After reporting a 15-percent increase in used retail revenue, Asbury Automotive execs delved deeper into the topics of used margins and pre-owned inventory, and also gave an update on the dealer group’s standalone used-car outlet program, Q Auto.

Although Asbury dealers were bringing in revenue of $21,238 per used vehicle retailed, up 9 percent from $20,860 during Q2, gross profit was down slightly at $1,653, falling from $1,789 during Q2 2014.

During the conference call to discuss the quarter, margin pressures, both new and used, were a focus of investors.

Craig Monaghan, president and chief executive officer and director at Asbury, said that the dealer group saw an increasingly competitive environment in Q2, a contributor to margin pressure, explaining this was most prevalent in the midline import sector.

“And midlines alone represented about two-thirds of our decrease in gross profit. And we believe that was largely attributable to the impact of very low gas prices,” he said. “It hit particularly hard in the car segment as opposed to SUVs. But we also saw, as you see in the numbers here, we saw some pressure in luxury as well. And what we sense there is it's a shift in consumer preference to lower-priced vehicles.”

David Hult, chief operating officer and executive vice president at Asbury, shared that on the used side of the business, the dealer group is very focused on driving volume.

“We see the benefits from our reconditioning growth, I mean our incremental F&I dollars, and feel like we have a pretty good balance offsetting that margin pressure to increase that volume,” Hult added.

The execs were also asked to give an outlook on used gross profit per unit going forward, and they both agreed “it’s tough to predict the future.”

That said, Hult shared the company is focused on its reconditioning work, noting this is a big “value add.”

“So, when we increase the cost into the vehicle, it's certainly going to depress some of the margin, but we feel it's a more than a fair trade-off and we've been happy with our results so far,” Hult said.

Another metric that caught investors’ attention was the fact that the company’s used vehicle day supply was at 36 days in Q2, which is just slightly above its targeted range of 30 to 35 days.

Listeners wanted to know whether this slightly elevated number was due to its new stand-along used-car outlet program, Q Auto.

The Asbury team explained the increase is not likely connected to Q Auto — which currently includes just three stores — and more to do with seasonality.

“That inventory build would have very little to do with the Q stores. They're running at inventory levels that are pretty much in line with what we do at our core stores,” said Monaghan. “So, I think that's just a build in the core stores. It's just a little bit higher than what we would normally expect. So, we don't see that as being unusual in any way, shape or form.

Instead, Asbury attributes the increase to being in the “heat of our selling season,” as July and August are some of Asbury’s bigger months,

“So carrying that excess inventories is a strategic and smart move, I think, on our part,” said Hult.

The company also gave an update on the Q Auto brand and where it might be heading in years to come.

Monaghan reiterated a point he has made throughout the first half of the year, noting that Q Auto has the potential to be a huge business for the company, but they have to solve the "riddle."

“And I think we're very much in the mode today of solving that riddle. We think the three-store format is an ideal way to go about it. And we've got a medium, a small and a large format that are in three different markets,” said Monoghan. “It allows us to experiment with a lot of different things, including technologies. We've got a major piece of technology that we're actually rolling out in the stores as we speak. We think it will significantly improve our customer experience, make our employees in the stores more efficient.”

Asbury also traditionally takes about 35,000 cars a year to the auctions, and Q Auto is a way to retail some of those units.

“But it's not easy. If it were easy, there would be many others out there selling used vehicles in a standalone format in a big way. We know that's not the case. So, it takes some time. It takes some commitment,” Monaghan said. “We feel like we're making very good progress. We lost $0.02 this quarter. Our objective is to drive this thing to profitability before we take the next step. And we feel like we're on that path.”

Before wrapping up the call, the Asbury team gave an update on the apparent uptick in acquisition activity, as the company secured another Florida store and expanded its presence in the Atlanta market, as well.

Looking ahead, Monaghan shared the company is open to bigger platform deals and actually prefers larger stores to smaller dealerships, as they prove to be easier to operate.

The company also will be focusing on stores that are in the dealer group’s current “footprint.”

“We think proximity matters. We run an organization structure, where we allow our general managers to run the stores. But we do have support teams that are there to help them. And if it's easier for those support teams to get to a store, we think there is real incremental value that comes from that,” Monaghan explained.

Price is also a factor, as the team shared they are “not going to pay more for it (acquisition) than where our company trades.”

“So, typically, we look to pay less and then hope to bring synergies so that we can get real incremental value out of an acquisition. With respect to brand, though, we're pretty much wide open. We're just looking for things that make economic sense,” he concluded.