, the constant effort to improve the organization (and it seems to be gaining momentum at Asbury) is also the opportunity as long as Mr. Oglesby keeps that at the forefront.
A few weeks ago, I said that 2007 could be the year that Wall Street "wakes up" to the investment merits of Asbury. And while I didn't expect it to be under different leadership, I feel just as strongly today as I did when I initially wrote the piece. There are just too many good things happening throughout the organization to be ignored. Too many initiatives to become a better organization under way at Asbury. Obviously if the culture changes, we (as investors) will need to change. But right now, I think there is a good possibility they get even better. So I'm sticking with my statement. I think 2007 can be the year Wall Street wakes up to the investment merits of Asbury.
Asbury 4Q operating results: much of the same
As far as the results go, while the headlines said "profits fall," when you really dig into the results, it was "much of the same" (of encouraging year over year operating trends) that we have seen out of Asbury.
Specifically, income from continuing operations were $15.6 million, or $0.45 per diluted share, a modest increase from the $14.4 million, or $0.44 per diluted share reported last year in the fourth quarter. But when you adjust for non-operational items and stock based compensation, comparable income from continuing operations were up 25%. The best (year over year) earnings improvement so far to be reported out of the public dealers.
Now there was one thing that I did not like to see (in the results), which was Asbury's $0.10 per diluted share in losses from discontinued operations. I never like to see dealers report such a high loss in the discontinued ops line. And would actually prefer to see the large public dealership groups follow Group 1's (GPI) example by including individual dealerships they plan to sell in the continuing operations results.
I just think the mega dealers are in the business of buying and selling stores, so unless they plan on ditching a platform or something, it really should be part of continuing operations. Having said that, it is simply a philosophical reporting difference I hold with all of the public dealers outside of Group 1, and I don't see the reporting approach changing any time in the near future (at any of the groups).
But it is important to point out that last year in the fourth quarter the company had $0.18 per diluted share in losses from continuing operations. So I hardly think we can say management is just throwing a bunch of stores that aren't working into their disc ops line. If anything, the amount of dispositions are becoming less, suggesting the company's portfolio of dealerships is getting closer to where they want it.
4Q06 Total same-store sales: up 4.6% (retail)
New: 3.3% (retail)
Used: 9.5% (retail)
Parts and service: 3.1% (retail)
4Q06 Gross profit: 16.9% up 30 basis points to 16.6% in the prior year period
New: 7.5%, up 15 basis points from the prior year period.
Used: 12.1%, up 30 basis points from 11.8% last year.
Parts and service: 51.2%, up 70 basis points from 50.5% in the prior year period.
SG&A as a percent of gross: 77%, down from 78.6% in last year's fourth quarter.
Tax rate: 38.1% up from 37.2% last year
Share count: 34.194 million versus 33.044 million last year.
Long-term debt/cap: 43.8%, down from 47.6%
ABG 1-yr chart:
Correction: Just wanted to make a quick correction. Above I said that Asbury's discontinued operations were a loss of $0.18, a lot more than the $0.10 this year (in the fourth quarter). I had the number right, but it was a gain not a loss.