It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity . . .
- Charles Dickens, A Tale of Two Cities
Asbury turns 5 on NYSE
Tuesday, Asbury Automotive (ABG) celebrated its 5 year anniversary as a publicly traded company. To go public simply means anyone that wants can buy a piece of ownership in the company (you, me, even my kid niece or nephews).
To celebrate, management hosted an analyst day where they provided "An Insider's View of Automotive Retailing." Meaning they had real people from the field/regions (not just senior management) talk about a number of the initiatives, processes, and ultimately try to show investors the Asbury culture.
But before I go into (looking ahead), I think it is only appropriate we briefly reflect on what has happened over the last 5 years. And the story begins eerily similar to the famous Charles Dickens novel, A Tale of Two Cities.
It was the best of times . . .
March 14, 2002, Asbury Automotive becomes the first large dealership group to go public in four years (it turned out to be the last public offering in the space). It was priced near the high end of the range at $16.50.
April 25, 2002, Asbury Automotive announces that it expects to report earnings that exceed analysts' consensus forecast for the first quarter ending March 31, 2002. The stock closes at $18.80.
Sometime around April/May 2002 I also recall an article appearing in Automotive News about Asbury potentially piloting a "one price" (later named "Price 1") used vehicle store concept in Wal-Mart parking lots. It was then that I realized how powerful e-mail could be as I sent an email alert out to investors about the article, which apparently no one in the investment community had caught since mostly retail analysts covered the name (and therefore didn't read Auto News).
May 9, 2002, almost about the same time the entire group (of franchised auto retailers) were "peaking," fueled by enthusiasm for the one price concept and just franchised auto retailers in general, Asbury closed at a record price of $22.25.
It was the worst of times . . .
March 2003, Asbury states in its 10k filing (toward the end of March) that in January 2003 the company did not meet its fixed charge coverage ratio (so technically in default of a loan). Essentially it happened due to not timing right the sale-leaseback of a couple recently acquired franchises. On April 1, 2003, Asbury's stock closes at $7.25.
April 30, 2003, CEO Ken Gilman:
As anticipated, earnings were down on a year-over-year basis, due to increased operating expenses, which we discussed in our year-end results call. . . The strategy during the quarter, in terms of new vehicle sales, was primarily volume-driven. The new vehicle environment was particularly difficult, especially in the first two months of the quarter. By taking a volume-driven approach, and foregoing a small amount of new vehicle margin, we were able to sustain unit sales -- thereby fostering good relations with our manufacturer partners.
Asbury's stock closes at $9.25.
July 10, 2003, Asbury Automotive reached a mutual agreement with Wal-Mart to end the no haggle used vehicle test pilot "Price 1" program. Asbury's stock closes at $14.11.
December 2, 2003, Asbury announced that its proposed agreement to buy the Bob Baker Group of dealerships after a lawsuit upheld Ford's REFUSAL to allow the purchase to go through and "attempts to carve Baker's Ford store out of the acquisition proved too complex. . ." Asbury' stock closes at $17.05.
And now. . .
Since the fourth quarter of 2004, Asbury has led the peer group of publicly traded auto retailers in new, used and fixed operations (service and parts) same store sales, and comes in second to UnitedAuto Group in same-store finance and insurance income.
February 15, 2007, Retiring CEO Ken Gilman:
Asbury's strong financial results were achieved predominantly through strategic programs designed to accelerate the growth of our higher-margin businesses, used vehicles and fixed operations, as well as our ability to leverage our expense structure. The combination of these efforts delivered 25% growth in income from continuing operations, on an adjusted and comparable basis, for the fourth quarter and 18% for the full year. This performance, especially in light of the industry- wide decline in new vehicle sales in 2006, underscores the strength of our balanced retailing and services business model, as well as Asbury's exceptionally strong brand mix.
Asbury's stock closes at $25.84.
March 20, 2007. So I could not think of a more fitting finish to Ken Gilman's tenure as CEO of Asbury to present in front of investors for his last time at the New York Stock Exchange as the stock closed around an all time high of $28.50.
You know, I had breakfast with a friend the morning of Asbury's analyst meeting and I asked him to give me critical advice on how I could make the newsletter better. His insights were incredible. But, I found one part interesting, where he said: "you know, sometimes you seem to be more favorable toward certain management teams." "To be honest," I said, "I don't even know anymore what tends to be considered favorable."
I think I am sometimes more critical with some of the stocks I rank in the top ten than with the stocks that are not in the top ten. I just try to be very open with my thoughts at a given time and welcome disagreements/criticism of my analysis as I constantly strive to help my readers better understand their investments and the industry (better understanding is my only "agenda.")
But if anyone wants to know why I have been so positive about Ken Gilman (and just Asbury's management in general), it is because of the history I just outlined above. I will tell you in the Spring of 2003, most of Wall Street had pretty much given up on franchised auto retailers, and frankly Asbury was the "black sheep" of this rather out of favor group. "How can these non automotive guys ever make a go of this?" (We non automotive Wall Street folks ourselves would say).
And yet Asbury's management persevered despite all of the criticisms. It's March Madness (college basketball season). And while I haven't had a chance to watch any of the games this year, I can only suspect if the University of Nevada Las Vegas (UNLV) the number seven seed, beats the third seeded Oregon University Friday, Sunday night's "elite 8" match up against Florida or Butler will probably be the most watched game of the tournament. Why? Because we all love the "underdog." The "sleeper" (as I referred to Asbury a couple months ago). The one everyone thought didn't have a chance and comes out to shock us all.
Asbury over the last couple years has been similar to a #14 or #15 seed making the final four. When we all said it couldn't be done, they persevered. And considering this newsletter is often considered by the "powers" on Wall Street "the business model that will never work" I guess like almost everyone on this planet that at one point or another has been told "it can't be done," we like to see when people or organizations like Asbury "prove' em all wrong" as Peter Siris from Guerrilla Capital appropriately shouted out on the company's last conference call.
Looking ahead: Highlights from analyst day
But as investors and industry observers, we should learn from the past, not live in it. I think understanding Asbury's history offers promise that companies with solid management teams like Lithia (where you hear almost identical comments today to what Ken Gilman was saying back in early 2003), can similarly persevere through their challenges today.
Importantly, however, while we should respect what has been done at Asbury, we need to keep in mind they have a new "coach" (incoming CEO Charles Oglesby). And it is "a new season." While there are a lot of promising signs that the company is headed in the right direction, we are all left watching to see how the new team executes.
So I know I have gone on a lot today, but it was an important (and incredibly relevant) history that I think few in the industry remember or were even aware of (there tends to be a lot of turnover of people on Wall Street covering the sector). And what I want to do now is give you the most interesting thing or two that I took out of each of the presentations/conversations from Tuesday's Asbury analyst meeting.
Incoming CEO: Charles Oglesby
Incoming CEO Charles Oglesby: was at my lunch table and similar to when we had breakfast at the National Auto Dealers Association [NADA] convention, his emphasis is on creating better tools for the Asbury Associates to use, not creating a "command and control" structure. As I have said repeatedly, over time I do think some of the entrepreneurial culture of all of the large dealership groups gets lost a little as an "Asbury" or "Dealer Group XYZ" way of doing business is developed.
But this is a highly people intensive business, and cultures don't change over night. Approaching it any way BUT a "win win" for the employees is likely to make your efforts toward productivity futile. Will there always be associates/employees that get upset. Of course, change is disruptive, and not everyone wants to accept change. But if the focus is on creating this "win win," it should help move the organization in a positive direction.
And a good sign the company has been achieving this "win win" proposition was when Mr. Oglesby indicated in the question and answer period that employee turnover has been trending down since 2003. I think this "win win" approach with new tools and technology will clearly be a philosophy/approach to the business Charles Oglesby will carry on in Ken Gilman's stead.
There is a negative comment I have however. During the question and answer period, I asked Mr. Oglesby what were some of the biggest mistakes or problems encountered during 2006 that the company plans to focus on improving in 2006. Mr. Oglesby turned over the question to David Council, where the answer essentially came back to being a constant focus on improving and developing their people and processes "so nothing and everything!" Mr. Oglesby exclaimed.
Maybe the question took them by surprise, and to be honest, I probably wouldn't have been able to answer "on the spot" the very same question about my business (efficient insights), but the more I think about it, every management team and division head should have a top five or ten priority list of things that are not going how they would like, and therefore what they plan on trying to improve for the next year.
Remember, one of the key traits I described about Genuine Parts management and why they have been able to remain so successful despite their rich history of success (usually success breeds complacency), is a seemingly relentless focus on "kaizen" or continuous improvement.
Mike Waldrop, internet
Mike Waldrop, Asbury's internet director of the Florida region. Mr. Waldrop talked about how "internet sales" now represented about 20% of the company's business. And how the internet sales person was becoming one of the more coveted positions in the dealership. He said the difference between a traditional sales person (who I think has to spend a fair amount of time waiting for the next customer to walk in), is that the internet sales person is constantly "working," following up on leads and setting up appointments.
When I asked why we hear about studies suggesting 70% of the vehicle search now beginning online and them only capturing 20%, (he indicated an NADA study suggested the figure was more like 80%), he said Absury's 20% figure was when the customer actually contacts the dealership online (versus someone printing something out and walking into the dealership like those 70% to 80% studies).
But what I really liked was Allen Levenson's (head of sales and marketing for Asbury who was kind of serving as "master of ceremonies" of the event) comment at the end of Mr. Waldrop's presentation. He said, "these are the current ways we are trying to reach customers via the internet" (i.e. like shifting more advertising dollars from traditional mediums to things like search engine marketing), "and the only thing I can guarantee you is that it will change in the coming years."
The use of the internet is just becoming a bigger and bigger part of the vehicle process, and so it will continue to evolve. Maybe the most interesting comment was that in some of the company's dealerships, like with some Honda stores, they are now approaching 40% to 50% of their sales being an "internet sale."
And so as you begin to cross the threshold of more than one out of every two vehicle sales at the store originating online, do you even have "internet sales people" and "regular sales people," or does your entire sales force become "internet sales people?" I think this potential shift (of where every sales person potentially has to become an "internet sales person") may be one of the biggest cultural and structural shifts that occurs in the industry (not really Asbury specifically) over the next ten years.
Ric Moreno, "Road to the sale"
Ric Moreno, "Road to the Sale," General Sales Manager, McDavid Lincoln Mercury. Allen Levenson once again pointed out that one of the greatest challenges facing the industry is that sales people really aren't making or selling more vehicles today (in real dollars) than they were 20 or 30 years ago. I have pointed out in past notes (including sharing comments/studies from industry consultants) that the sales person today (similar to 30 years ago) still sells only somewhere between 8 - 10 vehicles a month. And so the goal is to help the sales person become more productive/profitable (moving them up to an average of more like 12 or 15).
As an aside, I talked with Mr. Moreno during the break and he indicated there is a HUGE range usually between the top sales people (maybe doing around 15 or 20 sales a month), to the bottom sales people (doing maybe only three or four). Clearly the goal is to move up the underperforming sales people up. However, an easy way to achieve higher sales person productivity is to simply not replace sales people as they leave the dealership with new ones.
But what you have to be careful about are "lost sales" as he indicates the industry close rate is only around 15 per every 100 people that walk into the dealership. So you might be able to sell 25 vehicles per sales person, but if you only have 3 people standing around your store on a Saturday, and 90 - 95 out of every 100 people that walk into your showroom walk out not buying a vehicle (often times because they were frustrated with the rate), is a high sales productivity entirely a good thing? I think the above discussion about the potential transition toward more "internet" related sales people, who book appointments (versus waiting for someone to walk in) can help address this productivity/lost sales conundrum (problem) over time.
Importantly, Mr. Moreno showed a new "desking" tool, which is essentially a new electronic "tool" being experimented with by the company as kind of an answer to AutoNation's "Smart Choice." Essentially, like most new desking tools, it puts the traditional "4 square" approach of showing the selling price, down payment, the trade-in and monthly payment into a more user friendly electronic format.
However, I asked Mr. Moreno if it limited the number of changes (back and forth between customer, sales person and new vehicle sales manager) that could be put into the system (i.e. down payment, price, trade-in, etc). He said no.
This is actually why I like AutoNation's Smart Choice desking tool. True, as Gordon Smith (Asbury's CFO) pointed out when I raised this concern about Asbury's desking tool that maybe the sales person "gives up to much on the gross profit" right away in order to land the deal if they can only make changes to the deal three times. He is probably right.
But most industry people tell me that the longer the transaction takes, the lower the gross profit is (and probably the worse the customer experience is). So while initially, it may hurt a sales persons gross profit performance, over time, it probably makes them better sales people because it forces the sales person/new vehicle manager to learn to price the deal right from the get go, shortening the sales time (which hopefully helps improve productivity) and over the long run actually improve gross profits.
This is the theory AutoNation management has articulated to me, and while risks to the initial sales person's performance are real, no one in the industry has yet to disagree with the notion that the longer the transaction takes, the lower the gross and the worse the customer experience is. It just seems to me that the process needs to be rolled out very delicately.
So if there is a process (remember anyone can put in new technology) that can reduce the transaction time (like new desking tools), over the long run (and we're focused on long term returns) I have to believe limiting the number of changes that can be made in a new vehicle transaction will help the returns of the dealership. Admittedly, it has not been proven out with AutoNation's financial results. Although as I have also written, AutoNation's financial struggles may have more to do with employee morale issues than the tools being provided to the employees.
Mike Howse, F&I
Mike Howse, Director of Finance and Insurance, Southern Region. Mr. Howse talked about the electronic finance and insurance menu, and how 1) standardized processes, 2) better pricing (from lending institutions), and 3) the people are all why the company can generate roughly $906 "per vehicle retailed" in 2006 versus $663 in 2001. Many private dealers tell me they don't believe the public dealer finance and insurance per vehicle retailed figures.
True, there probably are some accounting differences, but I think there is a lot to the benefits that come from standardized processes (menu approach to F&I sale), and better (preferred lender) pricing that has helped drive F&I per vehicle at most of the large public dealer groups and one of the actual clear differences/benefits (right now) I can point to about the advantage of being a part of a large organization versus an entrepreneurial store.
One thing I just wanted to caution investors on. Mr. Howse indicated there is a potential "one time" working capital benefit of around $50 million (for the company) if they can move the finance process more electronically, reducing the "contract in transit" [CIT] time from 4 - 5 days to 24 hours.
I remember enthusiastically talking to Mr. Gilman (retiring CEO) and Smith (CFO) about the potential to reduce CITs at lunch in the Spring of 2005 after Craig Monaghan (AutoNation's former CFO) had talked about this potential. We're now in the Spring of 2007 and no one in the industry (that I am aware of) has lowered their contracts in transit to 24 hours. The industry is moving in this direction, but there are a number of technical (precautions) that need to be worked through, and as Mr. Howse appropriately pointed out, the banks are also moving slow in the process (because they don't like losing the use of the cash for an extra few days). So we (investors/industry observers) may still be two to three years out from seeing this benefit hit the cash flow lines at any of the large public dealer groups.
David Council, Used Vehicles
Mr. Council talked about teams and technology being the secret to their success in used vehicles. This is a direction I see all of the public dealership groups moving toward in various ways, which is improving the productivity of the used vehicle manager. Historically, the used vehicle manager was either a really good "merchant" (meaning they knew how to stock the lots right), or they were a good manager (meaning they knew how to develop the used vehicle sales person).
Today, Asbury, and so many of the public dealership groups are developing teams (in this case by region) to provide do the "major lifting" when it comes to the merchandising decisions. And therefore the used manager can be more effective in focusing on the development of his/her people. Clearly this again is a slow and delicate process, because it requires a shift in the culture of the dealership. But if it is presented as a "win win" to the stores (instead of "command and control,") it really becomes helpful to store General Managers (whom I understand are finding it tougher and tougher anyway to find used managers with the merchandising skill set).
The results? You know how you hear about "domestic brands" struggling in the industry in 2006? And they have. At Asbury's 21 domestic branded stores, they saw total store gross profits go up from $8.4 million (in 2005), to $8.41 million in 2006. And the ENTIRE gross profit improvement at the company's domestic stores could be attributed to an improvement in their used vehicle gross profits from $1.61 million in 2005 to $1.78 million in 2006.
Randy Foust, Sub Prime Success
The sub prime area, at least with large franchised dealership groups, is one area where I clearly think you can not discuss a process (and Asbury's management even acknowledged this). You really need to have the right person in place that knows what they are doing. Otherwise, as I have discussed in areas like the buy here pay here market or even going into Europe, if you don't know what you are doing you could really "get your head handed to you."
I did find it interesting, however, that the company's store generates about 2,500 leads a month in subprime. And among those 2,500 leads, 22% walk in, and 78% (1,950 a month) come from advertising. Among those 1,950, about 75% of those leads are generated from infomercials. So I guess the one take away that I have is that if you are going to compete in the sub prime market, it seems like one of the more successful ways to reach these customers is with infomercials.
Henry Day, Vice President of Fixed Ops
Mr. Day talked about three initiatives: 1) customer retention, 2) customer pay, and 3) increasing employee productivity and process efficiency. What I found interesting about Mr. Day's presentation was the shift in the type of work that seems to be occurring at dealerships.
We all hear on the large public dealer group conference calls about how large dealer groups are really focused on "customer pay" business. Customer pay is simply what you or I would pay out of our pockets to the dealer for work versus the manufacturers' warranty. However, what I didn't realize was how "customer pay" business has shifted from repair to maintenance work over the years. Mr. Day indicated that today, about 70% of the customer pay business is really maintenance work, whereas several years ago about half of it was repair work.
The other interesting stat I thought Mr. Day provided was how their focus on employee productivity and process efficiency seems to be working. Apparently, the industry average is to generate about $30,000 to $38,000 in parts sales per person at a dealership. In Asbury's southern region, they average around $47,000 per sales person. Now there may be some brand or market influences going on here. And keep in mind, Asbury needs to be monitoring lost sales as well (improving productivity at the expense of sales isn't always the answer). But it sure is a good sign that the company is putting in processes that are making their employees more productive.
ABG 5-yr chart: