Asbury Automotive Group chief executive Craig Monaghan doesn’t downplay the impact that swelling supply and off-lease volume has on pricing in the used-car market.

That said, he’s not hitting the panic button, instead treating the pre-owned sector as a “trading business” and leaning on fast turns.

“We think that’s going to create some pressure on used-car prices; I think that’s inevitable,” Monaghan said of the used-car supply dynamics spurred by off-lease volumes. 

“But we see it as a trading business. We try to be in and out of these cars in 30 to 35 days,” he said, speaking during the retailer’s quarterly earnings conference call last week

And then it's on to the next one.  

“If used-car valuations fall, that means we’ll buy them cheaper, we’ll recondition them and then we’ll sell them at a lower price. But we’re just trying to make a spread. Try to make our $1,500-1,600 on a transaction and then move on and get the next one done,” Monaghan said.

“So for us, it’s really about turn. It’s about velocity of moving that inventory through the stores. And as long as the market price for a vehicle goes up slowly or goes down slowly, as long as there’s no major or dramatic shifts in valuations, we’ll manage through this fine,” Monaghan said. “We deal with this on a regular basis anyhow because used cars happen to be a very seasonal business. We see values fall at the end of the year, and then values pick up again in the spring.”

Granted, some folks come back when the lease is done and they’re under water, Asbury’s Dan Clara confirmed to an analyst during the Q&A portion of the call. But the automakers will often work with Asbury, appraising the vehicle and putting a market value on it so that the retailer can buy it if the consumer decides not to.

“It’s good support from our manufacturer partners and it is also allowing us to feed our used-vehicle inventory and then turn it into a certified pre-owned, which as I mentioned earlier, our CPO growth was very healthy in Q1,” said Clara, a vice president with the company.

In fact, same-store certified pre-owned sales in the first quarter were up 13 percent year-over-year.

Clara said that while the percentage of off-lease cars it acquires has remained steady, there is a higher volume hitting the dealerships.

“But we have always been aggressive at buying those cars in the past, and we will continue to do so,” he said.

In the first quarter, Asbury averaged 85 used unit sales per month at its store. That beats 80 monthly sales for full-year 2015 and 2016.

It retailed 20,067 used vehicles in Q1, up from 19,736 in Q1 2016, a 2-percent increase. On a same-store basis, used retail sales climbed from 18,447 to 19,555, a 6-percent jump.

And the retailer believes pre-owned can continue climbing.

Update on Q auto

The Asbury executives were asked multiple times about Q auto by the investment community on the call.

Emphasizing that Q auto’s impact on quarterly results was “immaterial,” Monaghan said that Asbury is operating Q auto as “discount used-car store that’s supporting just the local Tampa market” and largely sees it as an “experiment.”

“Fundamentally, we keep coming back to ROI on everything we do. We want to generate a return on the investment. We’re trying to prove that we can make that model economically viable,” Monaghan said. “And at this point, with just two stores, it’s just not material to our results. I don’t think there’s much to add. We continue to work on it. But we’ll watch and see where it goes.”

Monaghan said Asbury has not considered utilizing some form of M&A with an established used-car standalone brand, something that, for instance, both Penske Automotive Group and Sonic Automotive have done.

Instead, Asbury is concentrating on making Q auto generate a return on investment that exceeds the capital cost, he said, and going from there.

Monaghan said that, “if we can make that model work, the outlets in our model if you would, we can move that across mobile markets and enjoy some success there.

“But until we see that it’s viable,” he said, “we’re not going to put a whole lot more capital into that. I would just share with you that the challenges of a standalone used-car store are really two-fold.  One, you’ve got to source inventory. And, two, you’ve got to hang the paper for a large population of subprime buyers. “

The former, Monaghan said, isn’t incredibly difficult, provided the model doesn’t become “too large.” In fact, Asbury has cars it’s selling at auctions that it believes it could likely retail, he said.

As far as the second of those challenges, he pointed out Asbury has found many of the buyers at its standalone used-car stores are in subprime credit tiers.

“Hanging the paper is something that we’re doing in the marketplace; we do not want to retain that risk. Others have made a decision to retain the risk. That’s not where we want to go,” he said. “And so we’re just being careful as we move down this path.”