Tuesday, April 03, 2007

Unlike other Executives at Asbury Automotive, CEO Gilman's Been Working for 'Paper Cups.'

Asbury Automotive Group Inc. (ABG-$28.25) is one of the largest automotive retailers in the United States, operating 114 franchises at 87 dealership locations, auto dealer and service chain, with 2006 revenues of approximately $5.7 billion.

The Company operates through geographically concentrated, individually branded regions. These regions operate approximately 87 retail auto stores, encompassing 120 franchises for the sale and servicing of 33 different brands of American, European and Asian automobiles.

In its five-year history of being a public company, the auto retailer has generated compelling results: compounded annual revenue growth of about 13.6%; 18.0% operating profit (CAGR); and enviable industry-leading comp stats: (4Q:04 – 3Q:06), including new and used comp store sales of 5.2% and 12.0%, respectively.

Yet, despite posting admirable numbers-year-in & year-out, the share price traded in a narrow band for much of the prior four years. Patient shareholders were finally rewarded with an approximately 56% gain in the price of Asbury’s stock in the last year. In our view, LBO rumors were the catalyst behind the gain.

In February 2007, ABG issued initial earnings guidance for fiscal 2007 of $2.05 – $2.15 per diluted share from continuing operations. Applying a P/E of about 13 times [derived from historic P/E ratio comparisons] 2007 share-net analyst estimates of $2.13, ABG is fairly valued at $28 per share.

In the last six months, insiders have been net sellers.

The Company recently announced that Kenneth B. Gilman, 60, President and Chief Executive Officer, plans to retire effective May 4, 2007, the date of the Company’s annual meeting.

Take this job and shove it
I ain't working here no more
I will not get all the pieces
I've been working for Paper cups, minimum wage
Just walk on out the door
Take this job and shove it
I ain't working here no more

Pursuant to the terms of his employment agreement, Mr. Gilman is eligible for separation benefits, including (i) a lump sum cash payment of approximately $2.7 million and (ii) the acceleration of 3,333 unvested restricted stock of the Company, which has a value of approximately $94,157, assuming a stock price of $28.25, the closing price of the Company’s common stock on April 2, 2007.

Let's all go use our sick leave up
And then we'll shoot some pool
Got brand new skinhead hair cuts
You think he's a fool
One of these days I'll blow my top
Or somebody's gonna’ pay
I'd hate to see the process
As you enter the factory and say

Gillman also owns 791,559 in unexercised stock options.

Take this job and shove it
I ain't working here no more
I won't let that shit bother me
That I've been working for Paper cups, minimum wage
Just walk on out the door
Take this job and shove it
I ain't working here no more

Unknown is whether or not Messer. Gillman will be allowed to keep a ‘demonstrator’ vehicle given to each senior executive for personal and business use. In the case of Gillman, however, since the Company’s corporate office was not conveniently located near any dealerships, he received a car allowance of $1,500 per month. Our advice—take the car, not a watch!

Take this job and shove it
I ain't working here
Ain't working here
Ain't working here no more
- Dead Kennedys (Album: Bedtime for Democracy, 1987)

During our due diligence, we were pleasantly surprised to find out how little Gillman profited from ‘double-dipping’ during his time at ABG:

  • Thomas F. McLarty, III is employed as the Chairman of Asbury Automotive Arkansas, L.L.C. , and formerly served as a director on the Board from April 2002 until his resignation on July 12, 2006. The Company leases from Mr. McLarty, affiliates, and his immediate family members, properties used by the Company’s dealerships in Arkansas for dealership lots and offices, for monthly rental fees totaling $129,257.

    Mr. McLarty is paid an annual base salary of $100,000. Asbury Arkansas also reimburses Mr. McLarty a total of $5,800 per month for lease and miscellaneous expenses relating to his office space, including administrative support. In addition, Asbury Arkansas pays the monthly rental cost for two vehicles leased on Mr. McLarty’s behalf, for a total amount of $1,185 per month. The agreement expires on February 1, 2010.

  • Director Jeffrey I. Wooley is employed as the Chairman of the Company’s subsidiary, Asbury Automotive Tampa, L.P. The Company leases two properties used by the Company’s Florida region for dealership lots and offices from Jeffrey I. Wooley for a monthly rental fee of $208,255.

    Mr. Wooley receives an annual salary of $100,000, is entitled to the use of an office located at one of Asbury Tampa’s dealership locations and is reimbursed an additional $3,333 per month for administrative support.

    In addition to his salary, Mr. Wooley and his family receive the use of four demonstrator vehicles, the use of which amounted to $29,048 of imputed income to him during 2006.

    Messer. Wooley is also reimbursement for annual dues for membership in two country clubs selected by Mr. Wooley, which dues are not to exceed $20,000.

According to regulatory filings, the Company’s directors and named executive officers may purchase or lease vehicles at the Company’s dealerships that are valued over $120,000.

Kenneth Gilman spent 25 years with the multi-brand retailer The Limited Brands (LTD-$26.43) before signing with ABG in December 2001. In fiscal 2000, his last full year with The Limited, Gilman took home $1.34 million in salary/cash bonus and $350,000 in Other Compensation (as compared to $776,250 in salary/bonus in fiscal 2006 with ABG).

In our view, Gilman's unremarkable severance package from ABG can be explained away by looking at his job history. In July 2001, The Limited announced a
definitive agreement to sell its Lane Bryant chain to Charming Shoppes, Inc. (CHRS-$13.00) At the time, Gilman was the CEO of this women's plus size and misses apparel division. Translation: He was about to be out of a job!

Dear, never forget one little point. It’s my business. You just work here. – Cosmetic empress Elizabeth Arden (to her husband)

Editor David J. Phillips does not hold financial interests in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.


    NO DooDahs said...

    Yeah, I've never been a fan of ABG's filings, even after reviewing them several times when they've come across my value radar. That said, I'm currently long and have been long off and on a few times.

    I also don't like the business segment - it's too hard to decipher the cash flow statements on this type of business.

    So what brought Asury to your attention?

    David J. Phillips said...

    break-out in price of stock was several years in the making; Belief that Gilman got screwed--as a CEO pay package goes; stock is now fully-valued--based on peer metrics like oper. margins, P/E multiple, etc.