Asbury Automotive Group Inc Q4 FY2020 Earnings Call

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 Pettoni. 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 was issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; PJ 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 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 SEC 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 GAAP measures on our website. It is my pleasure to hand the call over to our CEO, David Hult. David?

Thanks, Matt. Good morning, everyone. Welcome to our fourth quarter earnings call. We just reported another all-time record fourth quarter despite continued volatility and uncertainty in the economy. As SAAR 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 remain very active in managing expenses, and we achieved SG&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 Barclays' 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 in 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 have 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. Turning 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 at or below 3 times while executing a more active capital allocation strategy. Finally, we know the only differentiator we have in our 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 Barclays, we increased our luxury mix to 48%, driving our all store PVRs 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 that day supply to remain low for the first half of the year, but gradually recover for the back half as production capacity recovers. Turning to used vehicles, our gross profit margin was 7.1%, up 60 basis points from the prior period, representing our 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 growth to maximize profits. As a result of our performance, our used retail gross profit was up 10%. 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 by $701 per car to a fourth quarter record of $3,924. In addition, if you include reconditioning gross profit, which we report 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 Clicklane, which is the latest evolution in our omnichannel strategy that we began more than five years ago. Clicklane is a communications technology ecosystem that allows for a true online car buying and selling experience. It fills many other 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, and the in-tool service and collision appointment scheduler. Early results and guest feedback on our Clicklane platform have been extremely encouraging. We piloted Clicklane 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 for the guest to complete a total online transaction, including arranging the financing, was 14 minutes, and it took only 8 minutes for an entire transaction without financing or an all-cash deal. Since the end of Q4, we've continued with our rollout of Clicklane and expect to have all the 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 Barclays, it confirms why we made the acquisition. The 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 PJ to discuss our financial performance. PJ?

Thank you, Dan, and good morning, everyone. I would like to provide some financial highlights, which marks another record quarter for our company in this 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 2. 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 decrease 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 over the same period last year. Adjusted EPS increased by 76% 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 $0.15 per diluted share pretax gain on a dealership divestiture. Net income for the fourth quarter of 2019 was adjusted for a $7.1 million pretax charge for franchise rights imperatives or $0.27 per diluted share, a $600,000 pretax charge for real estate-related charges or $0.03 per diluted share, and a $600,000 pretax 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 repayment, which includes fully paying off our used line. 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, availability on both our used line and revolving credit facility. 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 SAAR approximating 16 million units, but we'll 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 gross profit will see a full recovery. We also believe that SG&A as a percentage of gross 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% and CapEx of 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 continued 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 Instructions] We'll take our first question from Rick Nelson with Stephens Incorporated. Please go ahead.

So, I wanted to talk about the same-store units both new and used cars, new down 6%, used down 9%. It sounds like you've taken a strategy where you're going to try to maximize GPUs. If you could speak to that which I think is happening to market share about 11 years [ph] and whether the strategy will continue.

Yes, Rick, good morning, and thanks for the question. This is David. I would tell you we went into this with the approach of, we can see our day supply and 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, 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. For individual hot models, you didn’t have any day supply. So there is 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 returns. 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 during 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, we sat here a quarter ago and thought by the end of the first quarter days supply would be back up to normal. But because of what's going on with the microchips and some other things, it's probably going to bleed well into the second quarter before inventories get back. You never really know how that ends up, but we're going into each month, looking at how we can maximize our return. Even with some of those numbers, we actually exceeded market share in some markets and in 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 and return. So, we're happy with our strategy and the way it's played out so far.

I hope so - on the inventory front, when things do normalize, it sounds like the back half of 2021 and your [ph] current tax expectation. Do you think you hold on to some of those GPUs? Do we go back to 2019 pre-COVID levels sort of 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 will maintain this when things get back to normal? I'm sure there will 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 2021 compared to 2020. And 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 are a lot of good things happening in this space, and we certainly want to be disciplined and execute as best we can.

Okay. 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 as your preference acquisition versus buybacks at the moment?

Yes, Rick. I would say generally overall, what gives the greatest returns for our shareholders - but and the best way for us to deploy capital. The pipeline for our 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, it's a competitive space right now. And there are a lot of buyers out there. I’m sure there are a lot of sellers that want to make sure that they are concerned about their legacy and who they sell to. So, it will 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 PJ. I would just add that we do have a capital allocation policy. And first and foremost, we want to reinvest in our core business, and then we look to delever to the extent we're over our target. 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 is cash left over in the waterfall, we would look to return to shareholders.

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

Just a first question on the Park Place acquisition and integration. It seems like we've gone even better than planned on the integration, more hiccups whatsoever, and actually they are helping to drive the better performance. I'm just curious if there's any lessons learned here on targets or the actual integration process. Exactly what I mean, it just seems like it's - still 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. It really just speaks to the Park Place folks and their level of professionalism changing hands going through a buy-sell 1,400 employees. There's a lot of moving pieces, and I'm sure there are a lot of frustrated folks on the Park Place side. I think both sides went at it with the intent that there is a level of respect and trust for one another and work through the issues that came up, but it's truly a credit to them. Certainly in the quarter, the luxury mix that they have in the low-day supply that benefited us as well. But I'll tell you, post-acquisition we've 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 what if 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. Just a second question around parts and service. Obviously, there is 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, is it post-vaccine sort of mid this year or maybe the second half? Or could it normalize sooner, and how much deferred maintenance do you think there's out there that you might catch up on over time?

Sure. And just as a reminder, those numbers include our collision numbers, and collision still maintains 20% to 30% back from prior year. 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 cooled off through the summer, and business started bouncing back. In the fourth quarter, we went negative in parts and service in November, and we came back positive in December. We're starting January off a little bit more volatility. So, I would tell you, 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 the 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 about pent-up demand with service work; that is our opinion; we believe right now it 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, but it's hard to predict with what's going on with the vaccine, and 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 for the long a sooner, but, yes, that's helpful. And then just lastly on SG&A. Obviously, in the last few quarters you ran in the 51% range; grosses are high rates in the year, there will be the denominator it's benefited to some degree. So if you think about SG&A going forward, has something structurally changed here that you think that you can operate in this low 60s or maybe even better over time as quickly and it takes off, and you're able to leverage the whole base of your bricks-and-mortar?

I would say there are three main levers. Like I said in my statement, some of the divestitures and some of the acquisitions really lifted our margins, and those were stores that had a history of higher margin business when we had lower margin business. 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 stayed disciplined with that. To your point, with Clicklane, it's only three stores, it's one full month, but it's up over 100% pretty close to each. Most of them were luxury brands that we tried Clicklane in. So we're very hopeful between those three levers that there is a meaningful difference here in SG&A over time as well.

Okay. But would you underwrite something in the low 60% range now or you really kind of saw where this is going to land?

Yes. I would say it's still bouncing around right now. Our goal through the next few, I would say this quarter is maintaining higher operating margins and maximizing our opportunity. Depending when we get back to normal, depending upon where margins lay, I think we'll certainly be in a much better position from an SG&A standpoint than we were pre-COVID. But where exactly we land, I think there are too many variables to call that right now.

We'll take our next question from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Just wanted to dig in a little bit on the online, specifically looking at Slide 11 and 12. Those slides show internet leads down sequentially or I guess year-over-year down a little bit, online service appointments also kind of trending lower. As you're expanding your Clicklane, can 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?

Yes. So I'll talk about the decline in traffic and then the comment on Clicklane. 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, it really didn’t make sense to create some supply of leads where we really didn't have the product there to sell it. On the Clicklane side, the growth that we're talking about on Clicklane, I would say the material difference when we made that comment and I can't compare PushStart, which most of our stores are on today, compared to Clicklane, it's the conversion. It's not the lead count up with Clicklane; it's the conversion on Clicklane that is up dramatically from PushStart.

And then just on Clicklane. Four rollout by the end of Q1, you have 3 beta tested in December. Can you talk through the cadence of how you're going to roll that out over the next couple of months, and all at once or stage - what the cadence plan to start?

Sure. We have the whole company set up, we're rolling out depending upon the size of the stores anywhere between eight 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 in their sights in Q4.

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

So a couple of questions for you here [technical difficulty] ICE-powered vehicles. I'm just wondering if you could refresh us on as a rapid move to EV in any concern, a long-term debt holder 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. 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 but they want to control the downstream distribution. If there are - David that you're acquiring legacy brick-and-mortar dealerships that still sell legacy ICE OEM products, ICE intense 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? Thanks.

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 in 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, but literally as we speak, we're 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 is 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. We're figuring out as we go or how to handle a recall.

We'll take our next question from Rajat Gupta with JPMorgan. Please go ahead.

Just a follow-up on the SG&A question earlier. I'm not sure if I missed it earlier, but could you give us a sense of where you expect the SG&A growth to line up like in some sort of range that anything you want to walk around for this year, just based on what are the expectations are for GPUs for the rest of the year. And I have a follow-up. Thanks.

Yes, Rajat, it's PJ. So on SG&A, as David mentioned, it's difficult to forecast in this environment. What we do know is the leverage we generated in Q3 and Q4, predominantly driven on the personnel side and then the balance in advertising and other related costs. What we have confidence in is that those - 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 growth per associate. We track a lot of metrics, and we do see that our productivity is up, and we hope to or we are confident that we can retain that. As the production comes back online, again, we're looking at the latter half of the year. We do expect to see some pressure on growth, 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 our SG&A will continue to be favorable.

Is there anything within the SG&A [technical difficulty] any follow-ups on the execution around advertising might look like, which again in the context of rolling on this Clicklane platform and even broadening the reach of that platform. Outside just normalization in advertising spending back to pre-COVID level, should we expect a further after beyond that? Just for Clicklane purchases, or is that another case?

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 in Clicklane, if you look at us against our peers, we've traditionally and still do, I guess I can't speak for the fourth quarter, but prior to that have the lowest dollars per car spend in marketing. So I think it was a business 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 PVR at the end of the quarter, but there will be some dollars spent on it. The SG&A, because we've kept our head count down, our productivity is up, there is always opportunity in compensation and certainly operating expenses. I think we've been fairly disciplined over time regarding that, and we'll continue to look at that. We think our plan moving forward will keep us certainly competitive and probably in the better half with our peer group.

Just last one for me, any color when you talked about like the chip shortages and like the margin strength here in the near-term. Any color on what January was in terms of just units? Are you seeing the same situation that was in the fourth quarter with respect to the demand with the GPU trade out? Or has there been any change so far in January? In general, how is the demand environment looking like here in January?

Sure. Yes, absolutely. In January, always a little bit of a letdown from December, but I would tell you compared to January over the last 35 that have been in the business 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 is that potential, 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.

We will take our next question from Glenn Chin with Seaport Global Securities. Please go ahead.

So, David, perhaps a question for you. I'm getting a lot of questions from investors just regarding the achievability of revenue implied by Targets to Clicklane. Can you just remind us or share with us maybe a framework or the assumptions underlying some of your goals for Clicklane? Maybe if you could start at the top of the funnel and then narrow it down first? Maybe starting with TAM, the number of leads you expect to get from that, the conversion rates and the market share that ultimately implies?

Sure. If I don't explain it well, Glenn, please just come back at me. We will start to spend money on Clicklane, and we do expect additional traffic because of that. But when we talk about our model of the $5 billion with Clicklane, 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 PushStart and what we believe the conversion will be with Clicklane. So, for lack of a better term, if we had 100 leads on PushStart and we close 10 of those leads out of 100, that’s your conversion at 10%. 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 enabling that takes place online; you think about airline tickets when they first converted to online; people used to call in, if you remember at that time they actually charged you more to call 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. So 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 consumers will transact online over the next five years. So it's basically taking our traditional conversion rates, looking at what PushStart means, what Clicklane can do against PushStart and modeling that out over five years, which really no incremental growth on the Clicklane 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 in a mid-line import. I would tell you, again, month one out of the gate, we were conservative on our conversion numbers.

And just speaking about that five-year window, David. I think you're quoting in Automotive News interview saying that you expected not Clicklane, but sort of the Clicklane type capability to be promising throughout the industry within two years. So after that two years, when it is 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 when the websites came online in the late ‘90s, early 2000. Walk-in and phone traffic, and now there was Internet. 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 an experience that the consumers can go through and how transparent it will be and how that will be beneficial and controlling costs within a store with the use of a tool like this really being accepted in this space. 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 that 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 that we have now and then we look to over the next five years, we looked at our service retention numbers, our market share numbers, and where we thought what we can do with the brand. We did not factor in any economic downturn in that five-year model. We kind of assume a SAAR somewhere between 16% and 17% over that five-year period. Very conservative numbers; everything that we do. So we just kind of modeled it that way and that's where the numbers lay if you will.

Okay. I guess my question around F&I, David, was not so much around volume because obviously you got a less increased volume of retail sales. But more around, I guess, increased penetration or attachment rates you're expecting with that?

That's going to be subject because it's over time. But again, and it's a small sample, I'll talk to the four luxury stores and one mid-line import. And 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 talked only 30-days, but in most cases, we’re up significantly in F&I dollars per vehicle with the Clicklane tool so far, more than we forecasted for.

And what do you think might be driving that?

I think there is a convenience for consumers, and consumers sell 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 we focus on products that add value to the vehicle. The average length of ownership is almost 12 years in the country. There is 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 consumers to make an educated decision, what you end up with is selling products.

Okay. Great. Thanks very much. I 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 2 times to 3 times; is it now just 3 times someone's asking?

Yes. Hey, Glenn. So it's typically been or it's typically been 3 times, so 2 times to 3 times that's kind of a big window. Our target is 3 times; we feel like that conservatively balances both risk and enables us to put the balance sheet to work.

Okay. But just to clarify, has your thinking around your targets changed?

No. 3 times.

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

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

Yes. Stephanie, this is David. I would say the best way to describe the used business right now is our goal is not to chase volume. Our goal is to chase return. We really track all the different avenues whether we purchased a car and the service charge, whether we acquired 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 being up 10% in gross profit was kind of the target where we wanted it to be. I would tell you, the margins are not deceiving, but the cost of sale has really jumped up a lot. If you think about it, it's probably up a couple of thousand dollars since 2018. I think we ended the quarter over $24,000, close to $24,400. When you think back at the end of Q4 2018, it was $22,010. So, a material increase in cost of sales is going to have an effect on the margin. But just as a GPUs standpoint in Q4 of 2018 we were $15,041 a car. So we're still running a couple of hundred dollars a car ahead of where we were in a competitive market space, and that's based on a same-store number. So we're confident in our plan. It's just really being opportunistic about 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. We're really trying to have a strategic plan on how to acquire the inventory and not just turnover the inventory at a low margin, but turn it over to a fair margin.

And quick follow-up on that, as you rollout Clicklane and you noted some incremental kind of advertising or support behind that tool. Will that also include possibly some advertising about supplying your vehicle, so through an online component kind of like some of your pure digital used peers out there and then buy your cars is that something up 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 as a part of it, yes.

We'll take our next question from Bret Jordan with Jefferies. Please go ahead.

On the Clicklane, I guess in the test stores, is there any 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?

Bret, again, it's early on; it's a few stores. So I can share stores and give you real numbers. The answer is yes; it's both. It's higher conversion 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. 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. They put $13,000 down on their credit card, financed the balance, and did the whole transaction online, and we delivered the car over 950 miles away. And obviously, there were a lot of local dealers, and quite honestly, one of them was Park Place within that market space. 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, seamless with a great experience for them. So, that's one story; we have many like that. I think the awareness of consumers, actually 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 the website.

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

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 they would take off with midline imports. And I was concerned about what would happen with the luxury buyer. 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 Clicklane 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 a majority of new 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’ve built the five-year plan literally by rooftop. So we kind of kept to our used to new ratio, and then we kept the same sales volume just higher conversions on Clicklane.

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

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

Thanks for the question, Dave. This is David. 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 am 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 that today's new vehicle customers seems very like truck-focused and very on the high end trends focus versus a used customer who may be - the used customer wants actually wants a van. Just what kind of differences that you're seeing in preferences between those two channels?

Dave, it's a great question. And I'll jump in and then - this is David and then Dan can if he wants. It's the same on the pre-owned, and because it's more discretionary income right now with what's going on, because people are spending on vacations or in bars or restaurants that kind of thing. We've seen higher down payments in 2020, and we saw higher credit scores in 2020. You could see that by the jump in our cost of sale of pre-owned. People are stepping up buying more car with more equipment. They are 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 predominantly SUV and truck.

So in your opinion, are sedans just going to keep shrinking? Do you think like car 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 is still a huge issue that hasn't been addressed in the country with an infrastructure to support it. The demand there from the OEMs coming out of the products and the start-ups; there are the incentives there from the government, but there is not an infrastructure to charge it and support it. So I think, and it'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. But I'm sure no differently than we all know that the electric cars that have been out there for years now. As they get up there 80,000, 90,000 miles their battery life as far as charging goes isn't what it was when the car was new. So there is 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 the sedan, SUV, and truck market.

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

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

No, this is Dan, David. I have not heard anything in regards to that to be our 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 loyal Ford buyer is definitely excited about it and can't wait for it to come out.

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