Asbury Automotive Group, Inc. (ABG) Earnings Call Transcript & Summary

Greetings, and welcome to the Asbury Automotive Group Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeves, Vice President of Finance and Investor Relations. Thank you, sir. You may begin.

Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's Second Quarter 2026 Earnings Call. The press release detailing Asbury's second quarter results was issued earlier this morning and is posted on our website at investor.asburyauto.com. Participating with me today are Dan Clara, our President and Chief Executive Officer; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and will be available later today for any follow-up questions. . Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts and current expectations, each of which is subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 31, 2025, and any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We've also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our second quarter results. It is my pleasure to now hand the call over to our President and CEO, Dan Clara. Dan?

Thank you, Chris, and good morning, everyone. Welcome to our second quarter earnings call. I want to begin my first earnings call as Asbury's CEO, by thanking our team members across the country for the work they do every day to serve our guests and support one another. Your commitment, resilience and focus on continuous improvement are what makes this company strong. As we noted in our prior quarter commentary, 2026 is a year of transition for Asbury as we finalized the rollout of Tekion across our store base, focus on growth through operational improvements and continue our balanced approach to capital allocation. . Our results continue to reflect the investments associated with completing the Tekion rollout while simultaneously operating our legacy systems. This investment positions us to capture meaningful operating efficiencies as we anticipate completion of the rollout by October of this year. Rolling out a new DMS at this scale is a significant undertaking, I am proud of our team members' commitment to making this transition successful. Crossing the 70% implementation milestone is important because an increasing percentage of our store base is now positioned to benefit from a common operating platform. Importantly, the operational improvements we're seeing are not isolated. Markets that have been on Tekion the longest continue to demonstrate better productivity, stronger customer pay performance, higher technician efficiency and improving sales effectiveness. For example, our Koons, Georgia and Florida markets have at least 5 months post conversion under their belts. Just looking at the month of June, those stores grew average units per salesperson by 12% and increased the dollar per technician by 10%. These are just a few of the operating metrics we expect it to improve as stores mature on the platform. Our strategic initiatives, which I will refer to as our 5 pillars are focused on increasing new vehicle market share, reestablishing consistent growth in customer pay gross profit, driving profitable volume growth in used vehicles, managing SG&A and leveraging technology. A successful migration to Tekion remains a top priority as we approach our final remaining stores. Collectively, these pillars are not a changing direction. They represent a sharpened way of executing the priorities that will drive growth and returns for our shareholders. On the capital allocation front, we continue deploying capital into our own shares because we believe our stock represents an attractive long-term investment while maintaining ample liquidity and flexibility. In the first 2 quarters combined, we have repurchased 7% of our 2025 ending share count. Michael will provide additional details on our approach to capital allocation. And now I will speak to our operational results on a same-store basis unless otherwise noted. Starting with new vehicles. New units were down 6%, new PVRs were $3,896 on a same-store basis and $3,124 on an all-store basis. with flattening sequential declines indicating we are near normalized levels. We ended the quarter with new day supply of 53 days, a healthy level that supports stabilizing PVR. Next, turning to used vehicles. We earn the used retail PVR of $1,927, a sequential increase of 5% on effectively the same store volume as the first quarter. Our used vehicle strategy is already producing sequential improvement while positioning us for higher volume over time. As a reminder, our used vehicle strategy has been focused on maintaining discipline rather than chasing volume for volume's sake with an emphasis on maximizing gross profit. In May, we began shifting our approach towards driving higher used vehicle volume while still maintaining multi PVRs. We are beginning to see positive results from this strategy. As we continue deploying this used vehicle strategy across the organization, I expect to see increased used vehicle volume as we move into the fourth quarter of 2026. We're also continuing to invest in our appraisal and pricing tools while maintaining discipline in our sourcing of vehicles from consumers, off-lease channels, along with strategic acquisitions through the office. Finally, we ended the quarter with a 37-day supply. Moving to F&I. We earned an F&I PVR of $2,214, and finally, in the second quarter, our total front-end yield per vehicle was $4,698. Next, on parts and service. Our customer pay business was flat year-over-year, and our overall parts and service gross profit was slightly down. As I mentioned earlier, it takes 5 to 6 months to see operational improvements from our DMS change. A large number of transition stores are still within this window, and we expect a return to normalized growth levels in the coming quarters. We did see better traction in June, where total same-store fixed gross profit was up 4%. Now I'd like to quickly talk about continued focus on operational efficiency. Along with growing gross profit, cost discipline remains a top priority, and we measure ourselves on how well we contain expenses in order to drive a strong operating margin. Our same-store adjusted SG&A as a percentage of gross profit was 65.3% in the quarter. Once all stores are converted to Tekion and we begin to gain all its efficiencies, we believe our SG&A can get to the low 60% range by the end of 2027. We also continue to invest in AI across every department in the company. Whether in operations or support, we've seen meaningful opportunities to improve efficiency as same-store team members and enhance the guest experience. As we enter the second half of the year, we have greater visibility into the completion of our technology rollout, encouraging operational trends in our mature tech end markets, a healthy balance sheet meaningful liquidity and significant flexibility to continue investing in our business while returning capital to our shareholders. We believe that the foundation we're building today positions us very well for long-term value creation. And with that, I'll now pass the call to Michael to discuss our financial results for the quarter. Michael?

Thank you, Dan, and good morning, everybody. I'll start with our high-level financial results for the second quarter. We generated $4.4 billion in revenue, earned a gross profit of $753 million and a gross profit margin of 17.2%, and we delivered an adjusted operating margin of 5.3%. Our adjusted net income was $125 million. Our adjusted EBITDA was $235 million and adjusted EPS was $6.82 for the quarter. In addition, the noncash deferral headwind due to TCA this quarter was $0.66 per share. Our adjusted EPS would have been $7.48 without the deferral impact. Adjusted net income for the second quarter of 2026 excludes net of tax, $4 million related to Tekion implementation expenses, $3 million of noncash asset impairments weather-related losses and $1 million related to duplicate DMS related expenses. Adjusted SG&A as a percentage of gross profit on an all-store basis came in at 66%, in line with our expectations, a 260 bps improvement over the first quarter of this year. We expect gradual improvement throughout the year in our SG&A leverage. There are some frictional costs of our Tekion rollout not associated with the implementation or duplicative costs that are short term in nature that ease over time as the stores become more efficient with the technology, as Dan mentioned. With 30% of our store base remain to be rolled out as of today, the third quarter will be a little heavier lift compared to the second quarter in order to complete the rollout. We have already transitioned 13 stores in July. We see a path to start realizing some of the cost savings in late 2026 and into 2027. Next, the adjusted tax rate for the quarter was 24.3%, and upside to our initial forecast, we expect the effective tax rate to be approximately 25% for the remainder of the year. TCA generated $5 million of pretax income in the second quarter. The negative noncash deferral impact for the quarter net of tax, about $12 million. We anticipate implementing TCA to the chamber stores in the second half of this year to complete the rollout to the company. We generated $305 million of adjusted operating cash flow year-to-date. Excluding real estate purchases, we spent $117 million of capital expenditures in the first half of the year and still anticipate approximately $250 million in CapEx spend for the full year 2026. Adjusted free cash flow was $188 million through the end of June. We ended the quarter with $966 million of liquidity comprised of floor plan offset accounts, availability on both our used line and revolving credit facility and cash, excluding cash in Total Care Auto. Our transaction adjusted net leverage ratio was 3.4x at the end of the second quarter. As Dan mentioned, we took the opportunity to lean more heavily in the buybacks during the quarter, purchasing 668,000 shares for $131 million. On a year-to-date basis, we have bought back 1.35 million shares for $278 million. We made the strategic decision for temporarily higher leverage given the valuation of our shares and the performance outlook of our business, our target of 3.0x is still a priority for us, and we plan to reach it in early to mid 2027. And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator?

[Operator Instructions] Our first question comes from Jeff Lick with Stephens Inc.

Congrats on the progress. Dan or Michael, I was wondering if you start off with you, just talk about compared to Q1, what's changed and what's evolved? And if you could build into that, your -- the negative 6% same-store new maybe just drill down into what parts of that are kind of Tekion related versus other type of market factors and whatnot.

Yes. I think the things that changed a little bit as first quarter had the noise from the weather in January and February. So this is kind of, I'll call it, a normal quarter in terms of weather-related and those impacts. You saw a little bit of a decline in new vehicle PBR as expected, we still think 3,000 is probably the right long-term number. So we saw a little bit of a decline there, but nothing out of the ordinary. And then on SG&A, with the higher gross profits this quarter, and a little bit of an improvement on some of the stores that kind of are in that 5- to 6-month window. We saw the SG&A come down to 66%. so those are the big ones, fixed ops. We still have a lot of stores in the heart of the Tekion transition. So we're seeing the impact of fixed op still, but expect more positive results that we saw in June, we talked about the 4% growth in June. And so we expect to see continued improvement on fixed ops going forward this year. But again, we're right in the heart of the tech on rollout phase right now.

Jeff, just to add to Michael's comments, too, on the new car side, down 6% to your point, what percentage of that is Tekion and what could be some market conditions or OEM mix. From a Tekion conversion, as I stated last quarter, we still -- we don't see the immediate impact that we see with customer pay. We're technicians on the muscle memory, but there is still an adaptation period for sales managers and salespeople on just the basic blocking and tackling of Internet lead follow-up et cetera. And it is not so much about -- they know what to do. Of course, they do, but it is more about just learning the new system and navigating through it. So we see a little bit of a dip in sales when we install a new store, but it is a much faster recovery than we do on the fixed side. On the other side of the equation, too, is we had an impact on steel on the Salento stores. down 28% over last quarter. We are starting to see improvements on the inventory mix of those stores. But as you know, that takes time for it to really replace the old high-priced inventory to where -- to the new inventory that is coming in. And then the last one that I'll mention is also in some of the imports we have seen a pretty significant drop in volume, some of it having to do with the rush that there was last year to buy some of the EVs due to the incentives going away.

And then just a quick follow-up on used use grew or shrank faster, call it, same-store down 14% versus same-store down 6% for new. A lot of us tend to use that ratio of, hey, you're -- if your trade-ins or your inventory availability should maybe grow at the same rate or shrink at the same rate as new -- there's a bit of a spread there, I'm assuming that you alluded to it in the call or our prepared remarks about Tekion, maybe you can just kind of reconcile that for us and then talk about how the new strategy of ramping up volume a little bit is helping that?

Absolutely. Yes. Part of -- to your point, I mean, part of the decrease in used cars is you sell less new cars, you're going to take in less trades. And so some of that is part of that. But I would tell you, the biggest impact is just the slow but very methodical and strategic approach to moving from a strategy that we're not chasing volume and maximizing gross profit to a strategy where we are going to go more aggressively after the volume while maintaining healthy PVRs. And that has to be done in a very slow, methodical approach, because let's not forget that September is right around the corner. We all know what happens to used car valuations when September comes. And so going in and aggressively acquiring inventory just to hit a outline volume number and then having to liquidate all the agent inventory come September, October does not make sense. So the approach that we have taken is strategically acquiring inventory. We bought approximately 6,500 cars from auction last quarter. You can see the impact in our day supply from a 30 to 37 days supply. And we still have a healthy inventory where 70% of our inventory is less than 30 days. So we're starting to see the improvements. You look at also the impact that additional inventory is having in our internal gross profit. It is having a nice impact there. And as we continue to execute on this methodical approach, that's where I feel comfortable that by the -- going into the fourth quarter, you will start to see the increase in volume in year-over-year.

Our next question comes from Rajat Gupta with JPMorgan.

Just wanted to follow up on the SG&A comments and some of the Koons and Florida stores on Tekion. Given like those stores have had a bit of a larger period of seasoning with Tekion, are you able to share what the SG&A to gross is for those stores versus pre Tekion? Any directional color on that would be helpful. And then just to clarify, you are suggesting that asset growth will continue to decline in 3Q and 4Q? Just wanted to clarify that. And I have a quick follow-up.

I'll let Dan hit a few of the detailed numbers, but I don't have -- we don't have -- I don't know the SG&A by store in front of me. But just as a reminder, the Koons stores have been on it for about a year. So they're the most seasoned of the stores. The Atlanta stores went on December. So they're just in that 6-month mark at the very end of the quarter. And then the Florida stores went on in January and February. So they're really in that -- right at the end of the quarter, they hit the 5-month mark. So I'll say of that -- those 3 buckets that we gave you, one, season well past the time frame, the other ones just hit the end of that time frame right at the end of the quarter. So again, as we talked about the numbers, those are kind of the spectrum of where we are in the kind of process. From an SG&A perspective, next quarter is a pretty heavy quarter for implementations, but we still think we'll be able to shrink the SG&A percentage of growth in the third quarter. And then you'll see a continued kind of decline in fourth quarter and then into the first and second quarter. And we think we get to that low 60s number kind of in the -- towards the end of 2027 is kind of where we're projecting. So that's kind of the -- you'll see a steady decline each quarter as we go through from an SG&A perspective. But Dan, is there maybe a few more numbers on the on the sales side. But again, I just don't have the SG&A number by store in front of me.

Rajat, I'll give you -- I'll share a little bit more information. But before I share that, I can't stress enough how excited we are that 70% of our stores have already converted to Tekion, we believe this investment will deliver meaningful long-term value not just by enhancing the guest experience but also making us a lot more efficient. And so when you look out here with you a few other numbers that we have not quoted in the past. From a unit per sales manager, I'm just going to focus on Koons on a quarter-over-quarter increased 14.2% in productivity. Another number that I'll give you also is units per F&I manager again on a quarter-over-quarter sequential increase. this will be Koons increased in F&I 15.2%. So we're seeing healthy efficiencies coming from the variable and the fixed side of it. and we just cannot be more excited to finish the completion and have all the stores operating under 1 DMS so that we can gain the efficiencies and get back to normalized growth levels.

Got it. That's helpful color. And then just to follow up on the Parts & Services comments. We appreciate the comment on June, plus 4%. Is it safe to assume that the third quarter should be at least at or above 4% given the run rate? And then just zooming out is it still safe to assume that the normalized growth rate is like mid-single digits for the business. I mean we have been hearing say, like some data points around maybe labor rates are peaking out. And we are seeing consumers just downshift a bit. given affordability concerns. Curious to get your thoughts on that and obviously, the third quarter.

Yes. I'll start on the service part of it, and then Michael can jump in as well. On the first question was what do we expect for Q3. As I mentioned, as I shared in the month of June 4%, July is starting pretty similar to what -- not starting, we're almost done, but it's very similar to what we saw in June. So it's very exciting to see some level of consistency there. And as we move into the third quarter, we believe that, that low to mid-single digit in customer pay is achievable. Then you had asked me -- can you repeat the second question? There was a second part to it, please.

Just like one of the broader Parts & Services question in terms of medium, long-term normalized growth rate. We have been hearing some data points where we suggested that it's becoming harder to increase the labor rates and also some impact to traffic because of consumers down shifting due to affordability concerns. I'm just curious if you're viewing any of that at your stores.

We have not seen much of that, but I will tell you one of the good opportunities as you roll out a new DMS is it really allows you the opportunity to adjust the labor rates as you need to and in our approach is not so much about maximizing the ticket with the consumer where we only see that consumer one time is more about growing the customer payer account and growing net retention basis. so that we can have sustainable growth as we move forward. We have been able to adjust labor rates as we are rolling out Tekion. And we see that as another one of the impacts that we have of rolling out a new DMS. And when I say adjusting labor rates, obviously, is not about going up on the expense side of, it is more how can we provide a good value for the guests, while being a great guest experience. and allowing them to keep coming back from a retention basis and grow the customer pay accounts. So there is some pressure on the consumer availability out there but not that it has been impactful in our service, right?

Our next question comes from Alex Perry with Bank of America. .

I guess, first, just starting on used. I wanted to dig in a little more on your thoughts around the used vehicle procurement environment and how that should impact volumes and GPUs in the back half. Obviously, you have the sort of shifted strategy internally, but with a lot of the off-lease supply coming into the market, maybe you could just talk about how that may sort of impact GPUs and volumes in the back half?

Alex. The -- our approach to going away strategy-wise of not chasing the volume was all well thought out, trying to time with the market as to when the lease returns were going to start to come back in because we know -- the one thing that you guarantee when you go and buy a car, the auction is you're the last person standing. That means you pay the most of that car. And so realizing the margins that we expect is a little bit tougher or very tough when you're the last person standing at the auction. So therefore, when you think about our strategic approach, as we start to get this lease turns to come in, it definitely gives us the ability to enhance the amount of inventory that we have turn it faster at a better acquisition price point than if we go to the auction. And that's one of the benefits of being a franchise dealer. Those leased earnings come in. We got the first rather refusal for a lack of a better term. So that fits straight into our strategy. There's quite a few electric vehicles that are coming off lease right now. we didn't plan for the gas prices to be where they are right now, but it's actually a nice mix because we're seeing those cars coming in and also being retail in the used car market. So I see it as a benefit that we have these costs coming in. I don't see a negative impact to the gross profit. Now keep in mind, as we get more aggressive and we go after the volume, there will be an impact in the margins, but we're still going to run a healthy PVR. And as I mentioned last quarter, we have done the stress analysis. And for every additional, call it, 500 used cars that we sell, we have the ability to drop about $200, $250 a car. So we're really managing that accordingly to make sure that we get the best return for our shareholders.

That's incredibly helpful. Really good color. I guess just shifting to the new side. Can you talk a little bit more about sort of the performance by segment, especially luxury versus non-luxury and what you're seeing there and sort of expectations as we trend through the balance of the year on some of the luxury versus non luxury?

Yes. In the second quarter, luxury, from a volume standpoint, we were down 10% in luxury where imports from a unit basis on quoting same-store, we were flat. And then on domestic we were down 16%. We all know that luxury is really more of a tail end of the third quarter and going into the fourth quarter is really where luxury takes off. I don't see anything out there that is of major concern from a luxury standpoint, I believe, Lexus, BMW, Mercedes, I mean all the OEMs in the luxury arena for the most part are performing well. There's nice influx of inventory coming in, and I expect the third quarter to continue to deliver, like they always have. From an import standpoint, we're seeing a little bit of margin compression a little bit, slightly in some of the OEMs, but Toyota is still averaging 12 to 15 days supply. It is positioned for a healthy margin. So imports, I think that we have hit a stabilized level and not much fluctuation to come from where we have been.

Our next question comes from Robert Saltzman with UBS.

Is the first 1 on the pace of the Tekion rollout. So you're now at 70% of stores that's versus over 50% mentioned on the Q1 call and more than 25% in Q4. So 20% of total stores added in the quarter. by a slight slowdown from that Q1 pace positions. Any reason for that slowdown? Or is that just in line with your kind of internal rollout plan and expectations kind of add that extra 30% here between now and October.