Asbury Automotive Group Inc

Good day, ladies and gentlemen, and welcome to the Asbury Automotive Group Q4 2020 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Matt Petone. Please go ahead.

Thanks, Operator, and good morning, everyone. Welcome to Asbury Automotive Group's fourth quarter 2020 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's fourth quarter results were issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Holt, our President and Chief Executive Officer, E.J. Guido, our Chief Financial Officer, and Dan Clara, our Senior Vice President of Operations. At the conclusion of our remarks, we will open the call up for questions and I will be available later for any follow-up questions you might have. Before we begin, I 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, including those statements relating to the duration and the contemplated impact of the COVID-19 pandemic on our business and financial performance, as well as the financial projections and expectations about our products, markets, and growth. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements, including potential impacts from the COVID-19 pandemic on us, our industry, and our customers, suppliers, vendors, and business partners. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SDC from time to time, including our Form 10-K, For the year ended December 2019, 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 gap measures on our website. It is my pleasure to hand the call over to our CEO, David Holt. David?

Thanks, Matt. Good morning, everyone. Welcome to our fourth quarter earnings call. We have just reported another all-time record fourth quarter despite continued volatility and uncertainty in the economy. As SAR recovered from Q2 lows, we delivered a strong gross margin of 16.7%. which expanded 80 basis points versus Q4 of last year. We also remained very active in managing expenses, and we achieved FD&A as a percentage of gross profit of 61.4%. Our focus on gross profit and expense management once again produced a great quarter, with adjusted EPS of $4.44, up 76% over the prior year. I would also like to call out that 2020 as a whole was a record year for Asbury. For the full year, we grew adjusted EPS by 36%, increased adjusted income from operations by over 70 million to 405 million, an increase of 21% and the highest level ever. We acquired a Chrysler Jeep Dodge store in Denver from John Elway. We acquired eight Park Place dealerships, two collision centers, and one auction center in Dallas, which in total added 1.9 billion in annualized revenue. We launched Clicklane, our communication technology and ecosystem, which allows for a true online car buying and selling transaction. We publicly announced our five-year strategic plan, which targets growing the company to 20 billion in revenue by 2025. Our balance sheet remains strong due to our performance and cash flow. Our pro forma net leverage ended this quarter at 2.1 times. This will allow us to maintain a more active acquisition pipeline and grow our business strategically by deploying capital. Looking back over the last three years, we've dramatically transformed our portfolio by acquiring 2.5 billion and divesting 700 million in annualized revenue. Our acquisitions had much higher margins than our divestitures and were accretive to our overall margin. This helped us achieve our 5.7 operating margin compared to 4.6 in 2018. We will continue to optimize our portfolio in the future. Turn to our key objectives in 2021. We will continue to build a strong culture obsessed with the guest experience. Roll out our Clicklane platform to all stores by the end of Q1. Be great partners to our OEMs by delivering an exceptional and transparent guest experience. Grow our same-store revenue across all departments. Build our M&A pipeline to support our goal of acquiring $5 billion of revenue by 2025. And maintain net leverage added below three times while executing a more active capital allocation strategy. Finally, we know the only differentiator we have in a franchise system is the level of service we offer. Our strong performance is because of all the men and women in our stores who show up every day committed to serving our guests with passion and professionalism. Their incredible performance inspires all of us to be better today than we were yesterday. Our future is bright, and we look forward to sharing this journey with all of our teammates who run our business every day. We are thankful they are here, making a meaningful difference. I will now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. My remarks will pertain to our same-store performance compared to the fourth quarter of 2019. Looking at new vehicles, based on current market conditions, our focus remains on improving margins and not chasing volume. Our new gross profit per vehicle was up $779 per car, or 49% from the prior year period. All segment margins were up significantly from the prior year period. Factoring in the acquisition of Park Place, we increased our luxury mix to 48%, driving our all-store PBRs up $1,282 a car, or 79%. At the end of December, Our total new vehicle inventory was $640 million, and our day supply was 40 days, down 26 days from the prior year. As a reminder, 40 days is an average composite of all of our brands. Some of our brands were below 20-day supply during the quarter and experienced major challenges due to the lack of inventory. We expect the day supply to remain low for the first half of the year. but gradually recover toward the back half as production capacity recovers. Turning to used vehicles, our gross profit margin was 7.1 percent, up 60 basis points from the prior period, representing a gross profit per vehicle of $1,741. Similar to our new vehicle strategy in the current market condition, we focused on being opportunistic with our inventory and improving grosses to maximize profit. As a result of our performance, our used retail gross profit was up 10 percent. Our used vehicle inventory ended December at 189 million, which represents a 31-day supply, up two days from the prior year. Turning to F&I, our strong, consistent, and sustainable growth in F&I delivered an increase of $126 to $1,817 per vehicle retail. from the prior year quarter. In the fourth quarter, our front-end yield per vehicle increased $701 per car to a fourth quarter record of $3,924. In addition, if you include reconditioning gross profit, which we record in parts and service, our front-end yield per vehicle was $4,582 per car. Turning to parts and service. Although our parts and service revenue decreased in the quarter, Our business improved from the lows in April, but the recovery continues to be choppy due to the pandemic. And now, I would like to provide an update on our omnichannel initiatives. In December, we launched ClickLink, which is the latest evolution in our omnichannel strategy that we began more than five years ago. ClickLink is a communications technology ecosystem which allows for a true online car buying and selling experience. It fills many of the gaps that exist with online automotive retail platforms currently on the market. Features that are unique to this platform include penny-perfect trading values and loan payoffs, real payment figures based on local taxes and fees, a loan marketplace, which now includes more than 30 lenders, VIN-specific finance and insurance products customized to the vehicle and consumer, the ability to sign all documents online via DocuSign, in-tool service, and collision appointment scheduler. Early results and guest feedback on our ClickLink platform have been extremely encouraging. We piloted ClickLink in three stores for the full month of December, and the results have exceeded expectations. These three stores doubled their online car sales versus the prior year period. In addition, customers have commented on the great transparency, ease of use, and ability to complete a transaction in minutes. The average time it took guests to complete a total online transaction, including arranging the financing, was 14 minutes. And it took only eight minutes for an entire transaction without financing or an all-cash deal. Since the end of Q4, we've continued with our role out of click lane and expect to have all stores rolled out by the end of Q1, with the majority of stores connected during the second half of Q1. And finally, Looking at the results from our first full quarter of Park Place reconfirms why we made the acquisition. Their first full quarter contributed meaningfully to our top line and profitability results. And we are well on track to deliver the synergies we have targeted within the timeframe previously outlined. I would like to take this opportunity to express appreciation to all of our teammates in the field for their continued focus on the guest experience. their commitment to continuous improvement, and their perseverance during 2020. I will now hand the call over to P.J. to discuss our financial performance.

P.J.? Thank you, Dan, and good morning, everyone. I would like to provide some financial highlights which marked another record quarter for our company in a still uncertain macro environment. For additional details on our financial performance for the quarter, I would refer you to our financial supplement in our press release dated today, February 2nd. Overall, compared to the fourth quarter of last year, total revenue was 18% higher than last year due to completed acquisitions and improvement in F&I PVRs and higher average selling prices for both new and used. Gross margin expanded by 80 basis points to 16.7%, driven by our proactive inventory management and focus on improving gross profit per unit. Moving down the P&L, we saw SG&A as a percent of gross profit decreased by 690 basis points to 61.4%. This is due to proactive expense reductions and efficiencies gained on personnel and advertising. Our actions to maximize gross profit and control expenses resulted in a record fourth quarter adjusted operating margin of 6%, an increase of 140 basis points above the same period last year. Adjusted EPS increased by 76 percent versus the prior period, maintaining momentum from the previous quarter. Net income for the fourth quarter of 2020 was adjusted for a $3.9 million or 15 cents per diluted share pre-tax gain on a dealership divestiture. Net income for the fourth quarter of 2019 was adjusted for a $7.1 million pre-tax charge for franchise rights impairments for 27 cents per diluted share. a $600,000 pre-tax charge for real estate-related charges, or $0.03 per diluted share, and a $600,000 pre-tax gain from a legal settlement, or $0.03 per diluted share. Our effective tax rate was 24.8% for the full year 2020, compared to 24.4% in 2019. Floor plan interest expense for the quarter decreased by $4.6 million over the prior year quarter, driven primarily by lower inventory levels and lower LIBOR rates. With respect to capital deployed this quarter, we spent approximately $20 million on store improvements and real estate, and we spent approximately $80 million on debt repayments, which includes fully paying off our used loans. Also during the quarter, we divested a Ford dealership in Georgia, which generated approximately $50 million in annualized revenues. As a result of our operational performance, our balance sheet remains in a very strong position, and we ended the quarter with approximately $462 million of liquidity, comprised of cash, floor plan offset accounts, and availability on both our use line and revolving credit facilities. Also at the end of the quarter, our pro forma net leverage stood at 2.1 times, well below our targeted leverage range of 3.0 times. I would now like to make a few comments regarding our expectations for 2021. We are still operating in a volatile environment with limited visibility, but do anticipate a gradual recovery in the second half of 2021 as COVID vaccines get rolled out and OEM production capacity improves. As a result, we are planning our business for a SAR approximating 16 million units, but will remain nimble and vigilant to adapt to whatever conditions evolve. As inventories begin to normalize and the economy opens up, we believe our parts and service growth profits see the full recovery. We also believe SG&A as a percentage of growth profit should continue to benefit from active expense management and improved productivity. We are also planning for a tax rate in 2021 of approximately 25 percent and CapEx approximately $55 million. This amount excludes real estate purchases and potential lease buyout opportunities that we consider to be financing transactions. Finally, I would like to also provide a quick review of our five-year plan we unveiled at our launch of Clicklane in December. Our five-year strategic plan is to add $12 billion of revenue by 2025, expand our operating margins, and grow EPS in excess of revenue growth. Specifically, this includes driving same-store revenue growth of $2 billion over five years, acquiring $5 billion of additional revenue over five years, and adding an incremental $5 billion of revenue through the new Clicklane platform. In closing, I would also like to thank our teams across the business who continue to work tirelessly during this unprecedented time to ensure our current and long-term success. We will now turn the call over to the operator and take your questions. Operator?

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause a moment to assemble our phone queue. We'll take our first question from Rick Nelson with Stevens Incorporated. Please go ahead.

Thanks, and good morning. So I'd like to talk about same-store units, both new and used, new down six, used down nine. It sounds like you've taken a strategy where you're going to try to maximize GPUs. You know, if you could speak to that, what you think is happening to market share above million years and whether, you know, the strategy will continue.

Yeah, Rick, good morning, and thanks for the question. This is David. You know, I would tell you we went into it with the approach of we can see our day supply, where we're at, We're sitting in October. We can see what we have for inventories and what's coming by the end of the year. And we know what a large month December is for luxury. So, you know, I would tell you on the new car side, we lost unit sales because we just weren't chasing volumes because we couldn't replace the inventory. So we just thought it was a better return on our cash to maximize the gross profit as best as possible. As Dan pointed out, even with that strategy, In December, we had many stores below a 20-day supply. And that's a 20-day supply across all model lines. So individual hot models, you didn't have any day supply. So there's no question that hurt the unit sales. On the pre-owned side, again, it's not about chasing volume for us. It's about maximizing our return. We make far greater profits when we sell a vehicle that we've traded for than when we go out and purchase a vehicle. So we've tried to be more opportunistic. and at least at these challenging months when inventory is tight and prices are high at the auction, to really just maintain the gross as best we can and give the greatest returns we can. So I would tell you, you know, we sat here a quarter ago and thought by the end of the first quarter, day supply would be back up to normal. But because what's going on with the microchips and some other things, you know, it's probably going to bleed well into the second quarter before inventories gets back. You never really know how that ends up, but, we're going into each month looking at is how do we maximize our return? Even with some of those numbers, we actually exceeded market share in some markets and some we didn't. We're not looking at that short-term market share gain or loss. We're kind of looking at the overall picture in return. So we're happy with our strategy and the way it's played out so far.

Great. That's a helpful color. Also, on the inventory front, when things do normalize, it sounds like the back half of 2021 is your current expectation. Do you think you hold on to some of those GPUs? Do we go back to 2019 pre-COVID levels or your expectation there?

Sure. As a company, I don't think we'll go back to pre-COVID because the acquisition of Park Place just does move our overall numbers. Do I think that we'll maintain this when things get back to normal? I'm sure there'll be some drop-off in some areas. Very difficult to predict what incentives are going to be, what the day supply is going to be like, and what the economic conditions are. But from everything that we see, we're very excited about 2021. We see our business growing in 21 compared to 20. And, you know, there might be different things moving around in those numbers throughout, but very opportunistic about what 2021 offers. And quite honestly, the acquisition pipeline is certainly active right now. So there's a lot of good things happening in the space, and we certainly want to be disciplined and execute as best we can.

Just to follow up on that, comment about the acquisition pipeline. If you could speak to that, what you're seeing in terms of pricing out there. I know you stepped up the buyback authorization as well. Do you preference acquisitions versus buybacks at the moment?

Yeah, Rick, I would say generally overall it's what gives the greatest returns for our shareholders, but and the best way for us to deploy capital. You know, the pipeline for conversations and activity was kind of slow around the holidays. It dramatically picked up in January, and we're having a lot of meaningful conversations with different folks right now. So it's early. We'll see where it goes, but we're very engaged in a lot of conversations and excited about that. As far as the pricing and overall multiples, you know, it's a competitive space right now, and there's a lot of buyers out there. And I'm sure there's a lot of sellers that, you know, want to make sure that they're concerned about their legacy and who they sell to. So it'll be an interesting year and see what happens. But I'm sure from an M&A perspective, at least what we see so far, it should be an active year.

Great. Thanks for all of that. Sure, go ahead.

Rick, sorry, this is TJ. I would just add that, you know, we do have a capital allocation policy. And, you know, first and foremost, you know, we want to reinvest in our core business. Then we look to de-lever to the extent we're over our target. And as I mentioned earlier, we're well below our target, which means our balance sheet has capacity for acquisitions, which, as David said, we're maintaining an active pipeline. And to the extent there's cash left over in the waterfall, we would look to return to shareholders.

Great. Thanks for the color, and good luck. Thank you, Rick.

We'll take our next question from John Murphy with Bank of America. Please go ahead.

Good morning, everybody. First question on the Park Place acquisition and integration. You know, it seems like this has gone even better than planned on the integration, no hiccups whatsoever, and actually they're helping you drive the better performance performance almost immediate. I'm just curious if there's any lessons learned here on targets or the actual integration process itself, David. I mean, it just seems like it's just slid in and actually been sort of a net benefit right off the bat, which is pretty amazing for an acquisition.

Sure, John. This is David. I'll start. You know, it really just speaks to the Park Place folks and their level of professionalism. You know, changing hands, going through a buy-sell, 1,400 employees There's a lot of moving pieces, and I'm sure there's a lot of frustrated folks on the Park Place side. I think both sides went at it with the intent that there's a level of respect and trust for one another and worked through the issues that came up. But it's truly a credit to them. Now, certainly in the quarter, the luxury mix that they have and the low day supply, that benefited us as well. But I'll tell you, post-acquisition, we got exactly what we thought we were getting, which is amazing teammates who are really passionate and professional with what they do every single day and committed to what they do. I would say in the last couple of years, that's been our big difference when we look at acquisitions. We just don't look at the revenue stream. We're really interested in how the business runs and whether it would be a good steward of the business. And whether it's the Colorado acquisitions or the Indiana ones, I think so far the model that we're working on As far as when we look at acquisitions and integrate, we've been pretty successful at making sure we'd be a good steward of the business.

Okay, that's incredibly helpful. A second question around parts and service. Obviously, there's some choppiness here. The world and the markets are volatile, so it's somewhat understandable. But if you think about parts and service, when do you think that, normalizes? You know, is it, you know, post-vaccine and sort of mid, mid the, you know, mid this year to maybe the second half? Or, you know, could it normalize sooner? And how much deferred maintenance do you think is out there that you might catch up on over time?

Sure. And just as a reminder, those numbers, too, are collision numbers. And collision still maintains, you know, 20 to 30 percent back from prior year. You know, I'll tell you, the virus, while it's only been around for a year, It feels like it's been around longer, and it was dramatic when it first hit, but then it kind of cooled off through the summer and business started bouncing coming back. In the fourth quarter, you know, we went negative in parts and service in November, and we came back positive in December, and we're starting January off, you know, with a little bit more volatility. So I would tell you you know, these high positive rates that you're seeing across the country and the number of deaths a day over 4,000 are playing an impact on the parts and service business. It varies a little bit by market, but generally that's a theme. So we feel confident as the vaccines roll out and things normalize, parts and service not only comes back, it should have a nice tailwind. To your point on pent up demand with service work, that's our opinion. And the belief right now is somewhere between June and late July, early August is when we think that we should really start to get back in a groove of a normal look in parts and service. Could be sooner. It's hard to predict with what's going on with the vaccine. I mean, it's very fluid. We're all reading about it every day. But that's the way we see it right now.

I hope for all of us a little sooner, but that's helpful. And then just lastly on SG&A, obviously the last two quarters you're running in the 51% range. You know, grosses are high, right? So, I mean, the denominator has benefited to some degree. But if you think about SG&A going forward, has something structurally changed here that you think that, you know, you can operate in those 60s or maybe even better over time as quickly it takes off and you're able to, you know, leverage the whole base of your bricks and mortar?

I would say there's three main levers. You know, like I said in my statement, you know, some of the divestitures and some of the acquisitions really lifted our margins. And those were stores that had a history of higher margins business when we were lower margins. I think there's definitely going to be a sustainable pickup there. We also changed our production per employee when the downturn hit, and we've stayed disciplined with that. And to your point with ClickLane, you know, it's only three stores. It's one full month, but it's up over 100% with those three stores. Most of them were luxury brands that we tried ClickLane in. So, you know, we're very hopeful between those three levers that, you know, there's a meaningful difference there in SG&A over time as well.

Okay, but would you underwrite something in the low 60% range now, or should you really kind of tell where this is going to land?

Yeah, I would say it's still bouncing around right now. I mean, our goal through the next view, I would say, this quarter is maintaining high operating margins and maximizing our opportunity. You know, depending when we get back to normal, depending upon where margins lay, um i think we'll certainly be in a much better position from an sgna standpoint than we were pre-covered but where exactly that lands i think there's too many variables to call that right now okay thank you very much thank you we'll take our next question from ryan signal with craig hallam capital group please go ahead

Great. Thanks for taking our questions. Just want to dig in a little bit on the online, so specifically looking at slide 11 and 12. So it shows, you know, Internet leads down sequentially, or I guess year over year down a little bit. Online service appointments also kind of trending lower. I guess as you're expanding your click lane, you talk about a lot of traction you're gaining online. I guess can you just talk through the sequential decline and kind of the moving pieces there?

Yeah, so I'll talk about the decline in traffic and then the comment on Clicklane. You know, one thing is true for our industry. When you have more inventory online, you have more leads and more eyeballs on your site. So part of the traffic coming down was lack of inventory. Had we had more inventory, I don't think the leads would have been down as much. The other piece of it was, too, is trying to be more strategic with the marketing dollars, knowing we had less of an inventory. Did it really make sense to create some supply of leads where we really didn't have the product there to sell it? On the click lane side, the growth that we're talking about on click lane, I would say the material difference when we make that comment, and I'm going to compare PushStar, which most of our stores are on today, compared to click lane, it's the conversion. it's not the lead counts up with click lane. It's the conversion on click lane is up dramatically from push start.

Great. And then just on click lane, you know, full rollout by the end of Q1, you have three beta tests in December. Can you talk through the cadence of how you're going to roll that out over the next couple months, kind of all at once or staged or what the cadence plan is there?

Sure. We have the whole company set up. We're rolling out, you know, depending upon the size of the stores and when, anywhere between 8 to 12 stores a week. And we'll also include towards the tail end of the quarter Park Place, which in the fourth quarter did not offer an online transactional tool at all. So they'll get their first shot or first look at it, if you will, at the end of Q1. It wasn't at all on their sites in Q4.

Great. Thanks, guys. I'll turn it over. Good luck.

Thank you.

We'll take our next question from Adam Jonas with Morgan Stanley. Please go ahead.

Hi, everybody. Can you hear me? Forgive me. Yes. So I've got a couple questions for you here. Stop sales on IC powered vehicles. I'm just wondering if you could refresh us on, does a rapid move to EV in any way concern a long-term stakeholder about your business, including your P&S business? I'm also noticing a lot of startups are moving to direct-to-consumer models, and they insist they don't want to use existing dealer franchises anymore. Apple is entering the auto industry. It's our understanding they don't want to do a franchise dealer model, although that's not fully confirmed. They want to control the downstream distribution. If there are rules, David, that you're acquiring legacy brick-and-mortar dealerships that still sell legacy ICE OEM products, ICE and P&S, how can you assure shareholders that you're not doubling down on this ICE legacy tech at the worst possible time at the end of the ICE age? Thanks.

Sure. Sure, Adam. I would tell you that our manufacturer partners have been building quality cars for a long time, and they're all in the process of transitioning to EV, and we'll certainly go along for the ride and the journey with them and be great partners to them. And I would tell you, like any industry that has spurts, if you will, there's a lot of EV companies that are coming out. We'll see which ones make it, which ones don't, which ones consolidate. and which ones share and sell their technology. I would also tell you, as I'm sure you're aware, some of them that will be launching cars soon are literally, as we speak, working with third-party vendors to try and figure out how they're going to handle parts and service on the backside. So I don't think that's a well-thought-out model either. And I think there's something tried and true to the supply chain and mechanisms that work now. So The mechanism, whether it's ice or electrification or hybrids or whatever it might be, it doesn't really matter. We're here locally in the community to sell and service the vehicles and have been for many years and have a strong reputation and know how to do it. We're not making it up as we go or figuring out as we go or how to handle a recall.

Appreciate it, David. Thanks.

Yep. We'll take our next question. from Raja Gupta with JP Morgan. Please go ahead.

Good morning, everyone. Thanks for taking my question. You know, just to follow up on, you know, the SG&A question earlier, I'm not sure if I missed this earlier, but did you get a sense of where you expect the SG&A growth to, you know, land up, like in some sort of range that you think you want to work around? for this year, you know, just based on what our expectations are for GPUs .

Yeah, Roger, it's PJ. So, on STNA, as David mentioned, it's difficult to forecast in this environment. What we do know is, you know, the leverage we generated in Q3, Q4, you know, predominantly driven on the personnel side and then the balance in advertising and other related costs. What we have confidence in is that there are structural changes there that we will continue to benefit from in the form of higher productivity, whether it's units per salesperson, average gross per associate. We track a lot of metrics and we do see that our productivity is up and And we hope to, you know, or we're confident that we can retain that. You know, as production comes back online, again, we're looking at the latter half of the year. We do expect to see some pressure on grosses, which will put pressure on SG&A. But again, the structural changes we've made and the fact that we're very active in managing expense gives us confidence that that our SG&A will be, you know, will continue to be favorable.

Got it. And anything within the SG&A, you know, like the buckets within that, you know, any follow or any expectation around what advertising might look like, you know, particularly in the context of, you know, rolling out this ClickLinks platform and even broadening the reach of that platform. outside of just normalization, should we expect a further update beyond that, just for click lane purposes, or is that not the case?

Raj, this is David, and if I got the question wrong, I apologize. It was cutting in and out a little bit. But as it relates to marketing and click lane, if you look at us against our fears, We traditionally, and still do, I guess I can't speak for the fourth quarter, but prior to that, have the lowest dollars per car spent in marketing. So I think we're as efficient as we're going to get. Once ClickLane is fully rolled out in our stores by the end of Q1, for the first time, we will make an investment and spend some dollars marketing ClickLane to drive traffic. We never really marketed PushStart that much. We will market ClickLane. So I don't know that you'll see much of a meaningful difference in the PBR at the end of the quarter, but there will be some dollars spent on it. You know, the SG&A, because we've kept our headcount down, our productivity is up, there's always opportunity in compensation and certainly operating expenses. And I think we've been fairly disciplined over time regarding that. We'll continue to look at that, and we think our plan moving forward will keep us keep us certainly competitive and probably in the better half with our peer group.

Got it. Yeah, that's helpful. This last one for me, you know, any color, and we talked about like, you know, the chip shortages and, you know, like the margin strength here in the near term, any color on like how January was in terms of just units? Are you seeing the same situation that is in the fourth quarter, you know, with respect to you know, the demand versus GPU trade-off, or has that, has that in any way changed so far in January? In general, how is the demand environment looking like here?

Sure. Yeah, absolutely. In January, there's always a little bit of a letdown from December, but I would tell you, comparing this January to the last 35 I've been in the business, I was very surprised by the activity and the overall performance in January. It was amazingly resilient, and we're very pleased with how January looked. I will tell you it's the same frustration, very low day supply in a lot of areas. So there's that potential of what you could have sold compared to what you did sell just because of lack of inventory. But considering what went on with the pandemic in the month of January and the horrible numbers we all saw nationally, It was a productive January for us.

Got it. Thanks and good luck.

Thank you. Thank you.

We'll take our next question from Glenn Chen with Seaport Global Securities. Please go ahead. Great. Thank you.

Good morning, gentlemen. Hi, Glenn. So, David, perhaps a question for you. I'm getting a lot of questions from investors just regarding the achievability of revenue and implied buy-in targets for Cook Lane. Can you just remind us or share with us maybe a framework or the assumptions underlying some of your goals for Cook Lane? Maybe if you could just start at the top of the funnel and then narrow it down for us, maybe starting with, you know, the number of leads you expect to get from that, the conversion rates, then the market share that ultimately that implies.

Sure. And if I don't explain it well, Glenn, please just come back at me. We will start to spend money on click lane. We do expect additional traffic because of that. But when we talk about our model of the $5 billion with click lane, it actually is not accounting for any additional traffic. It's basically looking at the traffic we have now and looking at the conversion on push start and what we believe the conversion will be with Clicklane. So for lack of a better term, if we had 100 leads on push start and we closed 10 of those leads out of 100, that's your conversion at that 10% number. If we had those same 100 leads with Clicklane, we believe that number will be more than double that in year one. And by the time we get to year five, like any tool and anything that takes place online, you think about airline tickets, when they first converted to online, people were used to calling in. If you remember at the time, they actually charged you more to call in than online because they were trying to push online. Once the acceptance level is there and people realize you can do a full transaction, we believe over the next five years that number will go up materially. Do we think 100% of the people are going to buy online? No, of course not. but we certainly believe somewhere between 30% and 50% of the consumers will transact online over the next five years. So it's basically taking our traditional conversion rates, looking at what click lane can do against push start, and modeling that out over five years with really no incremental growth on the click lane tool itself. So we think we're very conservative in our numbers and our approach. And, again, one month out of the gate, with only three stores, but within those three stores, you had four different luxury brands and a midline import. And I would tell you, again, month one out of the gate, we were conservative on our conversion numbers.

Okay. And so speaking about that five-year window, David, I think you were quoted in an Automotive News interview saying that you expected... not quick lane, but sort of a quick lane type capability to be prominent throughout the industry within two years. So after that two years, when it is, you know, has proliferated around the dealer network nationwide, do you expect that conversion rate or the traffic to diminish given the increased competition online?

I don't. I kind of look at it as, you know, when the websites came online in the late 90s, early 2000s, you know, it was walk-in and phone traffic, and now there was Internet. It just, you know, the traffic flows move into different channels. The benefit here to the overall automotive space will be the level of satisfaction to the consumers, the speed or experience that the consumers can go through and how transparent it will be, and how that will be beneficial in controlling costs within a store with the use of a tool like this really being accepted in the space. You know, that's the opportunity that is really meaningful.

And then the $5 billion target, David, is that all new and used retail? Is any of it at parts and service or F&I?

Well, some of it's F&I for sure. But, no, it's not parts and service. It's just... Simply sales. When we talked about the five-year plan and we talked about the $2 billion in revenue growth in our store count, it didn't assume any acquisitions, obviously. And we looked at our same store sales and what we have now. And then we looked over the next five years. We looked at our service retention numbers, our market share numbers, and where we thought what we could do with the brand. We did not factor in any economic downturn in that five-year model. We kind of assumed a SAR somewhere between 16 and 17 over that five-year period. Very conservative numbers is everything that we do. So we just kind of modeled it that way, and that's where the numbers laid, if you will.

Okay. I guess my question around F&I, David, was not so much around volume, because obviously that will go up with increased volume of retail sales, but more around, I guess, increased penetration or attachment rates.

Sure.

Do you expect anything like that?

So, you know, that That's going to be subjective because it's over time. But again, and it's a small sample, I'll talk to the four luxury stores and one midline import. It's in three stores, but one store has multiple brands. I would tell you we're very pleased with the F&I numbers that we've seen so far. Again, I know it's only a few stores. I know it's only 30 days. But in most cases, we're up significantly in F&I dollars per vehicle with the click lane tool so far, more than we've forecasted for.

And what do you think might be driving that?

I think, you know, there's the convenience of consumers and consumers selling themselves. Most people sell themselves on something before they ever go out and purchase it, and they justify why they're going to buy it and what they're going to pay for it. I think, you know, we focus on products that add value to the vehicle. The average length of ownership is almost 12 years in the country. It's a big purchase, a big expense. I think if you can present products professionally, price them fairly, and give information on the products to allow a consumer to make an educated decision, what you end up with is selling products.

Okay, great. Thanks very much. Appreciate the feedback. And just a quick housekeeping follow-up for PJ. PJ, did you guys say that your leverage target has changed? It was two to three times. Is it now just three times, someone's asking?

Yeah, hey, Glenn. So it's typically been three times. So, you know, two to three times, that's kind of a big window. Our target, three times, we feel like that's, you know, conservative and balances, you know, both risk with being able to put the balance sheet to work.

Okay. But just to clarify, has your thinking around coverage for you guys changed? Okay. Very good. No, three times target. Okay. Very good. All right. Thanks very much, gentlemen, and good luck.

Thank you. Thank you.

We'll take our next question from Stephanie Benjamin with Truist. Please go ahead.

Hi, good morning.

Good morning. Morning, Stephanie.

I wanted to ask a bit about the use side of your business. Just looking at it, whether it's grosses or margins themselves, decelerated in the fourth quarter, still obviously up on the growth side year over year. So whether you could speak a little bit about that, just given we did see, you know, actually a slight acceleration in ASPs and even the unit performance. So just if you could kind of walk through what you're seeing in the used business. Thank you.

Yeah, Stephanie, this is David. I would say, you know, the best way to describe the used business right now is our goal is not to chase volume. Our goal is to chase returns. We really track all the different avenues, whether we purchase the car in a service drive, whether we acquire it off the street, whether we take it in trade or buy it at an auction. And we say, what's our best investment and how do we get our highest return? I would say we're very happy with our margin performance on pre-owned and, you know, being up 10% in gross profit was kind of the target where we want it to be. I would tell you the margins are not deceiving, but, you know, the cost of sale has really jumped up a lot. Uh, and if you think about it, it's probably up a couple thousand dollars since 18. Uh, I think we ended the quarter over 24,000, close to 24, four. Uh, and you know, when you think back, uh, at the end of Q4, 18, it was 22 and change. So, you know, a material increase in cost of sale is going to have an effect on the margin, but just as a GPU standpoint and Q4 of 18, we were 1541 a car. So we're still running a couple hundred dollars a car ahead of where we were in a competitive market space. And that's based on the same store number. So we're confident in our plan. It's just really being opportunistic where we acquire inventory from. Our ability to make money in pre-owned is not going to be above the sale price because the market dictates that. It's really going to be about the acquisition price. And we're really trying to have a strategic plan on how to acquire the inventory and not just turn over the inventory at a low margin, but turn it over at a fair margin.

Great. And to follow up on that, as you roll out Quicklane and you notice some incremental kind of advertising or support behind that tool, will that also include possibly some advertising about acquiring your vehicle? So, you know, through an online component, you know, kind of like some of your Pure Digital used peers out there, and they're We Buy Your Car. Is that something that's on the table?

Yes. It's in the tool, and the quick answer is yes. It's on the homepage of the websites that are on those stores now, but absolutely is a part of it, yes.

Got it. Well, thank you so much.

Thank you.

We'll take our next question from Brett Jordan with Jefferies. Please go ahead. Good morning, guys.

Morning.

On the click lane, I guess in the test stores, is there any, I guess, information, anecdotal maybe, that these are incremental customers, or is it just a better conversion of folks that would have been coming to an Asbury store in the first place?

Yeah, Brent, again, it's early on. It's a few stores, so I can share stories and give you real numbers. The answer is yes. It's both. It's higher conversions of the customers you may or may not have had before. But it's also we're seeing acquisitions what I would call outside of our marketplace with pre-owned. And I think it's because they can actually do the transaction online. And I'll just give you one anecdotal sale. It was a $97,000 used Land Rover that was sold from our Greenville store in South Carolina. And the person lived in the DFW marketplace. Um, you know, they, they put $13,000 down on their credit card. They financed the balance, um, and did the whole transaction online. And we delivered the car, you know, over 950 miles away. Um, and obviously there were a lot of local dealers and quite honestly, one of them was park place, uh, within that market space. And when you talk to that consumer, It was the ease and transparency with the vehicle that they wanted to be able to do the whole transaction online and have it be so transparent and seamless was a great experience for them. So that's one story. We have many like that. But just I think the awareness of consumers actually, you know, they've all wanted this for a long time. So to know that it actually exists out there, a lot of them are stumbling on it by mistake when they see it on their websites.

Are you finding a different customer reaction between midline and luxury? I guess you demoed it for us at a Kia dealership in Florida. Are you seeing that luxury buyers are more likely to do an online end-to-end transaction than midline, or is it similar?

You know, it's a fantastic question. I'd like to give you an honest answer by saying I'd like to give you my thoughts before we started it and then tell you what the reaction was or the real numbers. Before we launched it, I assumed it would take off with midline imports, and I was concerned what would happen with the luxury buyer. You know, after December, like usual, I was wrong. It was accepted really well by the luxury buyers. It had nothing to do with price transactionally. It did well with the midline imports customers too, but I expected that. I was shocked how well it did with the luxury buyers. Thanks.

And I guess maybe you might have told us this before, but the $5 billion expected click lane revenues in 2025, what's the mix of new versus used in that outlook?

So we kind of stick to our same – well, I'll tell you this. With PushStart, when we initially launched PushStart right out of the gate, it was majority new to used sales. Very soon it transitioned within months, and it stayed there for years to where over two-thirds of it was pre-owned. and a third of it was new. As we start off with Clicklane, it's close to the 50-50 right now, but the way we've modeled it in, we've kind of, again, we want to get granular with our five-year plan, and so we built the five-year plan literally by rooftop. So we kind of kept to our use-to-new ratio, and then we kept the same sales volume, just higher conversions on Clicklane.

Great. Thank you. Thank you.

We'll take our next question from David Whiston with Morningstar. Please go ahead.

Thanks. Good morning. A question on Toyota's announcement yesterday on their new e-commerce platform. A lot of the capability in Nissan is very similar to Clicklane. Obviously, at the end, they do transfer the customer over to a dealer, but I'm just curious, is having more automakers having a capability of their own like Clicklane, does that help you, hurt you, or is it really neutral issue.

Thanks for the question, David. This is David. You know, I'll answer it the way I did in December on the investor day. I think it helps the space overall. Our franchise system is being challenged now, as John talked about earlier, with startup companies coming into the space. I think this tool really levels the playing field and changes the experience. So I'm excited to see my competitors within the franchise system get the tool. and get them to see the benefits of it. So we actually see this as a very positive thing for our space and helps us in the long run dramatically.

Okay. And on the used market, I'm just wondering if you could contrast or maybe compare the today's new vehicle customer seems very truck-focused and very on the high-end trims. versus a used customer who maybe the used customer actually wants a sedan? Just what kind of differences are you seeing in preferences between those two channels?

David, it's a great question. I'll jump in, and then this is David, and then Dan can if he wants. You know, it's the same on the pre-owned. And because there's more discretional income right now with what's going on because people aren't spending it on vacations or in, you know, bars or restaurants or that kind of thing, We've seen higher down payments in 2020, and we saw higher credit scores in 2020. And you can see that by the jump in our cost of sale of pre-owned, people are stepping up, buying more car with more equipment. They're looking for the trucks and the SUVs. When you have a used truck, you can't go wrong with it, and it's going to move very quickly. When you have a nice sedan, depending upon the price market that it's in, it may turn quickly or it may sit a little bit. But The used business is the same as the new. It's predominant SUV and truck.

So in your opinion, are sedans just going to keep shrinking? Do you think light truck penetration stabilizes now or keeps growing?

It's hard to say. I mean, over the last few decades, we've seen a lot of movement in a lot of different areas. And as you see electrification coming in, battery anxiety when you get to the SUV size and bigger vehicles, how that's going to come into play. There's still a huge issue that hasn't been addressed in the country with an infrastructure to support it. There's the demand there from the OEMs, you know, coming out with the products and the startups, and there's the incentives there from the government, but there's not an infrastructure to charge it and support it. Um, so I think, and there's also the range anxiety that you talk to when you talk to customers that aren't just willing to go there yet, all that will change over time and things will get better and battery life will get better. Um, but I'm sure no differently than we all know this, that the electric cars that have been out there for years now, as they get up there 80, 90,000 miles, their battery life, as far as charging goes, isn't what it was when the car was new. So there's a lot of things to work out over time with electrification. to see how that goes and what role that will play as it relates to sedan, SUV, and truck market.

Okay, and last question. On the new generation F-150, are your Ford customers really anxious to buy that truck?

Yeah, it's a great question, David. You know, I honestly can't say. We're not hearing – I'm not hearing a tremendously high demand right now. There's a tremendous amount of curiosity. about seeing it and what it looks like and what the numbers will be as far as range and all that stuff. But I'm just not hearing it.

No, and this is Dan. I have not heard anything in regards to the new F-150. Although, as you know, the truck buyer is very, very loyal to the brand. Probably one of the most loyal ones out there. So I would expect that they are loyal forward buyer is definitely excited about it and can't wait for it to come out.

Okay. Thanks, guys.

Thank you very much. This concludes today's discussion. We appreciate your participation and look forward to talking to you at the end of the quarter. Have a good day.