Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, (as definedor an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Act).
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: The number of shares of common stock outstanding as of February 26, 201827, 2024 was 20,913,251.20,404,121.
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated:
ASBURY AUTOMOTIVE GROUP, INC.
PART I.
Certain of the discussions and information included or incorporated by reference in this report may constitute "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are statements that are not historical in nature and may include statements relating to our goals, plans and projections regarding industry and general economic trends, our expected financial position, results of operations or market position and our business strategy. Such statements can generally be identified by words such as "may," "target," "could," "would," "will," "should," "believe," "expect," "anticipate," "plan," "intend," "foresee," and other similar words or phrases. Forward-looking statements may also relate to our expectations and assumptions with respect to, among other things:
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual future results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to:
Many of these factors are beyond our ability to control or predict, and their ultimate impact could be material. Moreover, the factors set forth under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" below and other cautionary statements made in this report should be read and considered as forward-looking statements subject to such uncertainties. We urge you to carefully consider those factors.
Forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation to update any forward-looking statement contained herein.
We intend to provide any information required by Item 5.05 of Form 8-K (relating to amendments or waivers of our Code of Business Conduct and Ethics for Directors, Officers, and Employees) by disclosure on our website.
Except as the context otherwise requires, "we," "our," "us," "Asbury," and "the Company" refer to Asbury Automotive Group, Inc. and its subsidiaries.
Item 1. BUSINESS
2023: | | | | | | | | | | | | | | |
Dealership Group Brand Name | | State | | Franchise |
| | | | |
Dealership Group | | Market | | Franchise Brand Name |
| | | | |
Coggin Automotive Group | | Florida | | Fort Pierce, FL | Acura, BMW, Honda,Buick, Chevrolet, Ford(a), GMC, Honda(d), Hyundai, Mercedes-Benz, Nissan(a), Toyota |
| | | Jacksonville, FL | | Buick, Chevrolet, Ford, GMC, Honda(a), Nissan(a), Toyota
| | Orlando, FL | | Ford, Honda(a), Hyundai, Lincoln |
| | | | |
Courtesy Autogroup | | Florida | | Tampa, FL | Chrysler, Dodge, Genesis, Honda, Hyundai, Infiniti, Jeep, Kia, Mercedes-Benz, Nissan, smart (b), Sprinter, Toyota |
| | | | |
Crown Automotive Company | | South Carolina | | Charlottesville, VA | BMWNissan |
| | Virginia | | Durham, NC | | HondaAcura, BMW(a), MINI |
| | | | |
David McDavid Auto Group | | Texas | | Fayetteville, NC | Dodge, Ford, Honda(a), Lincoln |
| | | | |
Greenville Automotive Group | | South Carolina | | Greensboro, NCLand Rover, Porsche, Toyota, Volvo |
| | | | |
Hare, Bill Estes & Kahlo Automotive Groups | | Indiana | | Acura, BMW, Buick, Chevrolet(b), Chrysler(a), Dodge(a), Ford, GMC, Honda, Isuzu, Jeep(a), Toyota |
| | | | |
Jim Koons Automotive Companies | | Maryland | | Buick, Chevrolet(a), Ford, GMC, Kia, Mercedes-Benz, Sprinter, Toyota(b), Volvo |
| | Virginia | | Buick(a), Chevrolet, Chrysler, Dodge, Ford(b), GMC(a), Hyundai, Jeep, Kia, Toyota(a) |
| | Delaware | | Lexus |
| | | | |
Larry H. Miller Dealerships | | Arizona | | Chrysler(b), Dodge(c), Fiat, Ford, Genesis, Hyundai, Jeep(b), Nissan, Toyota, Volkswagen(a) |
| | California | | Toyota(a) |
| | Colorado | | Chrysler(a), Dodge(b), Fiat, Ford, Jeep(a), Nissan(b), Volkswagen |
| | Idaho | | Chrysler, Dodge, Honda, Jeep, Nissan, VolvoSubaru |
| | New Mexico | | Greenville, SC | | Jaguar, Land Rover, Lexus, Nissan, Porsche,Chevrolet, Chrysler(a), Dodge, Hyundai(a), Jeep(a), Toyota Volvo |
| | Utah | | Richmond, VA | | Acura, BMW(a)Chevrolet(a), MINIChrysler(c), Dodge(c), Ford(b), Honda, Jeep(c), Lexus(a), Lincoln, Mercedes-Benz, Toyota, Sprinter |
| | Washington | | | | Honda |
| David McDavid Auto Group | | | |
Mike Shaw, Stevinson & Arapahoe Automotive Groups | | Colorado | | Austin, TX | AcuraSubaru(a), Chevrolet, Chrysler, Dodge, Hyundai(a), Jaguar, Jeep, Lexus(a), Porsche, Toyota(a) |
| | | Dallas/Fort Worth, TX | | Acura, Ford, Honda(a), Lincoln
| | Houston, TX | | Nissan |
| | | | |
Gray-Daniels Auto Family | | Jackson, MS | | Chevrolet, Ford, Lincoln, Nissan(a), Toyota |
| | | | |
Hare Automotive Group | | Indianapolis, IN | | Chevrolet, Isuzu |
| | | | |
Nalley Automotive Group | | Georgia | | Atlanta, GA | Acura, Audi, Bentley, BMW, Ford,Chevrolet, Honda, Hyundai, Infiniti(a), Kia, Lexus(a), Nissan(a), Toyota(a)Nissan, Toyota(b), Volkswagen |
| | | | |
Park Place Automotive | | Texas | | | Acura, Lexus(a), Land Rover, Mercedes-Benz(b), Porsche, Volvo, Sprinter(b) |
| | | | |
Plaza Motor Company | | Missouri | | St. Louis, MO | Audi, BMW, Infiniti, Jaguar, Land Rover, Lexus, Mercedes-Benz(a), smart (b), Sprinter(a) |
____________________________ _____________________________(a)This state has two of these franchises.
| |
(a) | This market has two of these franchises. |
| |
(b) | Parts and service operations only. |
(b)This state has three of these franchises.
(c)This state has four of these franchises.
(d)This state has five of these franchises.
Operations
New Vehicle Sales
The following table reflects the number of franchises we owned as of December 31, 20172023 and the percentage of new vehicle revenues represented by class and franchise for the year ended December 31, 2017:2023:
| | | | | | | | | | | | | | |
Class/Franchise | | Number of Franchises Owned | | % of New Vehicle Revenues |
Luxury | | | | |
Lexus | | 9 | | | 11 | % |
Mercedes-Benz | | 9 | | | 8 | |
BMW | | 5 | | | 3 | |
Acura | | 4 | | | 2 | |
Infiniti | | 4 | | | 1 | |
Land Rover | | 3 | | | 2 | |
Porsche | | 3 | | | 2 | |
Volvo | | 3 | | | 1 | |
Audi | | 2 | | | 1 | |
Genesis | | 2 | | | 1 | |
Lincoln | | 2 | | | 1 | |
Bentley | | 1 | | | * |
Jaguar | | 1 | | | * |
Total Luxury | | 48 | | | 33 | % |
Import | | | | |
Toyota | | 19 | | | 16 | % |
Honda | | 13 | | | 10 | |
Hyundai | | 9 | | | 4 | |
Nissan | | 9 | | | 3 | |
Sprinter | | 8 | | | 1 | |
Kia | | 4 | | | 2 | |
Volkswagen | | 4 | | | 1 | |
Subaru | | 3 | | | 2 | |
Fiat | | 2 | | | * |
MINI | | 1 | | | * |
Isuzu | | 1 | | | * |
Total Import | | 73 | | | 39 | % |
Domestic | | | | |
Chrysler, Dodge, Jeep, Ram | | 52 | | | 12 | % |
Chevrolet, Buick, GMC | | 22 | | | 6 | |
Ford | | 13 | | | 10 | |
Total Domestic | | 87 | | | 28 | % |
Total Franchises | | 208 | | | 100 | % |
|
| | | | | | |
Class/Franchise | | Number of Franchises Owned | | % of New Vehicle Revenues |
Luxury | | | | |
Mercedes-Benz | | 4 |
| | 7 | % |
Lexus | | 4 |
| | 7 |
|
BMW | | 7 |
| | 6 |
|
Acura | | 6 |
| | 4 |
|
Infiniti | | 4 |
| | 3 |
|
Audi | | 2 |
| | 3 |
|
Lincoln | | 3 |
| | 1 |
|
Volvo | | 2 |
| | 1 |
|
Land Rover | | 2 |
| | 1 |
|
Jaguar | | 2 |
| | 1 |
|
Porsche | | 1 |
| | * |
|
Bentley | | 1 |
| | * |
|
Total Luxury | | 38 |
| | 34 | % |
Import | | | | |
Honda | | 11 |
| | 18 | % |
Toyota | | 6 |
| | 11 |
|
Nissan | | 10 |
| | 12 |
|
Kia | | 2 |
| | 2 |
|
Hyundai | | 3 |
| | 2 |
|
Volkswagen | | 1 |
| | 1 |
|
MINI | | 1 |
| | * |
|
smart (a) | | — |
| | * |
|
Isuzu | | 1 |
| | * |
|
Sprinter | | 3 |
| | * |
|
Total Import | | 38 |
| | 46 | % |
Domestic | | | | |
Ford | | 6 |
| | 11 | % |
Chevrolet | | 3 |
| | 4 |
|
Dodge | | 3 |
| | 3 |
|
Jeep | | 2 |
| | 1 |
|
GMC | | 1 |
| | 1 |
|
Chrysler | | 2 |
| | * |
|
Buick | | 1 |
| | * |
|
Total Domestic | | 18 |
| | 20 | % |
Total Franchises | | 94 |
| | 100 | % |
(a) Two Franchise agreements pursuant to which we perform parts and service operations.
* Franchise accounted for less than 1% of new vehicle revenues for the year ended December 31, 2017.2023.
Our new vehicle revenues include new vehicle sales and lease transactions arranged by our dealerships with third-party financial institutions. We believe that leasing provides a number of benefits to our other business lines, including the historical customer loyalty to the leasing dealership for repairs and maintenance services and the fact that lessors typically give the leasing dealership the first option to purchase the off-lease vehicle.
Used Vehicle Sales
We sell used vehicles at all of our franchised dealership locations. Used vehicle sales include the sale of used vehicles to individual retail customers ("used retail") and the sale of used vehicles to other dealers at auction ("wholesale") (the terms "used retail" and "wholesale" collectively referred to as "used").
Gross profit from the sale of used vehicles depends primarily on our dealerships' ability to obtain a high quality supply of used vehicles and our use of technology to manage our inventory. Our new vehicle operations typically provide our used vehicle operations with a large supply of trade-ins and off-lease vehicles, which we believe are good sources of high quality used vehicles. We also purchase a portion of our used vehicle inventory at "open" auctions and auctions restricted to new vehicle dealers. Additionally, our used vehicle sales benefit from our ability to sell certified pre-owned vehicles from our franchised dealerships.
Parts and Service
We provide vehicle repair and maintenance services, sell replacement parts, and recondition used vehicles at all of our dealerships. In addition, we provide collision repair services at our 2437 free-standing collision repair centers that we operate either on the premises of, or in close proximity to, our dealerships. Historically, parts and service revenues have been more stable than those from vehicle sales. Industry-wide, parts and service revenues have consistently increased over time primarily due to the increased cost of maintaining vehicles, the added technical complexity of vehicles, and the increasing number of vehicles on the road.
The automotive parts and service industry tends to be highly fragmented, with franchised dealerships and independent repair shops competing for this business. We believe, however, that the increased use of advanced technology in vehicles is making it difficult for independent repair shops to compete effectively with franchised dealerships as they may not be able to make the investment necessary to perform major or technical repairs. In an effort to maintain the necessary knowledge to service vehicles and further develop our technician staff, we focus on our internal and manufacturer specific training and development programs for new and existing technicians. We believe our parts and service business is also well-positioned to benefit from the service work potentially generated through the sale of extended service contracts to customers who purchase new and used vehicles from us, as historically these customers tend to have their vehicles serviced at the location where they purchased the extended service contract. In addition, our franchised dealerships benefit from manufacturer policies requiring that warranty and recall related repairs be performed at a franchised dealership. We believe that our collision repair centers provide us with an attractive opportunity to grow our business due to the high margins provided by collision repair services and the fact that we are able to source original equipment manufacturer parts from our franchised dealerships.
Finance and Insurance
We offer a wide variety of automotive finance and insurance ("F&I")&I products to our customers. Through the acquisition of TCA in December 2021, we offer extended vehicle service contracts, prepaid maintenance contracts, key replacement contracts, guaranteed asset protection contracts, paintless dent repair contracts, appearance protection contracts, tire and wheel, and lease wear and tear contracts. These F&I products are sold to our customers via our network of dealerships.
In addition to the TCA F&I products, we offer our customers a variety of vehicle protection products through independent third parties in connection with the purchase of vehicles. These products are underwritten and administered by these third parties. Under our arrangements with the providers of these products, we primarily sell the products on a straight commission basis. We are subject to chargebacks for service and other contracts as a result of early termination, default, or prepayment of the contract. In addition, we participate in future profits associated with the performance of the third-party held underlying portfolio for certain products pursuant to retrospective commission arrangements.
We also arrange third-party financing for the sale or lease of vehicles to our customers in exchange for a feecompensation paid to us by the third-party financial institution. We do not directly finance our customers' vehicle purchases or leases, therefore our exposure to losses in connection with those third-party financing arrangements is limited generally to the fees thatcompensation we receive. The feescompensation we receive areis subject to chargeback, or repayment, to the third-party finance company if a customer defaults or prepays the retail installment contract typically during some limited time period at the beginning of the contract term. We have negotiated agreements with certain lenders pursuant to which we receive additional feescompensation upon reaching a certain volume of business.
We offerF&I revenue in our Dealerships segment represents the commissions earned from both TCA and independent third parties related to a broad range of F&I products. This F&I revenue is presented net of third-party chargebacks.
F&I revenue in our TCA segment represents the premium revenue earned from customers a variety of vehicle protectionfor F&I products primarily sold in connection with the purchase of vehicles. These productsvehicles at our dealerships. The premium revenue is recognized over the life of the F&I
product contract as services are underwrittenprovided. We capitalize costs, such as employee sales commissions, to obtain customer contracts, and administered by independent third-parties. Under our arrangements withamortize those costs over the providers of these products, we primarily sell the products on a straight commission basis. We are subject to chargebacks for insurance contracts as a result of early termination, default, or prepaymentlife of the contract. Amortization of costs to obtain customer contracts is included in selling, general and administrative expenses in the consolidated statements of income. The portion of commissions that are paid to affiliated dealerships are eliminated in the TCA segment upon consolidation. The Dealerships segment also provides vehicle repair and maintenance services to TCA customers in connection with claims related to TCA's products. Upon consolidation, the associated service revenue and costs recorded by the Dealerships segment are eliminated against claims expense recorded by the TCA segment. Third-party claims paid related to the contracts are recognized in F&I cost of sales.
In addition, we participate in future profits associated withF&I revenue includes investment income and other gains and losses related to the performance of the third-party held underlying portfolio for certain products pursuant to retrospective commission arrangements. The following is a brief description of some of the vehicle protection products we offer to our customers:
Extended service contracts – covers certain repair work after the expiration of the manufacturer warranty;
GAP debt cancellation – covers the customer after a total loss for the difference between the value of the vehicle and the outstanding loan or lease obligation after insurance proceeds;
Prepaid maintenance – covers certain routine maintenance work, such as oil changes, cleaning and adjusting of brakes, multi-point vehicle inspections, and tire rotations; and
Credit life and disability – covers the remaining amounts due on an auto loan or a lease in the event of death or disability.
Recent Developments
In January 2018, we acquired the assets of one franchise (one dealership location) in the Indianapolis, Indiana market.investment portfolio.
Business Strategy
We seek to be the most guest-centric automotive retailer and to create long-term value for our stockholders by striving to drive operational excellence and deploy capital to its highest risk adjusted returns. To achieve these objectives, we employ the strategies described below.
Drive Operational ExcellenceProvide an exceptional customer experience in our stores.
We are guided by our mission and vision to be the most guest-centric automotive retailer in the industry and use that framework as our North Star. We have designed our dealerships’ services to meet the needs of an increasingly sophisticated and demanding automotive consumer. We endeavor to establish relationships that we believe will result in both repeat business and additional business through customer referrals. Furthermore, we provide our dealership managers with appropriate incentives to employ efficient selling approaches, engage in extensive follow-up to develop long-term relationships with customers, and extensively train our sales staff to meet customer needs.
Accelerate same store growth and guest experience through technology investment.
As part of our long-term growth strategy, we invest in technologies or partner with leading software platform vendors to develop applications that (i) serve our guests with omni-channel buying options offering enhanced speed, and transparency, (ii) drive a more efficient guest experience at a lower cost to serve and (iii) offer tailored recommendations to value add products and services.
Grow F&I product penetration and expand TCA's service offerings across the full dealership portfolio.
We are positioned to leverage the acquisition of LHM to improve profitability via the ownership of TCA, a highly scalable provider of a full-suite of F&I products. TCA’s key offerings include vehicle service contracts, prepaid maintenance, protection plans, key and remote replacement, leased vehicle protection and tire and wheel protection. We are continuing to integrate TCA’s service offerings across our full dealership portfolio to increase our F&I product penetration and profitability. We expect to complete the rollout of TCA's service offerings to all of our dealerships in 2024.
Attract, retain and retaininvest in top talent to drive growth and optimize operations.
We believe the core of our business success lies in our talent pool, so we are focused on attracting, hiring and retaining the best talent
people. We also invest in resources to train and develop our employees. Our executive management team has extensive experience in the auto retail sector and is able to leverage experience from all positions throughout the Company. In addition, we believe that local management of dealership operations enables our retail network to provide market specific responses to sales, customer service and inventory requirements. The general manager of each of our dealerships is responsible for the operations, personnel and financial performance of that dealership as well as other day-to-day operations. We believe our general managers' familiarity with their respective markets enables them to effectively run day-to-day operations, market to customers, and recruit new employees. The general manager of each dealership is supported, in most cases, by a new vehicle sales manager, a used vehicle sales manager, an F&I manager, a parts manager, and a service manager. Our dealership management teams typically have many years of experience in the automotive retail industry. This management structure is complemented by support from our market-based management teams and the corporate office, which we refer to as the Dealership Support Center ("DSC"), through our advanced technology solutions, centralized processes, marketing support, and financial oversight.
Implement best practices and improve productivity
While new vehicle sales are critical to drawing customers to our dealerships, used vehicles, parts and service, and F&I sales generally provide higher profit margins and account for the majority of our gross profit. In order to maximize the growth of these higher margin businesses, we have discipline-specific executives who focus on increasing the penetration of current services and expanding the breadth of our offerings to customers through the implementation of best practices and continuous training on our technology solutions throughout our dealership network. In addition, we have marketing initiatives designed to attract customers to our online channels and mobile applications.
In order to mitigate the impact of significant fluctuations in vehicle sales, we tie management and employee compensation at various operational levels to performance through incentive-based pay systems based on various metrics. We compensate our general managers, department managers, and sales and other dealership personnel with incentive-based pay, using metrics such as dealership profitability, departmental profitability, customer satisfaction and individual performance, as appropriate. In addition, a portion of management's compensation is variable based in nature, including an annual cash bonus based on achieving certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets and a component of equity compensation tied to our financial performance in comparison to our peer group.
Provide an exceptional customer experience
We are focused on providing a high level of customer service and have designed our dealerships' services to meet the needs of an increasingly sophisticated and demanding automotive consumer. We endeavor to establish relationships which we believe will result in both repeat business and additional business through customer referrals. Furthermore, we provide our dealership managers with appropriate incentives to employ efficient selling approaches, engage in extensive follow-up to develop long-term relationships with customers, and extensively train our sales staff to meet customer needs. We continually evaluate opportunities, and implement appropriate new technologies, to improve the buying experience for our customers, and believe that our ability to share best practices across our multi-jurisdictional platform gives us an advantage over independent dealerships. For example, we have implemented a common customer relations management tool in all of our dealerships to facilitate communications with customers before, during, and after the sale. We continue to invest in technologies designed to improve our sales process and employee productivity, all with the goal of improving the customer experience. In addition, our higher margin parts and service operations are an integral part of our overall approach to customer service, providing an opportunity to foster ongoing relationships and improve customer loyalty. We continue to train our technicians and service advisors on processes and technologies to both educate our customers on their service needs and ensure that our customers continue to receive excellent service. We believe our parts and service business provides us with an opportunity for future growth due to improved customer retention, the added technical complexity of vehicles and the increasing number of vehicles on the road.
Centralize, streamline, and automate processes
Our DSC management is responsible for our capital expenditures and determining our operating strategy, while the implementation of our operating strategy rests with our market-based management teams and each dealership management team based on the policies and procedures established by DSC management. DSC management and our market-based management teams continually evaluate the financial and operating results of our dealerships, as well as each dealership's geographical location, and from time to time, make decisions to evaluate new technologies and/or processes to further enhance our operational performance. As part of our investment in our information technology ("IT") systems, we have deployed a common dealer management system ("DMS"). We believe a single DMS provides the foundation for future efficiencies and creates a more efficient retail operation. We consolidate financial, accounting, and operational data received from our dealerships through customized financial products. Our IT approach enables us to efficiently integrate and aggregate information from our dealerships. Through the combination of a common DMS and our corporate IT products, management has access to the financial, accounting, and operational data at various levels of the organization. In addition, we are in the process of centralizing business processes throughout our organization which we expect will deliver future cost synergies and enhanced performance.
Leverage our scale and cost structure to improve our operating efficienciesefficiencies.
We are positioned to leverage our significant scale so that we are able to achieve competitive operating margins by centralizing and streamlining various back-office functions. We are able to improve financial controls and lower servicing costs by maintaining key store-level accounting and administrative activities in our shared service centers, and we leverage our scale to reduce costs related to purchasing certain equipment, supplies, and services through national vendor relationships. Similarly, we are able to leverage our scale to implement these best practices when integrating newly acquired dealerships allowing us to continue to improve our operating efficiencies.
Deploy Capitalcapital to Highest Returnshighest returns and continue to invest in the business.
Our capital allocation decisions are made within the context of maintaining sufficient liquidity and a prudent capital structure. We continually evaluatetarget a 2.5x to 3.5x adjusted net leverage ratio, which is calculated as set forth in our investment opportunities based upon: (i)credit facility, in a normal
business environment. The Company’s adjusted net leverage ratio was 2.5x at December 31, 2023, compared to 1.7x at December 31, 2022. We believe our cash position and cash equivalents on hand, (ii) the funds that we expect to generate through future operations, (iii)borrowing capacity, combined with our current and expected borrowing availability under our credit facilities and mortgage financings, (iv) amountsfuture cash generation capability, provides us with financial flexibility to, among other things, reinvest in our new vehicle floor plan notes payable offset accounts,business, acquire dealerships and (v) the potential impact of any contemplated or pending future transactions, including, but not limited to, financings, acquisitions, dispositions or other capital expenditures.
Seek opportunities to further invest inrepurchase our business; acquire real estate currently being operated under lease agreementsstock, when prudent.
We continually evaluate our existing dealership network and seek to make strategic investments whichthat will increase the capacity of our dealerships and improve the customer experience. In addition, we continue to execute on our strategy of selectively acquiring our leased properties where financing rates make it attractive to be an owner.owner and provide us a further means to finance our business.
Evaluate opportunities to refine ourthe dealership portfolio, including acquiring value added operating assets and dealershipsportfolio.
We evaluate dealership acquisition opportunities based on market position and geography, brand representation and availability, key personnel, and other factors. We believe our financial position, IT systems, management structure, and experience, position us to efficiently and opportunistically complete, integrate, and benefit from dealership acquisitions. We alsocontinually evaluate the financial and operating results of our owned dealerships, as well as each dealership'sdealership’s geographical location and, based on various financial and strategic rationales, may make decisions to dispose of dealerships to refine our dealership and real estate portfolio. We also evaluate dealership acquisition opportunities based on market position and geography, brand representation and availability, key personnel and other factors. Our approach to dispositions and acquisitions is highly disciplined with a focus on long-term strategic value to stockholders.
ReturnDeliver on our mission to grow and transform our business with revenue of $30 billion or more by 2030.
We continually evaluate additional opportunities to drive revenue growth while maintaining our disciplined approach to capital allocation. In February 2024, the Company announced an update to stockholders through share repurchase programs and/our strategic outlook targeting revenue of $30 billion or dividends
Ourmore by 2030. We intend to execute on this strategic plan by focusing on a variety of growth efforts including, balanced capital allocation, decisions are primarily based on our desire to maintain sufficient liquiditydriving same-store revenue growth and a prudent capital structure. We believe our cash position and borrowing capacity, combined with our current and expected future cash generation capability, provides us with significant financial flexibility to enhance shareholder valueacquiring revenue through the repurchase of our common stock and/or dividends. Our share repurchase decisions are based on many factors, including a comparison of the market price of our common stock versus our view of its intrinsic value.strategic transactions.
Competition
The automotive retail and service industry is highly competitive with respect to price, service, location, and selection. For new vehicle sales, our dealerships compete with other franchised dealerships, primarily in their regions. Our new vehicle store competitors also have franchise agreements with the various vehicle manufacturers, and as such, generally obtain new vehicle inventory from vehicle manufacturers on the same terms as us. The franchise agreements grant the franchised dealership a non-exclusive right to sell the manufacturer's (or distributor's) brand of vehicles and offer related parts and service within a specified market area. State automotive franchise laws restrict competitors from relocating their stores or establishing new stores of a
particular vehicle brand within a specified area that is served by our dealership of the same vehicle brand. Recently, certain electric vehicle manufacturers have been permitted to circumvent the state automotive franchise laws of several states in the United States thereby permitting them to sell their new vehicles directly to consumers. We rely on our advertising and merchandising, sales expertise, service reputation, strong local branding, and location of our dealerships to assist in the sale of new vehicles.
Our used vehicle operations compete with other franchised dealerships, non-franchised automotive dealerships, regional and national vehicle rental companies, and Internet-basedinternet-based vehicle brokers for the supply and resale of used vehicles.
We compete with other franchised dealerships to perform warranty and recall-related repairs and with other franchised dealerships and independent service centers for non-warranty repair and maintenance services. We compete with other automobile dealers, service stores, and auto parts retailers in our parts operations. We believe that we have a competitive advantage in parts and service sales due to our ability to use factory-approved replacement parts, our skilled manufacturer trained and certified technicians, our competitive prices, our familiarity with manufacturer brands and models, and the quality of our customer service.
We compete with a broad range of financial institutions in arranging financing for our customerscustomers' vehicle purchases. In addition, many financial institutions are now offering F&I products through the Internet,internet, which has increased competition and may reduce our profits on certain of these items. We believe that the principal competitive factors in providing financing are convenience, interest rates, and flexibility in contract length.
Seasonality
The automobile industry has historically been subject to seasonal variations. Demand for new vehicles is generally highest during the second, third, and fourth quarters of each year and, accordingly, we expect our revenues and operating results to generally be higher during these periods. In addition, we typically experience higher sales of luxury vehicles, in the fourth quarter, which have higher average selling prices and gross profit per vehicle retailed.retailed, in the fourth quarter. Revenues and operating results may be impacted significantly from quarter to quarter by changing economic conditions, vehicle manufacturer incentive programs, or adverse weather events.
Dealer and Framework Agreements
Each of our dealerships operate pursuant to a dealer agreement between the dealership and the manufacturer (or in some cases the distributor) of each brand of new vehicles sold and/or serviced at the dealership. The dealer agreements grant the franchised dealership a non-exclusive right to sell the manufacturer's (or distributor's) brand of vehicles and offer related parts and service within a specified market area. Each dealer agreement also grants our dealerships the right to use the manufacturer's trademarks and service marks in connection with the dealershipsdealerships' operations and they also impose numerous operational requirements related to, among other things, the following:
•inventories of new vehicles and manufacturer replacement parts;
•maintenance of minimum net working capital requirements, and in some cases, minimum net worth requirements;
•achievement of certain sales and customer satisfaction targets;
•advertising and marketing practices;
•products offered to customers;
•information systems;
•geographic market, including but not limited to requirements to meet sales and service targets within an assigned market area, geographic limitations on where the dealership may locate or advertise, and restrictions on the export of vehicles; and
•dealership monthly and annual financial reporting.
Our dealer agreements are for various terms, ranging from one year to indefinite. We expect that we will be able to renew expiring agreements in the ordinary course of business. However, typical dealer agreements give the manufacturer the right to terminate or the option of non-renewal of the dealer agreement under certain circumstances, subject to applicable state automotive dealership franchise laws, including:
•insolvency or bankruptcy of the dealership;
•failure to adequately operate the dealership or to maintain required capitalization levels;
•impairment of the reputation or financial condition of the dealership;
•change of ownership or management of the dealership without manufacturer consent;
•certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets without manufacturer consent;
•failure to complete facility upgrades required by the manufacturer or agreed to by the dealer;
•failure to maintain any license, permits or authorization required to conduct the dealership's business;
•conviction of a dealer/manager or owner for certain crimes; or
•material breach of other provisions of a dealer agreement.
Notwithstanding the terms of any dealer agreement, the states in which we operate have automotive dealership franchise laws thatwhich provide that it is unlawful for a manufacturer to terminate or not renew a franchise unless "good cause" exists.
In addition to requirements under dealer agreements, we are subject to provisions contained in supplemental agreements, framework agreements, dealer addenda and manufacturers' policies, collectively referred to as "framework agreements." Framework agreements impose requirements on us in addition to those described above. Such agreements also define other standards and limitations, including:
•company-wide performance criteria;
•capitalization requirements;
•limitations on changes in our ownership or management;
•limitations on the number of a particular manufacturer's franchises owned by us;
•restrictions or prohibitions on our ability to pledge the stock of certain of our subsidiaries; and
•conditions for consent to proposed acquisitions, including sales and customer satisfaction criteria, as well as limitations on the total local, regional, and national market share percentage that would be represented by a particular manufacturer's franchises owned by us after giving effect to a proposed acquisition.
Some dealer agreements and framework agreements grant the manufacturer the right to terminate or not renew our dealer and framework agreements, or to compel us to divest our dealerships, for a number of reasons, including default under the agreement, any unapproved change of control (which specific(specific changes vary from manufacturer to manufacturer, but which include material changes in the composition of our Board of Directors during a specified time period, the acquisition of 5% or more of our voting stock by another vehicle manufacturer or distributor, the acquisition of 20% or more of our voting stock by third parties, and the acquisition of an ownership interest sufficient to direct or influence management and policies), or certain other unapproved events (including certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets). Triggers of the clauses are often based upon actions by our stockholders and are generally outside of our control. Some of our dealer agreements and framework agreements also give the manufacturer a right of first refusal if we propose to sell any dealership representing the manufacturer's brands to a third-party. These agreements may also attempt to limit the protections available under applicable state laws and require us to resolve disputes through binding arbitration. For additional information, please refer to the risk factor captioned "We are dependent upon our relationships with the manufacturers of vehicles that we sell and are subject to restrictions imposed by, and significant influence from, these vehicle manufacturers. Any of these restrictions or any changes or deterioration of these relationships could have a material adverse effect on our business, financial condition, results of operations, and cash flows."
Our framework agreements with certain manufacturers contain provisions that, among other things, attempt to limit the protections available to dealers under these laws. If these laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing us with advance notice, an opportunity to cure or a showing of good cause. Without the protection of these laws, it may also be more difficult for us to renew our dealer agreements upon expiration.
Changes in laws that provide manufacturers the ability to terminate our dealer agreements could materially adversely affect our business, financial condition and results of operations. Furthermore, if a manufacturer seeks protection from creditors in
bankruptcy, courts have held that the federal bankruptcy laws may supersede these laws, resulting in either the termination, non-renewal or rejection of franchises by such manufacturers, which, in turn, could materially adversely affect our business, financial condition, and results of operations. For additional information, please refer to the risk factor captioned "If state laws that protect automotive retailers are repealed, weakened, or superseded by our framework agreements with manufacturers, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their dealer agreements which could have a materially adverse effect on our business, financial condition, and results of operations."
Regulations
We operate in a highly regulated industry. In every state in which we operate, we must obtain one or more licenses issued by state regulatory authorities in order to operate our business. In addition, we are subject to numerous complex federal, state, and local laws regulating the conduct of our business, including those relating to our sales, operations, finance and insurance, advertising,marketing, and employment practices. These laws and regulations include state franchise laws and regulations, product standards and recalls, consumer protection laws, privacy and data security laws, anti-money laundering laws, and other extensive laws and regulations applicable to new and used motor vehicle dealers. These laws also include federal and state wage and hour, anti-discrimination, and other laws governing employment practices.
Industry Regulations
The Federal Trade Commission ("FTC") has regulatory authority over automotive dealers and has implemented enforcement initiatives relating to the marketing practices of automotive dealers. Our operations are also subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle Safety Standards and other product standards promulgated by the United States Department of Transportation, and the rules and regulations of various state motor vehicle regulatory agencies.
Our financing activities with customers are subject to federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, leasing laws, installment finance laws, usury laws, and other installment state and leasing laws and regulations. Some U.S. states regulate fees and charges that may be paidcollected as a result of vehicle sales.sales and service. Claims arising out of actual or alleged violations of law may be asserted against us or our stores by individuals or governmental entities and may expose us to significant damages, fines or other penalties, including revocation or suspension of our license to conduct store operations. Our financing activities, as well as our sale of finance and insurance products, may also be impacted indirectly by laws and regulations that govern automotive finance
In July 2010, the Dodd-Frank Wall Street Reform
companies and Consumer Protection Act was signed into law and establishedother financial institutions, including regulations adopted by the Consumer Financial Protection Bureau ("CFPB"(the "CFPB") with broad regulatory powers. Although automotive dealers are generally excluded from.
Our TCA business involves the CFPB's regulatory authority, the CFPB has announced its intention to regulate automotive financing activities through its regulationoffer and sale of automotive finance companiesextended vehicle service contracts, debt protection products, vehicle protection plans and other financial institutions that service the automotive industry.miscellaneous vehicle protection products, which are subject to a wide range of federal, state and local laws and regulations. The CFPB has issued regulatory guidance instructing financial institutions to monitor dealer lending practices for potential discrimination, resulting from the system used to compensate dealers for assisting in the customer financing transaction. The CFPB has instructed lenders that, if discrimination is found, the lender would be required to change dealer compensation practices. In addition, the CFPB has announced its intention to regulate the saleDepartments of other finance and insurance products. The Federal Trade Commission has certainInsurance of U.S. states have regulatory authority over automotive dealersour TCA business. Our TCA business is subject to state licensing and has implemented an enforcement initiative relating to the advertising practices of automotive dealers.registration requirements, and financial responsibility and security requirements. For additional information, please refer to the risk factor captionedfactors captioned: "Our operations are subject to extensive governmental laws and regulations. If we are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect our operations, our business, our reputation, financial condition, results of operations, and prospects could suffer" and "Our TCA business is subject to a wide range of federal, state and local laws and regulations, some of which we may not have previously been subject. If we are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect our TCA business, our business, results of operations, financial condition, cash flows, reputation and prospects could suffer."
Environmental, Health and Safety Laws and Regulations
We are subject to a wide range of environmental laws and regulations, including those governing discharges into water, air emissions, storage of petroleum substances and chemicals, handling and disposal of solid and hazardous wastes, remediation of various types of contamination, and otherwise relating to health, safety and protection of the environment. For example, and without creating an exhaustive list: as with automobile dealerships generally, and service and parts and collision repair center operations in particular, our business involves the generation, use, handling, and disposal of hazardous or toxic substances and wastes and the use of above ground and underground storage tanks (ASTs and USTs). Operations involving the management of wastes and the use of ASTs and USTs are subject to requirements of the Resource Conservation and Recovery Act, analogous state statutes, and their implementing regulations. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storing, treating, transporting, and disposing of regulated substances and wastes with which we must comply. We also are subject to laws and regulations governing responses to any releases of contamination at or from our facilities or at facilities that receive our hazardous wastes for treatment or disposal. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state statutes, can impose strict and joint and several liability for cleanup costs on those that are considered to have contributed to the release of a "hazardous substance." We also are subject to the Clean Water Act, analogous state statutes, and their implementing regulations which, among other things, prohibit discharges of pollutants into regulated waters without permits, require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Currently, we are not aware of any non-compliance with these or any other environmental requirements applicable to our operations, nor are we aware of any material remedial liabilities to which we are subject.
We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations and to obtain and maintain all necessary environmental permits.regulations. We believe that our operations currently are being conducted in substantial compliance with all applicable environmental laws.regulations. From time to time, we may experience incidents and encounter conditions that are not in compliance with environmental laws and regulations. We may occasionally receive notices from environmentalgovernmental agencies regarding potential violations of environmentalthese laws or regulations. In such cases, we will work with the agencies to address any issues and to implement appropriate corrective action when necessary. However, none of our dealerships havehas been subject to any material environmental liabilities in the past, nor do we know of any fact or condition that would result in any material environmental liabilities being incurred in the future.
EmployeesHuman Capital
Mission and Vision
At Asbury, our North Star and our mission is to be the most guest-centric automotive retailer. Our success depends on our employees and their commitment to delivering a consistent and exceptional guest experience. Our employees work at locations in Colorado, Florida, Georgia, Indiana, Missouri, South Carolina, Texas, California, Arizona, New Mexico, Idaho, Utah, Washington, Virginia, Maryland and Delaware. We believe that our employees help to set us apart from our competitors, and, therefore, we understand they are our greatest asset. As a result, a critical part of our business strategy is investing in, supporting and developing our employees so that they are trained and incentivized to provide best-in-class service to our guests.
As of December 31, 2017,2023, we employed approximately 8,00015,000 full-time and part-time employees, none of whom were covered by collective bargaining agreements. We believe we have good relations with our employees.
InsuranceDiversity, Equity and Inclusion
We strive to recruit new employees based on their diversity of thought, background and experience as well as diversity of personal characteristics to best reflect our guests and communities we serve.
The goal of our diversity, equity and inclusion ("DE&I") efforts is to create more welcoming and inclusive workplaces throughout our dealerships and offices to enable us to attract, retain and develop the careers of diverse, highly talented team members. We intend to continue to learn and develop - working towards building a workplace where every Asbury team member feels included and welcomed.Our Chief Diversity Equity and Inclusion Officer and her team lead the strategic focus and execution of our DE&I strategy in partnership with our operations leadership and support teams throughout the company.
Community Outreach
Through our Asbury Cares program, we support selected community partner organizations to focus on reducing social inequality. Since 2021, we have awarded all of our employees with an additional 40 hours of paid time off per year that can only be used to volunteer with our local community partners. We have seen significant year-over-year growth in employee participation in our community engagement events.
A significant portion of our Asbury Cares Community Initiative revolves around education and making sure that young people in underserved communities have access to a quality education. We formed a partnership with HBCU Change, an app-based organization that lets users round up their spending and donate to historically black colleges and universities ("HBCU"). We learned that many HBCUs historically lag in funding and resources compared to other public or private universities and many have closed their doors in recent years. Many of our Asbury team members are proud HBCU alumni and these institutions provide a unique community of support and understanding for not only African American students, but students of all races and backgrounds.
In partnership with HBCU Change, we launched a campaign to help raise funds for HBCUs across the country and in the local communities where we operate. All the point-of-sale credit card machines in all our locations show a prompt asking our guests if they would like to round up their change or donate $1, $3, $5, or a custom amount to HBCUs in their communities. At the end of each quarter, the funds raised are donated to the HBCUs across the country. Through donations from our guests and company match, we have contributed more than $1 million to HBCUs since the start of our partnership with HBCU Change in May 2021.
Recruitment and Talent Development
When recruiting for open positions, we search for people of varying backgrounds, perspectives, and experiences in order to support a diverse and inclusive culture. We also partner with local colleges and trade schools to develop apprenticeship and internship programs. This allows us to help provide valuable training to entry-level candidates while also growing our pipeline.
Our goal is to promote employees from within to career growth opportunities whenever possible. We invest resources to train and develop our employees to reach their career goals. In 2022, we launched a training curriculum for all store positions. In addition, we offer our employees access to an online career path tool, which helps them plan their desired career path and see the required performance goals and milestones to be considered for a promotion. Our fixed operations organization encourages technicians to obtain and maintain certification status with our vehicle manufacturers, and in most cases, our dealership pays for the training. Our employees also attend vehicle manufacturer-sponsored and industry training events.
We pride ourselves on rewarding and developing talented and tenured employees.
Compensation and Benefits
We offer competitive compensation and benefits to attract and retain the best people, including the following benefits for our full-time employees:
•Health, dental, and vision benefits with multiple plan choices;
•Discounted healthcare premiums for biometric screening and completion of health survey; and
•Employee assistance program.
Saving and retirement
•Holiday match; and
•401(k) match.
Paid time off
•Up to 4 weeks paid time off;
•Paid pregnancy leave; and
•Paid parental leave.
Disability and accident insurance
•Short-term disability and long-term disability insurance;
•Accident insurance, hospital indemnity, employee critical illness insurance;
•Employer paid life insurance; and
•Supplemental life insurance.
Scholarships for education
•Annual scholarship program.
Broad employee equity ownership
•We also lead the industry by offering equity awards to frontline employees because we want them to be owners of our Company and committed to our long-term success.
Self-Insurance Programs
Due to the inherent risk in the automotive retail industry, our operations expose us to a variety of liabilities. These risks generally require significant levels of insurance covering liabilities such as claims from employees, customers, or other third parties, for personal injury and property relatedproperty-related losses occurring in the course of our operations. We may be subject to fines and civil and criminal penalties in connection with alleged violations of federal and state laws or regulatory environments. Further, the automobile retail industry is subject to substantial risk of real and personal property loss, due to the significant concentration of property values located at the various dealership locations.
OurUnder our self-insurance programs, including property and casualty, workers’ compensation, and medical, the Company retains various levels of aggregate loss limits and per-claim deductibles. In addition, the Company maintains separate insurance programs include multiple umbrella policies with a total per occurrenceto address potential cyber and aggregate limit of $100.0 million.directors and officers exposures. We are self-insured for certain employee medical claims and maintain stop lossstop-loss insurance for individual claims. We have large deductible insurance programs in place for workers compensation, property, and general liability claims.
Provisions for retained losses and deductibles are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims. The insurance companies that underwrite our insurance require that we secure certain of our obligations for deductible reimbursements with collateral. Our collateral requirements are set by the insurance companies and, to date, have been satisfied by posting surety bonds, letters of credit, and/or cash deposits. Our collateral requirements may change from time to timetime-to-time based on, among other things, our claims experience.
Item 1A. Risk Factors
In addition to the other information contained, referred to or incorporated by reference into this report, you should consider carefully the following factors when evaluating our business and before making an investment decision. Our business, operations, ability to implement our strategy, reputation, results of operations, financial condition, cash flows, and prospects may be materially adversely affected by the risks described below. In addition, other risks or uncertainties not presently known to us or that we currently do not deem material could arise, any of which could also materially adversely affect us.
Risks Related to Our Business
Operating Risks
Disruptions in the production and delivery of new vehicles and parts from manufacturers due to the lack of availability of parts and key components from suppliers could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Historically, we have generated a significant portion of our revenue through new vehicle sales, and new vehicle sales also tend to lead to sales of higher-margin products and services, such as F&I products and vehicle-related parts and service.In addition, new vehicle buyers often trade in an owned vehicle, or turn in a leased vehicle, to us at the time of purchase, and these traded vehicles have historically been an important source for our used vehicle inventory. We rely exclusively on the various vehicle manufacturers for our new vehicle inventory and maintenance and replacement parts inventory. In turn, our vehicle manufacturers rely on certain third-party suppliers to manufacture and deliver certain parts and key components for their vehicles. As a result, our profitability is dependent to a great extent on various aspects of vehicle manufacturers’ operations and timely delivery of new vehicles and parts.
Property loss or other uninsured liabilities could have a material adverse impact on our results of operations.
We are subject to substantial risk of property loss due to the significant concentration of property at dealership locations, including vehicles and parts. We have historically experienced business interruptions from time to time at several of our dealerships, due to actual or threatened adverse weather conditions or natural disasters, such as hurricanes, earthquakes, tornadoes, floods, hail storms, fires or other extraordinary events. Concentration of property at dealership locations also makes the automotive retail business particularly vulnerable to theft, fraud and misappropriation of assets. Illegal or unethical conduct by employees, customers, vendors, and unaffiliated third parties can result in loss of assets, disrupt operations, impact brand reputation, jeopardize manufacturer and other relationships, result in the imposition of fines or penalties, and subject us to governmental investigations or lawsuits. While we maintain insurance to protect against a number of losses, this insurance coverage often contains significant deductibles. In addition, we "self-insure" a portion of our potential liabilities, meaning we do not carry insurance from a third-party for such liabilities, and are wholly responsible for any related losses including for certain potential liabilities that some states prohibit the maintenance of insurance to protect against. In certain instances, our insurance may not fully cover a loss depending on the applicable deductible or the magnitude and nature of the claim. Additionally, changes in the cost or availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase our self-insured risks. To the extent we incur significant additional costs for insurance, suffer losses that are not covered by in-force insurance or suffer losses for which we are self-insured, our financial condition, results of operations and cash flows could be materially adversely impacted.
If we are unable to acquire and successfully integrate additional businesses into our existing operations, and realize expected benefits and synergies from such acquisitions, our revenue and earnings growth may be adversely affected.
We believe that the automotive retailing industry is a mature industry whose sales are significantly impacted by the prevailing economic climate, both nationally and in local markets. Accordingly, we believe that our future growth depends in part on our ability to manage expansion, control costs in our operations and acquire and effectively integrate acquired dealerships into our organization. For example, with the recent consummation of the Koons acquisition, we will experience significantly more sales, and have more assets and employees than we did prior to the transaction. The integration processes require us to expend significant capital and significantly expand the scope of our operations and financial systems. Integration also requires support or other actions by third-parties such as vendors, suppliers, and licensing agencies and the untimely or inadequate responses from such third-parties can delay or otherwise negatively impact the integration process.
When seeking to acquire other dealerships, we often compete with several other national, regional and local dealership groups, and other strategic and financial buyers, some of which may have greater financial resources than us. Competition for attractive acquisition targets may result in fewer acquisition opportunities for us and we may have to forgo acquisition opportunities to the extent we cannot negotiate such acquisitions on acceptable terms.
We also face additional risks commonly encountered with growth through acquisitions. These risks include, but are not limited to: (i) failing to obtain manufacturers’ consents to acquisitions of additional franchises; (ii) incurring significant transaction-related costs for both completed and failed acquisitions; (iii) incurring significantly higher capital expenditures and operating expenses; (iv) failing to integrate the operations and personnel of the acquired dealerships and impairing relationships with employees; (v) incorrectly valuing entities to be acquired or incurring undisclosed liabilities at acquired dealerships; (vi) disrupting our ongoing business and diverting our management resources to newly acquired dealerships; (vii) failing to achieve expected performance levels; (viii) impairing relationships with manufacturers and customers as a result of changes in management; (ix) failing to realize expected benefits and synergies from the transaction; and (ix) failing to implement or improve controls, policies and information systems and related security measures in the acquired businesses.
We may not adequately anticipate all the demands that our growth will impose on our personnel, procedures and structures, including our financial and reporting control systems, information technology systems, data processing systems, and management structure. Moreover, our failure to retain qualified management personnel at any acquired dealership may increase the risks associated with integrating the acquired dealership. If we cannot adequately anticipate and respond to these demands, we may fail to realize acquisition synergies and our resources will be focused on incorporating new operations into our structure rather than on areas that may be more profitable.
We are a holding company and as a result are dependent on our operating subsidiaries to generate sufficient cash and distribute cash to us to service our indebtedness and fund our ongoing operations.
Our ability to make payments on our indebtedness and fund our ongoing operations depends on our operating subsidiaries' ability to generate cash in the future and distribute that cash to us. It is possible that our subsidiaries may not generate cash from operations in an amount sufficient to enable us to service our indebtedness. In addition, many of our subsidiaries are required to comply with the provisions of franchise agreements, dealer agreements, other agreements with manufacturers, mortgages, and credit facility providers. Many of these agreements contain minimum working capital or net worth requirements, and are subject to change at least annually. Although the requirements contained in these agreements did not restrict our subsidiaries from distributing cash to us as of December 31, 2023, unexpected changes to our financial metrics or to the terms of our franchise agreements, dealer agreements, or other agreements with manufacturers could require us to alter the manner in which we distribute or use cash. If our operating subsidiaries are unable to generate and distribute sufficient cash to us to service our indebtedness and fund our ongoing operations, our financial condition may be materially adversely affected.
Our inability to execute a substantial portion of our business strategy, including our mission to grow and transform our business, could have an adverse effect on our business, results of operations, financial condition and cash flows.
Our inability to execute a substantial portion of our business strategy, could adversely affect our business, results of operations, financial condition and cash flows. We seek to execute on our strategic plan using a variety of growth efforts including, driving same-store revenue growth and acquiring additional revenue through strategic acquisitions. Many of the factors that impact our ability to execute our strategic vision, such as the advancement of certain technologies, general economic conditions and legal and regulatory obstacles are beyond our control.
Consumers are increasingly shopping for new and used vehicles, automotive repair and maintenance service and other automotive products and services online and through mobile applications, including through third-party online and mobile sales platforms, with which we compete, that are designed to generate consumer sales that are sold to automotive dealers. We have invested and will continue to invest in our omni-channel and other online applications in furtherance of our strategic vision. We face increased competition for market share from other automotive retailers and other sales platforms that have also invested in digital channels. There can be no assurance that our initiatives and investments in digital channels will be successful or result in improved financial performance.
We may not adequately anticipate all the demands that our growth will impose on our personnel, procedures and structures, including our financial and reporting control systems, information technology systems, data processing systems, and management structure. Furthermore, we may decide to alter or discontinue aspects of our strategic plan and may adopt alternative or additional strategies in response to business or competitive factors or other factors or events beyond our control. We cannot give assurance that we will be able to execute a substantial portion of our strategic plan which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Goodwill and manufacturer franchise rights comprise a significant portion of our total assets. We must test our goodwill and manufacturer franchise rights for impairment at least annually, which could result in a material, non-cash write-down of goodwill or manufacturer franchise rights and could have a material adverse effect on our results of operations and stockholders’ equity.
Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. Goodwill and indefinite-lived intangible assets, including manufacturer franchise rights, are subject to impairment assessments at least annually (or more frequently when events or changes in circumstances indicate that an impairment may have occurred), by applying a qualitative or quantitative assessment. A decrease in our market capitalization or profitability increases the risk of goodwill impairment. The fair value of our manufacturer franchise rights is determined by discounting a subset of the projected cash flows at a dealership that we attribute to the value of the franchise. Changes to the business mix or declining cash flows in a dealership increase the risk of impairment. During the year ended December 31, 2023, we recognized asset impairment charges of $117.2 million associated with manufacturer franchise rights recorded at certain dealerships and goodwill associated with certain asset disposal groups. We cannot accurately predict the amount and timing of any additional impairment charges at this time; however, any such impairment charge could have an adverse effect on our results of operations and stockholders' equity. See Note 10 "Goodwill and Intangible Franchise Rights" of the notes to the consolidated financial statements for more information.
The loss of key personnel and limited management and personnel resources could adversely affect our business.
Our success depends, to a significant degree, upon the continued contributions of our management team, and service and sales personnel. In addition, manufacturer dealer or framework agreements may require the prior approval of the applicable manufacturer before any change is made in dealership general managers or other management positions. The loss of the services of one or more of these key employees may materially impair the profitability of our operations, or may result in a violation of an applicable dealer or framework agreement. In addition, the market for qualified employees in the industry and in the states in which we operate, specifically for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of such employees or the inability to attract additional qualified employees may adversely affect the ability of our dealerships to conduct their operations in accordance with the standards set by us or the manufacturers. If we are unable to retain our key personnel, we may be unable to successfully execute our business plans, which may have a material adverse effect on our business.
Risks Related to Macroeconomic and Market Conditions
The automotive retail industry is sensitive to unfavorable changes in general economic conditions and various other factors that could affect demand for our products and services, which could have a material adverse effect on our business, our ability to implement our strategy and our results of operations.
Our future performance will be impacted by general economic conditions including:including among other things: changes in employment levels; consumer demand, preferences and confidence levels; the availability and cost of credit; fuel prices; levels of discretionary personal income; inflation; and interest rates. Recently, inflation has increased throughout the U.S. economy. Inflation can adversely affect us by increasing the costs of labor, fuel and other costs as well as by reducing demand for automobiles. Sales of certain vehicles, particularly trucks and sport utility vehicles that historically have provided us with higher gross profit per vehicle retailed, may be sensitive to fuel prices. In addition, rapid changes in fuel prices can cause shifts in consumer preferences which are difficult to accommodate given the long lead-time of inventory acquisition. Inflation is also often accompanied by higher interest rates, which could reduce the fair value of our outstanding debt obligations. Changes in interest rates can also significantly impact new and used vehicle sales and vehicle affordability due to the direct relationship between interest rates and monthly loan payments, a critical factor for many vehicle buyers, and the impact interest rates have on customers’ borrowing capacity and disposable income. In an inflationary environment, depending on automotive industry and other economic conditions, we may be unable to raise prices to keep up with the rate of inflation, which would reduce our profit margins. We have experienced, and continue to experience, increases in the prices of labor, fuel and other costs of providing service. Continued inflationary pressures could impact our profitability.
We also are subject to economic, competitive, and other conditions prevailing in the various markets in which we operate, even if those conditions are not prominent nationally.
Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand, which could result in a need for us to lower the prices at which we sell vehicles, which would reduce our revenue per vehicle sold and our margins. Additionally, a shift in consumer'sconsumer’s vehicle preferences driven by pricing, fuel costs or other factors may have a material adverse effect on our revenues, margins and results of operations.
Changes in general economic conditions may make it difficult for us to execute our business strategy. In such an event, we may be required to enter into certain transactions in order to generate additional cash, which may include, but not be limited to, selling certain of our dealerships or other assets or increasing borrowings under our existing, or any future, credit facilities. There can be no assurance that, if necessary, we would be able to enter into any such transactions in a timely manner or on reasonable terms, if at all. Furthermore, in the event we were required to sell dealership assets, the sale of any material portion of such assets could have a material adverse effect on our revenue and profitability.
Adverse conditions affecting one or more of the vehicle manufacturers with which we hold franchises or their inability to deliver a desirable mix of vehicles that our consumers demand could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Historically, we have generated most of our revenue through new vehicle sales, and new vehicle sales also tend to lead to sales of higher-margin products and services, such as finance and insurance products and vehicle relatedvehicle-related parts and service. As a result, our profitability is dependent to a great extent on various aspects of vehicle manufacturers'manufacturers’ operations, many of which are outside of our control. Our ability to sell new vehicles is dependent on manufacturers'manufacturers’ ability to design and produce, and willingness to allocate and deliver to our dealerships, a desirable mix of popular new vehicles that consumers demand. PopularFor example, improvements in electric, battery-powered and hybrid gas/electric vehicles have increased consumer demand for such vehicles. If consumer demand increases for certain types of vehicles, including electric, battery-powered and hybrid gas/electric, and our manufacturers are not able to adapt and produce such vehicles that meet consumer demands, our new and used vehicle sales volumes, parts and service revenue and our results of operations may be adversely affected. Further, if manufacturers shift significant resources away from traditional production models to invest in clean vehicles and new technologies, we may experience an inadequate supply of historically popular vehicles and other adverse effects on our new and used vehicle sales volume, parts and service revenue and our results of operations until such time as consumer preferences for clean vehicles and other new technologies become widespread. In addition, popular vehicles may often be difficult to obtain from manufacturers for a number of reasons, including the fact that manufacturers generally allocate their vehicles to dealerships based on sales history and capital expenditures associated with such dealerships. Further, if a manufacturer fails to produce desirable vehicles or develops a reputation for producing undesirable vehicles or produces vehicles that do not comply with applicable laws or government regulations, and we own dealerships thatwhich sell that manufacturer'smanufacturer’s vehicles, our revenues from those dealerships could be adversely affected as consumers shift their vehicle purchases away from that brand.
Although we seek to limit our dependence on any one vehicle manufacturer, there can be no assurance that the brand mix allocated and delivered to our dealerships by the manufacturers will be appropriate or sufficiently diverse, to protect us from a significant decline in the desirability of vehicles manufactured by a particular manufacturer or disruptions in a manufacturer's ability to produce vehicles. For the year ended December 31, 2017,2023, manufacturers representing 5% or more of our revenues from new vehicle sales were as follows: | | | | | | | | |
| | | |
Manufacturer (Vehicle Brands): | | % of Total New Vehicle
Revenues
|
Toyota Motor Sales, U.S.A., Inc. (Toyota and Lexus) | | 27 | % |
Stellantis N.V. (Chrysler, Dodge, Jeep, Ram and Fiat) | | 12 | % |
American Honda Motor Co., Inc. (Honda and Acura) | | 12 | 22 | % |
Toyota Motor Sales, U.S.A., Inc. (Toyota and Lexus)
| | 18 | % |
Nissan North America, Inc. (Nissan and Infiniti)
| | 15 | % |
Ford Motor Company (Ford and Lincoln) | | 11 | 12 | % |
Mercedes-Benz USA, LLC (Mercedes-Benz smart and Sprinter) | | 9 | 8 | % |
BMW ofGeneral Motors Company (Chevrolet, Buick and GMC)
| | 6 | % |
Hyundai Motor North America LLC (BMWHyundai and MiniGenesis) | | 5 | 6% |
| % | |
| | |
Similar to automotive retailers, vehicle manufacturers may be affected by the long-term U.S. and international economic climate. In addition, we remain vulnerable to other matters that may impact the manufacturers of the vehicles we sell, many of which are outside of our control, including: (i) changes in their respective financial condition; (ii) changes in their respective marketing efforts; (iii) changes in their respective reputation; (iv) manufacturer and other product defects, including recalls; (v) changes in their respective management; (vi) disruptions in the production and delivery of vehicles and parts due to natural disasters, pandemics or other reasons; and (vii) issues with respect to labor relations. Our business is highly dependent on consumer demand and brand preferences for our manufacturersmanufacturers’ products. Manufacturer recall campaigns are a common occurrence that have accelerated in frequency and scope over the last several years.scope. Manufacturer recall campaigns could (i) adversely affect our new and used vehicle sales or customer residual trade-in valuations, could(ii) cause us to temporarily remove vehicles from our inventory, could(iii) force us to incur increased costs, and could(iv) expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Vehicle manufacturers that produce vehicles outside of the U.S. are subject to additional risks including changes in quotas, tariffs or
duties, fluctuations in foreign currency exchange rates, regulations governing imports and the costs related thereto, and foreign governmental regulations.
Adverse conditions that materially affect a vehicle manufacturer and its ability to profitably design, market, produce or distribute desirable new vehicles could in turn materially adversely affect our ability to (i) sell vehicles produced by that manufacturer, (ii) obtain or finance our new vehicle inventories, (iii) access or benefit from manufacturer financial assistance programs, (iv) collect in full or on a timely basis any amounts due therefrom, and/or (v) obtain other goods and services provided by the impacted manufacturer. In addition, we depend on manufacturers'manufacturers’ ability to design, produce, and supply parts to us and any failure to do so could have a material adverse effect on our parts and services business. Our business, results of operations, financial condition, and cash flows could be materially adversely affected as a result of any event that has an adverse effect on any vehicle manufacturer.
In addition, if a vehicle manufacturer'smanufacturer’s financial condition worsens and it seeks protection from creditors in bankruptcy or similar proceedings, or otherwise under the laws of its jurisdiction of organization, (i) the manufacturer could seek to terminate or reject all or certain of our franchises, (ii) if the manufacturer is successful in terminating all or certain of our franchises, we may not receive adequate compensation for those franchises, (iii) our cost to obtain financing for our new vehicle inventory
may increase or no longer be available from such manufacturer'smanufacturer’s captive finance subsidiary, (iv) consumer demand for such manufacturer'smanufacturer’s products could be materially adversely affected, especially if costs related to improving such manufacturer'smanufacturer’s financial condition are factored into the price of its products, (v) there may be a significant disruption in the availability of consumer credit to purchase or lease that manufacturer'smanufacturer’s vehicles or negative changes in the terms of such financing, which may negatively impact our sales, or (vi) there may be a reduction in the value of receivables and inventory associated with that manufacturer, among other things. The occurrence of any one or more of these events could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Furthermore, the automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters, adverse weather, pandemics, labor stoppages and other events may affect the flow of vehicle and parts inventories to us or our manufacturing partners. If we experience disruptions in the supply of vehicle and parts inventories, such disruptions could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Substantial competition in automobile sales and services may have a material adverse effect on our results of operations.
The automotive retail and service industry is highly competitive with respect to price, service, location, and selection. Our competition includes: (i) franchised automobile dealerships in our markets that sell the same or similar new and used vehicles; (ii) privately negotiated sales of used vehicles; (iii) other used vehicle retailers, including regional and national vehicle rental companies; (iv) companies with a primarily internet-based business model, such as Carvana, and used vehicle brokers that sell used vehicles to consumers; (v) service center and parts supply chain stores; and (vi) independent service and repair shops.
We do not have any cost advantage over other retailers in purchasing new vehicles from manufacturers. We typically rely on our advertising, merchandising, sales expertise, service reputation, strong local branding and dealership location to sell new vehicles. Because our dealer agreements only grant us a non-exclusive right to sell a manufacturer’s product within a specified market area, our revenues, gross profit and overall profitability may be materially adversely affected if competing dealerships expand their market share. Further, our vehicle manufacturers may decide to award additional franchises in our markets in ways that negatively impact our sales.
The internet has become a significant part of the advertising and sales process in our industry. Customers are using the internet to shop, and compare prices, for new and used vehicles, automotive repair and maintenance services, finance and insurance products and other automotive products. If we are unable to effectively use the internet to attract customers to our own online channels, and mobile applications, and, in turn, to our stores, our business, financial condition, results of operations and cash flows could be materially adversely affected. Additionally, the growing use of social media by consumers increases the speed and extent that information and opinions can be shared, and negative posts or comments on social media about us or any of our stores could damage our reputation and brand names, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Additionally, we rely on the protection of state franchise laws in the states in which we operate and if those laws are repealed or weakened, our framework, franchise and related agreements may become more susceptible to termination, nonrenewal or renegotiation. These laws have historically restricted the ability of automobile manufacturers to directly enter the retail market and sell vehicles directly to consumers. However, many states have recently passed or introduced legislation to permit direct to consumer sales of electric vehicles by certain companies, such as Tesla and Rivian, without the requirements of establishing a dealer network. If the state franchise laws are repealed, weakened or amended to permit vehicle manufacturers to sell vehicles (whether electric or not) directly to consumers, they may be able to have a competitive advantage over the
traditional dealers, which could have a material adverse effect on our sales in those states, which in turn, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are dependent upon our relationships with the manufacturers of vehicles that we sell and are subject to restrictions imposed by, and significant influence from, these vehicle manufacturers. Any of these restrictions or any changes or deterioration of these relationships could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are dependent on our relationships with the manufacturers of the vehicles we sell, which have the ability to exercise a great deal of control and influence over our day-to-day operations, as a result of the terms of our dealer, framework and related agreements. We may obtain new vehicles from manufacturers, service vehicles, sell new vehicles and display vehicle manufacturers’ trademarks only to the extent permitted under these agreements. The terms of these agreements may conflict with our interests and objectives and may impose limitations on key aspects of our operations, including acquisition strategy and capital spending.
For example, manufacturers can set performance standards with respect to sales volume, sales effectiveness and customer satisfaction, and require us to obtain manufacturer consent before we can acquire dealerships selling a manufacturer’s automobiles. From time to time, we may be precluded under agreements with certain manufacturers from acquiring additional franchises, or subject to other adverse actions, to the extent we are not meeting certain performance criteria at our existing stores (with respect to matters such as sales volume, customer satisfaction and sales effectiveness) until our performance improves in accordance with the agreements, subject to applicable state franchise laws. In addition, many vehicle manufacturers place limits on the total number of franchises that any group of affiliated dealerships may own and certain manufacturers place limits on the number of franchises or share of total brand vehicle sales that may be maintained by an affiliated dealership group on a national, regional or local basis, as well as limits on store ownership in contiguous markets. If we reach any of these limits, we may be prevented from making further acquisitions, or we may be required to dispose of certain dealerships, which could adversely affect our future growth. We cannot provide assurance that manufacturers will approve future acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.
In addition, certain manufacturers use a dealership’s manufacturer-determined customer satisfaction index ("CSI") score as a factor governing participation in incentive programs. To the extent we do not meet minimum score requirements, our future payments may be materially reduced or we may be precluded from receiving certain incentives, which could materially adversely affect our business, financial condition, results of operations and cash flows.
Manufacturers also typically establish facilities and minimum capital requirements for dealerships on a case-by-case basis. In certain circumstances, including as a condition to obtaining consent to a proposed acquisition and qualifying for certain financial incentives, a manufacturer may require us to remodel, upgrade or move our facilities, and capitalize the subject dealership at levels we would not otherwise choose to fund, causing us to divert our financial resources away from uses that management believes may be of higher long-term value to us. Delays in obtaining, or failing to obtain, manufacturer consent, would impede our ability to execute acquisitions that we believe would integrate well with our overall strategy and limit our ability to expand our business.
Manufacturers can also establish new franchises or relocate existing franchises, subject to applicable state franchise laws. The establishment or relocation of franchises in our markets could have a material adverse effect on the business, financial condition and results of operations of our dealerships in the market in which the action is taken.
Manufacturers may also limit our ability to divest one or more of our franchise dealerships in a timely manner. Most of our dealer agreements provide the manufacturer with a right of first refusal to purchase any of the manufacturer’s franchises we seek to sell. Divestitures of our franchise dealerships may also require manufacturer consent and failure to obtain consent would require us to find another potential buyer or wait until the buyer is able to meet the requirements of the manufacturer. A delay in the sale of a dealership could have a negative impact on our business, financial condition, results of operations, and cash flows.
Manufacturers may terminate or may not renew our dealer and framework agreements, or may compel us to divest our dealerships, for a number of reasons, including default under the agreement, any unapproved change of control (which specific changes vary from manufacturer to manufacturer, but which include material changes in the composition of our Board of Directors during a specified time period, the acquisition of 5% or more of our voting stock by another vehicle manufacturer or distributor, the acquisition of 20% or more of our voting stock by third parties, and the acquisition of an ownership interest sufficient to direct or influence management and policies), or certain other unapproved events (including certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets). Triggers of these clauses are often based upon actions by our stockholders and are generally outside of our control. Restrictions on any unapproved changes of ownership or management may adversely impact our value, as they may prevent or deter prospective acquirers from gaining
control of us. In addition, actions taken by a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise agreements or otherwise could also have a material adverse effect on our revenues and profitability.
There can be no assurances that we will be able to renew our dealer and framework agreements on a timely basis, on acceptable terms, or at all. Our business, financial condition and results of operations may be materially adversely affected to the extent that our rights become compromised or our operations are restricted due to the terms of our dealer or framework agreements or if we lose franchises representing a significant percentage of our revenues due to the termination of, or failure to renew, such agreements.
If vehicle manufacturers reduce or discontinue sales incentive, warranty or other promotional programs, our business, financial condition, results of operations and cash flows may be materially adversely affected.
We benefit from certain sales incentive, warranty, and other promotional programs of vehicle manufacturers that are intended to promote and support their respective new vehicle sales. Key incentive programs include: (i) customer rebates on new vehicles; (ii) dealer incentives on new vehicles; (iii) special financing or leasing terms; (iv) warranties on new and used vehicles; and (v) sponsorship of used vehicle sales by authorized new vehicle dealers.
Vehicle manufacturers often make many changes to their incentive programs. Any reduction or discontinuation of manufacturers’ incentive programs for any reason, including a supply and demand imbalance, may reduce our sales volume which, in turn, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Technological advances, including electrification of vehicles and adoption of autonomous vehicles in the long-term, could have a material adverse effect on our business.
The automotive industry is predicted to experience change over the long-term. Technological advances are facilitating the development of electric, battery powered and hybrid gas/electric vehicles and autonomous vehicles. While most major vehicle manufacturers have announced plans to electrify some or all of their new vehicle offerings, the eventual timing of widespread availability of electric, battery powered and hybrid gas/electric vehicles and driverless vehicles is uncertain due to regulatory requirements, additional technological requirements, and uncertain consumer acceptance of these vehicles. We expect to continue to sell electric, battery powered and hybrid gas/electric vehicles through our dealerships, however, the effect of these vehicles on the automotive retail business is uncertain and could include changes in the level of the new and used vehicle sales, the price of new and used vehicles and the levels of service required for such vehicles and the profitability of our parts and service business, our finance and insurance business, including our TCA business, and the role of franchised dealers, any of which could materially adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Our Indebtedness and Financial Matters
Our outstanding indebtedness, ability to incur additional debt and the provisions in the agreements governing our debt, and certain other agreements, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
As of December 31, 2017,2023, we had total debt of $879.3 million, which excludes$3.23 billion and total floor plan notes payable, net of $732.1 million.$1.79 billion. We have the ability to incur substantial additional debt in the future to finance, among other things, acquisitions, working capital and capital expenditures, and new and used vehicle inventory, as well as to refinance new and used vehicle inventory, subject in each case to the restrictions contained in our debt instruments and other agreements existing at the time such indebtedness is incurred. We will continue to have substantial debt service obligations, consisting of required cash payments of principal and interest, for the foreseeable future.
Our debt service obligations could have important consequences to us for the foreseeable future, including the following: (i) our ability to obtain additional financing, or to obtain such financing on attractive terms, for acquisitions, capital expenditures, working capital or other general corporate purposes may be impaired; (ii) a substantial portion of our cash flow from operating activities must be dedicated to the payment of principal and interest on our debt, thereby reducing the funds available to us for our operations and other corporate purposes; (iii) some of our borrowings are and will continue to be at variable rates of interest, which exposes us to certain risks of interest rate increases; and (iv) we may be or become substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to changes in market conditions and governmental regulations.
In addition to our ability to incur additional debt in the future, there are operating and financial restrictions and covenants, such as leverage covenants, in certain of our debt and mortgage agreements, including the agreement governing our senior credit facility, the indenture governing our senior notes2023 Senior Credit Facility and our mortgage agreements and related mortgage guarantees, as well as certain other agreements to which we are a party that may adversely affect our ability to finance our future operations or capital needs or to pursue certain business activities. These limit, among other things, our ability to incur certain additional debt, create certain liens or other
encumbrances and make certain payments (including dividends and repurchases of our common stock and for investments). Certain of these agreements also require us to maintain compliance with certain financial ratios.ratios, including, but not limited to, our adjusted net leverage ratio.
Our failure to comply with any of these covenants in the future could constitute a default under the relevant agreement, which could, depending on the relevant agreement, (i) entitle the creditors under such agreement to terminate our ability to borrow under the relevant agreement and accelerate our obligations to repay outstanding borrowings; (ii) require us to repay those borrowings; (iii) entitle the creditors under such agreement to foreclose on the property securing the relevant indebtedness; or (iv) prevent us from making debt service payments on certain of our other indebtedness, any of which would have a material adverse effect on our business, financial condition, results of operations orand cash flows. In many cases, a default under one of our debt, mortgage, or other agreements, could trigger cross-default provisions in one or more of our other debt or mortgage agreements. There can be no assurance that our creditors would agree to an amendment or waiver of our covenants. In the event we obtain an amendment or waiver, we would likely incur additional fees and higher interest expense.
In addition to the financial and other covenants contained in our various debt or mortgage agreements, certain of our lease agreements contain covenants that give our landlords the right to terminate the lease, seek significant cash damages, or evict us from the applicable property, if we fail to comply. Similarly, our failure to comply with any financial or other covenants in any of our framework agreements would give the relevant manufacturer certain rights, including the right to reject proposed acquisitions, and may give it the right to repurchase its franchises from us. Events that give rise to such rights, and our inability to acquire additional dealerships or the requirement that we sell one or more of our dealerships at any time, could inhibit the growth of our business, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Manufacturers may also have the right to restrict our ability to provide guarantees of our operating companies, pledges of the capital stock of our subsidiaries and liens on our assets, which could materially adversely effectaffect our ability to obtain financing for our business and operations on favorable terms or at desired levels, if at all.
The occurrence of any one of these events may limit our ability to take strategic actions that would otherwise enable us to manage our business in a manner in which we otherwise would, absent such limitations, which could materially adversely affect our business, financial condition, results of operations and cash flows.
Our business, financial condition and results of operations may be materially adversely affected by increases in interest rates.
We generally finance our purchases of new vehicle inventory, have the ability to finance the purchases of used vehicle inventory, and have the availability to borrow funds for working capital under our senior secured credit facilities that charge interest at variable rates. Therefore, our interest expense from variable rate debt will rise with increases in interest rates. In addition, a significant rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used vehicle sales and the related profit margins and F&I revenue per vehicle, because most of our customers finance their vehicle purchases.As a result, rising interest rates may have the effect of simultaneously increasing our capital costs and reducing our revenues. Given our variable interest rate debt and floor plan notes payable outstanding as of December 31, 2017,2023, each one percent increase in market interest rates would increase our total annual interest expense by as much as $7.2approximately $18.1 million. When considered in connection with reduced expected sales, as and if interest rates increase, any such increase could materially adversely affect our business, financial condition and results of operations.
Our vehicle sales, financial condition and results of operations may be materially adversely affected by changes in costs or availability of consumer financing.
The majority of vehicles purchased by our customers are financed. Reductions in the availability of credit to consumers have contributed to declines in our vehicle sales in past periods. Reductions in available consumer credit or increased costs of that credit, could result in a decline in our vehicle sales, which would have a material adverse effect on our financial condition and results of operations.
Lenders that have historically provided financing to those buyers who, for various reasons, do not have access to traditional financing, including those buyers who have a poor credit history or lack the down payment necessary to purchase a vehicle, are often referred to as subprime lenders. If market conditions cause subprime lenders to tighten credit standards, or if interest rates increase, the ability to obtain financing from subprime lenders for these consumers to purchase vehicles could become limited, resulting in a decline in our vehicle sales, which in turn, could have a material adverse effect on our financial condition and results of operations.
Substantial competition in automobile sales and services
We may haveidentify a material adverse effect on our results of operations.
The automotive retail and service industry is highly competitive with respect to price, service, location, and selection. Our competition includes: (i) franchised automobile dealershipsweakness in our marketsinternal control over financial reporting in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements or otherwise adversely affect the accuracy, reliability or timeliness of our financial statements.
As described under Item 9A. "Controls and Procedures" below, we previously concluded that sell the same or similar new and used vehicles; (ii) privately negotiated sales of used vehicles; (iii) other used vehicle retailers, including regional and national vehicle rental companies; (iv) Internet-based used vehicle brokers that sell used vehicles to consumers; (v) service center and parts supply chain stores; and (vi) independent service and repair shops.
We do not have any cost advantage over other retailers in purchasing new vehicles from manufacturers. We typically rely on our advertising, merchandising, sales expertise, service reputation, strong local branding, and dealership location to sell new vehicles. Because our dealer agreements only grant us a non-exclusive right to sell a manufacturer's product within a specified market area, our revenues, gross profit and overall profitability may be materially adversely affected if competing dealerships expand their market share. Further, our vehicle manufacturers may decide to award additional franchisesmaterial weakness in our marketsinternal control over financial reporting existed as of December 31, 2022 and, accordingly, internal control over financial reporting and our disclosure controls and procedures were not effective as of such date. A material weakness is a deficiency, or a combination of deficiencies, in waysinternal control over financial reporting, such that negatively impact our sales.
The Internet has becomethere is a significant part of the advertising and sales process in our industry. Customers are using the Internet to shop, and compare prices, for new and used vehicles, automotive repair and maintenance services, finance and insurance products, and other automotive products. If we are unable to effectively use the Internet to attract customers to our own on-line channels and mobile applications, and, in turn, to our stores, our business, financial condition, results of operations, and cash flows could be materially adversely affected. Additionally, the growing use of social media by consumers increases the speed and extentreasonable possibility that information and opinions can be shared, and negative posts or comments on social media about us or anya material misstatement of our stores, could damage our reputation and brand names, which could haveannual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the material adverse effect on our business, financial condition, results of operations, and cash flows.
Additionally, if one or more companies are permitted to circumvent the state franchise laws of several states in the United States thereby permitting them to sell their new vehicles without the requirements of establishing a dealer-network, they may be able to have a competitive advantage over the traditional dealers, which could have a material adverse effect on our sales in those states.
We are dependent upon our relationships with the manufacturers of vehicles that we sell and are subject to restrictions imposed by, and significant influence from, these vehicle manufacturers. Any of these restrictions or any changes or deterioration of these relationships could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We are dependent on our relationships with the manufacturers of the vehicles we sell, which have the ability to exercise a great deal of control and influence over our day-to-day operations,weakness as a result of deficiencies in information technology general controls ("ITGCs") at LHM and TCA, businesses that we acquired in December 2021.
During 2023, we completed the termsremediation measures related to the material weakness and we have concluded that our internal control over financial reporting is effective as of December 31, 2023. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. Failure to maintain effective internal control over financial reporting may adversely affect the accuracy and reliability of our dealer, framework,financial statements and related agreements. We may obtain new vehicles from manufacturers, service vehicles, sell new vehicles, and display vehicle manufacturers' trademarks only to the extent permitted under these agreements. The terms of these agreements may conflict with our interests and objectives and may impose limitations on key aspects of our operations, including acquisition strategy and capital spending.
For example, manufacturers can set performance standards with respect to sales volume, sales effectiveness and customer satisfaction, and require us to obtain manufacturer consent before we can acquire dealerships selling a manufacturer's automobiles. From time to time, we may be precluded under agreements with certain manufacturers from acquiring additional franchises, or subject tohave other adverse actions, to the extent we are not meeting certain performance criteria at our existing stores (with respect to matters such as sales volume, customer satisfaction and sales effectiveness) until our performance improves in accordance with the agreements, subject to applicable state franchise laws. In addition, many vehicle manufacturers place limits on the total number of franchises that any group of affiliated dealerships may own and certain manufacturers place limits on the number of franchises or share of total brand vehicle salesconsequences that may be maintained by an affiliated dealership group on a national, regional or local basis, as well as limits on store ownership in contiguous markets. If we reach any of these limits, we may be prevented from making further acquisitions, which couldmaterially and adversely affect our future growth. We cannot provide assurance that manufacturers will approve future acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.
In addition, certain manufacturers use a dealership's manufacturer-determined customer satisfaction index ("CSI") score as a factor governing participation in incentive programs. To the extent we do not meet minimum score requirements, our future payments may be materially reduced or we may be precluded from receiving certain incentives, which could materially adversely affect our business, financial condition, results of operations and cash flows.
Manufacturers also typically establish facilities and minimum capital requirements for dealerships on a case-by-case basis. In certain circumstances, including as a condition to obtaining consent to a proposed acquisition, a manufacturer may require us to remodel, upgrade or move our facilities, and capitalize the subject dealership at levels we would not otherwise choose to fund, causing us to divert our financial resources away from uses that management believes may be of higher long-term value to us. Delays in obtaining, or failing to obtain, manufacturer consent, would impede our ability to execute acquisitions that we believe would integrate well with our overall strategy and limit our ability to expand our business.
Manufacturers can also establish new franchises or relocate existing franchises, subjectRisks Related to applicable state franchise laws. The establishment or relocation of franchises in our markets could have a material adverse effect on the business, financial conditionLegal and results of operations of our dealerships in the market in which the action is taken.Regulatory Matters
Manufacturers may also limit our ability to divest one or more of our dealerships in a timely manner or at all. Most of our dealer agreements provide the manufacturer with a right of first refusal to purchase any of the manufacturer's franchises we seek to sell. Divestitures may also require manufacturer consent and failure to obtain consent would require us to find another potential buyer or wait until the buyer is able to meet the requirements of the manufacturer. A delay in the sale of a dealership could have a negative impact on our business, financial condition, results of operations, and cash flows.
Manufacturers may terminate or may not renew our dealer and framework agreements, or may compel us to divest our dealerships, for a number of reasons, including default under the agreement, any unapproved change of control (which specific changes vary from manufacturer to manufacturer, but which include material changes in the composition of our Board of Directors during a specified time period, the acquisition of 5% or more of our voting stock by another vehicle manufacturer or distributor, the acquisition of 20% or more of our voting stock by third parties, and the acquisition of an ownership interest sufficient to direct or influence management and policies), or certain other unapproved events (including certain extraordinary corporate transactions such as a merger or sale of all or substantially all of our assets). Triggers of these clauses are often based upon actions by our stockholders and are generally outside of our control. Restrictions on any unapproved changes of ownership or management may adversely impact our value, as they may prevent or deter prospective acquirers from gaining control of us. In addition, actions taken by a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise agreements or otherwise, could also have a material adverse effect on our revenues and profitability.
There can be no assurances that we will be able to renew our dealer and framework agreements on a timely basis, on acceptable terms, or at all. Our business, financial condition, and results of operations may be materially adversely affected to
the extent that our rights become compromised or our operations are restricted due to the terms of our dealer or framework agreements or if we lose franchises representing a significant percentage of our revenues due to termination or failure to renew such agreements.
If vehicle manufacturers reduce or discontinue sales incentive, warranty or other promotional programs, our financial condition, results of operations, and cash flows may be materially adversely affected.
We benefit from certain sales incentive, warranty, and other promotional programs of vehicle manufacturers that are intended to promote and support their respective new vehicle sales. Key incentive programs include: (i) customer rebates on new vehicles; (ii) dealer incentives on new vehicles; (iii) special financing or leasing terms; (iv) warranties on new and used vehicles; and (v) sponsorship of used vehicle sales by authorized new vehicle dealers.
Vehicle manufacturers often make many changes to their incentive programs. Any reduction or discontinuation of manufacturers' incentive programs for any reason, including a supply and demand imbalance, may reduce our sales volume which, in turn, could have a material adverse effect on our results of operations, cash flows, and financial condition.
If state laws that protect automotive retailers are repealed, weakened, or superseded by our framework agreements with manufacturers, our dealerships will be more susceptible to termination, non-renewal, or renegotiation of their dealer agreements,which could have a material adverse effect on our business, results of operations, financial condition and results of operations.cash flows.
Applicable state laws generally provide that an automobile manufacturer may not terminate or refuse to renew a dealer agreement unless it has first provided the dealer with written notice setting forth "good cause" and stating the grounds for termination or non-renewal. Many states also limit the circumstances in which an automobile manufacturer may sell vehicles directly to consumers.Some state laws allow dealers to file protests or petitions or allow them to attempt to comply with the manufacturer'smanufacturer’s criteria within a notice period to avoid the termination or non-renewal. Our framework agreements with certain manufacturers contain provisions that, among other things, attempt to limit the protections available to dealers under these laws, and, though unsuccessful to date, manufacturers'manufacturers’ ongoing lobbying efforts may lead to the repeal or revision of these laws. If these laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of these state laws, it may also be more difficult for us to renew our dealer agreements upon expiration. Changes in laws that provide manufacturers the ability to terminate our dealer agreements could materially adversely affect our business, results of operations, financial condition and results of operations.cash flows. Furthermore, if a manufacturer seeks protection from creditors in bankruptcy, courts have held that the federal bankruptcy laws may supersede the state laws that protect automotive retailers resulting in either the termination, non-renewal or rejection of franchises by such manufacturers, which, in turn, could materially adversely affect our business, result of operations, financial condition and cash flows.Market disruptors continue to push for legislation permitting direct-to-consumer sales models; if those lobbying efforts are successful, automotive manufacturers could bypass the traditional franchised dealer network, which in turn could materially adversely affect our business, results of operations.operations, financial condition and cash flows.
New laws, regulations, or governmental policies in response to climate change, including fuel economy and greenhouse gas emission standards, or changes to existing standards, could adversely impact our business, results of operations, financial condition, cash flow, and prospects.
New laws and regulations designed to address climate change concerns could affect vehicle manufacturers’ ability to produce cost effective vehicles. For example, laws and regulations enacted that directly or indirectly affect vehicle manufacturers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could materially adversely impact our business, results of operations, financial condition, cash flow, and prospects. In addition, vehicle manufacturers are subject to government-mandated fuel economy and greenhouse gas, or GHG, emission standards, which continue to change and become more stringent over time. Significant increases in fuel economy requirements or new federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or lead to changes in automotive technology.
A failure of any of our management information systems or those of our third-party service providers, or a data security breach with regard to personally identifiable information ("PII") about our customers or employees, could have a material adverse effect on our business, financial condition, results of operations, financial condition and cash flows.
We depend on the efficient operation of our information systems and those of our third partythird-party service providers. We rely on management information systems at our dealerships in all aspects of our sales and service efforts, as well in the preparation of our consolidated financial and operating data. All of our dealerships currently operate on two dealer management systems ("DMS"). Additionally, in the ordinary course of business, we and our partners receive significant PII about our customers in order to complete the sale or service of a common DMS. vehicle and related products. We also receive PII from our employees. The regulatory environment surrounding information security and privacy is increasingly demanding, with numerous state and federal regulations, as well as payment card industry and other vendor standards, governing the collection and maintenance of PII from consumers and other individuals.
Cyber incidents can result from human error or intentional (or deliberate) attacks or unintentional events by insiders (e.g., employees) or third parties, including cybercriminals, competitors, nation-states and “hacktivists,” among others. Cyber incidents can include, for example, phishing, credential harvesting or use of stolen access credentials, unauthorized access to systems, networks or devices (for example, through hacking activity), structured query language attacks, infection from or spread of malware, ransomware, computer viruses or other malicious software code, corruption of data, exfiltration of data to malicious sites, the dark web or other locations or threat actors, the use of fraudulent or fake websites, and other attacks (including, but not limited to, denial-of-service attacks on websites), which shut down, disable, slow, impair or otherwise disrupt operations, business processes, technology, connectivity or website or internet access, functionality or performance. In addition to intentional cyber incidents, unintentional cyber incidents can occur (for example, the inadvertent release of confidential or non-public personal information). Changes to our business, processes, systems, or technology, if not implemented properly, can increase our vulnerability to cyber incidents.
Our business could be significantly disrupted if (i) the DMS fails to integrate with other third-party management information systems, customer relations management tools or other software, or to the extent that any of these systems become unavailable to us or fail to perform as designed for an extended period of time or (ii) our relationship with our DMS providerproviders or any other third-party provider deteriorates. Additionally, any disruption to access and connectivity of our information systems due to natural disasters, power loss or other reasons could disrupt our business operations, impact sales and results of operations, expose us to customer or third partythird-party claims, or result in adverse publicity.
Additionally, in the ordinary course of business, In addition, we and our partners receive significant PII about our customers in order to complete the sale or service of a vehicle and related products. We also receive PII from our employees. Numerous state and federal regulations, as well as payment card industry and other vendor standards, govern the collection and maintenance of PII from consumers and other individuals. We believe the automotive dealership industry is a particular target of identity thieves, as there are numerous opportunities for a data security breach, including cyber-securitycybersecurity breaches, burglary, lost or misplaced data, scams,malware, ransomware, computer viruses or other malicious software code, corruption of data, exfiltration of data to malicious sites, the dark web or other locations or threat actors, or misappropriation of data by employees, vendors or unaffiliated third parties. Because cyber-attacks areof the increasing in number and sophistication of cyber-attacks, and despite the security measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, acts of vandalism and/or other events. AllegedWhile we have experienced cyber incidents in the past, and may experience additional incidents in the future, we are not aware of any incident having a material adverse effect on our business, results of operations or financial condition to date. However, there can be no assurance that we will not experience future cyber incidents that may be material. Although we believe we have systems and processes in place to protect against risks associated with cyber incidents in the future, depending on the nature of an incident, these protections may not be fully sufficient. In addition, because techniques used in cybersecurity attacks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. An incident may not be detected until well after it occurs and the severity and potential impact may not be fully known for a substantial period of time after it has been discovered. Any such alleged or actual data security breachesincident can increase costs of doing business, negatively affect customer satisfaction and loyalty, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or
criminal investigations or actions, and infringe on proprietary information, any of which could have a material adverse effect on our business, financial condition, or results of operations.operations or cash flows.
Our dealership operations and facilities are subject to extensive governmental laws and regulations. If we are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect our operations, our business, our reputation,results of operations, financial condition, results of operations,cash flows, reputation and prospects could suffer.
The automotive retail industry, including our facilities and operations, is subject to a wide range of federal, state, and local laws and regulations, such as those relating to motor vehicle sales, retail installment sales, leasing, finance and insurance, marketing, licensing, consumer protection, consumer privacy, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety. In addition, with respect to employment practices, we are subject to various
laws and regulations, including complex federal, state, and local wage and hour and anti-discrimination laws. The violation of the laws or regulations to which we are subject could result in administrative, civil, or criminal sanctions against us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business, as well as significant fines and penalties. Violation of certain laws and regulations to which we are subject may also subject us to consumer class action or other lawsuits or governmental investigations and adverse publicity. We currently devote significant resources to comply with applicable federal, state, and local regulation of health, safety, environmental, zoning and land use regulations, and we may need to spend additional time, effort, and money to keep our operations and existing or acquired facilities in compliance therewith.
In addition, there is a risk that our employees could engage in misconduct that violates the laws or regulations to which we are subject. It is not always possible to detect or deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If any of our employees were to engage in misconduct or were to be accused of such misconduct, our business and reputation could be adversely affected.
The Dodd-Frank Act, which was signed into law on July 21, 2010, established the CFPB an independent federal agency funded by the United States Federal Reserve with broaddoes not have direct regulatory powers and limited oversight from the United States Congress. Althoughauthority over automotive dealers are generally excluded, the Dodd-Frank Actbut could lead toimplement additional, indirect regulation of automotive dealers, in particular, their sale and marketing of finance and insurance products, through its regulation of automotive finance companies and other financial institutions. In addition, the CFPB possesses supervisory authority with respect to certain non-bank lenders, including automotive finance companies, participating in automotive financing. The Dodd-Frank Act also provided the FTC with new and expanded authority regarding automotive dealers. Since then, the FTC has been gathering information on consumer protection issues through roundtables, public comments and consumer surveys. The FTC may exercise its additional rule-making authority to expand consumer protection regulations relating to the sale, financing and leasing of motor vehicles.
In 2014, the FTC implemented an enforcement initiative relating to the advertising practices of automotive dealers. In connection therewith, in May 2016, we signed a consent order with the FTC to settle allegations that in certain instances our advertisements did not adequately disclose information about used vehicles with open safety recalls. Under the consent order, we did not agree to make any payments or admit wrong-doing, but we did agree to make certain disclosures in marketing materials and at the point of sale and comply with certain record-keeping obligations. Our failure to comply with the consent order may result in the imposition of significant fines and/or penalties, which could have a material adverse effect on our results of operations. In January 2024, the FTC published the Combatting Auto Retail Scams Final Rule (the “CARS Rule”), which prohibits a broad range of current accepted industry sales and marketing practices and imposes significant new dealer disclosure obligations and record-keeping requirements throughout the vehicle-buying process.The FTC has stayed the CARS Rule’s original effective date of July 30, 2024 pending the resolution of a judicial challenge to the CARS Rule.Compliance with the CARS Rule, if it becomes effective, would be burdensome and cause us to incur increased costs.A failure to comply with the CARS Rule would expose us to potential significant damages, penalties and adverse publicity, which could have a material adverse effect on our business, operations and financial results.
Continued pressure from the CFPB, FTC, and other federal agencies could lead to significant changes in the manner that dealers are compensated for arranging customer financing and vehicle protection products, and while it is difficult to predict how any such changes might impact us, any adverse changes could have a material adverse impact on our finance and insurance business and results of operations. Furthermore, we expect that new laws and regulations, particularly at the federal level, in other areas may be enacted, which could also materially adversely impact our business. On August 3, 2022, we received a Civil Investigative Demand (“CID”) from the FTC requesting information and documents concerning the Company’s corporate structure and operation of six of its dealerships. We responded to the CID by producing information and documents for the period August 1, 2019 to April 24, 2023. On February 8, 2024, the FTC staff counsel sent to us a proposed consent order and draft complaint, alleging that the Company and three of our dealerships had violated Section 5 of the Federal Trade Commission Act (“FTC Act”) and certain provisions of the Equal Credit Opportunity Act (“ECOA”) in connection with the sale of add-on products (e.g., vehicle service contracts, maintenance plans, etc.), and advising that it would recommend the filing of an enforcement action if the Company did not settle the FTC’s claims. The Company disputes the FTC’s allegations that it violated the FTC Act and the ECOA, and is currently involved in discussions with the FTC staff regarding the matter. There can be no assurance that negotiations between us and the FTC for a favorable settlement will be successful, or that we will succeed in any litigation as a result of the investigation. At this time, we are unable to reasonably predict the possible outcome of this matter, or provide a reasonably possible range of loss, if any, as a result of the investigation. If the FTC files a suit against us based on these allegations, whether meritorious or not, it may adversely affect our ability to attract customers, result in the loss of existing customers, harm our reputation and cause us to incur defense costs and other expenses.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of solid and hazardous wastes, investigation and remediation of contamination, and otherwise protective of health, safety and the environment.contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs to comply with such federal and state statutes.laws and regulations. In addition, we may become subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us.
Liability under these laws and regulations can be imposed on a joint and several basis and without regard to fault. For such potential liabilities, we believe we are entitled to indemnification from other entities. However, we cannot assure youprovide assurance that such entities will view their obligations as we do or will be able or willing to satisfy them. We may have indemnity obligations for liabilities relating to contamination at our currently or formerly owned and/or operated facilities as part of the acquisition or divestiture of certain properties in the ordinary course of business. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, could have a material adverse effect on our business, results of operations, financial condition or cash flows.
A significant judgment against us or the imposition of a significant fine could have a material adverse effect on our business, financial condition and future prospects. We further expect that, from time to time, new laws and regulations,
particularly in the environmental area, will be enacted, and compliance with such laws, or penalties for failure to comply, could significantly increase our costs. For example, vehicle manufacturers are subject to government-mandated fuel economy and greenhouse gas emission standards, which continue to change and become more stringent over time. Specifically, vehicle manufacturers are subject to corporate average fuel economy standards ("CAFE") for passenger cars and light trucks. Failure of a manufacturer to develop passenger vehicles and light trucks that meet CAFE and/or greenhouse gas emissionthese and other government standards could subject the manufacturer to substantial penalties, increase the cost of vehicles sold to us, and adversely affect our ability to market and sell vehicles to meet consumer needs and desires, which could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Our TCA business is subject to a wide range of federal, state, and local laws and regulations, some of which we may not have previously been subject. If we are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect our TCA business, our business, results of operations, financial condition, cash flows, reputation and prospects could suffer.
The TCA business is, and will continue to be, subject to a wide range of federal, state, and local laws and regulations, some of which Asbury may not have been previously subject. Such laws and regulations include but are not limited to:
•state and local licensing requirements;
•federal and state laws regulating vehicle finance and insurance products; and
•federal and state consumer protection laws.
No assurance can be given that applicable statutes, regulations, and other laws will not be amended or construed differently, that new laws will not be adopted, or that any of these laws will not be enforced more aggressively. For example, changes in the regulatory and supervisory environments could adversely affect the TCA business in substantial and unpredictable ways. Further, the TCA business’ noncompliance with applicable laws (whether as a result of changes in interpretation or enforcement, system or human errors, or otherwise) could result in the suspension or revocation of licenses or registrations necessary to the operation, or the initiation of enforcement actions or private litigation.
In addition, we are required to set aside an amount of restricted cash sufficient to satisfy potential claims associated with the TCA business. While we are permitted to invest such cash in fixed income and equity securities, and other investments, we cannot provide any assurance that a loss in such investments would not have a material adverse effect on our ability to honor customers’ claims, which could have a material adverse effect on our business.
We are subject to risks related to the provision of employee health care benefits, which could have a material adverse effect on our business, financial condition, results of operations, financial condition and cash flows.
We use a combination of insurance and self-insurance for health care plans. We record expenses under those plans based on estimates of the costs of expected claims, administrative costs, stop-loss insurance premiums, and expected health care trends. Actual costs under these plans are subject to variability that is dependent upon participant enrollment, demographics and the actual costs of claims made. Negative trends in any of these areas could cause us to incur additional unplanned health care costs, which could adversely impact our business, financial condition, results of operations and cash flows. In addition, if enrollment in our health care plans increases significantly, the additional costs that we will incur may be significant enough to materially affect our business, financial condition, results of operations and cash flows.
We are, and expect to continue to be, subject to legal and administrative proceedings, which, if the outcomes are adverse to us, could have a material adverse effect on our business, financial condition, results of operations, financial condition, cash flows, reputation and cash flows.prospects.
We are involved and expect to continue to be involved in numerous legal proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, class actions, purported class actions, and actions brought by governmental authorities. We do not believe that the ultimate resolution of any known matters will have a material
adverse effect on our business, reputation, financial condition, results of operations, cash flows or cash flows.prospects. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Property loss or other uninsured liabilities could have a material adverse impact on our results of operations.
We are subject to substantial risk of property loss due to the significant concentration of property at dealership locations, including vehicles and parts. We have historically experienced business interruptions from time to time at several of our dealerships, due to actual or threatened adverse weather conditions or natural disasters, such as hurricanes, tornadoes, floods, and hail storms, or other extraordinary events. Concentration of property at dealership locations also makes the automotive retail business particularly vulnerable to theft, fraud, and misappropriation of assets. Illegal or unethical conduct by employees, customers, vendors, and unaffiliated third parties can result in loss of assets, disrupt operations, impact brand reputation, jeopardize manufacturer and other relationships, result in the imposition of fines or penalties, and subject us to governmental investigations or lawsuits. While we maintain insurance to protect against a number of losses, this insurance coverage often contains significant deductibles. In addition, we "self-insure" a portion of our potential liabilities, meaning we do not carry insurance from a third-party for such liabilities, and are wholly responsible for any related losses including for certain potential liabilities that some states prohibit the maintenance of insurance to protect against. In certain instances, our insurance may not fully cover a loss depending on the applicable deductible or the magnitude and nature of the claim. Additionally, changes in the cost or availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase our self-insured risks. To the extent we incur significant additional costs for insurance, suffer losses that are not covered by in-force insurance or suffer losses for which we are self-insured, our financial condition, results of operations, or cash flows could be materially adversely impacted.
A decline in our credit rating or a general disruption in the credit markets could negatively impact our liquidity and ability to conduct our operations.
A deterioration of our credit rating, or a general disruption in the credit markets, could limit our ability to obtain credit on terms acceptable to us, or at all. In addition, uncertain economic conditions or the re-pricing of certain credit risks may make it more difficult for us to obtain one or more types of funding in the amounts, or at rates considered acceptable to us, at any given time. Our inability to access necessary or desirable funding, or to enter into certain related transactions, at times and at costs deemed appropriate by us, could have a negative impact on our liquidity and our ability to conduct our operations. Any of these developments could also reduce the ability or willingness of the financial institutions that have extended credit commitments to us, or that have entered into hedge or similar transactions with us, to fulfill their obligations to us, which also could have a material adverse effect on our liquidity, and our ability to conduct our operations.
operations and our prospects.
We are subject to risks of doing businessassociated with manufacturers that produce vehicles outside of the United States including importimported product restrictions or limitations, foreign trade risks, and currency valuations.
A portion of ourOur business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside of the United States. As a result, our operations are subject to risks of doing business outside of the United States and importing merchandise, including import duties, exchange rates, trade restrictions, work stoppages, natural or man-made disasters, and general political and socio-economic conditions in other countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions or limitations, or adjust presently prevailing quotas, duties or tariffs. The imposition of new, or adjustments to prevailing, quotas, duties, tariffs which may affector other restrictions or limitations could have a material adverse effect on our business, financial condition, results of operations and our ability to purchase imported vehicles and/or parts at reasonable prices.cash flows. Relative weakness of the U.S. dollar against foreign currencies in the future may result in an increase in costs to us and in the retail price of such vehicles or parts, which could discourage consumers from purchasing such vehicles and adversely impact our revenues and profitability.
If we are unable to acquire and successfully integrate additional dealerships into our business, our revenue and earnings growth may be adversely affected.
We believe that the automotive retailing industry is a mature industry whose sales are significantly impacted by the prevailing economic climate, both nationally and in local markets. Accordingly, we believe that our future growth depends in part on our ability to manage expansion, control costs in our operations and acquire and effectively integrate acquired dealerships into our organization. When seeking to acquire other dealerships, we often compete with several other national, regional and local dealership groups, and other strategic and financial buyers, some of which may have greater financial resources than us. Competition for attractive acquisition targets may result in fewer acquisition opportunities for us and we may have to forgo acquisition opportunities to the extent we cannot negotiate such acquisitions on acceptable terms.
We also face additional risks commonly encountered with growth through acquisitions. These risks include, but are not limited to: (i) failing to obtain manufacturers' consents to acquisitions of additional franchises; (ii) incurring significant transaction-related costs for both completed and failed acquisitions; (iii) incurring significantly higher capital expenditures and operating expenses; (iv) failing to integrate the operations and personnel of the acquired dealerships and impairing relationships with employees; (v) incorrectly valuing entities to be acquired or incurring undisclosed liabilities at acquired dealerships; (vi) disrupting our ongoing business and diverting our management resources to newly acquired dealerships; (vii) failing to achieve expected performance levels; and (viii) impairing relationships with manufacturers and customers as a result of changes in management.
We may not adequately anticipate all the demands that our growth will impose on our personnel, procedures and structures, including our financial and reporting control systems, data processing systems, and management structure. Moreover, our failure to retain qualified management personnel at any acquired dealership may increase the risks associated with integrating the acquired dealership. If we cannot adequately anticipate and respond to these demands, we may fail to realize acquisition synergies and our resources will be focused on incorporating new operations into our structure rather than on areas that may be more profitable.
We are a holding company and as a result are dependent on our operating subsidiaries to generate sufficient cash and distribute cash to us to service our indebtedness and fund our ongoing operations.
Our ability to make payments on our indebtedness and fund our ongoing operations depends on our operating subsidiaries' ability to generate cash in the future and distribute that cash to us. It is possible that our subsidiaries may not generate cash from operations in an amount sufficient to enable us to service our indebtedness. In addition, many of our subsidiaries are required to comply with the provisions of franchise agreements, dealer agreements, other agreements with manufacturers, mortgages, and credit facility providers. Many of these agreements contain minimum working capital or net worth requirements, and are subject to change at least annually. Although the requirements contained in these agreements did not restrict our subsidiaries from distributing cash to us as of December 31, 2017, unexpected changes to our franchise agreements, dealer agreements, or other agreements with manufacturers could require us to alter the manner in which we distribute or use cash. If our operating subsidiaries are unable to generate and distribute sufficient cash to us to service our indebtedness and fund our ongoing operations, our financial condition may be materially adversely affected.
Goodwill and manufacturer franchise rights comprise a significant portion of our total assets. We must test our goodwill and manufacturer franchise rights for impairment at least annually, which could result in a material, non-cash write-down of goodwill or manufacturer franchise rights and could have a material adverse effect on our results of operations and stockholders' equity.
Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. Goodwill and indefinite-lived intangible assets, including manufacturer franchise rights, are subject to impairment assessments
at least annually (or more frequently when events or changes in circumstances indicate that an impairment may have occurred), by applying a qualitative or quantitative assessment. A decrease in our market capitalization or profitability increases the risk of goodwill impairment. The fair value of our manufacturer franchise rights is determined by discounting a sub-set of the projected cash flows at a dealership that we attribute to the value of the franchise. Changes to the business mix or declining cash flows in a dealership increase the risk of impairment. An impairment loss could have a material adverse effect on our results of operations and stockholders' equity. During 2017, we recorded non-cash impairment charges of $5.1 million ($3.2 million after-tax) associated with franchise rights recorded at certain dealerships. See Note 9 of the Notes to Consolidated Financial Statements for more information.
Technological advances, including increases in ride sharing applications, electric vehicles and autonomous vehicles in the long-term could have a material adverse effect on our business.
The automotive industry is predicted to experience change over the long-term. Shared vehicle services such as Uber and Lyft provide consumers with increased choice in their personal mobility options. The effect of these and similar mobility options on the retail automotive industry is uncertain, and may include lower levels of new vehicles sales, but with increasing miles driven, which could require additional demand for vehicle maintenance. In addition, technological advances are facilitating the development of driverless vehicles. The eventual timing of availability of driverless vehicles is uncertain due to regulatory requirements, additional technological requirements, and uncertain consumer acceptance of these vehicles. The effect of driverless vehicles on the automotive retail industry is uncertain and could include changes in the level of new and used vehicles sales, the price of new vehicles, and the role of franchised dealers, any of which could materially adversely affect our business, financial condition and results of operations. The widespread adoption of electric and battery powered vehicles also could have a material adverse effect on the profitability of our parts and service business.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Overview
We have processes in place designed to protect our information systems, data, assets, infrastructure, and computing environments from cybersecurity threats and risks while maintaining confidentiality, integrity, and availability.Our cybersecurity risk management processes are integrated into our enterprise risk management program.
Training
We conduct regular training for cybersecurity awareness of our employees, senior executives, and certain other vendors or personnel.We also perform phishing and social engineering simulations and provide cybersecurity training for personnel with Company email and access to Company assets. We disseminate security awareness communications to certain employees to highlight emerging or urgent cybersecurity threats.
Asbury’s information and data security training programs are housed in a Learning Management System (LMS). We migrate our acquired companies into Asbury’s current LMS.
Governance
Our Chief Information Officer (“CIO”), who has over 35 years of experience in the technology field, oversees cybersecurity, data privacy and manages Asbury’s information and security procedures. Asbury also has a Director of Cybersecurity, as well as a formal team of analysts.
Our Board of Directors maintains ultimate oversight of the Company’s enterprise risk management program, which includes material cyber security risks.Under the oversight of the audit committee and capital allocation and risk management committee of the Company’s Board of Directors, and as directed by the Company’s Chief Executive Officer, our CIO is primarily responsible for the assessment and management of material cybersecurity risks. Our CIO oversees the Company’s cybersecurity incident response plan and related processes that are designed to assess and manage material risks from cybersecurity threats.
The CIO also coordinates with the Company’s legal counsel and third parties, such as consultants and legal advisors, to assess and manage material risks from cybersecurity threats. Our CIO is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents pursuant to criteria set forth in the Company’s incident response plan and related processes.
The capital allocation and risk management committee of the Company’s Board of Directors assists the Board in the periodic review and evaluation of the Company’s risk profile and related risk management processes which identify and manage the Company’s key financial, strategic and operational risks.The audit committee of the Company’s Board of Directors oversees, among other things, the adequacy and effectiveness of the Company’s internal controls, including internal controls designed to assess, identify, and manage material risks from cybersecurity threats. The audit committee is informed of material risks from cybersecurity threats pursuant to the escalation criteria as set forth in the Company’s disclosure controls and procedures. Further, our CIO reports on cybersecurity matters, including material risks and threats, to the Company’s audit committee on a quarterly basis, and the audit committee provides updates to the Company’s Board of Directors at regular board meetings. In addition, the audit committee and capital allocation and risk management committee hold a joint meeting annually during which the CIO provides a comprehensive update regarding the assessment and management of material cybersecurity risks. Our CIO also provides updates as appropriate to the Company’s Board of Directors.
Risk Management
We have processes for assessing, identifying, and managing material risks from cybersecurity threats. These processes are integrated into the Company’s overall risk management systems. These processes also include overseeing and identifying risks from cybersecurity threats associated with the use of third-party service providers. The Company conducts security assessments of certain third-party providers before engagement and has established monitoring procedures in its effort to mitigate risks related to data breaches or other security incidents originating from third parties. The Company from time to time engages third-party consultants, legal advisors, and audit firms in evaluating and testing the Company’s risk management systems and assessing and remediating certain potential cybersecurity incidents as appropriate.
Management
In an effort to effectively prevent, detect, and respond to cybersecurity threats, we employ a multi-layered cybersecurity risk management program supervised by our CIO, whose team is responsible for leading enterprise-wide cybersecurity strategy, policy, architecture, and processes. This responsibility includes identifying, considering, and assessing potentially material cybersecurity incidents on an ongoing basis, establishing processes designed to prevent and monitor potential cybersecurity risks, implementing mitigation and remedial measures, and maintaining our cybersecurity program. To do so, our program leverages both internal and external techniques and expertise. Internally, among other things, we may perform penetration tests, internal tests/code reviews, and simulations using cybersecurity professionals to assess vulnerabilities in our information systems and evaluate our cyber defense capabilities. Our cybersecurity capabilities, processes, and other security measures also include, without limitation:
•Service Organization Controls ("SOC")-as-a-Service (SOCaas) wherein a third-party vendor operates and maintains a fully-managed SOC on a subscription basis via the cloud;
•Security Information and Event Management (“SIEM”) software, which provides a threat detection, compliance, and security incident management system;
•Endpoint Detection and Response (“EDR”) software, which monitors for malicious activities on internal endpoints (e.g., Windows workstations, servers, MAC clients, and Linux endpoints);
•Cloud monitoring; and
•Disaster recovery and incident response plans, including a ransomware response plan.
Although we believe we have systems and processes in place to protect against risks associated with cybersecurity incidents in the future, depending on the nature of an incident, these protections may not be fully sufficient. We have experienced targeted cybersecurity incidents in the past that have resulted in unauthorized persons gaining access to certain of our information systems, and we could in the future experience similar incidents.As of the date of this Form 10-K, no cybersecurity incident or attack, or any risk from cybersecurity threat, has materially affected or has been determined to be reasonably likely to materially affect the Company, our business strategy, results of operations, or financial condition. For additional information regarding the risks from cybersecurity threats we face, see the section captioned. For further discussion of the risks associated with cybersecurity incidents, see “A failure of any of our information systems or those of our third-party service providers, or a data security breach with regard to personally identifiable information ("PII") about our customers or
employees, could have a material adverse effect on our business, results of operations, financial condition and cash flows.” beginning on page 27 of the section entitled “Item 1A. Risk Factors” in this Form 10-K.
Item 2. Properties
We lease our corporate headquarters, which is located at 2905 Premiere Parkway, NW, Suite 300, Duluth, Georgia 30097. We also have a corporate office in Texas. The operations of our TCA business are located in leased office space in Utah.
As of December 31, 2017,2023, our operations encompassed 80158 franchised dealership locations, throughout 9 states, and 2437 collision repair centers, throughout 16 states as follows:
| | | | Dealerships | | | Collision Repair Centers |
Dealership Group: | | Owned | | Leased | | | Owned | | Leased |
| | Dealerships | | | | Dealerships | | | Collision Repair Centers |
Dealership Group Brand Name: | | Dealership Group Brand Name: | | Owned | | Leased | | | Owned | | Leased |
Coggin Automotive Group | | 12 |
| | 4 |
| (a) | | 5 |
| | 2 |
|
Courtesy Autogroup | | 5 |
| | 3 |
| | 2 |
| | — |
|
Crown Automotive Company | | 13 |
| | 5 |
| (b) | | 3 |
| | — |
|
David McDavid Auto Group | | 7 |
| | ��� |
| | 4 |
| | 1 |
|
Gray-Daniels Auto Family | | — |
| | 5 |
| (b) | | — |
| | 1 |
|
Hare Automotive Group | | 2 |
| | — |
| | — |
| | 1 |
|
Greenville Automotive Group | |
Hare, Bill Estes & Kahlo Automotive Groups | |
Koons Automotive Group | |
Larry H. Miller Dealerships | |
Mike Shaw, Stevinson & Arapahoe Automotive Groups | |
Nalley Automotive Group | | 16 |
| | 1 |
| | 3 |
| | 1 |
|
Park Place Automotive | |
Plaza Motor Company | | 6 |
| | 1 |
| (b) | | — |
| | 1 |
|
Total | | 61 |
| | 19 |
| | 17 |
| | 7 |
|
Item 3. Legal Proceedings
From time to time, we and our dealerships are involved and will continue to be involved in various claims relating to, and arising out of, our business and our operations. These claims may involve, but are not limited to, financial and other audits by vehicle manufacturers or lenders, and certain federal, state, and local government authorities, which relate primarily to (i) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (ii) compliance with lender rules and covenants and (iii) payments made to government authorities relating to federal, state, and local taxes, as well as compliance with other government regulations. Claims may also arise through litigation, government proceedings, and other dispute resolution processes. Such claims, including class actions, can relate to, but are not limited to, the practice of charging administrative fees, employment-related matters, truth-in-lending practices, contractual disputes, actions brought by governmental authorities, and other matters. We evaluate pending and threatened
claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable. We do not believe that the ultimate resolution of the claims we are involved in will have a material adverse effect on our business, results of operations, financial condition, cash flow and prospects.
Item 4. Mine Safety Disclosures
Not applicable.
Our credit agreement with Bank of America, N.A. ("Bank of America"), as administrative agent, and the other agents and lenders party thereto (the "2016"2023 Senior Credit Facility") and the IndentureIndentures governing our 6.0%the Senior Notes (the "Indenture"(as defined below) (collectively, the "Indentures") currently allow for us to make certain restricted payments, including payments to repurchase shares of our common stock, among other things, subject to our continued compliance with certain covenants. For additional information, see the "Covenants and Defaults" section within "Liquidity and Capital Resources."
PERFORMANCE GRAPH
The following graph furnished by us shows the value as of December 31, 2017,2023, of a $100 investment in our common stock made on December 31, 2012,2018, as compared with similar investments based on (i) the value of the S&P 500 Index (with dividends reinvested) and (ii) the value of a market-weighted Peer Group Index composed of the common stock of AutoNation, Inc.; Sonic Automotive, Inc.; Group 1 Automotive, Inc.; Penske Automotive Group, Inc.; and Lithia Motors, Inc., in each case on a "total return" basis assuming the reinvestment of any dividends. The market-weighted Peer Group Index values were calculated from the beginning of the performance period. The historical stock performance shown below is not necessarily indicative of future expected performance.
The forgoing graph is not, and shall not be deemed to be, filed as part of our annual report on Form 10-K. Such graph is not, and will not be deemed, filed or incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent specifically incorporated by reference therein by us.
Item 6. Selected Financial DataReserved
The following table sets forth selected consolidated financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014, and 2013. Certain reclassifications of amounts previously reported have been made to the accompanying income statement data and balance sheet data in order to conform to current presentation. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto, included elsewhere in this annual report on Form 10-K. |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
Income Statement Data: | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in millions, except per share data) |
REVENUE: | | | | | | | | | | |
New vehicle | | $ | 3,561.1 |
| | $ | 3,611.9 |
| | $ | 3,652.5 |
| | $ | 3,230.6 |
| | $ | 2,952.2 |
|
Used vehicle | | 1,834.1 |
| | 1,876.4 |
| | 1,931.7 |
| | 1,741.5 |
| | 1,564.2 |
|
Parts and service | | 786.1 |
| | 778.5 |
| | 740.7 |
| | 666.6 |
| | 611.6 |
|
Finance and insurance, net | | 275.2 |
| | 261.0 |
| | 263.4 |
| | 229.0 |
| | 206.9 |
|
TOTAL REVENUE | | 6,456.5 |
| | 6,527.8 |
| | 6,588.3 |
| | 5,867.7 |
| | 5,334.9 |
|
COST OF SALES | | 5,400.6 |
| | 5,469.1 |
| | 5,527.5 |
| | 4,900.5 |
| | 4,458.9 |
|
GROSS PROFIT | | 1,055.9 |
| | 1,058.7 |
| | 1,060.8 |
| | 967.2 |
| | 876.0 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Selling, general, and administrative expenses | | 729.7 |
| | 732.5 |
| | 729.9 |
| | 671.6 |
| | 617.8 |
|
Depreciation and amortization | | 32.1 |
| | 30.7 |
| | 29.5 |
| | 26.4 |
| | 24.3 |
|
Franchise rights impairment | | 5.1 |
| | — |
| | — |
| | — |
| | — |
|
Other operating expense (income), net | | 1.3 |
| | (2.3 | ) | | (0.2 | ) | | 1.0 |
| | 7.8 |
|
INCOME FROM OPERATIONS | | 287.7 |
| | 297.8 |
| | 301.6 |
| | 268.2 |
| | 226.1 |
|
OTHER EXPENSES (INCOME): | | | | | | | | | | |
Floor plan interest expense | | 22.7 |
| | 19.3 |
| | 16.1 |
| | 12.4 |
| | 12.5 |
|
Other interest expense, net | | 53.9 |
| | 53.1 |
| | 44.0 |
| | 38.9 |
| | 39.0 |
|
Swap interest expense | | 2.0 |
| | 3.1 |
| | 3.0 |
| | 2.0 |
| | 2.5 |
|
Loss on extinguishment of long-term debt, net | | — |
| | — |
| | — |
| | 31.9 |
| | 6.8 |
|
(Gain) loss on divestitures | | — |
| | (45.5 | ) | | (34.9 | ) | | — |
| | — |
|
Total other expenses, net | | 78.6 |
| | 30.0 |
| | 28.2 |
| | 85.2 |
| | 60.8 |
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX | | 209.1 |
| | 267.8 |
| | 273.4 |
| | 183.0 |
| | 165.3 |
|
Income tax expense | | 70.0 |
| | 100.6 |
| | 104.0 |
| | 71.0 |
| | 64.2 |
|
INCOME FROM CONTINUING OPERATIONS | | 139.1 |
| | 167.2 |
| | 169.4 |
| | 112.0 |
| | 101.1 |
|
Discontinued operations, net of tax | | — |
| | — |
| | (0.2 | ) | | (0.4 | ) | | 8.0 |
|
NET INCOME | | $ | 139.1 |
| | $ | 167.2 |
| | $ | 169.2 |
| | $ | 111.6 |
| | $ | 109.1 |
|
Income from continuing operations per common share: | | | | | | | | | | |
Basic | | $ | 6.69 |
| | $ | 7.43 |
| | $ | 6.44 |
| | $ | 3.75 |
| | $ | 3.29 |
|
Diluted | | $ | 6.62 |
| | $ | 7.40 |
| | $ | 6.42 |
| | $ | 3.72 |
| | $ | 3.25 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
Balance Sheet Data: | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in millions) |
Working capital | | $ | 243.9 |
| | $ | 227.5 |
| | $ | 323.4 |
| | $ | 225.4 |
| | $ | 265.1 |
|
Inventories | | 826.0 |
| | 894.9 |
| | 917.2 |
| | 886.0 |
| | 767.7 |
|
Total assets | | 2,356.7 |
| | 2,336.1 |
| | 2,294.1 |
| | 2,178.0 |
| | 1,879.4 |
|
Floor plan notes payable | | 732.1 |
| | 781.8 |
| | 712.2 |
| | 766.8 |
| | 609.5 |
|
Total debt | | 875.5 |
| | 926.7 |
| | 954.3 |
| | 697.4 |
| | 545.1 |
|
Total shareholders' equity | | $ | 394.2 |
| | $ | 279.7 |
| | $ | 314.5 |
| | $ | 444.9 |
| | $ | 490.6 |
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This MD&A should be read in conjunction with the accompanying audited consolidated financial statements and notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to the "Forward-Looking Statements" and Part I, Item 1A. Risk Factors for a discussion of these risks and uncertainties. The discussion of our financial condition and results of operations for the year ended December 31, 2021 is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.
OVERVIEW
We are one of the largest automotive retailers in the United States. As of December 31, 20172023, through our Dealerships segment, we owned and operated 94208 new vehicle franchises (80(158 dealership locations), representing 2931 brands of automobiles, and 24within 16 states. We also operated 37 collision centers, in 17 metropolitan markets, within nine states.and Total Care Auto, Powered by Landcar ("TCA"), our F&I product provider. Our stores offer an extensive range of automotive products and services, including new and used vehicles; parts and service, which include repair and maintenance services, replacement parts, and collision repair service; and finance and insurance products. As ofThe finance and insurance products are provided by both independent third parties and TCA. The F&I products offered by TCA are sold through affiliated dealerships. For the year ended December 31, 2017,2023, our new vehicle revenue brand mix consisted of 46%39% imports, 34%33% luxury, and 20%28% domestic brands. The Company manages its operations in two reportable segments: Dealerships and TCA.
Our Dealerships segment revenues are derived primarily from: (i) the sale of new vehicles; (ii) the sale of used vehicles to individual retail customers ("used retail") and to other dealers at auction ("wholesale") (the terms "used retail" and "wholesale" are collectively referred to as "used"); (iii) repair and maintenance services, including collision repair, the sale of automotive replacement parts, and the reconditioning of used vehicles (collectively referred to as "parts and service"); and (iv) the arrangement of third-party vehicle financing and the sale of a number of vehicle protection products. F&I products (defined below and collectively referredare offered by dealerships to as "F&I").customers in connection with the purchase of vehicles through either TCA or independent third parties. We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle sold, our parts and service operations based on aggregate gross profit, and our F&I business based on F&I gross profit per vehicle sold. Amounts presented have been calculated using non-rounded amounts for all periods presented and therefore certain amounts may not compute or tie to prior year financial statements due to rounding.
Our dealerships gross profit margin varies with our revenue mix. Historically, the sales of new vehicles generally results in a lower gross profit margin than used vehicle sales, sales of parts and service, and sales of F&I products. As a result, when used vehicle, parts and service, and F&I revenue increase as a percentage of total revenue, we expect our overall gross profit margin to increase. However, recently, new vehicle gross profit margins have been above historical levels and higher than used vehicle gross margins as a result of inventory disruptions from supply chain issues.
Our TCA segment revenues, reflected in F&I revenue, net, are derived from the sale of various vehicle protection products including vehicle service contracts, GAP, prepaid maintenance contracts, and appearance protection contracts. These products are sold through company-owned dealerships. TCA's F&I revenues also include investment gains or losses and income earned associated with the performance of TCA's investment portfolio.
Our TCA segment gross profit margin can vary due to incurred claims expense and the performance of our investment portfolio. Certain F&I products may result in higher gross profit margins to TCA. Therefore, the product mix of F&I products sold by TCA can affect the gross profits earned. In addition, interest rate volatility based on economic and market conditions outside the control of the Company, may increase or reduce TCA segment gross profit margins as well as the fair market values of certain securities within our investment portfolio. Fair market values typically fluctuate inversely to the fluctuations in interest rates.
Selling, general, and administrative ("SG&A") expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities, and other customary operating expenses. A significant portion of our cost structure is variable (such as sales commissions) or controllable (such as advertising), which we believe allows us to adapt to changes in the retail environment over the long-term. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit, advertising expense on a per vehicle retailed ("PVR") basis, and all other SG&A expenses in the aggregate as a percentage of total gross profit. Commissions expense paid by TCA to our affiliated dealerships and reflected as F&I revenue in our Dealerships segment is eliminated in the TCA segment upon consolidation.
Our continued organic growth is dependent upon the execution of our balanced automotive retailing and service business strategy, the continued strength of our brand mix, and the production and allocation of desirable vehicles from the automobile manufacturers whose brands we sell. Our vehicle sales have historically fluctuated with product availability as well as local and national economic conditions, including consumer confidence, availability of consumer credit, fuel prices, and employment levels. Additionally,
In addition, our ability to sell certain new and used vehicles can be negatively impacted by a number of factors, some of which are outside of our controlcontrol. Manufacturers continue to be hampered by the lack of availability of parts and maykey components from suppliers which has impacted new vehicle inventory levels and availability of certain parts. We cannot predict with any certainty how long the automotive retail industry will continue to be subject to these production slowdowns or when normalized production will resume at these manufacturers.
Jim Koons Acquisition
On December 11, 2023, the Company completed the acquisition of substantially all of the assets, including all real property and businesses of the Jim Koons Dealerships ("Koons") pursuant to a Purchase and Sale Agreement with various entities that comprise the Jim Koons automotive dealerships group (the "Koons acquisition") for an aggregate purchase price of approximately $1.50 billion, which includes $256.1 million of new vehicle floor plan financing and $103.8 million of assets held for sale related to Koons Lexus of Wilmington. The acquisition was funded with borrowings under Asbury’s existing credit facility and cash on hand. The Koons acquisition comprised 20 new vehicle dealerships and six collision centers.
Larry H. Miller Acquisition
On December 17, 2021, the Company completed the acquisition of the businesses of the Larry H. Miller ("LHM") Dealerships and TCA (collectively, the "LHM acquisition"), thereby acquiring 54 new vehicle dealerships, seven used cars stores, 11 collision centers, a used vehicle wholesale business, the real property related thereto, and the entities comprising the TCA business for an aggregate purchase price of $3.48 billion. The purchase price was financed through a combination of cash, debt, including senior notes, real estate facilities, new and used vehicle floor plan facilities and the proceeds from the issuance of common stock.
Financial Highlights
Highlights related to our financial condition and results of operations include manufacturer imposed stop-sales or open safety recalls,the following:
•Consolidated revenue for the year ended December 31, 2023 decreased to $14.80 billion, compared to $15.43 billion for the prior year.
•Consolidated gross profit for the year ended December 31, 2023 decreased to $2.76 billion, compared to $3.10 billion for the prior year.
•The decrease in consolidated revenue and gross profit is primarily due to but not limitedlower used vehicle and F&I revenue. Additionally, lower gross profit was driven by lower gross profit per vehicle sold for both new and used vehicles as margins continue to vehicle safety concerns or a vehicle's failure to meet environmental related requirements. We believeshift downward from the historic highs in recent years.
•The effects of dealership divestitures also impacted consolidated revenue and gross profit. During the year ended December 31, 2023, we sold one franchise (one dealership location) in Austin, Texas. During 2022, we completed sixteen divestitures that contributed $683 million in revenue for the impact on our businessyear ended December 31, 2022. Four of any future negative trends in new vehicle sales would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure, and (iii) our diversified brand and geographic mix.
The seasonally adjusted annual rate ("SAAR") of new vehicle salesdivestitures closed in the U.S. during 2017 was 17.2 million compared to 17.6 millionfirst quarter, three in 2016. The automotive retail business continues to benefit from the availability of credit to consumers, strong consumer confidence and relatively low overall unemployment levels, fuel prices, and interest rates. Demand for new vehicles is generally highest during the second third,quarter, and fourth quarters of each year and, accordingly, we expect our revenues to generally be higher during these periods. We typically experience higher sales of luxury vehiclesnine in the fourth quarter which have higher average selling prices and gross profit per vehicle retailed. Revenues and operating results may be impacted significantly from quarter-to-quarterof 2022.
•Our capital allocation priorities were supported by changing economic conditions, vehicle manufacturer incentive programs, adverse weather events, or other developments outside our control.
Our gross profit margin varies with our revenue mix. Salesshare repurchases of new vehicles generally result in a lower gross profit margin than used vehicle sales, sales of parts and service, and sales of F&I products. As a result, when used vehicle, parts and service, and F&I revenue increase as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, general, and administrative ("SG&A") expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities, and other customary operating expenses. A significant portion of our cost structure is variable (such as sales commissions), or controllable (such as advertising), which we believe allows us to adapt to changes in the retail environment over the long-term. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit, advertising expense on a per vehicle retailed ("PVR") basis, and all other SG&A expenses in the aggregate as a percentage of total gross profit.
We had total available liquidity of $379.5approximately 1,316,167 million as of December 31, 2017, which consisted of cash and cash equivalents of $4.7shares for $258.1 million $49.3 million of funds in our floor plan offset accounts, $190.0 million of availability under our new vehicle floor plan facility that is able to be re-designated to our revolving credit facility, $46.7 million of availability under our revolving credit facility, and $88.8 million of availability under our used vehicle revolving floor plan facility. For further discussion of our liquidity, please refer to "Liquidity and Capital Resources" below.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions, that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities, as of the date of the financial statements, and reported amounts of revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions and the
effects of any such revisions are reflected in the financial statements, in the period in which they are determined to be necessary. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Consolidated Financial Statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and understanding our results of operations, based on the high degree of judgment or complexity in their application.
Revenue Recognition
Revenue from the sale of new and used vehicles (which excludes sales tax), is recognized upon the latest of delivery, signing of the sales contract or approval of financing. Manufacturer incentives and rebates, including manufacturer holdbacks, floor plan interest assistance and certain advertising assistance, are recognized as a reduction of new vehicle cost of sales at the time the related vehicles are sold.
Revenue from the sale of parts, service, and collision repair work (which excludes sales tax), is recognized upon the delivery of parts to the customer or at the time vehicle service or repair work is completed, as applicable.
We receive commissions from third-party lending and insurance institutions for arranging customer financing and from the sale of vehicle service contracts, guaranteed auto protection (known as "GAP") insurance, and other insurance to customers (collectively "F&I"). We may be charged back for F&I commissions in the event a contract is prepaid, defaulted upon, or terminated ("chargebacks"). F&I commissions are recorded at the time the associated vehicle is sold. F&I commissions, net of estimated future chargebacks, are included in Finance and Insurance, net in the accompanying Consolidated Statements of Income. Additionally, we participate in future profits associated with the performance of the third-party held underlying portfolio for certain products pursuant to retrospective commission arrangements. Our retrospective portfolio income is recorded as revenue at the time it is received from our third-party providers.
Used Vehicle Inventory - Lower of Cost and Net Realizable Value —
Our used vehicle inventory is stated at the lower of cost and net realizable value. We use the specific identification method to value our used vehicle inventories. We maintain a reserve for used vehicle inventory when cost basis exceeds the net realizable value. In assessing our reserve requirement, we consider (i) the age of our used vehicles, (ii) historical sales experience of used vehicles and (iii) current market conditions and trends in used vehicle sales. We also review and consider the following metrics related to used vehicle sales (both on a recent and longer-term historical basis): (i) days of supply in our used vehicle inventory, (ii) used vehicle units sold at less than original cost as a percentage of total used vehicles sold and (iii) average vehicle selling price of used vehicle units sold at less than original cost. We then determine the appropriate level of reserve required to reduce our used vehicle inventory to the lower of cost or net realizable value, and record the resulting adjustment in the period in which we determine a loss has occurred. The level of reserve determined to be appropriate for each reporting period is considered to be a permanent inventory write-down and therefore is only released upon the sale of the related inventory. Our used vehicle inventory reserves are as follows: |
| | | | | | | |
Used vehicle lower of cost and net realizable value reserve: | | Reserve Amount (in millions) | | Percentage of Gross Used Vehicle Inventory |
As of December 31, 2017 | | $ | 5.1 |
| | 3.6 | % |
As of December 31, 2016 | | $ | 5.8 |
| | 4.2 | % |
A 100 basis point change in our estimated reserve rate would change our used vehicle inventory reserve by approximately $1.4 million as of December 31, 2017.
F&I Chargeback Reserve—
We reserve for chargebacks on finance, insurance, or vehicle service contract commissions received. The reserve is established based on historical operating results and the termination provisions of the applicable contracts. This data is evaluated on a product-by-product basis. Our chargeback histories vary depending on the product, but generally range from 9% to 15% of F&I revenues. Our F&I cash chargebacks for the yearsyear ended December 31, 2017, 2016,2023.
•On October 20, 2023, we entered into a fourth amended and 2015 were $34.0 million, $34.9 million, and $31.3 million, respectively. Our chargeback reserves were $43.7 million and $43.0 millionrestated credit agreement with Bank of America, as of December 31, 2017 and December 31, 2016, respectively. Total chargebacks as a percentage of F&I revenue for the years ended December 31, 2017, 2016, and 2015, were 12%, 14%, and 13%, respectively. A 100 basis point change in our estimated reserve rate for future chargebacks, would change our finance and insurance chargeback reserve by approximately $3.0 million as of December 31, 2017.
Insurance Reserves—
We are self-insured for employee medical claims and maintain stop loss insurance for large-dollar individual claims. We have large deductible insurance programs for workers compensation, property and general liability claims. We maintain and review our claim and loss history to assist in assessing our expected future liability for these claims. We also use professional service providers, such as account administrators and actuaries, to help us accumulate and assess this information. Provisions for retained losses and deductibles are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims.
We had $15.7 million and $14.5 million of insurance reserves for both known and unknown employee medical, workers compensation, property, and general liability claims, net of anticipated insurance recoveries, as of December 31, 2017 and December 31, 2016, respectively. Expenses associated with employee medical, workers compensation, property, and general liability claims, including premiums for insurance coverage, for the years ended December 31, 2017, 2016, and 2015, totaled $27.9 million, $30.9 million, and $26.9 million, respectively.
Goodwill and Manufacturer Franchise Rights—
Goodwill represents the excess cost of an acquired business over the fair market value of its identifiable assets and liabilities. We have determined that, based on how we integrate acquisitions into our business, how the components of our business share resources and interact with one another, and how we review the results of our operations, that we have several geographic market-based operating segments. We have determined that the dealerships in each of our operating segments are components that are aggregated into several geographic market-based reporting units for the purpose of testing goodwill for impairment, as they (i) have similar economic characteristics, (ii) offer similar products and services (all of our franchised dealerships offer new and used vehicles, parts and service, and arrange for third-party vehicle financingadministrative agent, and the saleother lenders party thereto (the "2023 Senior Credit Facility'). The 2023 Senior Credit Facility increased our borrowing capacity from $2.55 billion to $2.80 billion and extended the maturity date to October 20, 2028.
Our only significant identifiable intangible assets, other than goodwill, are our rights under franchise agreements with manufacturers, which are recorded at an individual franchise level. The fair value of our manufacturer franchise rights are determined at the acquisition date, by discounting the projected cash flows specific to each franchise. We have determined that manufacturer franchise rights have an indefinite life as there are no economic, contractual or other factors that limit their useful lives, and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers' brand names. Furthermore, to the extent that any agreements evidencing our manufacturer franchise rights would expire, we expect that we would be able to renew those agreements in the ordinary course of business.
We do not amortize goodwill and other intangible assets that are deemed to have indefinite lives. We review goodwill and manufacturer franchise rights for impairment annually as of October 1st, or more often if events or circumstances indicate that any impairment may have occurred. We are subject to financial statement risk to the extent that goodwill becomes impaired due to decreases in the fair value of our automotive retail business or manufacturer franchise rights become impaired due to decreases in the fair value of our individual franchises.
CONSOLIDATED RESULTS OF OPERATIONS
The Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
| (Dollars in millions, except per share data) |
REVENUE: | | | | | | | |
New vehicle | $ | 3,561.1 |
| | $ | 3,611.9 |
| | $ | (50.8 | ) | | (1 | )% |
Used vehicle | 1,834.1 |
| | 1,876.4 |
| | (42.3 | ) | | (2 | )% |
Parts and service | 786.1 |
| | 778.5 |
| | 7.6 |
| | 1 | % |
Finance and insurance, net | 275.2 |
| | 261.0 |
| | 14.2 |
| | 5 | % |
TOTAL REVENUE | 6,456.5 |
| | 6,527.8 |
| | (71.3 | ) | | (1 | )% |
GROSS PROFIT: | | | | | | | |
New vehicle | 169.0 |
| | 187.1 |
| | (18.1 | ) | | (10 | )% |
Used vehicle | 121.9 |
| | 127.3 |
| | (5.4 | ) | | (4 | )% |
Parts and service | 489.8 |
| | 483.3 |
| | 6.5 |
| | 1 | % |
Finance and insurance, net | 275.2 |
| | 261.0 |
| | 14.2 |
| | 5 | % |
TOTAL GROSS PROFIT | 1,055.9 |
| | 1,058.7 |
| | (2.8 | ) | | — | % |
OPERATING EXPENSES: | | | | | | | |
Selling, general, and administrative | 729.7 |
| | 732.5 |
| | (2.8 | ) | | — | % |
Depreciation and amortization | 32.1 |
| | 30.7 |
| | 1.4 |
| | 5 | % |
Franchise rights impairment | 5.1 |
| | — |
| | 5.1 |
| | — | % |
Other operating expense (income), net | 1.3 |
| | (2.3 | ) | | 3.6 |
| | NM |
|
INCOME FROM OPERATIONS | 287.7 |
| | 297.8 |
| | (10.1 | ) | | (3 | )% |
OTHER EXPENSES (INCOME): | | | | | | | |
Floor plan interest expense | 22.7 |
| | 19.3 |
| | 3.4 |
| | 18 | % |
Other interest expense, net | 53.9 |
| | 53.1 |
| | 0.8 |
| | 2 | % |
Swap interest expense | 2.0 |
| | 3.1 |
| | (1.1 | ) | | (35 | )% |
Gain on divestitures | — |
| | (45.5 | ) | | 45.5 |
| | (100 | )% |
Total other expenses, net | 78.6 |
| | 30.0 |
| | 48.6 |
| | 162 | % |
INCOME BEFORE INCOME TAXES | 209.1 |
| | 267.8 |
| | (58.7 | ) | | (22 | )% |
Income tax expense | 70.0 |
| | 100.6 |
| | (30.6 | ) | | (30 | )% |
NET INCOME | $ | 139.1 |
| | $ | 167.2 |
| | $ | (28.1 | ) | | (17 | )% |
Income from continuing operations per common share—Diluted | $ | 6.62 |
| | $ | 7.40 |
| | $ | (0.78 | ) | | (11 | )% |
Net income per common share—Diluted | $ | 6.62 |
| | $ | 7.40 |
| | $ | (0.78 | ) | | (11 | )% |
NM—Not Meaningful
|
| | | | | |
| For the Year Ended December 31, |
| 2017 | | 2016 |
REVENUE MIX PERCENTAGES: | | | |
New vehicles | 55.2 | % | | 55.3 | % |
Used retail vehicles | 25.2 | % | | 25.7 | % |
Used vehicle wholesale | 3.1 | % | | 3.1 | % |
Parts and service | 12.2 | % | | 11.9 | % |
Finance and insurance, net | 4.3 | % | | 4.0 | % |
Total revenue | 100.0 | % | | 100.0 | % |
GROSS PROFIT MIX PERCENTAGES: | | | |
New vehicles | 16.0 | % | | 17.7 | % |
Used retail vehicles | 11.4 | % | | 12.3 | % |
Used vehicle wholesale | 0.1 | % | | (0.3 | )% |
Parts and service | 46.4 | % | | 45.6 | % |
Finance and insurance, net | 26.1 | % | | 24.7 | % |
Total gross profit | 100.0 | % | | 100.0 | % |
GROSS PROFIT MARGIN | 16.4 | % | | 16.2 | % |
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT | 69.1 | % | | 69.2 | % |
Total revenue during 2017 decreased by $71.3 million (1%) compared to 2016, due to a $42.3 million (2%) decrease in used vehicle revenue, and a $50.8 million (1%) decrease in new vehicle revenue, partially offset by a $14.2 million (5%) increase in F&I revenue and a $7.6 million (1%) increase in parts and service revenue. The $2.8 million decrease in gross profit during 2017 was the result of an $18.1 million (10%) decrease in new vehicle gross profit, and a $5.4 million (4%) decrease in used vehicle gross profit, partially offset by a $14.2 million (5%) increase in F&I gross profit, and a $6.5 million (1%) increase in parts and service gross profit. Our total gross profit margin improved 20 basis points to 16.4%, primarily due to our F&I and parts and service businesses, which had higher margins than new and used vehicle sales and represented a larger percentage of our total revenues for 2017 compared to 2016.
Income from operations during 2017 decreased by $10.1 million (3%) compared to 2016, primarily due to a $5.1 million impairment charge in 2017, a $3.6 million increase in other operating expense (income), net, and a $1.4 million (5%) increase in depreciation and amortization expenses, partially offset by a $2.8 million decrease in selling, general and administrative expenses. Total other expenses, net increased in 2017 by $48.6 million, primarily due to a $45.5 million gain on divestitures in 2016, a $3.4 million increase in floor plan interest expense in 2017, and a $0.8 million increase in other interest expense, net partially offset by a $1.1 million decrease in swap interest expense. As a result, income before income taxes decreased by $58.7 million (22%) to $209.1 million in 2017 resulting in a decrease in income tax expense of $30.6 million (30%). Net income decreased by $28.1 million (17%) from $167.2 million in 2016 to $139.1 million in 2017.
We assess the organic growth of our revenue and gross profit on a same store basis. We believe that our assessment on a same store basis represents an important indicator of comparative financial performance and provides relevant information to assess our performance. As such, for the following discussion, same store amounts consist of information from dealerships for identical months in each comparative period, commencing with the first full month we owned the dealership. Additionally, amounts related to divested dealerships are excluded from each comparative period. During 2022, the Company completed sixteen divestitures that contributed $683 million in revenue for the year. Four of the divestitures closed in the first quarter, three in the second quarter, and nine in the fourth quarter of 2022.
The Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions, except per share data) |
REVENUE: | | | | | | | |
New vehicle | $ | 7,630.7 | | | $ | 7,365.6 | | | $ | 265.1 | | | 4 | % |
Used vehicle | 4,414.3 | | | 5,197.1 | | | (782.8) | | | (15) | % |
Parts and service | 2,081.5 | | | 2,074.2 | | | 7.3 | | | — | % |
Finance and insurance, net | 676.2 | | | 797.0 | | | (120.8) | | | (15) | % |
TOTAL REVENUE | 14,802.7 | | | 15,433.8 | | | (631.2) | | | (4) | % |
GROSS PROFIT: | | | | | | | |
New vehicle | 703.0 | | | 844.0 | | | (141.0) | | | (17) | % |
Used vehicle | 264.0 | | | 353.2 | | | (89.2) | | | (25) | % |
Parts and service | 1,150.6 | | | 1,152.6 | | | (2.1) | | | — | % |
Finance and insurance, net | 638.2 | | | 750.7 | | | (112.5) | | | (15) | % |
TOTAL GROSS PROFIT | 2,755.8 | | | 3,100.6 | | | (344.8) | | | (11) | % |
OPERATING EXPENSES: | | | | | | | |
Selling, general, and administrative | 1,617.4 | | | 1,763.4 | | | (146.0) | | | (8) | % |
Depreciation and amortization | 67.7 | | | 69.0 | | | (1.3) | | | (2) | % |
Asset impairments | 117.2 | | | — | | | 117.2 | | | NM |
Other operating income, net | — | | | (4.4) | | | 4.4 | | | (100) | % |
INCOME FROM OPERATIONS | 953.5 | | | 1,272.6 | | | (319.1) | | | (25) | % |
OTHER (INCOME) EXPENSES: | | | | | | | |
Floor plan interest expense | 9.6 | | | 8.4 | | | 1.3 | | | 15 | % |
Other interest expense, net | 156.1 | | | 152.2 | | | 3.9 | | | 3 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Gain on dealership divestitures, net | (13.5) | | | (207.1) | | | 193.6 | | | NM |
Total other expenses (income), net | 152.2 | | | (46.5) | | | 198.8 | | | NM |
INCOME BEFORE INCOME TAXES | 801.3 | | | 1,319.1 | | | (517.8) | | | (39) | % |
Income tax expense | 198.8 | | | 321.8 | | | (123.0) | | | (38) | % |
| | | | | | | |
| | | | | | | |
NET INCOME | $ | 602.5 | | | $ | 997.3 | | | $ | (394.8) | | | (40) | % |
| | | | | | | |
Net income per common share—Diluted | $ | 28.74 | | | $ | 44.61 | | | $ | (15.87) | | | (36) | % |
NM—Not Meaningful
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2023 | | 2022 |
REVENUE MIX PERCENTAGES: | | | |
New vehicles | 51.5 | % | | 47.7 | % |
Used retail vehicles | 27.1 | % | | 31.3 | % |
Used vehicle wholesale | 2.7 | % | | 2.4 | % |
Parts and service | 14.1 | % | | 13.4 | % |
Finance and insurance, net | 4.6 | % | | 5.2 | % |
Total revenue | 100.0 | % | | 100.0 | % |
GROSS PROFIT MIX PERCENTAGES: | | | |
New vehicles | 25.5 | % | | 27.2 | % |
Used retail vehicles | 9.0 | % | | 11.2 | % |
Used vehicle wholesale | 0.6 | % | | 0.2 | % |
Parts and service | 41.8 | % | | 37.2 | % |
Finance and insurance, net | 23.2 | % | | 24.2 | % |
Total gross profit | 100.0 | % | | 100.0 | % |
GROSS PROFIT MARGIN | 18.6 | % | | 20.1 | % |
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT | 58.7 | % | | 56.9 | % |
Total revenue during 2023 decreased by $631.2 million (4%) compared to 2022, due to a $782.8 million (15%) decrease in used vehicle revenue, a $120.8 million (15%) decrease in F&I revenue, offset by a $265.1 million (4%) increase in new vehicle revenue and a $7.3 million increase in parts and service revenue.
The $344.8 million (11%) decrease in gross profit during 2023 was the result of a $141.0 million (17%) decrease in new vehicle gross profit, an $89.2 million (25%) decrease in used vehicle gross profit, a $2.1 million decrease in parts and service gross profit and a $112.5 million (15%) decrease in F&I gross profit. Our total gross profit margin decreased 147 basis points from 20.1% in 2022 to 18.6% in 2023.
Income from operations during 2023 decreased by $319.1 million (25%) compared to 2022, primarily due to a $344.8 million (11%) decrease in gross profit and a $117.2 million increase in asset impairments, partially offset by a $146.0 million (8%) decrease in selling, general, and administrative expenses.
Total other expenses (income), net increased by $198.8 million from income of $46.5 million in 2022 to $152.2 million of expenses in 2023, primarily due to a $193.6 million decrease in gain on dealership divestitures, a $3.9 million (3%) increase in other interest expense, net and a $1.3 million (15%) increase in floor plan interest expense. As a result, income before income taxes decreased by $517.8 million (39%) to $801.3 million in 2023. The $123.0 million (38%) decrease in income tax expense was primarily attributable to the 39% decrease in income before taxes, partially offset by a 41 basis point increase in the 2023 effective tax rate. Overall, net income decreased by $394.8 million (40%) from $997.3 million in 2022 to $602.5 million in 2023.
New Vehicle—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 2,524.1 | | | $ | 2,315.7 | | | $ | 208.4 | | | 9 | % |
Import | 3,002.6 | | | 2,914.9 | | | 87.7 | | | 3 | % |
Domestic | 2,104.1 | | | 2,135.0 | | | (30.9) | | | (1) | % |
Total new vehicle revenue | $ | 7,630.7 | | | $ | 7,365.6 | | | $ | 265.1 | | | 4 | % |
Gross profit: | | | | | | | |
Luxury | $ | 274.3 | | | $ | 293.0 | | | $ | (18.7) | | | (6) | % |
Import | 265.8 | | | 338.7 | | | (72.9) | | | (22) | % |
Domestic | 162.9 | | | 212.3 | | | (49.5) | | | (23) | % |
Total new vehicle gross profit | $ | 703.0 | | | $ | 844.0 | | | $ | (141.0) | | | (17) | % |
New vehicle units: | | | | | | | |
Luxury | 35,300 | | | 33,904 | | | 1,396 | | | 4 | % |
Import | 77,740 | | | 78,388 | | | (648) | | | (1) | % |
Domestic | 36,469 | | | 38,887 | | | (2,418) | | | (6) | % |
Total new vehicle units | 149,509 | | | 151,179 | | | (1,670) | | | (1) | % |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 2,503.2 | | | $ | 2,210.4 | | | $ | 292.8 | | | 13 | % |
Import | 2,967.3 | | | 2,744.2 | | | 223.1 | | | 8 | % |
Domestic | 2,059.0 | | | 2,074.3 | | | (15.4) | | | (1) | % |
Total new vehicle revenue | $ | 7,529.5 | | | $ | 7,028.9 | | | $ | 500.6 | | | 7 | % |
Gross profit: | | | | | | | |
Luxury | $ | 272.0 | | | $ | 281.6 | | | $ | (9.6) | | | (3) | % |
Import | 262.0 | | | 319.5 | | | (57.5) | | | (18) | % |
Domestic | 159.6 | | | 206.5 | | | (46.9) | | | (23) | % |
Total new vehicle gross profit | $ | 693.6 | | | $ | 807.6 | | | $ | (114.0) | | | (14) | % |
New vehicle units: | | | | | | | |
Luxury | 34,947 | | | 32,154 | | | 2,793 | | | 9 | % |
Import | 76,896 | | | 73,845 | | | 3,051 | | | 4 | % |
Domestic | 35,700 | | | 37,699 | | | (1,999) | | | (5) | % |
Total new vehicle units | 147,543 | | | 143,698 | | | 3,845 | | | 3 | % |
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 1,200.2 |
| | $ | 1,251.3 |
| | $ | (51.1 | ) | | (4 | )% |
Import | 1,637.4 |
| | 1,617.8 |
| | 19.6 |
| | 1 | % |
Domestic | 723.5 |
| | 742.8 |
| | (19.3 | ) | | (3 | )% |
Total new vehicle revenue | $ | 3,561.1 |
| | $ | 3,611.9 |
| | $ | (50.8 | ) | | (1 | )% |
Gross profit: | | | | | | | |
Luxury | $ | 78.9 |
| | $ | 84.4 |
| | $ | (5.5 | ) | | (7 | )% |
Import | 56.8 |
| | 68.9 |
| | (12.1 | ) | | (18 | )% |
Domestic | 33.3 |
| | 33.8 |
| | (0.5 | ) | | (1 | )% |
Total new vehicle gross profit | $ | 169.0 |
| | $ | 187.1 |
| | $ | (18.1 | ) | | (10 | )% |
New vehicle units: | | | | | | | |
Luxury | 22,525 |
| | 23,875 |
| | (1,350 | ) | | (6 | )% |
Import | 58,685 |
| | 58,466 |
| | 219 |
| | — | % |
Domestic | 18,765 |
| | 20,019 |
| | (1,254 | ) | | (6 | )% |
Total new vehicle units | 99,975 |
| | 102,360 |
| | (2,385 | ) | | (2 | )% |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 1,200.2 |
| | $ | 1,226.5 |
| | $ | (26.3 | ) | | (2 | )% |
Import | 1,610.3 |
| | 1,557.8 |
| | 52.5 |
| | 3 | % |
Domestic | 652.2 |
| | 698.4 |
| | (46.2 | ) | | (7 | )% |
Total new vehicle revenue | $ | 3,462.7 |
| | $ | 3,482.7 |
| | $ | (20.0 | ) | | (1 | )% |
Gross profit: | | | | | | | |
Luxury | $ | 79.0 |
| | $ | 82.4 |
| | $ | (3.4 | ) | | (4 | )% |
Import | 56.3 |
| | 67.0 |
| | (10.7 | ) | | (16 | )% |
Domestic | 28.7 |
| | 31.9 |
| | (3.2 | ) | | (10 | )% |
Total new vehicle gross profit | $ | 164.0 |
| | $ | 181.3 |
| | $ | (17.3 | ) | | (10 | )% |
New vehicle units: | | | | | | | |
Luxury | 22,525 |
| | 23,424 |
| | (899 | ) | | (4 | )% |
Import | 57,813 |
| | 56,430 |
| | 1,383 |
| | 2 | % |
Domestic | 16,731 |
| | 18,716 |
| | (1,985 | ) | | (11 | )% |
Total new vehicle units | 97,069 |
| | 98,570 |
| | (1,501 | ) | | (2 | )% |
New Vehicle Metrics—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
As Reported: | | | | | | | |
Revenue per new vehicle sold | $ | 51,038 | | | $ | 48,721 | | | $ | 2,318 | | | 5 | % |
Gross profit per new vehicle sold | $ | 4,702 | | | $ | 5,583 | | | $ | (881) | | | (16) | % |
New vehicle gross margin | 9.2 | % | | 11.5 | % | | (2.2) | % | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 7,770 | | | $ | 8,642 | | | $ | (871) | | | (10) | % |
New vehicle gross margin | 10.9 | % | | 12.7 | % | | (1.8) | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 3,419 | | | $ | 4,320 | | | $ | (901) | | | (21) | % |
New vehicle gross margin | 8.9 | % | | 11.6 | % | | (2.8) | % | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 4,466 | | | $ | 5,460 | | | $ | (994) | | | (18) | % |
New vehicle gross margin | 7.7 | % | | 9.9 | % | | (2.2) | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per new vehicle sold | $ | 51,033 | | | $ | 48,915 | | | $ | 2,118 | | | 4 | % |
Gross profit per new vehicle sold | $ | 4,701 | | | $ | 5,620 | | | $ | (919) | | | (16) | % |
New vehicle gross margin | 9.2 | % | | 11.5 | % | | (2.3) | % | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 7,783 | | | $ | 8,758 | | | $ | (975) | | | (11) | % |
New vehicle gross margin | 10.9 | % | | 12.7 | % | | (1.9) | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 3,407 | | | $ | 4,326 | | | $ | (919) | | | (21) | % |
New vehicle gross margin | 8.8 | % | | 11.6 | % | | (2.8) | % | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 4,472 | | | $ | 5,479 | | | $ | (1,007) | | | (18) | % |
New vehicle gross margin | 7.8 | % | | 10.0 | % | | (2.2) | % | | |
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
As Reported: | | | | | | | |
Revenue per new vehicle sold | $ | 35,620 |
| | $ | 35,286 |
| | $ | 334 |
| | 1 | % |
Gross profit per new vehicle sold | $ | 1,690 |
| | $ | 1,828 |
| | $ | (138 | ) | | (8 | )% |
New vehicle gross margin | 4.7 | % | | 5.2 | % | | (0.5 | )% | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | 3,503 |
| | 3,535 |
| | (32 | ) | | (1 | )% |
New vehicle gross margin | 6.6 | % | | 6.7 | % | | (0.1 | )% | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 968 |
| | $ | 1,178 |
| | $ | (210 | ) | | (18 | )% |
New vehicle gross margin | 3.5 | % | | 4.3 | % | | (0.8 | )% | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,775 |
| | $ | 1,688 |
| | $ | 87 |
| | 5 | % |
New vehicle gross margin | 4.6 | % | | 4.6 | % | | — | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per new vehicle sold | $ | 35,673 |
| | $ | 35,332 |
| | $ | 341 |
| | 1 | % |
Gross profit per new vehicle sold | $ | 1,690 |
| | $ | 1,839 |
| | $ | (149 | ) | | (8 | )% |
New vehicle gross margin | 4.7 | % | | 5.2 | % | | (0.5 | )% | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 3,507 |
| | $ | 3,518 |
| | $ | (11 | ) | | — | % |
New vehicle gross margin | 6.6 | % | | 6.7 | % | | (0.1 | )% | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 974 |
| | $ | 1,187 |
| | $ | (213 | ) | | (18 | )% |
New vehicle gross margin | 3.5 | % | | 4.3 | % | | (0.8 | )% | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,715 |
| | $ | 1,704 |
| | $ | 11 |
| | 1 | % |
New vehicle gross margin | 4.4 | % | | 4.6 | % | | (0.2 | )% | | |
NewDuring 2023, new vehicle revenue decreasedincreased by $50.8$265.1 million (1%(4%), primarily when compared to 2022, as a result of a 2% decrease5% increase in revenue per new vehicle units sold partially offset by a 1% decrease in new vehicle unit sales. Same store new vehicle revenue increased by $500.6 million (7%) as a result of a 4% increase in revenue per new vehicle sold. Same storesold and a 3% increase in new vehicle revenueunits sold.
New vehicle gross profit decreased by $20.0$141.0 million (1%)(17)% in 2023 when compared to 2022, as a result of a 2% decrease in new vehicle units sold partially offset by a 1% increase in revenue per new vehicle sold.
Same store unit volumes decreased by 2% due to a 4% decrease in luxury units, and an 11% decrease in domestic units, partially offset by a 2% increase in import units. The 2% decrease in unit sales was in line with the overall decrease in 2017 U.S. new vehicle sales, which decreased 2% from 17.6 million in 2016 to 17.2 million in 2017.
Same store new vehicle gross profit in 2017 decreased by $17.3 million (10%), as a result of the 2% decrease in unit volumes and an 8%16% decrease in gross profit per new vehicle sold. The 50 basis pointsold and a 1% decrease in sameunit volumes. Same store new vehicle gross profit decreased by $114.0 million (14%) in 2023, as a result of a 16% decrease in gross profit per new vehicle sold partially offset by a 3% increase in unit volumes. Same store new vehicle gross margin from 5.2%decreased 228 basis points to 9.2% in 2016 to 4.7%2023. The decrease in 2017,our new vehicle gross profit margin was primarily attributable to the easing of new vehicle inventory constraints which softened the historically high new vehicle margins seen in recent years.
The seasonally adjusted annual rate ("SAAR") for new vehicle sales in the U.S. during the year ended December 31, 2023 was approximately 15.4 million which increased as compared to approximately 13.7 million during the year ended December 31, 2022. The increase in new vehicle sales revenue on a higher mixsame store basis for the year ended December 31, 2023 over the same period in the prior year is primarily attributable to an increase of $2,118 of revenue per new vehicle sold and unit salesan increase of 3,845 in our import brands, which have traditionally had lower margins than our luxury and domesticnew vehicle units sold. The increase in SAAR period over period reflects higher inventory supply, including fleet, coupled with continued consumer demand for new vehicles. However, we continue to be negatively impacted by the significant variation in new vehicle days supply among brands and experienced margin pressure during 2017.models. We ended the year with approximately 43
days of supply of new vehicle inventory which reflects an increase from 26 days of supply as of December 31, 2022 but remains well below historical levels.
Used Vehicle—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenue | $ | 4,017.5 | | | $ | 4,828.8 | | | $ | (811.3) | | | (17) | % |
Used vehicle wholesale revenue | 396.7 | | | 368.3 | | | 28.5 | | | 8 | % |
Used vehicle revenue | $ | 4,414.3 | | | $ | 5,197.1 | | | $ | (782.8) | | | (15) | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 248.5 | | | $ | 347.1 | | | $ | (98.5) | | | (28) | % |
Used vehicle wholesale gross profit | 15.5 | | | 6.2 | | | 9.3 | | | 151 | % |
Used vehicle gross profit | $ | 264.0 | | | $ | 353.2 | | | $ | (89.2) | | | (25) | % |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 127,507 | | | 151,464 | | | (23,957) | | | (16) | % |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenue | $ | 3,949.1 | | | $ | 4,503.7 | | | $ | (554.6) | | | (12) | % |
Used vehicle wholesale revenue | 389.7 | | | 348.9 | | | 40.8 | | | 12 | % |
Used vehicle revenue | $ | 4,338.8 | | | $ | 4,852.6 | | | $ | (513.7) | | | (11) | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 243.7 | | | $ | 323.7 | | | $ | (80.0) | | | (25) | % |
Used vehicle wholesale gross profit | 15.3 | | | 7.1 | | | 8.3 | | | 117 | % |
Used vehicle gross profit | $ | 259.1 | | | $ | 330.8 | | | $ | (71.7) | | | (22) | % |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 125,124 | | | 139,446 | | | (14,322) | | | (10) | % |
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenues | $ | 1,635.3 |
| | $ | 1,675.0 |
| | $ | (39.7 | ) | | (2 | )% |
Used vehicle wholesale revenues | 198.8 |
| | 201.4 |
| | (2.6 | ) | | (1 | )% |
Used vehicle revenue | $ | 1,834.1 |
| | $ | 1,876.4 |
| | $ | (42.3 | ) | | (2 | )% |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 121.1 |
| | $ | 131.0 |
| | $ | (9.9 | ) | | (8 | )% |
Used vehicle wholesale gross profit | 0.8 |
| | (3.7 | ) | | 4.5 |
| | (122 | )% |
Used vehicle gross profit | $ | 121.9 |
| | $ | 127.3 |
| | $ | (5.4 | ) | | (4 | )% |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 76,929 |
| | 79,259 |
| | (2,330 | ) | | (3 | )% |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenues | $ | 1,577.3 |
| | $ | 1,571.4 |
| | $ | 5.9 |
| | — | % |
Used vehicle wholesale revenues | 190.5 |
| | 192.3 |
| | (1.8 | ) | | (1 | )% |
Used vehicle revenue | $ | 1,767.8 |
| | $ | 1,763.7 |
| | $ | 4.1 |
| | — | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 115.4 |
| | $ | 123.0 |
| | $ | (7.6 | ) | | (6 | )% |
Used vehicle wholesale gross profit | 1.1 |
| | (2.9 | ) | | 4.0 |
| | (138 | )% |
Used vehicle gross profit | $ | 116.5 |
| | $ | 120.1 |
| | $ | (3.6 | ) | | (3 | )% |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 73,772 |
| | 73,490 |
| | 282 |
| | — | % |
Used Vehicle Metrics—
| | | For the Year Ended December 31, | | Increase (Decrease) | | % Change | | For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
As Reported: | | | | | | | |
As Reported: | |
As Reported: | |
Revenue per used vehicle retailed | |
Revenue per used vehicle retailed | |
Revenue per used vehicle retailed | $ | 21,257 |
| | $ | 21,133 |
| | $ | 124 |
| | 1 | % | $ | 31,508 | | | $ | | $ | 31,881 | | | $ | | $ | (372) | | | (1) | | (1) | % |
Gross profit per used vehicle retailed | $ | 1,574 |
| | $ | 1,653 |
| | $ | (79 | ) | | (5 | )% | Gross profit per used vehicle retailed | $ | 1,949 | | | $ | | $ | 2,291 | | | $ | | $ | (342) | | | (15) | | (15) | % |
Used vehicle retail gross margin | 7.4 | % | | 7.8 | % | | (0.4 | )% | | |
| | | | | | | |
Same Store: | | | | | | | |
| Same Store: | |
| Same Store: | |
Revenue per used vehicle retailed | |
Revenue per used vehicle retailed | |
Revenue per used vehicle retailed | $ | 21,381 |
| | $ | 21,383 |
| | $ | (2 | ) | | — | % | $ | 31,562 | | | $ | | $ | 32,297 | | | $ | | $ | (735) | | | (2) | | (2) | % |
Gross profit per used vehicle retailed | $ | 1,564 |
| | $ | 1,674 |
| | $ | (110 | ) | | (7 | )% | Gross profit per used vehicle retailed | $ | 1,948 | | | $ | | $ | 2,321 | | | $ | | $ | (374) | | | (16) | | (16) | % |
Used vehicle retail gross margin | 7.3 | % | | 7.8 | % | | (0.5 | )% | | |
Used vehicle revenue decreased by $42.3$782.8 million (2%(15%), as a result of a 3%due to an $811.3 million (17%) decrease in used vehicle retail units sold,revenue, partially offset by a 1%$28.5 million (8%) increase in revenue per used vehicle retailed.wholesale revenue. Same store used vehicle revenue decreased by $513.7 million (11%) due to a $554.6 million (12%) decrease in used vehicle retail revenue, partially offset by a $40.8 million (12%) increase in used vehicle wholesale revenue. Used vehicle revenues and unit volume have continued to
contract during 2023, along with margins on both an all store and same store basis. Used vehicle revenue and unit volumes have been negatively impacted by the affordability headwinds and lack of inventory availability, especially in vehicles with lower mileage.
In 2017,2023, total Company and same store used vehicle retail gross profit margins decreased by $7.6 million (6%), resulting in a decrease in our gross margin from 7.8% in 2016100 and 102 basis points, respectively, to 7.3% in 2017.both 6.2%. We primarily attribute the 50 basis point decreasedecreases in same store used vehicle retail gross profit margin to increased competition and price transparency withina softening in the used vehicle marketplace.
market, which was at record highs in 2021 and, to a lesser extent 2022, as a result of new vehicle inventory shortages initially caused by COVID-19 disruptions followed by supply chain issues.
We believe that our used vehicle inventory continues to be well-aligned with current consumer demand, with approximately 3132 days of supply as of December 31, 2017.
2023. This level of days of supply is in line with our historic targeted range of 30 to 35 days.
Parts and Service—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions) |
As Reported: | | | | | | | |
Parts and service revenue | $ | 2,081.5 | | $ | 2,074.2 | | $ | 7.3 | | | — | % |
Parts and service gross profit: | | | | | | | |
Customer pay | 709.5 | | 709.7 | | (0.1) | | | — | % |
Warranty | 148.4 | | 142.4 | | 5.9 | | | 4 | % |
Wholesale parts | 78.7 | | 79.4 | | (0.7) | | | (1) | % |
Parts and service gross profit, excluding reconditioning and preparation | 936.6 | | 931.5 | | 5.1 | | | 1 | % |
Parts and service gross margin, excluding reconditioning and preparation | 45.0% | | 44.9% | | 0.1 | % | | |
Reconditioning and preparation * | 214.0 | | 221.1 | | (7.1) | | | (3) | % |
Total parts and service gross profit | $ | 1,150.6 | | $ | 1,152.6 | | $ | (2.1) | | | — | % |
Total parts and service gross margin | 55.3% | | 55.6% | | (0.3) | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Parts and service revenue | $ | 2,063.2 | | $ | 1,960.5 | | $ | 102.6 | | | 5 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | 702.3 | | 668.4 | | 33.8 | | | 5 | % |
Warranty | 147.5 | | 136.2 | | 11.3 | | | 8 | % |
Wholesale parts | 78.3 | | 75.9 | | 2.5 | | | 3 | % |
Parts and service gross profit, excluding reconditioning and preparation | 928.1 | | 880.5 | | 47.6 | | | 5 | % |
Parts and service gross margin, excluding reconditioning and preparation | 45.0% | | 44.9% | | 0.1 | % | | |
Reconditioning and preparation * | 212.7 | | 207.3 | | 5.4 | | | 3 | % |
Total parts and service gross profit | $ | 1,140.7 | | $ | 1,087.8 | | $ | 52.9 | | | 5 | % |
Total parts and service gross margin | 55.3% | | 55.5% | | (0.2) | % | | |
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
| (Dollars in millions) |
As Reported: | | | | | | | |
Parts and service revenue | $ | 786.1 |
| | $ | 778.5 |
| | $ | 7.6 |
| | 1 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | $ | 272.3 |
| | $ | 268.2 |
| | $ | 4.1 |
| | 2 | % |
Warranty | 81.7 |
| | 73.7 |
| | 8.0 |
| | 11 | % |
Wholesale parts | 21.2 |
| | 20.7 |
| | 0.5 |
| | 2 | % |
Parts and service gross profit, excluding reconditioning and preparation | $ | 375.2 |
| | $ | 362.6 |
| | $ | 12.6 |
| | 3 | % |
Parts and service gross margin, excluding reconditioning and preparation | 47.7 | % | | 46.6 | % | | 1.1 | % | | |
Reconditioning and preparation | 114.6 |
| | 120.7 |
| | (6.1 | ) | | (5 | )% |
Total parts and service gross profit | 489.8 |
| | 483.3 |
| | 6.5 |
| | 1 | % |
Total parts and service gross margin | 62.3 | % | | 62.1 | % | | 0.2 | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Parts and service revenue | $ | 772.7 |
| | $ | 743.8 |
| | $ | 28.9 |
| | 4 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | $ | 267.2 |
| | $ | 257.3 |
| | $ | 9.9 |
| | 4 | % |
Warranty | 80.5 |
| | 71.4 |
| | 9.1 |
| | 13 | % |
Wholesale parts | 21.0 |
| | 19.4 |
| | 1.6 |
| | 8 | % |
Parts and service gross profit, excluding reconditioning and preparation | $ | 368.7 |
| | $ | 348.1 |
| | $ | 20.6 |
| | 6 | % |
Parts and service gross margin, excluding reconditioning and preparation | 47.7 | % | | 46.8 | % | | 0.9 | % | | |
Reconditioning and preparation | 112.0 |
| | 114.7 |
| | (2.7 | ) | | (2 | )% |
Total parts and service gross profit | 480.7 |
| | 462.8 |
| | 17.9 |
| | 4 | % |
Total parts and service gross margin | 62.2 | % | | 62.2 | % | | — | % | | |
* Reconditioning and preparation represents the gross profit earned by our parts and service departments for internal work performed and is included as a reduction of Parts and service cost of sales within the accompanying consolidated statements of income upon the sale of the vehicle.The $7.6$7.3 million (1%) increase in parts and service revenue is primarilywas due to a $13.2$6.3 million (9%increase in customer pay revenue and a $10.2 million (4%) increase in warranty revenue, partially offset by a $5.6$9.2 million (1%(2%) decrease in customer paywholesale parts revenue. Same store parts and service revenue increased $28.9 million (4%$102.6 (5%) from $743.8 million$1.96 billion in 20162022 to $772.7 million$2.06 billion in 2017.2023. The increase in same store parts and service revenue was primarily due to a $15.4$72.1 million (11%(6%) increase in customer pay revenue, a $19.8 million (8%) increase in warranty revenue and a $6.9$10.7 million (2%) increase in wholesale parts revenue.
Parts and service gross profit, excluding reconditioning and preparation, increased by $5.1 million (1%) to $936.6 million and same store gross profit, excluding reconditioning and preparation, increased by $47.6 million (5%) to $928.1 million. The $47.6 million increase in same store gross profit, excluding reconditioning and preparation, is primarily due to a $33.8 million (5%) increase in customer pay gross profit, an $11.3 million (8%) increase in warranty gross profit, and a $2.5 million (3%) increase in wholesale parts gross profit. As a result of the shortage of new vehicle inventory, many customers have elected to keep their current vehicles longer which has generated additional customer pay and wholesale parts gross profit for the parts and service departments. We continue to focus on increasing our customer pay parts and service revenue over the long-term by improving the customer experience, providing competitive benefits to our technicians, capitalizing on our dealership training programs and upgrading equipment.
Finance and Insurance, net—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Finance and insurance, net revenue | $ | 676.2 | | | $ | 797.0 | | | $ | (120.8) | | | (15) | % |
Finance and insurance, net gross profit | $ | 638.2 | | | $ | 750.7 | | | $ | (112.5) | | | (15) | % |
Finance and insurance, net per vehicle sold | $ | 2,304 | | | $ | 2,480 | | | $ | (177) | | | (7) | % |
| | | | | | | |
Same Store: | | | | | | | |
Finance and insurance, net revenue | $ | 667.3 | | | $ | 761.7 | | | $ | (94.4) | | | (12) | % |
Finance and insurance, net gross profit | $ | 629.4 | | | $ | 715.5 | | | $ | (86.1) | | | (12) | % |
Finance and insurance, net per vehicle sold | $ | 2,308 | | | $ | 2,527 | | | $ | (219) | | | (9) | % |
F&I revenue, net decreased by $120.8 million (15%) in 2023 when compared to 2022 primarily as a result of an 8% decrease in new and used retail unit sales and a 7% decrease in F&I per vehicle retailed.
On a same store basis F&I revenue, net decreased by $94.4 million (12%) in 2023 when compared to 2022 primarily as a result of a 4% decrease in new and used retail unit sales and a 9% decrease in F&I per vehicle retailed.
The financial results of the TCA segment, after dealership eliminations, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2023 | | 2022 | |
| (Dollars in millions) |
Finance and insurance, revenue | $ | 138.3 | | | $ | 126.0 | | | $ | 12.3 | | | 10 | % |
Finance and insurance, cost of sales | $ | 37.9 | | | $ | 46.3 | | | $ | (8.4) | | | (18) | % |
Finance and insurance, gross profit | $ | 100.4 | | | $ | 79.8 | | | $ | 20.7 | | | 26 | % |
TCA offers a variety of F&I products, such as extended vehicle service contracts, prepaid maintenance contracts, GAP, appearance protection contracts and lease wear-and-tear contracts. TCA's products are sold through our automobile dealerships.
Revenue generated by TCA is earned over the period of the related product contract. The method for recognizing revenue is assigned based on contract type and expected claim patterns. Premium revenues are supplemented with investment gains or losses and income earned associated with the performance of TCA's investment portfolio. During the year ended December 31, 2023, TCA generated $138.3 million of revenue, consisting primarily of earned premium and $15.7 million from the investment portfolio.
Direct expenses incurred for the acquisition of F&I contracts on which revenue has not yet been recognized have been deferred and are amortized over the related contract period. During the year ended December 31, 2023, TCA recorded $37.9 million of cost of sales consisting primarily of claims expense, after the elimination of claims paid to affiliated dealerships. Commissions expense paid by TCA to our affiliated dealerships and reflected as F&I revenue in our Dealerships segment is eliminated in the TCA segment upon consolidation.
As we continue to integrate TCA, we expect a rollout of TCA products to our remaining stores by the end of 2024. With the ownership of TCA, while the combined profitability of the transaction is higher, the timing of revenue and cost recognition is deferred and amortized over the life of the contract. We expect that this rollout will result in lower F&I revenue and gross profit over the next two to three years due to the change in how these contracts are earned.
Selling, General, and Administrative Expense—
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % of Gross Profit Increase (Decrease) |
| 2023 | | % of Gross Profit | | 2022 | | % of Gross Profit | |
| (Dollars in millions) |
As Reported: | | | | | | | | | | | |
Personnel costs | $ | 1,081.7 | | | 39.3 | % | | $ | 1,247.4 | | | 40.2 | % | | $ | (165.7) | | | (1.0) | % |
Rent and related expenses | 119.0 | | | 4.3 | % | | 121.7 | | | 3.9 | % | | (2.7) | | | 0.4 | % |
Advertising | 47.5 | | | 1.7 | % | | 50.1 | | | 1.6 | % | | (2.6) | | | 0.1 | % |
Other | 369.2 | | | 13.4 | % | | 344.2 | | | 11.1 | % | | 25.0 | | | 2.3 | % |
Selling, general, and administrative expense | $ | 1,617.4 | | | 58.7 | % | | $ | 1,763.4 | | | 56.9 | % | | $ | (146.0) | | | 1.8 | % |
Gross profit | $ | 2,755.8 | | | | | $ | 3,100.6 | | | | | | | |
| | | | | | | | | | | |
Same Store: | | | | | | | | | | | |
Personnel costs | $ | 1,068.5 | | | 39.2 | % | | $ | 1,181.8 | | | 40.2 | % | | $ | (113.3) | | | (0.9) | % |
Rent and related expenses | 117.9 | | | 4.3 | % | | 116.3 | | | 4.0 | % | | 1.6 | | | 0.4 | % |
Advertising | 45.6 | | | 1.7 | % | | 43.8 | | | 1.5 | % | | 1.8 | | | 0.2 | % |
Other | 361.6 | | | 13.3 | % | | 329.0 | | | 11.2 | % | | 32.6 | | | 2.1 | % |
Selling, general, and administrative expense | $ | 1,593.6 | | | 58.5 | % | | $ | 1,670.9 | | | 56.8 | % | | $ | (77.3) | | | 1.7 | % |
Gross profit | $ | 2,722.8 | | | | | $ | 2,941.7 | | | | | | | |
SG&A expense as a percentage of gross profit increased 182 basis points from 56.9% in 2022 to 58.7% in 2023. Same store SG&A expense as a percentage of gross profit increased 173 basis points from 56.8% in 2022 to 58.5% in 2023. The increase in SG&A as a percentage of gross profit is primarily the result of lower gross profits for 2023 when compared to 2022. SG&A expense for the year ended December 31, 2023 includes $4.3 million of expense related to hail damage, a $3.6 million gain from the sale of real estate and $4.1 million of professional fees related to the Koons acquisition. SG&A expense for the year ended December 31, 2022 includes $2.7 million of professional fees related to acquisition due diligence.
Asset Impairments —
During the year ended December 31, 2023, we recognized asset impairment charges of $117.2 million as compared to no impairment charges during the year ended December 31, 2022. The asset impairment charges resulted from our annual franchise rights impairment tests and the classification of certain asset disposal groups as held for sale which resulted in additional franchise rights and goodwill impairment charges.
Floor Plan Interest Expense —
Floor plan interest expense increased by $1.3 million (15%) to $9.6 million during 2023 compared to $8.4 million during 2022 due to less cash held in the floor plan offset account in December 2023 as a result of funding the Koons acquisition.
Other Interest Expense —
Other interest expense increased $3.9 million (3%) from $152.2 million in 2022 to $156.1 million in 2023. The increase is primarily due to higher loaner payable interest expense driven by higher loaner vehicle balances, as well as interest expense on our revolving credit agreement in December 2023.
Gain on Dealership Divestitures —
During the year ended December 31, 2023, we sold one franchise (one dealership location) in Austin, Texas. The Company recorded a pre-tax gain totaling $13.5 million.
During the year ended December 31, 2022, we sold one franchise (one dealership location) in St. Louis, Missouri, three franchises (three dealership locations) and one collision center in Colorado, two franchises (two dealership locations) in Spokane, Washington, one franchise (one dealership location) in Albuquerque, New Mexico and 11 franchises (nine dealership locations) and two collision centers in North Carolina. The Company recorded a net pre-tax gain totaling $207.1 million.
Income Tax Expense —
The $123.0 million (38%) decrease in income tax expense was primarily the result of a $517.8 million (39%) decrease in income before income taxes. Our effective tax rate increased 41 basis points from 24.4% in 2022 to 24.8% in 2023. The increase in our effective tax rate was primarily due to lower income before taxes and our acquisition and divestiture activity. Stores acquired are located in relatively high tax rate states while the stores divested are located in relatively low or no tax rate states.
Refer to Note 16 "Income Taxes" for additional information regarding income taxes.
CONSOLIDATED RESULTS OF OPERATIONS
The Company's full year results for 2022 include the results of the dealerships acquired in the fourth quarter of 2021. Accordingly, the significant increases in revenue, gross profit and income from operations for 2022 compared to 2021 are largely a result of these acquisitions.
The Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
| (Dollars in millions, except per share data) |
REVENUE: | | | | | | | |
New vehicle | $ | 7,365.6 | | | $ | 4,934.1 | | | $ | 2,431.5 | | | 49 | % |
Used vehicle | 5,197.1 | | | 3,315.6 | | | 1,881.4 | | | 57 | % |
Parts and service | 2,074.2 | | | 1,182.9 | | | 891.4 | | | 75 | % |
Finance and insurance, net | 797.0 | | | 405.1 | | | 391.9 | | | 97 | % |
TOTAL REVENUE | 15,433.8 | | | 9,837.7 | | | 5,596.2 | | | 57 | % |
GROSS PROFIT: | | | | | | | |
New vehicle | 844.0 | | | 490.5 | | | 353.5 | | | 72 | % |
Used vehicle | 353.2 | | | 288.3 | | | 64.9 | | | 22 | % |
Parts and service | 1,152.6 | | | 721.9 | | | 430.8 | | | 60 | % |
Finance and insurance, net | 750.7 | | | 401.5 | | | 349.2 | | | 87 | % |
TOTAL GROSS PROFIT | 3,100.6 | | | 1,902.2 | | | 1,198.4 | | | 63 | % |
OPERATING EXPENSES: | | | | | | | |
Selling, general, and administrative | 1,763.4 | | | 1,073.9 | | | 689.4 | | | 64 | % |
Depreciation and amortization | 69.0 | | | 41.9 | | | 27.1 | | | 65 | % |
| | | | | | | |
Other operating income, net | (4.4) | | | (5.4) | | | 1.0 | | | (19) | % |
INCOME FROM OPERATIONS | 1,272.6 | | | 791.8 | | | 480.8 | | | 61 | % |
OTHER (INCOME) EXPENSES: | | | | | | | |
Floor plan interest expense | 8.4 | | | 8.2 | | | 0.2 | | | 2 | % |
Other interest expense, net | 152.2 | | | 93.9 | | | 58.3 | | | 62 | % |
| | | | | | | |
| | | | | | | |
Gain on dealership divestitures, net | (207.1) | | | (8.0) | | | (199.1) | | | NM |
Total other (income) expenses, net | (46.5) | | | 94.1 | | | (140.6) | | | NM |
INCOME BEFORE INCOME TAXES | 1,319.1 | | | 697.7 | | | 621.4 | | | 89 | % |
Income tax expense | 321.8 | | | 165.3 | | | 156.5 | | | 95 | % |
| | | | | | | |
| | | | | | | |
NET INCOME | $ | 997.3 | | | $ | 532.4 | | | $ | 464.9 | | | 87 | % |
| | | | | | | |
Net income per common share—Diluted | $ | 44.61 | | | $ | 26.49 | | | $ | 18.12 | | | 68 | % |
NM—Not Meaningful
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 |
REVENUE MIX PERCENTAGES: | | | |
New vehicles | 47.7 | % | | 50.2 | % |
Used retail vehicles | 31.3 | % | | 31.1 | % |
Used vehicle wholesale | 2.4 | % | | 2.6 | % |
Parts and service | 13.4 | % | | 12.0 | % |
Finance and insurance, net | 5.2 | % | | 4.1 | % |
Total revenue | 100.0 | % | | 100.0 | % |
GROSS PROFIT MIX PERCENTAGES: | | | |
New vehicles | 27.2 | % | | 25.8 | % |
Used retail vehicles | 11.2 | % | | 13.8 | % |
Used vehicle wholesale | 0.2 | % | | 1.4 | % |
Parts and service | 37.2 | % | | 38.0 | % |
Finance and insurance, net | 24.2 | % | | 21.1 | % |
Total gross profit | 100.0 | % | | 100.0 | % |
GROSS PROFIT MARGIN | 20.1 | % | | 19.3 | % |
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT | 56.9 | % | | 56.5 | % |
Total revenue during 2022 increased by $5.60 billion (57%) compared to 2021, due to a $2.43 billion (49%) increase in new vehicle revenue, a $1.88 billion (57%) increase in used vehicle revenue, a $891.4 million (75%) increase in parts and service revenue and a $391.9 million (97%) increase in F&I revenue.
The $1.20 billion (63%) increase in gross profit during 2022 was the result of a $353.5 million (72%) increase in new vehicle gross profit, a $64.9 million (22%) increase in used vehicle gross profit, a $430.8 million (60%) increase in parts and service gross profit and a $349.2 million (87%) increase in F&I gross profit. Our total gross profit margin increased 75 basis points from 19.3% in 2021 to 20.1% in 2022.
Income from operations during 2022 increased by $480.8 million (61%) compared to 2021, primarily due to a $1.20 billion (63%) increase in gross profit, partially offset by a $689.4 million (64%) increase in selling, general, and administrative expenses and a $27.1 million (65%) increase in depreciation and amortization expenses.
Total other (income) expenses, net decreased by $140.6 million (149%) from expense of $94.1 million in 2021 to $46.5 million of income in 2022, primarily due to a $199.1 million increase in gain on dealership divestitures, partially offset by a $58.3 million increase in other interest expense, net, and a $0.2 million increase in floor plan interest expense. As a result, income before income taxes increased by $621.4 million (89%) to $1.32 billion in 2022. The $156.5 million (95%) increase in income tax expense was primarily attributable to the 89% increase in income before taxes and a 70 basis point increase in the 2022 effective tax rate. Overall, net income increased by $464.9 million (87%) from $532.4 million in 2021 to $997.3 million in 2022.
DEALERSHIPS SEGMENT
New Vehicle—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 2,315.7 | | | $ | 2,183.0 | | | $ | 132.7 | | | 6 | % |
Import | 2,914.9 | | | 1,935.8 | | | 979.2 | | | 51 | % |
Domestic | 2,135.0 | | | 815.3 | | | 1,319.7 | | | 162 | % |
Total new vehicle revenue | $ | 7,365.6 | | | $ | 4,934.1 | | | $ | 2,431.5 | | | 49 | % |
Gross profit: | | | | | | | |
Luxury | $ | 293.0 | | | $ | 241.1 | | | $ | 51.9 | | | 22 | % |
Import | 338.7 | | | 175.3 | | | 163.4 | | | 93 | % |
Domestic | 212.3 | | | 74.1 | | | 138.2 | | | 187 | % |
Total new vehicle gross profit | $ | 844.0 | | | $ | 490.5 | | | $ | 353.5 | | | 72 | % |
New vehicle units: | | | | | | | |
Luxury | 33,904 | | | 34,648 | | | (744) | | | (2) | % |
Import | 78,388 | | | 58,413 | | | 19,975 | | | 34 | % |
Domestic | 38,887 | | | 16,849 | | | 22,038 | | | 131 | % |
Total new vehicle units | 151,179 | | | 109,910 | | | 41,269 | | | 38 | % |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 1,919.4 | | | $ | 2,031.4 | | | $ | (112.0) | | | (6) | % |
Import | 1,532.2 | | | 1,739.1 | | | (207.0) | | | (12) | % |
Domestic | 563.7 | | | 652.5 | | | (88.8) | | | (14) | % |
Total new vehicle revenue | $ | 4,015.2 | | | $ | 4,423.0 | | | $ | (407.8) | | | (9) | % |
Gross profit: | | | | | | | |
Luxury | $ | 239.1 | | | $ | 225.4 | | | $ | 13.7 | | | 6 | % |
Import | 178.5 | | | 156.2 | | | 22.3 | | | 14 | % |
Domestic | 52.8 | | | 57.6 | | | (4.8) | | | (8) | % |
Total new vehicle gross profit | $ | 470.4 | | | $ | 439.2 | | | $ | 31.2 | | | 7 | % |
New vehicle units: | | | | | | | |
Luxury | 27,920 | | | 32,005 | | | (4,085) | | | (13) | % |
Import | 42,179 | | | 52,719 | | | (10,540) | | | (20) | % |
Domestic | 10,799 | | | 13,591 | | | (2,792) | | | (21) | % |
Total new vehicle units | 80,898 | | | 98,315 | | | (17,417) | | | (18) | % |
New Vehicle Metrics—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
As Reported: | | | | | | | |
Revenue per new vehicle sold | $ | 48,721 | | | $ | 44,892 | | | $ | 3,829 | | | 9 | % |
Gross profit per new vehicle sold | $ | 5,583 | | | $ | 4,462 | | | $ | 1,120 | | | 25 | % |
New vehicle gross margin | 11.5 | % | | 9.9 | % | | 1.5 | % | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 8,642 | | | $ | 6,958 | | | $ | 1,684 | | | 24 | % |
New vehicle gross margin | 12.7 | % | | 11.0 | % | | 1.6 | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 4,320 | | | $ | 3,001 | | | $ | 1,319 | | | 44 | % |
New vehicle gross margin | 11.6 | % | | 9.1 | % | | 2.6 | % | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 5,460 | | | $ | 4,397 | | | $ | 1,063 | | | 24 | % |
New vehicle gross margin | 9.9 | % | | 9.1 | % | | 0.9 | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per new vehicle sold | $ | 49,633 | | | $ | 44,988 | | | $ | 4,645 | | | 10 | % |
Gross profit per new vehicle sold | $ | 5,815 | | | $ | 4,468 | | | $ | 1,348 | | | 30 | % |
New vehicle gross margin | 11.7 | % | | 9.9 | % | | 1.8 | % | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 8,563 | | | $ | 7,041 | | | $ | 1,522 | | | 22 | % |
New vehicle gross margin | 12.5 | % | | 11.1 | % | | 1.4 | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 4,233 | | | $ | 2,964 | | | $ | 1,269 | | | 43 | % |
New vehicle gross margin | 11.7 | % | | 9.0 | % | | 2.7 | % | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 4,892 | | | $ | 4,241 | | | $ | 652 | | | 15 | % |
New vehicle gross margin | 9.4 | % | | 8.8 | % | | 0.5 | % | | |
New vehicle revenue increased by $2.43 billion (49%), as a result of a 38% increase in new vehicle unit sales and a 9% increase in revenue per new vehicle sold. Same store new vehicle revenue decreased by $407.8 million (9%) as a result of a 18% decrease in new vehicle units sold offset by a 10% increase in revenue per new vehicle sold.
New vehicle gross profit increased by $353.5 million (72%) , as a result of a 25% increase in gross profit per new vehicle sold and a 38% increase in unit volumes. Same store new vehicle gross profit increased by $31.2 million (7%) in 2022, as a result of a 30% increase in gross profit per new vehicle sold partially offset by a 18% decrease in unit volumes. Same store new vehicle gross margin increased 179 basis points to 11.7% in 2022, primarily as a result of supply challenges for much of 2022 caused by a global semi-conductor shortage which led to manufacturer production challenges. We finished 2022 with a 26 days of supply of new vehicle inventory which is below our targeted days supply primarily as a result of these manufacturer production challenges.
Used Vehicle—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenue | $ | 4,828.8 | | | $ | 3,055.9 | | | $ | 1,772.8 | | | 58 | % |
Used vehicle wholesale revenue | 368.3 | | | 259.7 | | | 108.6 | | | 42 | % |
Used vehicle revenue | $ | 5,197.1 | | | $ | 3,315.6 | | | $ | 1,881.4 | | | 57 | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 347.1 | | | $ | 262.0 | | | $ | 85.1 | | | 32 | % |
Used vehicle wholesale gross profit | 6.2 | | | 26.4 | | | (20.2) | | | (77) | % |
Used vehicle gross profit | $ | 353.2 | | | $ | 288.3 | | | $ | 64.9 | | | 22 | % |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 151,464 | | | 105,206 | | | 46,258 | | | 44 | % |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenue | $ | 2,988.0 | | | $ | 2,761.1 | | | $ | 226.9 | | | 8 | % |
Used vehicle wholesale revenue | 154.3 | | | 232.4 | | | (78.1) | | | (34) | % |
Used vehicle revenue | $ | 3,142.3 | | | $ | 2,993.6 | | | $ | 148.7 | | | 5 | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 190.6 | | | $ | 238.0 | | | $ | (47.4) | | | (20) | % |
Used vehicle wholesale gross profit | 1.6 | | | 24.5 | | | (22.8) | | | (93) | % |
Used vehicle gross profit | $ | 192.3 | | | $ | 262.5 | | | $ | (70.2) | | | (27) | % |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 91,433 | | | 94,336 | | | (2,903) | | | (3) | % |
Used Vehicle Metrics—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
As Reported: | | | | | | | |
Revenue per used vehicle retailed | $ | 31,881 | | | $ | 29,047 | | | $ | 2,833 | | | 10 | % |
Gross profit per used vehicle retailed | $ | 2,291 | | | $ | 2,490 | | | $ | (199) | | | (8) | % |
Used vehicle retail gross margin | 7.2 | % | | 8.6 | % | | (1.4) | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per used vehicle retailed | $ | 32,679 | | | $ | 29,269 | | | $ | 3,411 | | | 12 | % |
Gross profit per used vehicle retailed | $ | 2,085 | | | $ | 2,523 | | | $ | (438) | | | (17) | % |
Used vehicle retail gross margin | 6.4 | % | | 8.6 | % | | (2.2) | % | | |
Used vehicle revenue increased by $1.88 billion (57%), due to a $1.77 billion (58%) increase in used retail revenue and a $108.6 million (42%) increase in used vehicle wholesale revenue. Same store used vehicle revenue increased by $148.7 million (5%) due to a $226.9 million (8%) increase in used vehicle retail revenue, partially offset by a $78.1 million (34%) decrease in used vehicle wholesale revenue.
In 2022, total Company and same store used vehicle retail gross profit margins both decreased 139 and 224 basis points to 7.2% and 6.4%, respectively. We attribute the decreases in used vehicle retail gross profit margin to a softening in the used
vehicle market, which was at record highs in 2021 as a result of new vehicle inventory shortages caused by semiconductor supply chain issues and COVID-19 disruptions.
We believe that our used vehicle inventory continues to be well-aligned with current consumer demand, with approximately 27 days of supply as of December 31, 2022.
Parts and Service—
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2022 | | 2021 | |
| (Dollars in millions) |
As Reported: | | | | | | | |
Parts and service revenue | $ | 2,107.5 | | $ | 1,184.3 | | $ | 923.3 | | | 78 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | 724.8 | | 434.2 | | 290.6 | | | 67 | % |
Warranty | 142.4 | | 98.0 | | 44.4 | | | 45 | % |
Wholesale parts | 79.4 | | 34.3 | | 45.1 | | | 132 | % |
Parts and service gross profit, excluding reconditioning and preparation | 946.7 | | 566.5 | | 380.2 | | | 67 | % |
Parts and service gross margin, excluding reconditioning and preparation | 44.9% | | 47.8% | | (2.9) | % | | |
Reconditioning and preparation * | 221.1 | | 153.6 | | 67.5 | | | 44 | % |
Total parts and service gross profit | $ | 1,167.8 | | $ | 720.1 | | $ | 447.7 | | | 62 | % |
Total parts and service gross margin | 55.4% | | 60.8% | | (5.4) | % | | |
| | | | | | | |
Same Store: | | | | | | | |
Parts and service revenue | $ | 1,181.8 | | $ | 1,055.5 | | $ | 126.3 | | | 12 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | 450.3 | | 390.3 | | 60.1 | | | 15 | % |
Warranty | 82.5 | | 88.2 | | (5.7) | | | (7) | % |
Wholesale parts | 32.9 | | 29.7 | | 3.2 | | | 11 | % |
Parts and service gross profit, excluding reconditioning and preparation | 565.7 | | 508.1 | | 57.5 | | | 11 | % |
Parts and service gross margin, excluding reconditioning and preparation | 47.9% | | 48.1% | | (0.3) | % | | |
Reconditioning and preparation * | 141.6 | | 137.6 | | 4.0 | | | 3 | % |
Total parts and service gross profit | $ | 707.3 | | $ | 645.7 | | $ | 61.6 | | | 10 | % |
Total parts and service gross margin | 59.8% | | 61.2% | | (1.3) | % | | |
* Reconditioning and preparation represents the gross profit earned by our parts and service departments for internal work performed and is included as a reduction of Parts and service cost of sales within the accompanying consolidated statements of income upon the sale of the vehicle.
The $923.3 million (78%) increase in parts and service revenue was due to a $568.1 million (70%) increase in customer pay revenue, a $270.2 million (143%) increase in wholesale parts revenue and a $85.0 million (47%) increase in warranty revenue. Same store parts and service revenue increased $126.3 million (12%) from $1.06 billion in 2021 to $1.18 billion in 2022. The increase in same store parts and service revenue was due to a $108.7 million (15%) increase in customer pay revenue and a $6.6$26.8 million (6%(17%) increase in wholesale parts revenue, partially offset by a $9.1 million (6%) decrease in warranty revenue.
Parts and service gross profit, excluding reconditioning and preparation, increased by $12.6$380.2 million (3%(67%) to $375.2$946.7 million and same store gross profit, excluding reconditioning and preparation, increased by $20.6$57.5 million (6%(11%) to $368.7$565.7 million. The $20.6$57.5 million increase in same store gross profit is primarily due to a $9.1 million (13%) increase in warranty gross profit and a $9.9 million (4%) increase in customer pay gross profit, which has continued to benefit from our strategic focus to improve customer retention and the recent trend of increasing new vehicle sales over the past few years.
We continue to focus on increasing our parts and service revenue, specifically our customer pay business, over the long-term by upgrading equipment, focusing on improving customer retention and customer satisfaction, and capitalizing on our dealer training programs.
Finance and Insurance, net—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2017 | | 2016 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Finance and insurance, net | $ | 275.2 |
| | $ | 261.0 |
| | $ | 14.2 |
| | 5 | % |
Finance and insurance, net per vehicle sold | $ | 1,556 |
| | $ | 1,437 |
| | $ | 119 |
| | 8 | % |
| | | | | | | |
Same Store: | | | | | | | |
Finance and insurance, net | $ | 266.9 |
| | $ | 249.1 |
| | $ | 17.8 |
| | 7 | % |
Finance and insurance, net per vehicle sold | $ | 1,562 |
| | $ | 1,448 |
| | $ | 114 |
| | 8 | % |
F&I revenue increased by $14.2 million (5%) during 2017 when compared to 2016 primarily as a result of a $119 (8% ) increase in F&I per vehicle retailed partially offset by a 3% decrease in new and used retail unit sales
On a same store basis F&I revenue increased by $17.8 million (7%) in 2017 when compared to 2016 primarily as a result of a $114 (8%) increase in F&I per vehicle retailed partially offset by a 1% decrease in new and used retail unit sales.
For the year ended December 31, 2017, we benefited from increased up-front commissions as a result of our amended agreement with our primary insurance products underwriter which became effective during the fourth quarter of 2016.
Selling, General, and Administrative Expense— |
| | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % of Gross Profit Increase (Decrease) |
| 2017 | | % of Gross Profit | | 2016 | | % of Gross Profit | |
| (Dollars in millions) |
As Reported: | | | | | | | | | | | |
Personnel costs | $ | 348.7 |
| | 33.0 | % | | $ | 343.1 |
| | 32.4 | % | | $ | 5.6 |
| | 0.6 | % |
Sales compensation | 111.1 |
| | 10.5 | % | | 112.0 |
| | 10.6 | % | | (0.9 | ) | | (0.1 | )% |
Share-based compensation | 13.6 |
| | 1.3 | % | | 12.0 |
| | 1.1 | % | | 1.6 |
| | 0.2 | % |
Outside services | 80.8 |
| | 7.7 | % | | 78.3 |
| | 7.4 | % | | 2.5 |
| | 0.3 | % |
Advertising | 30.3 |
| | 2.9 | % | | 34.0 |
| | 3.2 | % | | (3.7 | ) | | (0.3 | )% |
Rent | 26.7 |
| | 2.5 | % | | 29.9 |
| | 2.8 | % | | (3.2 | ) | | (0.3 | )% |
Utilities | 15.4 |
| | 1.5 | % | | 15.5 |
| | 1.5 | % | | (0.1 | ) | | — | % |
Insurance | 13.4 |
| | 1.3 | % | | 15.9 |
| | 1.5 | % | | (2.5 | ) | | (0.2 | )% |
Other | 89.7 |
| | 8.4 | % | | 91.8 |
| | 8.7 | % | | (2.1 | ) | | (0.3 | )% |
Selling, general, and administrative expense | $ | 729.7 |
| | 69.1 | % | | $ | 732.5 |
| | 69.2 | % | | $ | (2.8 | ) | | (0.1 | )% |
Gross profit | $ | 1,055.9 |
| | | | $ | 1,058.7 |
| | | | | | |
| | | | | | | | | | | |
Same Store: | | | | | | | | | | | |
Personnel costs | $ | 338.2 |
| | 32.9 | % | | $ | 327.1 |
| | 32.3 | % | | $ | 11.1 |
| | 0.6 | % |
Sales compensation | 107.2 |
| | 10.4 | % | | 106.6 |
| | 10.5 | % | | 0.6 |
| | (0.1 | )% |
Share-based compensation | 13.6 |
| | 1.3 | % | | 12.1 |
| | 1.2 | % | | 1.5 |
| | 0.1 | % |
Outside services | 78.7 |
| | 7.7 | % | | 73.6 |
| | 7.3 | % | | 5.1 |
| | 0.4 | % |
Advertising | 28.9 |
| | 2.8 | % | | 30.1 |
| | 3.0 | % | | (1.2 | ) | | (0.2 | )% |
Rent | 26.7 |
| | 2.6 | % | | 29.9 |
| | 3.0 | % | | (3.2 | ) | | (0.4 | )% |
Utilities | 15.0 |
| | 1.5 | % | | 14.5 |
| | 1.4 | % | | 0.5 |
| | 0.1 | % |
Insurance | 13.0 |
| | 1.3 | % | | 14.9 |
| | 1.5 | % | | (1.9 | ) | | (0.2 | )% |
Other | 87.8 |
| | 8.5 | % | | 87.9 |
| | 8.6 | % | | (0.1 | ) | | (0.1 | )% |
Selling, general, and administrative expense | $ | 709.1 |
| | 69.0 | % | | $ | 696.7 |
| | 68.8 | % | | $ | 12.4 |
| | 0.2 | % |
Gross profit | $ | 1,028.1 |
| | | | $ | 1,013.3 |
| | | | | | |
SG&A expense as a percentage of gross profit decreased 10 basis points from 69.2% in 2016 to 69.1% in 2017. The decrease in SG&A expense is primarily attributable to decreases in advertising, rent, and insurance, partially offset by increases in higher personnel costs and outside services.
Same store SG&A expense as a percentage of gross profit increased by 20 basis points, from 68.8% in 2016 to 69.0% in 2017. The increase in SG&A expense is primarily attributable to higher personnel costs and higher outside services predominately related to our investments in technologies to improve our customer experience and productivity, partially offset by decreases in insurance, advertising, and rent expense.
Depreciation and Amortization Expense —
The $1.4 million (5%) increase in depreciation and amortization expense during 2017 compared to 2016, was primarily the result of a higher depreciable basis of assets placed in service during 2016.
Franchise rights impairment —
We assessed our manufacturer franchise rights for impairment by comparing the present value of cash flows attributable to each franchise right to its carrying value. As a result of our impairment testing, we recognized a $5.1 million pretax non-cash charge.
Other Operating Expense (income), net —
Other operating expense (income), net includes gains and losses from the sale of property and equipment, income derived from lease arrangements, and other non-core operating items. The $1.3 million in other operating expense (income), net for 2017, is primarily due to recognized expenses associated with lease terminations of $3.1 million, partially offset by $0.8 million of other income, and a $0.9 million gain recognized for legal settlements.
Floor Plan Interest Expense —
The $3.4 million (18%) increase in floor plan interest expense during 2017 compared to 2016, was primarily the result of higher interest rates throughout 2017 compared with 2016.
Income Tax Expense —
The $30.6 million (30%) decrease in income tax expense, is primarily due to the $58.7 million (22%) decrease in income before income taxes in 2017 compared to 2016 coupled with a decrease in our effective tax rate. Our effective tax rate was 33.5% in 2017 compared to 37.6% in 2016.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affects 2017, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%. As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax liabilities as of December 31, 2017 and recorded a $7.9 million reduction based on our provisional estimate, with the offset recorded as a reduction to income tax expense for the year ended December 31, 2017. Our effective tax rate decreased primarily as a result of the revaluation of our net deferred tax liability balance.
Refer to Note 15 to the consolidated financial statements for further information regarding income taxes.
RESULTS OF OPERATIONS
The Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
| (Dollars in millions, except per share data) |
REVENUE: | | | | | | | |
New vehicle | $ | 3,611.9 |
| | $ | 3,652.5 |
| | $ | (40.6 | ) | | (1 | )% |
Used vehicle | 1,876.4 |
| | 1,931.7 |
| | (55.3 | ) | | (3 | )% |
Parts and service | 778.5 |
| | 740.7 |
| | 37.8 |
| | 5 | % |
Finance and insurance, net | 261.0 |
| | 263.4 |
| | (2.4 | ) | | (1 | )% |
TOTAL REVENUE | 6,527.8 |
| | 6,588.3 |
| | (60.5 | ) | | (1 | )% |
GROSS PROFIT: | | | | | | | |
New vehicle | 187.1 |
| | 203.0 |
| | (15.9 | ) | | (8 | )% |
Used vehicle | 127.3 |
| | 131.8 |
| | (4.5 | ) | | (3 | )% |
Parts and service | 483.3 |
| | 462.6 |
| | 20.7 |
| | 4 | % |
Finance and insurance, net | 261.0 |
| | 263.4 |
| | (2.4 | ) | | (1 | )% |
TOTAL GROSS PROFIT | 1,058.7 |
| | 1,060.8 |
| | (2.1 | ) | | — | % |
OPERATING EXPENSES: | | | | | | | |
Selling, general, and administrative | 732.5 |
| | 729.9 |
| | 2.6 |
| | — | % |
Depreciation and amortization | 30.7 |
| | 29.5 |
| | 1.2 |
| | 4 | % |
Other operating income, net | (2.3 | ) | | (0.2 | ) | | (2.1 | ) | | NM |
|
INCOME FROM OPERATIONS | 297.8 |
| | 301.6 |
| | (3.8 | ) | | (1 | )% |
OTHER EXPENSES (INCOME): | | | | | | | |
Floor plan interest expense | 19.3 |
| | 16.1 |
| | 3.2 |
| | 20 | % |
Other interest expense, net | 53.1 |
| | 44.0 |
| | 9.1 |
| | 21 | % |
Swap interest expense | 3.1 |
| | 3.0 |
| | 0.1 |
| | 3 | % |
Gain on divestitures | (45.5 | ) | | (34.9 | ) | | (10.6 | ) | | 30 | % |
Total other expenses, net | 30.0 |
| | 28.2 |
| | 1.8 |
| | 6 | % |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 267.8 |
| | 273.4 |
| | (5.6 | ) | | (2 | )% |
Income tax expense | 100.6 |
| | 104.0 |
| | (3.4 | ) | | (3 | )% |
INCOME FROM CONTINUING OPERATIONS | 167.2 |
| | 169.4 |
| | (2.2 | ) | | (1 | )% |
Discontinued operations, net of tax | — |
| | (0.2 | ) | | 0.2 |
| | (100 | )% |
NET INCOME | $ | 167.2 |
| | $ | 169.2 |
| | $ | (2.0 | ) | | (1 | )% |
Income from continuing operations per common share—Diluted | $ | 7.40 |
| | $ | 6.42 |
| | $ | 0.98 |
| | 15 | % |
Net income per common share—Diluted | $ | 7.40 |
| | $ | 6.41 |
| | $ | 0.99 |
| | 15 | % |
NM—Not Meaningful
|
| | | | | |
| For the Year Ended December 31, |
| 2016 | | 2015 |
REVENUE MIX PERCENTAGES: | | | |
New vehicles | 55.3 | % | | 55.4 | % |
Used retail vehicles | 25.7 | % | | 26.1 | % |
Used vehicle wholesale | 3.1 | % | | 3.3 | % |
Parts and service | 11.9 | % | | 11.2 | % |
Finance and insurance, net | 4.0 | % | | 4.0 | % |
Total revenue | 100.0 | % | | 100.0 | % |
GROSS PROFIT MIX PERCENTAGES: | | | |
New vehicles | 17.7 | % | | 19.1 | % |
Used retail vehicles | 12.3 | % | | 12.9 | % |
Used vehicle wholesale | (0.3 | )% | | (0.4 | )% |
Parts and service | 45.6 | % | | 43.6 | % |
Finance and insurance, net | 24.7 | % | | 24.8 | % |
Total gross profit | 100.0 | % | | 100.0 | % |
GROSS PROFIT MARGIN | 16.2 | % | | 16.1 | % |
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT | 69.2 | % | | 68.8 | % |
Total revenue during 2016 decreased by $60.5 million (1%) compared to 2015, due to a $55.3 million (3%) decrease in used vehicle revenue, a $40.6 million (1%) decrease in new vehicle revenue, and a $2.4 million (1%) decrease in F&I revenue, partially offset by a $37.8 million (5%) increase in parts and service revenue. The $2.1 million decrease in gross profit during 2016, was a result of a $15.9 million (8%) decrease in new vehicle gross profit, a $4.5 million (3%) decrease in used vehicle gross profit, and a $2.4 million (1%) decrease in F&I gross profit, partially offset by a $20.7 million (4%) increase in parts and service gross profit. Our total gross profit margin increased 10 basis points to 16.2%, primarily due to our parts and service business, which has higher margins than new and used vehicle sales, representing a larger percentage of our total revenue for the year ended 2016 compared to the year ended 2015.
Income from operations during 2016 decreased by $3.8 million (1%) compared to 2015, primarily due to the $2.1 million decrease in gross profit, increases in SG&A expenses and depreciation and amortization of $2.6 million and $1.2 million, respectively, partially offset by a $2.1 million increase in other operating income, net. Total other expenses, net increased by $1.8 million, primarily due to increase in floorplan interest expense and other interest expense, net of $3.2 million and $9.1 million respectively, partially offset by a $10.6 million increase in the gain on divestitures. As a result, income from continuing operations before income taxes decreased by $5.6 million (2%) to $267.8 million in 2016. The decrease in income from continuing operations before income taxes, resulted in a decrease in income tax expense of $3.4 million (3%). Net income decreased by $2.0 million (1%) to $167.2 million in 2016.
We assess the organic growth of our revenue and gross profit on a same store basis. As such, for the following discussion, same store amounts consist of information from dealerships for identical months in each comparative period, commencing with the first month we owned the dealership. Additionally, amounts related to divested dealerships are excluded from each comparative period.
New Vehicle—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 1,251.3 |
| | $ | 1,302.6 |
| | $ | (51.3 | ) | | (4 | )% |
Import | 1,617.8 |
| | 1,667.5 |
| | (49.7 | ) | | (3 | )% |
Domestic | 742.8 |
| | 682.4 |
| | 60.4 |
| | 9 | % |
Total new vehicle revenue | $ | 3,611.9 |
| | $ | 3,652.5 |
| | $ | (40.6 | ) | | (1 | )% |
Gross profit: | | | | | | | |
Luxury | $ | 84.4 |
| | $ | 87.2 |
| | $ | (2.8 | ) | | (3 | )% |
Import | 68.9 |
| | 77.3 |
| | (8.4 | ) | | (11 | )% |
Domestic | 33.8 |
| | 38.5 |
| | (4.7 | ) | | (12 | )% |
Total new vehicle gross profit | $ | 187.1 |
| | $ | 203.0 |
| | $ | (15.9 | ) | | (8 | )% |
New vehicle units: | | | | | | | |
Luxury | 23,875 |
| | 25,441 |
| | (1,566 | ) | | (6 | )% |
Import | 58,466 |
| | 61,633 |
| | (3,167 | ) | | (5 | )% |
Domestic | 20,019 |
| | 18,907 |
| | 1,112 |
| | 6 | % |
Total new vehicle units | 102,360 |
| | 105,981 |
| | (3,621 | ) | | (3 | )% |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Luxury | $ | 1,226.5 |
| | $ | 1,253.5 |
| | $ | (27.0 | ) | | (2 | )% |
Import | 1,544.6 |
| | 1,514.4 |
| | 30.2 |
| | 2 | % |
Domestic | 667.8 |
| | 639.7 |
| | 28.1 |
| | 4 | % |
Total new vehicle revenue | $ | 3,438.9 |
| | $ | 3,407.6 |
| | $ | 31.3 |
| | 1 | % |
Gross profit: | | | | | | | |
Luxury | $ | 82.4 |
| | $ | 83.7 |
| | $ | (1.3 | ) | | (2 | )% |
Import | 66.4 |
| | 71.2 |
| | (4.8 | ) | | (7 | )% |
Domestic | 29.8 |
| | 36.0 |
| | (6.2 | ) | | (17 | )% |
Total new vehicle gross profit | $ | 178.6 |
| | $ | 190.9 |
| | $ | (12.3 | ) | | (6 | )% |
New vehicle units: | | | | | | | |
Luxury | 23,424 |
| | 24,539 |
| | (1,115 | ) | | (5 | )% |
Import | 55,960 |
| | 56,224 |
| | (264 | ) | | — | % |
Domestic | 17,804 |
| | 17,669 |
| | 135 |
| | 1 | % |
Total new vehicle units | 97,188 |
| | 98,432 |
| | (1,244 | ) | | (1 | )% |
New Vehicle Metrics—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
As Reported: | | | | | | | |
Revenue per new vehicle sold | $ | 35,286 |
| | $ | 34,464 |
| | $ | 822 |
| | 2 | % |
Gross profit per new vehicle sold | $ | 1,828 |
| | $ | 1,915 |
| | $ | (87 | ) | | (5 | )% |
New vehicle gross margin | 5.2 | % | | 5.6 | % | | (0.4 | )% | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 3,535 |
| | $ | 3,428 |
| | $ | 107 |
| | 3 | % |
New vehicle gross margin | 6.7 | % | | 6.7 | % | | — | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,178 |
| | $ | 1,254 |
| | $ | (76 | ) | | (6 | )% |
New vehicle gross margin | 4.3 | % | | 4.7 | % | | (0.4 | )% | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,688 |
| | $ | 2,036 |
| | $ | (348 | ) | | (17 | )% |
New vehicle gross margin | 4.5 | % | | 5.6 | % | | (1.1 | )% | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per new vehicle sold | $ | 35,384 |
| | $ | 34,619 |
| | $ | 765 |
| | 2 | % |
Gross profit per new vehicle sold | $ | 1,838 |
| | $ | 1,939 |
| | $ | (101 | ) | | (5 | )% |
New vehicle gross margin | 5.2 | % | | 5.6 | % | | (0.4 | )% | | |
| | | | | | | |
Luxury: | | | | | | | |
Gross profit per new vehicle sold | $ | 3,518 |
| | $ | 3,411 |
| | $ | 107 |
| | 3 | % |
New vehicle gross margin | 6.7 | % | | 6.7 | % | | — | % | | |
Import: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,187 |
| | $ | 1,266 |
| | $ | (79 | ) | | (6 | )% |
New vehicle gross margin | 4.3 | % | | 4.7 | % | | (0.4 | )% | | |
Domestic: | | | | | | | |
Gross profit per new vehicle sold | $ | 1,674 |
| | $ | 2,037 |
| | $ | (363 | ) | | (18 | )% |
New vehicle gross margin | 4.5 | % | | 5.6 | % | | (1.1 | )% | | |
New vehicle revenue decreased by $40.6 million (1%), primarily as a result of a 3% decrease in new vehicle units sold, partially offset by a 2% increase in revenue per new vehicle sold. Same store new vehicle revenue increased by $31.3 million (1%) as a result of a 2% increase in revenue per new vehicle sold, partially offset by a 1% decrease in new vehicle units sold.
U.S. new vehicle sales were 17.6 million in 2016, which was relatively stable compared to 17.5 million in 2015. Our 1% decrease in same store unit volumes, was primarily the result of a 5% decrease in luxury units, partially offset by a 1% increase in domestic units. We attribute the decrease in luxury unit volumes to a consumer preference shift from cars to trucks, due in part to lower gas prices, which tends to favor domestic brands.
Same store new vehicle gross profit in 2016 decreased by $12.3 million (6%), as a result of the 1% decrease in unit volumes and a 5% decrease in gross profit per new vehicle sold. New vehicle gross margin in 2016 decreased by 40 basis points to 5.2%, primarily attributable to the decrease in luxury unit volumes, which have higher margins than import and domestic vehicles, reduced manufacturer incentives and increased competition in the marketplace for import and domestic vehicles.
Used Vehicle—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
| (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenues | $ | 1,675.0 |
| | $ | 1,717.5 |
| | $ | (42.5 | ) | | (2 | )% |
Used vehicle wholesale revenues | 201.4 |
| | 214.2 |
| | (12.8 | ) | | (6 | )% |
Used vehicle revenue | $ | 1,876.4 |
| | $ | 1,931.7 |
| | $ | (55.3 | ) | | (3 | )% |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 131.0 |
| | $ | 136.1 |
| | $ | (5.1 | ) | | (4 | )% |
Used vehicle wholesale gross profit | (3.7 | ) | | (4.3 | ) | | 0.6 |
| | (14 | )% |
Used vehicle gross profit | $ | 127.3 |
| | $ | 131.8 |
| | $ | (4.5 | ) | | (3 | )% |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 79,259 |
| | 82,589 |
| | (3,330 | ) | | (4 | )% |
| | | | | | | |
Same Store: | | | | | | | |
Revenue: | | | | | | | |
Used vehicle retail revenues | $ | 1,578.0 |
| | $ | 1,561.3 |
| | $ | 16.7 |
| | 1 | % |
Used vehicle wholesale revenues | 191.9 |
| | 198.2 |
| | (6.3 | ) | | (3 | )% |
Used vehicle revenue | $ | 1,769.9 |
| | $ | 1,759.5 |
| | $ | 10.4 |
| | 1 | % |
Gross profit: | | | | | | | |
Used vehicle retail gross profit | $ | 123.6 |
| | $ | 125.1 |
| | $ | (1.5 | ) | | (1 | )% |
Used vehicle wholesale gross profit | (3.2 | ) | | (3.1 | ) | | (0.1 | ) | | 3 | % |
Used vehicle gross profit | $ | 120.4 |
| | $ | 122 |
| | $ | (1.6 | ) | | (1 | )% |
Used vehicle retail units: | | | | | | | |
Used vehicle retail units | 74,027 |
| | 74,312 |
| | (285 | ) | | — | % |
Used Vehicle Metrics—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
As Reported: | | | | | | | |
Revenue per used vehicle retailed | $ | 21,133 |
| | $ | 20,796 |
| | $ | 337 |
| | 2 | % |
Gross profit per used vehicle retailed | $ | 1,653 |
| | $ | 1,648 |
| | $ | 5 |
| | — | % |
Used vehicle retail gross margin | 7.8 | % | | 7.9 | % | | (0.1 | )% | | |
| | | | | | | |
Same Store: | | | | | | | |
Revenue per used vehicle retailed | $ | 21,317 |
| | $ | 21,010 |
| | $ | 307 |
| | 1 | % |
Gross profit per used vehicle retailed | $ | 1,670 |
| | $ | 1,683 |
| | $ | (13 | ) | | (1 | )% |
Used vehicle retail gross margin | 7.8 | % | | 8 | % | | (0.2 | )% | | |
Used vehicle revenue decreased by $55.3 million (3%), as a result of a 4% decrease in used vehicle retail units sold, partially offset by a 2% increase in revenue per used vehicle retailed. Same store used vehicle revenue increased by $10.4 million (1%), due to a 1% increase in revenue per used vehicle retailed.
In 2016, same store used vehicle retail gross profit decreased by $1.5 million (1%), resulting in a slight decrease in gross margin from 8.0% to 7.8% in 2016. We primarily attribute the 20 basis point decrease in same store used vehicle retail gross profit margin, to increased competition and price transparency within the used vehicle marketplace. In addition, our effort to retail more used vehicles, specifically in the fourth quarter of 2016, resulted in lower margins on used vehicles, but delivered on our strategic focus to grow our reconditioning and preparation and finance and insurance businesses.
Parts and Service—
|
| | | | | | | | | | | | | | |
| For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
| (Dollars in millions) |
As Reported: | | | | | | | |
Parts and service revenue | $ | 778.5 |
| | $ | 740.7 |
| | $ | 37.8 |
| | 5 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | $ | 268.2 |
| | $ | 250.9 |
| | $ | 17.3 |
| | 7 | % |
Warranty | 73.7 |
| | 71.0 |
| | 2.7 |
| | 4 | % |
Wholesale parts | 20.7 |
| | 21.2 |
| | (0.5 | ) | | (2 | )% |
Parts and service gross profit, excluding reconditioning and preparation | $ | 362.6 |
| | $ | 343.1 |
| | $ | 19.5 |
| | 6 | % |
Parts and service gross margin, excluding reconditioning and preparation | 46.6 | % | | 46.3 | % | | 0.3 | % | | |
Reconditioning and preparation | 120.7 |
| | 119.5 |
| | 1.2 |
| | 1 | % |
Total parts and service gross profit | $ | 483.3 |
| | $ | 462.6 |
| | $ | 20.7 |
| | 4 | % |
Total parts and service gross margin | 62.1 | % | | 62.5 | % | | (0.4 | )% | | |
| | | | | | | |
Same Store: | | | | | | | |
Parts and service revenue | $ | 736.1 |
| | $ | 683.4 |
| | $ | 52.7 |
| | 8 | % |
Parts and service gross profit: | | | | | | | |
Customer pay | $ | 255.1 |
| | $ | 234.6 |
| | $ | 20.5 |
| | 9 | % |
Warranty | 70.3 |
| | 65.4 |
| | 4.9 |
| | 7 | % |
Wholesale parts | 19.2 |
| | 18.9 |
| | 0.3 |
| | 2 | % |
Parts and service gross profit, excluding reconditioning and preparation | $ | 344.6 |
| | $ | 318.9 |
| | $ | 25.7 |
| | 8 | % |
Parts and service gross margin, excluding reconditioning and preparation | 46.8 | % | | 46.7 | % | | 0.1 | % | | |
Reconditioning and preparation | 114.3 |
| | 109.4 |
| | 4.9 |
| | 4 | % |
Total parts and service gross profit | $ | 458.9 |
| | $ | 428.3 |
| | $ | 30.6 |
| | 7 | % |
Total parts and service gross margin | 62.3 | % | | 62.7 | % | | (0.4 | )% | | |
The $37.8 million (5%) increase in parts and service revenue was primarily the result of a $29.8 million (6%) increase in customer pay revenue and a $9.6 million (7%) increase in warranty revenue. Same store parts and service revenue increased by $52.7 million (8%) from $683.4 million in 2015 to $736.1 million in 2016. The increase in same store parts and service revenue was primarily due to a $37.3 million (8%) increases in customer pay revenue and a $13.3 million (11%) increase in warranty revenue. On a same store basis our parts and service gross margin decreased by 40 basis points, primarily due to a shift in parts and service revenue towards customer pay and warranty.
Parts and service gross profit, excluding reconditioning and preparation, increased by $19.5 million (6%) to $362.6 million and same store gross profit, excluding reconditioning and preparation, increased by $25.7 million (8%) to $344.6 million. The increase in same store gross profit is primarily due to ana $60.1 million (15%) increase in customer pay gross profit and a $3.2 million (11%) increase in wholesale parts gross profit, partially offset by a $5.7 million (7%) decrease in warranty gross profit. As a result of the shortage of new vehicle inventory, many customers have elected to keep their current vehicles longer which has continued to benefit from our strategic focus to improvegenerated additional customer retentionpay and wholesale parts gross profit for the recent trendparts and service departments.
Finance and Insurance, net—
| | | | For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| | For the Year Ended December 31, | | Increase (Decrease) | | % Change |
| 2016 | | 2015 | |
| (Dollars in millions, except for per vehicle data) | (Dollars in millions, except for per vehicle data) |
As Reported: | | | | | | | |
Finance and insurance, net | $ | 261.0 |
| | $ | 263.4 |
| | $ | (2.4 | ) | | (1 | )% |
Finance and insurance, net | |
Finance and insurance, net | | $ | 670.9 | | | $ | 402.7 | | | $ | 268.2 | | | 67 | % |
Finance and insurance, net per vehicle sold | $ | 1,437 |
| | $ | 1,397 |
| | $ | 40 |
| | 3 | % | Finance and insurance, net per vehicle sold | $ | 2,217 | | | $ | | $ | 1,872 | | | $ | | $ | 345 | | | 18 | | 18 | % |
| | | | | | | |
Same Store: | | | | | | | |
Same Store: | |
Same Store: | |
Finance and insurance, net | |
Finance and insurance, net | |
Finance and insurance, net | $ | 247.6 |
| | $ | 243.3 |
| | $ | 4.3 |
| | 2 | % | $ | 403.0 | | | $ | | $ | 362.7 | | | $ | | $ | 40.4 | | | 11 | | 11 | % |
Finance and insurance, net per vehicle sold | $ | 1,446 |
| | $ | 1,408 |
| | $ | 38 |
| | 3 | % | Finance and insurance, net per vehicle sold | $ | 2,339 | | | $ | | $ | 1,883 | | | $ | | $ | 456 | | | 24 | | 24 | % |