Lithia Motors (LAD) Q1 2019 Earnings Call Transcript

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Lithia Motors (NYSE: LAD)
Q1 2019 Earnings Call
April 24, 2019 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Lithia Motors first-quarter 2019 conference call. [Operator instructions] I would now like to turn the call over to Megan Kurz, director of corporate finance. Please begin.

Megan Kurz -- Director of Corporate Finance

Thank you, and welcome to the Lithia Motors first-quarter 2019 earnings call. Presenting today are Bryan DeBoer, president and CEO; Chris Holzshu, executive vice president; and Tina Miller, vice president and chief accounting officer. Today's discussions may include statements about future events, including financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made.

We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures.

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Please refer to the text of the earnings release for a reconciliation to comparable GAAP measures, which can be found at lithiainvestorrelations.com. With that, I'd like to turn the call over to Bryan DeBoer, president and CEO.

Bryan DeBoer -- President and Chief Executive Officer

Good morning, and thank you for joining us. Today, we reported the highest adjusted first-quarter earnings in company history at $2.44 per share, an 18% increase over last year. Our earnings were driven by strong top-line growth of 7% and an even greater increase in pre-tax income, which was up over 12%. As a growth company powered by people and innovation, our strategy centers around purchasing strong assets that have yet to realize their earnings potential.

We then refocus our teams on creating memorable consumer experiences, and install clear performance measurements to deliver operational excellence. These customer experiences are generated from several distinct business lines: New vehicle sales, used vehicle sales, finance and insurance, service, parts and body shops. This diversification creates resiliency in our revenue streams, sits atop of these -- each of these business value chains and provides multiple options for growth. As a result, in the quarter, we made meaningful strides toward realizing our earnings potential.

We increased our total same-store sales 3%, which was achieved despite a somewhat soft national new vehicle market and resulted in our new vehicle sales decreasing 3%. This was more than offset by strong same-store improvements in used vehicle retail sales, up 11%; F&I sales up 9%, and service, body and parts sales up an aggregated 6%. This is the key differentiator of our business model compared to other companies that have risk concentration in just one of these business lines. Our trends over the previous few quarters make our pathway to achieving $15 in EPS much clearer.

We have added over $7 billion in annualized revenues, and grew EPS over 250% from $4 in 2013 to $10 last year, all while maintaining low leverage. As a result of our value-based acquisition strategy, earnings potential is continually being realized and then replenished. This, combined with innovation and diversification, are the catalysts to take us beyond our $15 milestone. Earnings potential from new stores is realized through improving the performance in the following key areas.

New vehicle sales when purchased operate at around 75% of average manufacturer market share, and when seasoned achieve 125% market share. For used vehicle sales when purchased, the store average is 35 used units per month and over 85 units when seasoned. In finance and insurance, average per unit retailed is $700 and when seasoned is over $1,500. Service, body and parts for acquired dealerships at purchased are typically retaining customers below OEM average and in seasoned stores operate at 25% above OEM average.

By improving performance in each of these areas, we continue to build velocity in our units in operation to create leverage in the model. As a result, SG&A to gross when a store is purchased is over 90% and drops to below 65% when they're seasoned. This value-based growth strategy creates the opportunity to continue to grow profits and generate significant cash flows. Our capital has been reinvested into our omni-channel network to expand and modernize our personal transportation solutions, wherever, whenever and however our consumers desire.

Car buying and servicing is a local and regional experience for our consumers. Having a strategically diversified physical network centered around strong brands and locations provides consumers convenience and choice. We actively monitor only 2,600 acquisition targets of the 18,000 new vehicle dealers that we believe have the earnings potential we seek, while also complementing our national network strategy. Our current available liquidity is over $0.5 billion and our capital engine generates another $250 million in free cash flows annually.

We have historically purchased assets at below 15% of revenues. Therefore, if our funds were deployed exclusively to acquiring dealership, it could fund additional growth in excess of 30% of our current size. Another 15% growth could be added annually from free cash flows without adding any incremental leverage. Typically, consolidation comes with risk.

However, we have achieved an 80% success rate of recovering our entire investment within five years. These strengths, combined with an active market that remains ripe for consolidation, motivates us to continue to grow. We are now one of the three largest auto groups in the U.S. retailing over 335,000 units annually and operating the second largest own inventory marketplace online.

Despite this, and to keep things in perspective, our industry is highly fragmented with the top 10 dealership groups controlling just 8% of the total U.S. new vehicle market. In used vehicles, no single company controls more than 2% of the U.S. market.

Combined, the total addressable new and used vehicle market is over $1 trillion annually. As such, we see significant growth available to us through modernization of the vehicle ownership experience and expanding our network to deliver upon this. We also invest in innovation and diversification to further activate our physical network and expand market reach. These investments are prioritized as follows.

First, we create internal solutions to improve our existing operations. Secondly, we gain vertical and horizontal adjacencies to our core business. And lastly, we expand market share through strategic partnerships. Some examples include internal digital transformations being piloted at baierl.com, soon to launch at lithia.com and external partnerships such as Shift Technologies, a San Francisco-based digital retailer.

Shift provides an entirely new channel of direct-to-home vehicle purchasing and selling experiences. In addition to this new channel, this partnership brings synergies by sharing our existing retail network, personnel and data. We've also introduced vendor and lender relationships to provide Shift with financing capacity to more quickly drive them toward $1 billion in annual revenues. In closing, we look forward to continuing to drive operational excellence and deploy our capital for acquisition growth to build and capture more earnings potential.

These efforts, combined with innovation, will expand the reach of our network, pave the pathway to and beyond our $15 EPS milestone, and springboard us toward a much more meaningful share of the U.S. market. With that, I'd like to turn the call over to Chris.

Chris Holzshu -- Executive Vice President

Thank you, Bryan. Lithia's mission of Growth Powered by People is the foundation and driving force of our culture that promotes high performance. Our team members embrace our customer focus core values and promote an environment of continuous improvement. In addition, Lithia's proprietary strategy for acquiring and integrating stores utilizes our store performance scorecard or SPS to align these core values with the key metrics that drive our short and long-term success.

The SPS provides immediate visibility when diagnosing trends and identifying areas of opportunity that our empowered store leaders can use to take immediate action that improves results. Last quarter, we discussed how our store and department leaders developed individual annual operating plan, or AOPs, for 2019, a key component of the SPS. In the first quarter, our teams made good strides toward executing on their AOPs and where gaps remain, they will continue to reassess plans to drive higher results. Turning to same-store results, and as Bryan mentioned, total sales increased 3% in the quarter, reflecting strong performance in used, F&I and service, body and parts.

Our operating model is built upon several independent business lines that drive our overall performance. For example, over 80% of our gross profit is derived from used vehicle sales, F&I, service, parts and our body shops, which all coexist with the new vehicle nameplates we represent. We continue to grow our total gross profit per unit, which was $3,614 or an increase of $140 per unit over 2018. This metric continues to demonstrate the resiliency and flexibility our stores have and balancing volume and gross in the current environment.

Gross margin was 16%, an increase of 60 basis points from the same period last year. New vehicle revenue decreased 3%. Our average selling price increased 4%, and unit sales decreased 7%, in line with retail SAAR. Gross profit per unit was $2,136, compared to $2,104 last year, an increase of $32 even with a decline in incentives, which were down 10% in the quarter.

These trends demonstrate our stores' ability to remain nimble in their volume and growth strategies and adapt to local market conditions. Through this approach, our stores will continue to capture market share and expand their reach regardless of the selling environment. Retail used vehicles increased 11%, our average selling price increased 1% and unit sales increased 10%. Used retail gross profit per unit was $2,106, compared to $2,059 last year, an increase of $47.

Our used vehicle sales mix in the quarter was 28% certified, 58% core and 14% value auto. Our stores sold 49% off-brand vehicles on average per location, an improvement of 5% over the prior year. We continue to encourage store leaders to leverage the digital marketplace to grow their used car penetration and expand their reach. In addition, sourcing retail used vehicle inventory is key in generating increased sales, and we remain focused on securing a wide variety of options for sourcing used cars.

In the quarter, 63% of our used vehicles came from trade-ins, which were primarily available to a new car dealer; 12% came from auctions; 12% from other new car dealers; and 7% from independent wholesalers; and finally, 6% came directly from off-the-street purchases from customers looking for an easy way to sell their vehicle in a safe and a professional environment. We anticipate this last channel will continue to grow as we leverage technology. Our used vehicle to new vehicle sales ratio reached a new milestone, over one to one, and our stores continue to target selling 85 used units per location per month. In the first quarter of 2019, we reached 70 used units per store per month, an increase of three units over the prior year.

F&I per vehicle reached a new record of $1,485, compared to $1,378, an increase of $107 over the prior year. This improvement was the result of higher penetration rates and per unit profitability in virtually all our product offerings. Over the -- of the vehicles we sold in the quarter, we arranged financing on 75%, sold a service contract on 48%, and sold a lifetime oil product on 22%. Opportunity remains, particularly, on our current group of unseasoned stores where F&I PVR is still $400 to $500 below our seasoned stores.

Our service, body and parts revenue increased 6% over the prior year. Customer pay work, which represents over half of our fixed operations revenue stream, increased 7%; warranty spiked 12%; wholesale parts was flat; and our body shops decreased 2%. We anticipate continued growth in service, body and parts as the car parks continue to grow with an average age of 12 years, meaning more vehicles are staying on the road longer, creating more recurring repair and maintenance opportunities. In addition, vehicles are more technologically advanced and continue to require brand-specified digital diagnostic equipment owned by the OEM new car dealer.

Same-store adjusted SG&A to gross profit was 70.6%, an improvement of over 190 basis points from the first quarter of last year. Cost-savings initiatives are gaining traction as the results in the quarter indicated. 85% of our SG&A is made up of personnel, advertising and facility costs, and we saw improvements across all of these areas. As Bryan mentioned, we have acquired over $7 billion in annualized revenues over the past five years and our newer stores have an adverse impact on our SG&A results.

However, as these assets continue to season, we will continue to achieve leverage in our model, and we will get our current stores back to industry-leading results. On a consolidated basis, interest expense increased by $11 million or 30% in the quarter. Our floor plan facility is variable and is impacted by changes in LIBOR, which is up almost 50 basis points over the prior year. Increasing rates conceal some of the true improvements that have been made in capturing store potential, and our teams will continue to work to offset this headwind by managing down their days supply in the remainder of 2019.

In closing, we continue to look to the leadership at our 182 locations to drive innovation, efficiency and profitability, while providing solutions wherever, whenever and however customers desire. Unleashing Lithia's unique operating model that leverages proven local market leaders to make ground-level decisions allows us to the react quickly to market dynamics and leverage our scale. Our 15,000 employees are taking the steps necessary to exceed their AOPs, capture store potential and carry the trends of Q1 into the rest of 2019 and beyond. And with that, a few comments from Tina.

Tina Miller -- Vice President and Chief Accounting Officer

Thank you, Chris. At March 31st, we had approximately $280 million in cash and available credit. Unfinanced real estate could quickly provide us with an additional $247 million for an estimated total liquidity of approximately $527 million. Our leveraged EBITDA defined as adjusted EBITDA less capital expenditures was $83 million for the first quarter of 2019.

Our net debt-to-adjusted EBITDA is 2.1 times, a reduction of 0.2 from December 31st and at the low end of our targeted range of two to three times. As a reminder, to those new to the industry, we finance vehicle inventory with floor plan debt, a common instrument within the industry. As of March 31st, we had $2.5 billion outstanding as floor plan in used vehicle financing. Unadjusted and not reflecting how we think of our business, our net debt-to-EBITDA is overstated at 6.4 times.

Vehicle financing is integral to our operations and collateralized by these assets. Because of this nature, we treat the associated interest expense as an operating expense in our EBITDA and exclude this debt from our balance sheet leverage calculation, resulting in a ratio of 2.1 times. Our adjusted tax rate was 27.5%, up 210 bps compared to 2018. This was primarily driven by the tax impact of our annual vesting of stock awards and changes in certain state tax laws enacted late last year.

We adopted the new accounting lease guidance this quarter, which requires us to record a right-of-use assets with corresponding operating lease liability for leases with a duration over one year. This new guidance had an immaterial impact on our income statement. As of March 31st, we had a right-of-use assets of $250 million, as we own over 80% of our rooftops. This is a small amount compared to our own property of $1.5 billion.

We continue to balance our capital uses of reinvesting in our business through acquisitions and innovation investments and returning cash to our investors. Earlier this morning, we announced a 3% increase in our dividend to $0.30 per share. Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization. This concludes our prepared remarks.

We would now like to open the call to questions. Operator? 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Rick Nelson with Stephens. Please proceed with your question.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks. Good morning. Congratulations.

Bryan DeBoer -- President and Chief Executive Officer

Thanks, Rick.

Chris Holzshu -- Executive Vice President

Morning, Rick.

Rick Nelson -- Stephens Inc. -- Analyst

Bryan, I'd like to ask you for an update on the acquisition environment, how the pipeline might look for you guys, especially with dealers that fit the type that you might be speaking.

Bryan DeBoer -- President and Chief Executive Officer

Great, Rick. I think most everyone has seen that we took a little bit of a breather. We really haven't bought anything over the last year. The attempt was really to catch up with our operational teams to be able to start to capture potential.

I think we did more of that this quarter, which is great. So we got three good quarters under our belt trending back to where we want to be. We sit at the bottom of our two to three times leverage ratio range, which is good. The market is active.

And we are ready to grow again, and I think the pipeline is fairly full, and we should have a good three quarters of the remaining year.

Rick Nelson -- Stephens Inc. -- Analyst

All right. You've made a lot of progress on SG&A, down 150 basis points. If you could discuss some of the drivers there, maybe some of the acquisitions that you made the last few years where you are making the most progress, maybe where the opportunities -- those that might be lagging, where the opportunities might be?

Chris Holzshu -- Executive Vice President

Rick, this is Chris. You nailed it. The $7 billion in acquisition revenue that we've acquired over the last five years is all coming in at different paces. And so it's hard to just look at individual groups, but rather look at individual stores to decide kind of where our opportunities continue to stay focused on.

And so when you think about what we do, our first intent obviously in acquisitions is to drive gross. While a lot of stores do great in new car volumes, the used car volume, F&I opportunity and focusing on service, body and parts is a key focus, which generates the gross, and then after that we continue to work to manage down the cost, the big cost, primarily in personnel, marketing, and leveraging facilities. So as far as directly answering your question, I mean, if you looked at where the Baierl acquisition group has come in, they are definitely in the lower 70s. Downtown LA, actually that group is in the lower 70s.

We' have got some opportunities in upstate New York that we are working through right now and starting to finally get some momentum on. And then continuing to leverage the acquisition from DCH to maximize the next, and probably the final, push for them to get toward what we look toward a store potential.

Bryan DeBoer -- President and Chief Executive Officer

Rick, one other thing, and for those that are joining us for the first time on the call. Slide 7 shows our historical returns on acquisitions and how we recapture our entire investment within a five-year period, where you can actually see eight full years since we turned the faucet back on in 2010.

Rick Nelson -- Stephens Inc. -- Analyst

All right. Great. Finally, if I could ask you for an update on Shift. Maybe what your plan is for using some of their technology in your own dealerships, perhaps procurement or other opportunities?

Bryan DeBoer -- President and Chief Executive Officer

Rick, Bryan again. We are very pleased to how the progress has progressed over the first six months. It's neat to be able to learn how a digital company thinks and how they're so in tune with consumer behaviors and how to monetize those consumer behaviors through their technology. It's been fun to collaborate around people.

The technology currently is only being utilized in a few of the stores. This is their independent channel for business and growth. It's not necessarily ours today. Someday it could become that, but for now, it's really a second distribution channel directly to consumers' home to be able to purchase and buy cars from them.

So I think, for the time being, it is really their model. We are there to help guide them operationally and in execution more than anything.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks a lot and good luck. Thanks for reading through it.

Operator

Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Steven Dyer -- Craig-Hallum Capital Group -- Analyst

Thanks. Good morning, guys. F&I was really strong in the quarter, it has been for a bit now. Just wondering if you could get a little more granular on what's driving the strength there.

Is it just increased take rates, are there different product offerings, are the ASPs on those going up? What are you seeing there and how sort of sustainable is it going forward?

Chris Holzshu -- Executive Vice President

It's Chris. It's just kind of same response related to what I mentioned to Rick about SG&A. I mean, we've acquired $7 billion in revenue. One of the biggest opportunities that we have with new acquisitions that are coming in is the F&I opportunity and that really comes down to three core areas.

It's the people, products and the process that we instill to make sure that we stay focused on driving the F&I PVRs to the numbers that you see in a lot of our seasoned stores that are anywhere between $1,500 and $2,000 per unit. So we're going to continue to work kind of on the lower performers that continue to be part of the acquisition groups that we have done in recent years, and we feel like there is still quite a bit of upside for us there as we continue to season those stores.

Steven Dyer -- Craig-Hallum Capital Group -- Analyst

Great. And I was going to ask about your parts and service similar question, and I'm guessing potentially a similar answer.

Bryan DeBoer -- President and Chief Executive Officer

Yes, Steve, that's correct.

Steven Dyer -- Craig-Hallum Capital Group -- Analyst

OK. And then, I guess, lastly from me. As you look at maybe restarting the acquisition engine a little bit this year, any change in terms of geographies or what you're looking for in terms of sort of the legacy Lithia strategy of brand exclusivity in smaller, mid-tier markets versus large markets, any sort of change to the thought process as you go forward?

Bryan DeBoer -- President and Chief Executive Officer

Steve, this is Bryan, again. Definitely, no changes in our current strategy. No changes in our ROE hurdle rates. I think if we think about our national network, we would like to put some more meat on the bones in the areas where we are a little bit thin, which is the Midwest and the Southeast.

We are starting to be able to make a digital push into those areas to hopefully be a preamble to something in the future, which is good, but I would say that it's always about that value-based investing and finding those 2,600 stores in the country that are really underperforming in those four or five key areas where we have been able to prove time and time again with an 80% certainty that we're able to get that hurdle rate of getting our money back within a five-year period of time.

Steven Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. Thank you very much.

Bryan DeBoer -- President and Chief Executive Officer

Thanks, Steve.

Operator

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Bret Jordan -- Jefferies -- Analyst

Hey, good morning, guys. Could you talk about maybe regional performance on the new side, any dispersion in sales in the quarter? And then, maybe how you think you saw your volumes relative to the market in those regions, sort of, of a share gain standpoint?

Chris Holzshu -- Executive Vice President

Bret, this is Chris. As far as regions were concerned, we saw a single to double-digit improvements in gross profit across the board. I mean, the only market that we actually saw a bit of a headwind on was our Hawaiian market, was probably more personnel-driven and some transitions with some people there. But overall, we are continuing to really push on overall gross.

So even when we see a little bit of pressure on new car units, are focused on used cars, F&I, service, body and parts has really generated a nice story for us and we continue to anticipate seeing continued growth in gross profit across the board. If I had to pick like the big highlights that we saw, our markets in Nevada, New Jersey, Pennsylvania, and North Dakota and Alaska, all saw more than double-digit growth. So those are probably the positive for us on the regions.

Bret Jordan -- Jefferies -- Analyst

OK. I mean, a year ago, we were talking about the risk of maybe with a loss of state and local tax deductions, we would see some impact in demand. Did you see any, I guess, cadence shift through the quarter as people were doing their taxes and realizing they weren't getting a deduction as far as some of these state and local tax markets?

Chris Holzshu -- Executive Vice President

Bret, Chris, again. I mean, obviously the impact of some lower refunds for certain consumers may have had an impact on volume, but overall, our local market leaders are making great decisions as far as how to address what's happening in each of their stores and I would say, we didn't see a big impact there.

Bret Jordan -- Jefferies -- Analyst

OK. Great. And one follow-up question. I guess you talked about Shift with a $1 billion target for revenues.

Do you have a timeframe around that $1 billion?

Bryan DeBoer -- President and Chief Executive Officer

We'll let them answer that question. I know that they are on a clear path to be able to get there, and we're there to hopefully be some of the gas that goes into the engine to be able to get there.

Bret Jordan -- Jefferies -- Analyst

Great. Thank you.

Bryan DeBoer -- President and Chief Executive Officer

Thanks, Bret.

Operator

Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. I just wanted to follow-up on used and the strength there. I mean, how much of the 11% growth in same-store sales could be attributable to some incremental sales going through the Shift network. I'm just curious, how many of your stores are currently connected to the Shift system and how we should think about that over time?

Bryan DeBoer -- President and Chief Executive Officer

John, this is Bryan. There is only three stores that have any interaction with Shift at the current time. So it's not a big impact. The 10% increase in same-store sales in used cars is driven primarily off of our ability to procure inventory.

That is the No. 1 thing, and I think as you think about the used car business, those that can procure inventory and own the inventory are the ones that will end up in the greatest dominance of market share in the future. Chris, you got some other color to add on that?

Chris Holzshu -- Executive Vice President

Yes. John, just kind of as a follow-up to our prepared remarks is really around our street purchases, which is a big focus area for Shift on the one-sided marketplace. I think we have woken up a lot of our leaders to kind of look at maybe off-the-street purchases as a real opportunity to improve their procurement cycle. And right now, only 6% of the vehicles that we retail are coming from direct street purchases and as we mentioned we anticipate that will continue to grow.

John Murphy -- Bank of America Merrill Lynch -- Analyst

OK. How are you going out with the street purchase. I mean, it's cars for cash. I mean, is there a natural system or is there signs? I mean, how is that actually working? I mean, that's not part of a regular transaction, right? That's just going out and not a trade, it's just buying the car?

Bryan DeBoer -- President and Chief Executive Officer

That's correct. John. It's Bryan, again. That is directly buying them, that is not a trade-in.

Our trade-ins are almost 50% of our inventory. So being at the top of the food chain on that, sure helps a lot as well. I think when we look about going -- look at going forward, a lot of our street purchases today from consumers are done with heavy lifting. It's calling out at Craigslist, it's them walking in, it's them maybe not buying a car from us, but still wanting to sell their car.

And I think, as we think about going to market in the future and many of our stores are starting to touch on the digital presence, and being able to go right into people's living rooms and say, we'll come pick up your car directly at your home, and I think if you go to baierl.com, you can start to see what we're talking about, which is the pilot for the future of lithia.com as well.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Got it. OK. So that's going to become much more sophisticated over time, that's encouraging. Second question just on inventory on the new side.

I mean, you kind of alluded to it being a little bit high, it looks like the industry is a little bit heavy. What are you kind of hearing from auto makers as far as them pushing the inventory on you and you're able to kind of push back a little bit? Or do you expect the spring selling season to help work out of this, just kind of understand how that might get cleared in the next few months?

Bryan DeBoer -- President and Chief Executive Officer

John, I think that's our one big area of opportunity, and without increases in interest costs or inventories, we would have really had a killer quarter. I think that's part of the drag. I think when we think about our manufacturer partnerships, we think about seasonality a lot. So we are going into a seasonally better time of the year, so you should automatically see drops in that.

We are in the process of implementing an interest rate incentive for our stores to be able to drop inventory from our current about $1.8 billion in new car inventories. But we think that we can drop that somewhere in the 15% range through incentivizing our people to be able to, what I would say, discern a little bit better with utilizing technology and past sales, to be able to determine what things they should be stocking, but I would still say that we may still be a season or two away from having that really active and rolling. The other thing that we are seeing is with our manufacturers, it's primarily being driven off of incentives. I mean, you see incentives rise when there is too much inventory and you see incentives shrink like they did over the year-over-year basis, they're down about 10% or so.

That's usually an indication that inventories are going to start to thin out.

John Murphy -- Bank of America Merrill Lynch -- Analyst

OK. And then just on the front-end gross, you had some growth in the quarter. I think there was a lot of -- there had been a lot of concern with rates backing up that the F&I PVR part of that front-end gross may come under pressure, but now with the reversal and potentially reversal in rates here, we'll all see where this goes. It doesn't seem like there is a lot of risk to that F&I PVR number.

Could you foresee growth in your front-end gross? What do you think is kind of a -- do you have an actual target there? And is there kind of an esoteric limit we should be thinking about? I mean, it just seems like there might be more opportunity if rates are heading flat to maybe back down?

Chris Holzshu -- Executive Vice President

Yes, John, this is Chris. I definitely think we have opportunity in this. The balance that we put on our general managers to figure out each and every day based on the brand that they represent. So across the board, we were up in GPU dollars on every business line.

And that's a function of the reaction to maybe declining volumes on the new car side that a lot of our stores experience. So I think we anticipate that based on whatever the market is putting in front of us, our stores will react appropriately, knowing that the ultimate goal is to generate gross profit dollars, not generally drop off to bottom line, exactly, and bring it to the bottom line.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Is there sort of a rough rule of thumb we should think about that potentially going to $4,000. I don't know, I mean, is that something that's too pie in the sky for an average. I mean, over time, can this continue to grind higher?

Chris Holzshu -- Executive Vice President

John, this is Chris. I mean, a lot of our stores have focus on velocity, I wouldn't say that $4,000 is what they're focusing on, but in smaller markets, there are stores that have hit kind of that 120%, 150% sales efficiency number, where they have kind of captured the market or they're doing great on the used car side. I think then they'll start to sweeten the pot by pushing on more GPU dollars. So it's a store by store call and definitely opportunity there, but it's hard to predict what the final number is going to look like.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Gotcha. And then just lastly, Tina, I mean, you gave us an explanation of floor plan and why it shouldn't be included in the cap structure or the debt numbers, which I totally agree with. I mean, I'm just curious, why you felt it necessary to give that kind of an explanation on the call. Do you think there are some investors that are confused about this? Or has something kind of changed? I mean, I totally agree with the way you're looking at it, it's the right way to look at it, just curious what the motivation was?

Bryan DeBoer -- President and Chief Executive Officer

Great question, John. It's surprising -- we've been out on the road, Megan and I, for the last couple of months with investors. And it's surprising how much overhang there is about people outside the industry that have not really invested that are very nervous when they see that there is a six times plus leverage ratio, and they don't understand the flooring implications of that, that really bring it down to two times. So we thought for those people that are new to the call or new to the industry, it was very important to point that out because we think it's part of the drag on why our sector trades at such a discount to specialty retail or to exclusive parts, used vehicle or service providers.

John Murphy -- Bank of America Merrill Lynch -- Analyst

OK. Thank you very much. I appreciate it.

Operator

Our next question comes from the line of Armintas Sinkevicius with Morgan Stanley. Please proceed with your question.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Good morning. Thank you for taking the question. Just a few small ones here. Your same-store used was down roughly 7% and the comment was that it's in line with retail SAAR, although we have a retail SAAR number of down 5%.

I'm sure your data is better than ours, but just it doesn't seem to quite match up with retail SAAR, so is it a push for gross? Is it something else going on? Just curious there on the same-store sales for the new side?

Chris Holzshu -- Executive Vice President

Armintas, this is Chris. Just to clarify your question, I think you led with used car sales down 7%. I think you meant new cars.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Apologies, yes.

Chris Holzshu -- Executive Vice President

No worries. That's the rest of your question. So just to clarify that, and I think it really comes down to just a general mix issue. So just based on where we sit, we saw the biggest pressure on our domestic brands and some of the import brands as well.

So based on what the national numbers are, we don't kind of line up exactly to what national looks like, and I think we felt a little bit more pressure in those areas, and we are working through that. And one of the focuses on working through that is continue to push GPU dollars, which we did in the quarter.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. And then on the used side then, the strength there, is it the push with Shift? Is it a new focus? Is it getting the acquired stores more seasoned? Just trying to understand the strength there a little bit better?

Bryan DeBoer -- President and Chief Executive Officer

Armintas, this is Bryan, again. There is very little impact from Shift. Remember, it's only in three stores, and I think the procurement level was about 50 to 75 cars in the quarter. So it's a small impact there.

This is coming 100% from our stores finding the right cars and then pricing them at the right numbers and providing options for consumers to be able to finance them or to pick them up in different areas, whether it's our dealerships or at their home and really create a different type of experience wherever, whenever and however they choose.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. And then with regards to Shift, I know it's -- you mentioned, it's only in a few stores, it's their independent channel for business and growth and for the time being, it's their model. But any thoughts on when you would start putting your inventory on their site or is Baierl, baierl.com, the sort of the push of where you're putting the inventory online?

Bryan DeBoer -- President and Chief Executive Officer

Yes, this is Bryan, again. I'd almost explain it this way. I don't believe it's about getting more eyes on the inventory. I believe it's about getting more inventory.

So the idea of giving more visibility to Shift inventory on Lithia stores or Lithia inventory on Shift stores is less relevant than getting more vehicles. So I think we focus at Lithia, and I think Shift has done a very nice job at focusing on procurement, knowing that that's not where the battle is going to be won or lost, it's about being there to be able to buy the right cars. I hope that clarifies it, and I hate to simplify it that much, but that is what the endgame is in the space, is being able to procure the right inventory.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Got it. That's very helpful. Much appreciated. Thank you.

Operator

Our next question comes from the line of Rajat Gupta with JP Morgan. Please proceed with your question.

Rajat Gupta -- J.P. Morgan -- Analyst

Good morning. Thanks for taking my question. Just wanted to follow-up a little bit on parts and services. Could you elaborate a little bit more on the sources of strength there, both in sales and margins, which are up nicely and, again, across different parts of the businesses? Is it coming from different kind of band of vehicles or could you really just help parse that out a little bit?

Chris Holzshu -- Executive Vice President

This is Chris. I think that's kind of two-answered question there. The first part is really about UIO. And if you look back over the last 10 years, we are starting to see dropping off some of the smaller year SAARs in the $10 million to $13 million range that were back in 2009 to 2011.

So our UIO is continuing to grow, which is also evident in the overall car park, which is at 276 million units right now in the U.S., which I think is an all-time high. So that's continuing to help just as far as natural traffic. The other big piece goes back to acquisitions, again, where that $7 billion in revenue that we brought in, typically we see stores with service retention well below kind of the dealer's expected average rate of retention and what we are continuing to do is push those stores to get to where a lot of our seasoned stores are at, which is at plus 20%. So I think there is a lot happening related to the general market, but then our acquisitions coming online and focusing on service, body and parts the way our seasoned stores do is helping out a lot.

Bryan DeBoer -- President and Chief Executive Officer

One other thing to add is, it's key to remember that in those businesses, we are the top of the food chain, and we have been letting that business really move to independence, and over the last 7 to 10 years, we have really started to look at how do we become a commodity type of experience that's all about convenience and value for the consumers and that's starting to take hold, and I think it's part of the reason why we have had, now what, I would imagine it's close to seven to eight years of continual same-store sales increases in parts and service, but it's really a function of that, that we just weren't very good at that in the future, and now we're a one-stop shopping experience for our consumers.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That makes sense. Just wanted to follow-up on your M&A comments earlier this year. I mean, it sounded like, we could see an uptake in acquisition activity later this year.

Could you talk a little bit about the size of deals we might expect? I mean, could there be something as like a DCH? Or is it more combination of smaller ones? I mean, just being able to aggregate that a little bit?

Bryan DeBoer -- President and Chief Executive Officer

Sure. I don't mind giving you a little more color. This is Bryan again. I mean, we typically call our one to three store groups staple diet, OK? So you will see those trickling in periodically like we typically have done.

I think when we think about the areas that I mentioned, Midwest and Southeast, we would want to mid-size our larger group to be able to spend time logistically getting back and forth into those areas, and we need a management team with similar values that are customer based to join our team. So I think, unless we find that cultural fit, much like a DCH, we probably will move into those markets more as a slow move in the adjacent states. Outside of that, I mean, we always have our oars in the water and track those 2,600 stores, and I think it's fairly clear that a lot of the VC and private equity money seems to be leaving this space and having a fair amount of troubles, which is breaking some stores loose and obviously makes the buying environment much less competitive, so prices seem to be coming back into the realms of reality.

Rajat Gupta -- J.P. Morgan -- Analyst

That makes sense. Just lastly, on SG&A to gross profit. Obviously, good improvement here in the first quarter. I mean, excluding any acquisitions you might do, is that kind of the trajectory we should be anticipating for the rest of the year, if all else equal? Or is 1Q a little bit more of an anomaly and we could see a little bit of -- I mean, the question is basically, I mean, should we expect similar kind of decline the rest of the year?

Chris Holzshu -- Executive Vice President

Yes, this is Chris. I mean, we anticipate a continued focus on SG&A to gross, and we don't anticipate going backwards in that line item.

Rajat Gupta -- J.P. Morgan -- Analyst

OK. Thanks. That's all I had. Thank you.

Operator

Our next question comes from the line of Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Chris Bottiglieri -- Wolfe Research -- Analyst

Thanks for taking the question. I guess I wanted to first talk on warranty growth that really exploded this quarter. Your peer -- one of your peers coincided to a similar outcome. Curious if you expect this to continue for the rest of the year, or is there anything like large lumpy recall campaigns that are -- that you would expect to roll off?

Chris Holzshu -- Executive Vice President

Chris, this is Chris. I mean, we saw a number of OEMs that had significant positive recall activity, but really focused on four primary brands, which was Volkswagen, Subaru, Ford and Chrysler, and the big impact or the big recalls that helped drive the warranty related to airbags, some valve issues and some brake lights, which obviously we anticipate continuing for the rest of the year. So some good trends there. And outside of that, again, as we continue to push on UIO and selling more retail new vehicles, the warranty numbers will continue to go up.

Chris Bottiglieri -- Wolfe Research -- Analyst

That's really helpful. And then to understand kind of the impacts on -- is there a way to dimensionalize parts and service growth between traffic and ticket, trying to understand the impact from wage growth and probably parts inflation via the CPI growth like what that's contributing to the parts and service growth right now?

Chris Holzshu -- Executive Vice President

Chris, I think we have a lot of data that we can probably compile into an answer for that question, but we'll take that one off-line with you, if that's all right, later this afternoon.

Chris Bottiglieri -- Wolfe Research -- Analyst

That's great. OK. And then just one final one. Trying to think through such explosive growth in parts and service same-store sales and gross margin rate, and it sounds sustainable from what I'm hearing on the call right now.

So I'm trying to think through the incremental margins or SG&A impact from that, just going to see what this is doing to SG&A-to-gross metric. So is there a way to contextualize kind of the incremental SG&A that you have with parts and service growth or kind of maybe even more specifically, how much the parts and services SG&A rate improved this quarter?

Chris Holzshu -- Executive Vice President

Yes, Chris, Chris, again. Our focus on all of our core business lines is to continue to push for that 50% incremental throughput. So the incremental gross that we are generating in parts and service, we would expect to see at least 50% of that flow through to our operating profit. And that will continue to be our focus for the rest of the year.

I think one of the big opportunities and one of the big advantages that you have as a larger dealer really comes down to technicians. We have 75,000 technicians retiring out of this space in 2019. And from what I understand, there's 35,000 new techs coming in. So again, being kind of a larger dealer where we leverage better benefits, better pay, better training, able to attract more technicians and make sure that we can retain and do the work that's coming in is a big focal area for us, and we anticipate that with UIO increasing and our focus on tech recruiting, I think we are going to see continued positive trends for the rest of the year and beyond.

Chris Bottiglieri -- Wolfe Research -- Analyst

That's really helpful. Thank you.

Chris Holzshu -- Executive Vice President

Thanks. Chris.

Operator

Our next question comes from the line of Michael Ward with Seaport Global Securities. Please proceed with your question.

Michael Ward -- Seaport Global Securities -- Analyst

Thank you. Good morning. Just a point of clarification. I think, Chris, you mentioned in your remarks, and then Bryan you commented about incentives being down 10% year over year.

Are those the incentives from the vehicle manufacturers?

Bryan DeBoer -- President and Chief Executive Officer

Yes. The incentives from vehicles manufacturers is at 3,850 last year, and they're just under 3,600 this year approximately. This is triangulated number, OK, so kind of keep that in mind.

Michael Ward -- Seaport Global Securities -- Analyst

Right. Have you seen that continue in April?

Bryan DeBoer -- President and Chief Executive Officer

We have. It's a similar trend line.

Michael Ward -- Seaport Global Securities -- Analyst

Okay. And just a follow-up on the parts and service. One of the things that I think the industry, you've always had this big drop off after year 1 and year 2, with the retention levels. How was your experience been with the 3, 4 and 5 years into the ownership experience with retention levels?Bryan B.

DeBoerThat's a great question, Michael. It's Bryan, again. I think when we think about old -- automotive new car retailers, we were warranty businesses. Today, that's not who we are.

We think about the life cycle of a consumer of what they do with their vehicle for the entire ownership period and possibly even into their second gen. So we actually when warranty begins to get close to expiring, which is typically three to five years, we start to introduce the idea of lower-priced parts and service experiences. That comes through some aftermarket, although we do prefer OEM parts on our cars. We teach our people to be sensitive to that with the consumers because not all consumers will stay with us, if we only sell them OEM parts when an aftermarket could be half the price.

That's allowed us to really retain customers at a higher rate. I noted in my comments that when we buy stores, retention of consumers, which means a consumer that's in our 10-year UIO comes into our dealerships at least one or two times a year depending on what manufacturers we're talking with, but what basically happens is, we have increased that retention rate to over 25% of average, which is a fairly substantial increase and beyond. The other adjacencies of us being able to sell and expand our product offerings into batteries or windshield wipers and tires and brakes and shocks and all the other things that we are top of food chain on, are now adding to that existing business. So the idea of a two- to three-year life and service with our consumers is not quite the same as it used to be.

Keep in mind this one thing as well. Our facility utilization in our service departments still remains at less than 50%, which means that if we open longer hours and filled our stalls and were able to turn that business into production, that we still have double the potential with our existing base without spending any additional capital.

OK. So it sounds like the growth in the parts and service, there's no reason not to expect that we shouldn't see those types of levels, maybe incentive in the past were we thought 3% to 5%, maybe the 5% to 7% type levels of growth are more normal?

Bryan DeBoer -- President and Chief Executive Officer

I think -- Michael, I think that's probably accurate, and I think the better our stores are at understanding consumer needs, the better that we'll be and the longer that we'll be able to retain those customers.

Michael Ward -- Seaport Global Securities -- Analyst

And just one last question on Shift. If the website says they have roughly 700 units in inventory. To me that suggests that they're selling 3,000 to 4,000 units a year. If that's the right bucket, that would explain why we wouldn't see anything, any equity income line or anything like that on your results.

As it grows toward or it starts to expand out and grow the inventory that you enable, there could come a point that we start to see those numbers on the equity income line, is that how it would be presented?

Bryan DeBoer -- President and Chief Executive Officer

This is Bryan, again, Michael. Yes, if we get into an equity position, you're accurate. We currently don't sit at an equity position yet. I think if you think about their inventory as well, their inventory may not show their entire inventory on that specific site.

I believe it's about double that, but we can have you circle back with George or Toby at Shift and they can give you the particulars and what their run rates and stuff are.

Michael Ward -- Seaport Global Securities -- Analyst

So what is your relationship? It's just a partnership, you have no equity stake?

Bryan DeBoer -- President and Chief Executive Officer

Correct. You want to elaborate on that, Tina?

Tina Miller -- Vice President and Chief Accounting Officer

This is Tina. So just to clarify, we do have some ownership in Shift, right? We made the investment back at the second half of last year. It's not a material component of our financial statements, which is why you don't see it called out.

Michael Ward -- Seaport Global Securities -- Analyst

OK. And what level does that become significant? Is there a point -- is there a certain barrier that has to reach as far as in effect 1% or something like that?

Tina Miller -- Vice President and Chief Accounting Officer

Yes. Typically under guidance, right, it's less than 20% ownership, allows you to kind of --

Michael Ward -- Seaport Global Securities -- Analyst

OK. That's fine. So it's more the ownership level. Perfect.

Tina Miller -- Vice President and Chief Accounting Officer

Yes.

Michael Ward -- Seaport Global Securities -- Analyst

Thank you very much.

Bryan DeBoer -- President and Chief Executive Officer

Thanks for your question.

Operator

[Operator instructions] Our next question comes from the line of Derek Glynn with Consumer Edge Research. Please proceed with your question.

Derek Glynn -- Consumer Edge Research -- Analyst

Good morning, and thanks for taking the question. Given continued growth in new prices and loan rates where they are, do you think we're broadly approaching affordability problem in new vehicles?

Bryan DeBoer -- President and Chief Executive Officer

Derek, this is Bryan. No, I believe that manufacturers and retailers are pretty adaptable to those increases and figure out solutions for consumers to be able to afford new cars in any type of environment.

Derek Glynn -- Consumer Edge Research -- Analyst

OK. Got it. And then just secondly, just want to get your pulse on the auto credit environment. Is credit still widely available, have you seen any signs of a pull back?

Bryan DeBoer -- President and Chief Executive Officer

Derek, this is Bryan, again. No, it's widely available. I would say that it's definitely a driver. Leasing is in full swing, which is an important part of the model.

Valuations are stable in terms of LAD's, which is great. We don't foresee any blips on the radar, which is good. And we look forward to a solid next few quarters and years.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. DeBoer for any final comments.

Bryan DeBoer -- President and Chief Executive Officer

Thank you, everyone, for joining us today, and we look forward to updating you on the second-quarter results in July. Bye bye.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Megan Kurz -- Director of Corporate Finance

Bryan DeBoer -- President and Chief Executive Officer

Chris Holzshu -- Executive Vice President

Tina Miller -- Vice President and Chief Accounting Officer

Rick Nelson -- Stephens Inc. -- Analyst

Steven Dyer -- Craig-Hallum Capital Group -- Analyst

Bret Jordan -- Jefferies -- Analyst

John Murphy -- Bank of America Merrill Lynch -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Rajat Gupta -- J.P. Morgan -- Analyst

Chris Bottiglieri -- Wolfe Research -- Analyst

Michael Ward -- Seaport Global Securities -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

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