On top of announcing impressive pre-owned sales results for the first quarter on Wednesday, Asbury Automotive Group executives also revealed plans to follow CarMax and other competitors into the stand-alone used-car retailing space.

Company leaders said in Asbury’s conference call to discuss Q1 results that the move was fueled in part by significant growth in its pre-owned business.

The retailer announced it will be opening two stand-alone used-car stores in Florida this year that will operate under the “Q auto” brand.

Asbury plans on opening the first store in June in Tampa, Fla., then a second store this fall in Jacksonville, Fla.

During Wednesday’s conference call, when asked why the company chose these markets to start the initiative, chief operating officer Michael Kearney — who will retire on March 31 of next year — said the move was made in part because of how well the company already knows these markets.

“They are markets where we have a presence, and they are markets where we do a very good job of selling used cars. We know the streets, the intersections — we know which cars sell well,” said Kearney. “We have been identifying facilities that we feel we were attractive price points. We wanted to give this thing a shot with a reasonable amount of investment. It’s not a whole lot more complicated than that.”

Kearney said the Tampa store is held under a lease-to-buy contract, meaning the company has the option to buy in the future.

The Jacksonville store is already owned by Asbury, and previously housed a Toyota dealership, which is vacating to another location.

The company said it will likely take a year-and-a-half for stores to hit run-rate revenues and profitability.

“Over the last three years, we have grown used vehicle retail unit sales in excess of 55 percent and grown used-vehicle retail gross profit by close to 35 percent,” said company president and chief executive officer Craig Monaghan said in the statement announcing the new program.

“We remain excited about the opportunities we see in the used-vehicle market and believe there is an opportunity now for us to take our demonstrated used-vehicle retailing talent, technology, and processes and expand into a stand–alone used vehicle retailing model,” he continued. “This year, we plan on opening two free-standing used-vehicle stores, which we are branding as Q auto.”

Monaghan explained during the call that the company is currently focusing on just these two stores, and are not changing their acquisition outlook for the year.

Currently, the company is projecting acquisition spending this year to reach $0.5 billion.

As for the volume and size of these stores, Monaghan said the company is analyzing markets as they come in regards to potential volume for stand-alone used retail stores.

“We have looked at potentially different size stores for different markets, but I think we are really at a point in time right now that we just need to launch the storms and see how they perform,” he said.

Pre-Owned Growth Spurs Plans

Company leadership said Wednesday the plans to launch stand-alone used retail stores stemmed largely from growth in Asbury’s pre-owned performance.

“In terms of pre-owned, we have a very strong, dedicated culture toward pre-owned business, and we continue to push. So I think the pre-owned (success) is a result of continuing to talk about it and the culture we have created on how to maintain trades and take more trades at the desk, managing our inventory very carefully and how we price them on the Internet,” said Kearney.

This pre-owned strength was evident through Q1 used sales results, as well.

Same-store used-vehicle retail sales increased by 10 percent year-over-year in the first quarter, and Kearney said he expects this growth number to stabilize in the mid-single-digit area for the year.

And although Asbury’s same-store used sales profit margins decreased 50 basis points to 9.1 percent compared to the prior year period, “a substantial increase in volume more than offset the margin decline,” he added.

This resulted in a 7-percent increase in used-vehicle gross profit.

Though used growth has been steady, Kearney cautioned, “Please keep in mind that the first quarter of the year is traditionally the strongest quarter for used sales due to the timing of tax returns.”

The strong used performance resulted in a used-to-new sales ratio of 86 percent during the quarter, “and provided an additional source of trade-in vehicles," said Kearney.

“Our used-vehicle sales continue to grow faster than new-vehicle sales and will be in an important source of gross profit,” he added.

Asbury expects its new-to-used sales ratio to stabilize around 80 percent as the company enters into the second quarter, known for stronger new-vehicle sales.

“The pre-owned market is huge compared to the new-vehicle market. There is this huge opportunity out there, and as we have seen our teams grow, I think this (Q auto) is the next logical step,” Kearney said.

Stand-alone Sourcing

Another topic discussed during the conference call focused on how the company expects to source inventory for the new stand-alone used stores.

It may not be much of a challenge, though, judging by the company's current days’ supply.

The company ended the quarter with $139 million worth of used-vehicle inventory, translating to 36 days’ supply.

The company has invested $29 million in used-vehicle inventory over the past 12 months, which represents a year-over-year increase of 20 percent.

In broaching the topic for stand-alone store sourcing procedures, Monaghan pointed out the company’s wholesale activity first.

“We send 30,000 cars to auction; we are working on the mechanisms to move at least a portion of those stores to Q auto. Other than that, Q is very much a stand-alone operation. We want it to be a stand-alone format that is separate from our traditional model. That said, we do want to take advantage of the skill sets we have here,” Monaghan explained.

He pointed out there is an opportunity for the company to keep some of these cars in its system and generate sales.

Monaghan also shared that the company is still developing business rules for how it will sell cars to the Q auto entity.

“Of course, there are a number of vehicles that reside in our used-car bank at any given time, and we will now make those available to be purchased,” he shared.

Monaghan explained that store managers will also visit national and local auctions, solicit other dealers, and scan the Internet for private sellers, as well, in an effort to secure quality, used inventory for the Q auto stores.

Potential for Success

Many of the questions during the Q&A period of the conference call focused on this inquiry: Many have tried similar concepts in the past and failed, what is Asbury going to do differently?

 “We have not entered into this lightly. We have done a lot of homework. I have experience with this directly, the megastore concept, so we are well aware there have been a number of failures … This isn’t about what everyone else has tried or the way they go about it, this is essentially just an extension of what we already do today,” said Monaghan in response.

Company leadership said a variety of factors that may give the company an edge, such as Preferred Selling (the company’s no-haggle sales structure), technology infrastructure, pre-owned market experience and an in-depth knowledge about store locations.

“This is about Asbury. We look at the success we have had in used cars; we like the technologies we have in place; we think we have a great team, and we feel like we have a pretty good handle on the markets we do business in,” said Monaghan. “So these two stores we are talking about are in our backyard. We have a great team committed to this, and we have been doing a fair amount of homework. We think we can generate a fair amount of ROI that could potentially be quite attractive.”

Kearney went on to highlight the company’s Preferred Selling model and Asbury’s internal vehicle acquisition process as factors that will contribute to Q auto’s success.

“This is a normal expansion of what we think we have done a good job of over the past few years,” he added.

Another factor to consider is the lower capital required to run these stand-alone used stores.

Monaghan stressed that there is no blue sky (intangible value of a dealership) to pay with Q auto stores, “which is a significant piece of any capitol we put into an acquisition.”

Though the Q auto stores will feature the same sales model, utilize similar sourcing strategies, and offer service department functions to customers — similar to the company’s current stores — the company pointed out the stores will feature a different approach to customers in the showroom.

“It will look a little different; it will feel a little different, but it is still a used-vehicle retailing store,” Monagan concluded.