Q2 2023 Lithia Motors Inc Earnings Call
Good morning, welcome to Lithia, and Driveways second quarter 2023 conference call.
Lines have been placed on mute to prevent background noise. After the Speakers' remarks, there will be a question and answer session I would now like to turn the call over to admit marijuana director of Investor Relations. Please begin.
Thank you for joining us for our second quarter earnings call for 2023 with me today are Bryan Deboer, President and CEO , Chris Hoelscher, Executive Vice President and C O O Tina.
Tina Miller, senior Vice President and CFO and.
And Chuck Lee Senior Vice President of driveway finance.
Today's discussion May include statements about future events 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 materially differ from the statements made we.
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 to 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. Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website investors Dot Lithia driveway dotcom.
Highlighting our second quarter results.
With that I would like to turn the call over to Bryan Deboer, President and CEO .
Thank you Amit good morning, and welcome to our second quarter earnings call. We appreciate everyone joining us today and for the opportunity to update you on our business strategy growth and progress towards our 2025 plan and beyond.
In Q2 with Eon driveway grew revenues to $8 1 billion up 12% from 2022, resulting in adjusted diluted earnings per share of $10 91.
Sequentially Gpus were a little stronger than expected for both new and used vehicles and F. N F&I margins remained stable.
Thus far in 2023 Gpus for new vehicles have come down approximately $100 per month half of our original expectations.
We remain focused on growth and profitability and we look to gain further efficiencies across our businesses.
Our model is dynamic and diversified, allowing our vehicle operations in stores to adjust with local market dynamics.
This provides customers a variety of products and services, allowing us to serve customers across a wide set of demographics and manufacturing partners.
By offering a variety of channels to interact with customers our model fosters a responsive and adaptive culture that consistently delivers the best experience for our customers wherever whenever and however, they desire.
Sustainable vehicle sales continued to gain momentum in the quarter up almost 50% over the prior year and now representing nearly 10% of our overall, new and used vehicle sales.
And movies on our Green cars Dot Com channel was also up 73%, which reinforces the propensity for consumers to continue to explore sustainable options for their next vehicle purchase.
In Q2, SG&A as a percentage of gross profit was 64% versus 62, 7% sequentially adjusted.
Adjusted for the impact of our Adjacencies are core business SG&A as a percentage of gross profit was approximately 58% in the quarter.
This demonstrates the effectiveness of our cost cutting efforts and they're flowing through to our operating results, while still executing on our overall strategy.
Our captive finance arm driveway Finance Corporation, or Dfc continued to show steady growth with total receivables now over $2 $8 billion.
We're well capitalized and on our way to becoming systematic ABS issuers by year end and we're managing our loan loss provisions in line with expectations.
We are balancing the pace of originations with profitability to prudently grow the lending portfolio expand our net margins, while improving our liquidity and capital costs.
Both Chris and check will be sharing further details on the results of both vehicle and financing operations later in the call.
Acquisitions are fundamental to our customer centric strategy, enabling regular touch points with our customers and ultimately providing them with a convenient set of solutions throughout the ownership life cycle.
Our network aims to place us within 100 miles of consumers, which allows us to leverage our physical infrastructure as we continue to lessen our mix in the western region, while diversifying our network, which also aligns with the expansion of our national brand and growing our Omnichannel presence.
Our focus and discipline remains targeted on the most profitable regions in our country like the southeast and South Central where we have plenty of runway to expand relative to our peers.
Acquisitions are a core competency of lithium driveway and we are proactively looking to new opportunities that can be complementary to our business.
Our investment threshold remains consistent both in the near term and for the balance of our 2025 plan specifically, we target after tax returns of 15% or more and aimed to acquire for 15% to 30% of revenues or three to seven times EBITDA based on normalized earnings.
Life to date, our acquisitions are now yielding a 98% success rate.
We continue to be disciplined in our acquisition strategy balancing valuations with future returns and the potential for increasing cash flow generation.
We are patient and have the flexibility to manage the pace at which we decide to acquire businesses that fit within our network development strategy and most importantly return expectations.
During the second quarter, we completed two acquisitions in the United States, which are expected to generate approximately $1.5 billion in annualized revenues.
The first purchase was the high performing priority automotive group and the mid Atlantic, where we acquired 13 stores and over $1 $2 billion in annualized revenues.
Our latest acquisition weighed Ford expands our footprint in the southeast city of Atlanta, enhancing our position in one of the fastest growing and most lucrative regions in the United States.
Year to date, we have already acquired nearly three $6 billion more than all of last year's activities.
I'm glad to welcome our newest associates to the Lithia team and expand our nationwide presence and continue our growth throughout the rest of the year.
We're well on our way to achieving the upper range of our acquisition target of $3 billion to $5 billion in acquired revenues per year.
Our priority remains acquiring stores in the United States, but attractive valuations and opportunistic transition actions may warrant exploring other opportunities as well.
Selling decisions are driven by succession planning monetization and sellers that wish to partner with us and Lithia is long tenure of successfully completing deals in a timely and confidential manner.
We're proud of our track record of executing and integrating multiple transactions as we make our way towards our $50 billion in revenue target and beyond.
Now onto an update on our strategy and plan.
We just passed the midpoint since launching our initial plan and we are on track to achieve the objectives, we outlined in the market in July of 2020.
Since the launch we have acquired now over $17 $5 billion in revenues.
Driveway Finance Corporation, our captive Finance Division continues to make steady inroads as our top finance partner.
Despite the initial headwinds have starting dfc, our investment will realize its potential and contribute massively to future profitability.
As a reminder, the average loan we originated Dfc is three times more profitable over its lifetime relative to the fees. We received from third party commissions.
Finally, our Omnichannel presence continues to gain momentum as customer traffic to our various channels grows amongst consumers across North America and abroad.
Ladder is well underway to become the international Omnichannel mobility provider with an assortment of offerings for a diverse set of consumers.
Key to the plan is changing the economics of automotive retail by increasing overall margins and lowering SG&A through growth efficiency and diversification. These.
These design enhancements will D link our traditional one dollar of EPS being produced for every $1 billion of revenue.
Our first step is achieving $1 10 to $1 20 for every billion dollars by 2025.
This is being driven by several key factors as follows.
First achieving through scale, a blended U S market share of two 5% or more through acquisitions and channel expansion and same store growth improvements in a normalized Saar environment.
Driving SG&A as a percentage of gross profit to 60% through increased leverage of our cost structure in a normalized GPU environment and optimizing our network.
Sharing our first adjacency DSC and achieving profitability in 2024.
Driveway dot com, continuing to expand revenue and consumer optionality by attracting 98% new consumers through a simple and transparent one price experience directly to your home and a more efficient manner.
And finally, returning value to shareholders through dividends and flexibility in capital allocation for share buybacks when it makes sense.
We have created a unique foundation possessing a culture built on growth and higher performance with a capital engine annually generating significant free cash flows in an unconsolidated industry.
This positions us well for future growth were 1 billion in revenue generates $2 in EPS twice the amount of earnings and cash flows in a normalized steady state environment.
Key factors underlying our future state and totally within our control are as follows.
Optimizing our network through gradually lowering our west coast mix of business by focusing on buying in other regions.
Divesting of small less efficient locations expanding reach with our omnichannel platform maximizing leverage of our physical infrastructure and maintaining a portfolio of high performing businesses in locations.
Second financing up to 20% of units with DSC and maturing beyond the headwinds associated with seasonal reserves.
<unk> scale will continue to drive down vendor pricing develop competencies internally to save costs and lowering borrowing costs as we path towards an investment grade credit rating.
Maturing contributions from other horizontals, including fleet lease management charging infrastructure consumer insurance and other new verticals.
And finally, including the things above we will leverage our cost structure and customer lifecycle design to reduce our SG&A as a percentage of gross profit to 50% or below.
These assumptions are based on a normalized GPU in SAR and finally, a steady state for each of our business lines.
In closing lithium driveway provides a unique mobility platform that manages various transportation solutions and creates a great customer experience boosting revenues scale and profitability.
Our strong acquisition cadence combined with improved productivity and efficiency are helping us to outrun the normalizing market conditions are.
Our foundation is durable and our network is diversified and vast meeting the shifting needs of consumers with both online and in store solutions, coupled with financing solutions like Dfc.
The combination of our strategy and experienced team.
Gives us the confidence in our ability to achieve the $50 billion in revenues by 2025.
Equating to 55 plus dollars of EPS.
With the goal of $1 billion in revenues translating into $2 in EPS in the long term.
Ultimately, we're focused on delivering value and returns to our shareholders over time with that I'll turn the call over to Chris.
Thank you, Brian and good morning, we appreciate the efforts our operational teams put forth in the first half of 2023 and their continued drive towards executing on our strategic plan, we remain disciplined on delivering a customer centric experience with the convenience of an omnichannel offering that drives profitability cash flow sustained growth and the best in class written.
Turning to our shareholders.
As it relates to the second quarter several factors led to our better than expected results. These include a progressive focus on consumer Optionality and sales and service sustained pent up some interest in new and used vehicles better than expected resilience in gpus sustained strength in our high margin fixed operations business and improvements in our cost structure.
We continue to see healthy demand for new vehicles, even as rates and average vehicle prices continue to rise as customer resiliency and continued investment in transportation needs moderates related increases in monthly payments. We're also seeing inventory availability at all Oems improve and gradual increases in incentives continue to give relief to consumers.
<unk> impacted by the higher rate environment, the gradual rebuilding of new inventory is underway and we will continue as the year progresses, which will give consumers more selection and we will continue to support pent up demand.
We continue to outperform in most markets and saw favorable market conditions, and our northeast southeast and south central regions or regions four five and six we also saw some recovery in the southwest region to our largest region, the north west and north central regions or regions, one and three continue to experience tepid growth.
But our specific locations outperform the market and gain share regardless of the macro or market level dynamics. Our focus remains on local leadership, who are accustomed to delivering market share gains and improving operating leverage and profitability throughout the business cycle, our ability to adapt to these local market dynamics allows our team.
To adjust quickly and effectively which we continuously see translating into high performance.
Same store new vehicle revenues were up 7% for the quarter due to unit volumes, increasing three 6% and Asps rising three 3% new vehicle Gpus, including F&I have remained elevated at 7112 per unit down from $7500 in Q1 of 2023 and $8415.
In Q2 of 2022 consumers are focused on finding affordable vehicles and have the ability to choose from a massive influx of new models. We anticipate incentives will continue to grow to support demand for new vehicles and over time. This additional new vehicle supply will improve the related headwind and the used car market shifting to us.
Vehicles same store used vehicle revenues were down 15, 8% driven by unit volumes declining 11, 6% and Asps decreasing four 7%. The recent decline in used car prices as a result of higher interest rates and gradual pace of new vehicle inventory improving however, the U S car Park lost approximate.
8 million units during their production declines in the Covid pandemic, which will provide years of demand tailwind for used vehicle inventory. This scenario again highlights the benefits of being a top of funnel new car dealer, where access to customer trades and off lease products from our partner Oems is a massive differentiator as it.
Rents over 75% of our used vehicle sales.
Currently we have a robust supply of late model inventory and continue to work all our procurement channels to improve our core inventory product or three to seven year old vehicles, which are the hardest vehicles define and make up 60% of our total volume.
Including F&I Gpus were 4280 up 6% compared to Q1 of 2023, but down from $5122 in the prior year overall low inventories continue to support Gpus and overall prices, which again, we expect will take several years to rationalize.
At the end of June vehicle inventory day supply was 51 days for new and 58 days for us compared to 32 days and 62 days. This time last year, we are managing our inventory to balanced with our local demands and remain conservative in our outlook for margins.
Combining our in store footprint of over 340 locations with our in home and E. Commerce channels, we offer convenience to our customers and optionality to the retail experience. They desire in the quarter that the end driveways online channels averaged 11 million monthly unique visitors an increase of 42% from the same period last year with <unk>.
Advertising spend down 10% total e-commerce sales during the quarter were over 36000 units are up 14%.
Our efforts to improve economics at driveway and our brand recognition remains on the right track as we continue to focus on improving the consumer shopping experience.
Enforcing driveways model continues to be incremental to our overall sales with the average distance for deliveries being over 803 miles from the selling store location and 98% of those consumers have never shopped with us before.
Our national network reaches that given this the ability to touch 50 times more customers without fixed investment as we continue to expand the power of Omnichannel with driveway, we are leveraging our underutilized network to facilitate more auto related transaction as we move towards delivering a profitable online and.
In home experience.
During the quarter service body and parts delivered strong same store sales rising five 8% from the same period in 2022 customer pay which represents 57% of our after sales business was up six 1% while warranty.
Warranty sales were up 11% with the average age of vehicles horizon, coupled with the increasing complexity of new vehicles. Our team of certified factory trained technicians are working hard to deliver on the massive demand for services from our customers.
Excluding adjacencies, we reported SG&A as a percentage of gross profit at 58% versus 64% on a consolidated basis, we continue to see operating improvements and better throughput and net and thus far in 2023, we have reduced overall SG&A by almost 300 basis points translating into a throughput rate.
Of 60% this implies our cost reduction initiatives are driving operating leverage and improvements in productivity within our sales force our top quartile of stores continues to realize even greater results delivering SG&A to gross profit below 50% setting the bar for what we expect all of our locations to achieve over time.
We are confident we have implemented the changes necessary to realize the cost savings of $150 million annually laid out in Q1.
To summarize we are focused on improving our performance integrating new locations and attracting more consumers into our omnichannel offerings are leaders are navigating the current operating environment and expanding consumer optionality and the related services and sales and service and will continue to focus on executing our plan in the back half of 2023.
And beyond with that I'd like to turn the call over to Chuck Thanks, Chris since launching our captive finance division over three years ago. Dfc has continued to refine its underwriting process to align with current market conditions early last year, we pivoted towards underwriting higher quality paper to mitigate the stress in the general economy.
Potential volatility in the used vehicle market to put this into perspective on a year over year basis. The portfolio weighted average FICO score increased from 684% to $7 15, and the front end ltvs have fallen from nearly a 101, 4% to 95, 8% Dfc was able.
To improve credit quality, while at the same time, increasing our yield as the year to date portfolio weighted average APR rose from eight 3% to eight 8% as the captive lender for Lithia and driveway combined with our proprietary data this enable us to outperform traditional lenders, giving us the opportunity during our.
Higher return on assets over time it's.
It's important to remember Dfc is part of a broader customer centric strategy for lithia. It complements the core dealership business and our Omnichannel strategy a driveway. Additionally, we're well positioned for further growth as lithium moves into other mobility verticals and regions ultimately a robust captive finance business provides lab.
With a counter cyclical and diversified earnings stream that also increases customer attachment and retention rates.
Turning to the quarter results the portfolio grew to over $2 8 billion.
We originated $558 million in loans equivalent to a penetration rate of 12, 1%.
For the full year, we expect penetration rates to be approximately 12%, we realized a 53 basis point increase in the weighted average APR sequentially.
The reduction in the penetration rate from the previous quarter is primarily a result of our focus on yield along with units acquired through the purchase of <unk>. As a reminder, we are presently not originating loans in the U K and Q2 Dfc posted a net interest margin of $18 million and an operating loss of $19 million.
The provision expense was $25 8 million, which included the impact of the noncash vessel reserves taken at origination and an increase in our provision rate at the end of the quarter, we increased our allowance for loan losses as a percent of receivables to three 2% as a result of declining used vehicle prices daily.
<unk> rates fell by 73 basis points from the previous year due to an improvement in our credit quality of our portfolio coupled with enhancements in our operations on a side note in the second quarter 30 day, plus delinquency rates increased sequentially by 40 basis points, but this was expected and consistent with historical seasonal trends.
Halfway through 2023, DSC is incurred larger losses than originally forecasted and we now expect to incur a loss in the range of $50 million to $55 million for the full year. However losses are expected to decrease sequentially and we are confident the business is on track to breakeven in 2024 and over time realize the.
<unk> future state of $650 million of earnings on a fully mature portfolio. We believe now is the right time to invest in Dfc. During this startup period, which will bring us closer to achieving our future state profitability goals. In addition, Dfc has an ability to improves lithium capital costs and operating leverage which should over.
Time materially improved lithium ratio of revenues relative to earnings per share with that I'd like to turn the call over to Tina. Thanks, Chuck and thank you everyone for joining us today in the second quarter, we reported adjusted EBITDA of $503 million down 9% from last year. This result was driven by the impact of higher flooring interest.
Costs and investments across our Adjacencies offset by the strength in new vehicle demand in parts and service. We ended the quarter with net leverage excluding floorplan and debt related to DSC at two times.
During the quarter, we generated free cash flows of $354 million and $731 million year to date, we have defined free cash flows as EBITDA plus stock based compensation and reduced by interest and income taxes paid in cash.
On track to deploy these cash flows in line with our capital allocation strategy, namely, 65% toward acquisitions, 25% directed to internal investments, including capital expenditures and 10% for shareholder return in the form of dividends and share repurchases when they are appropriate and opportunistic.
The acquisitions completed in the second quarter were funded through a combination of free cash flows in our working capital facilities, we reiterate our goal to maintain financial discipline with leverage below three times and remain committed to achieving an investment grade rating overtime, while prioritizing growth and acquisitions in the near term through.
Through the first half of 2023, we have seen more orderly trends around inventory, resulting in GPU declines being slower than originally anticipated well Dfc has a slightly larger loss outlook. Chuck mentioned earlier, we expect this to be offset by the positive top line trends and our ability to continue to leverage our cost structure and drive profitability.
We're well positioned and have sufficient liquidity to achieve our 2025 plan, we remain focused on our growth trajectory, while preserving the quality of the balance sheet and reaching profitability in our maturing adjacencies.
As we work toward achieving over $55 and earnings per share as part of our 2025 plan and further profitability expansion in the long term, we are driven by our culture of growth and high performance to generate value for our shareholders.
This concludes our prepared remarks with that I'll turn the call over to the audience for questions operator.
Thank you.
To ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Please ask one question.
And one follow up question.
Our first question is from Danielle <unk> with Stephens. Please proceed.
Hey, good morning, everybody. Thanks for taking my questions.
Good morning, Daniel Bryan I want to start on the new side of the business. You know obviously, you mentioned Gpus have held in better than feared and maybe even despite the inventory build gpus.
Many of your peers just curious can you talk about any updated thinking on the pace of reduction you mentioned right now it's been about 100 Bucks.
A month and then how are inventories trended here into July any any notable change in any of your OEM it mix here quarter to date.
I'll, let Chris speak to inventory in just a second I think in terms of.
Looking forward on where we where we see Gpus going I think we still are in the camp that GT Gpus will normalize we still believe it's somewhere between three and $500 above pre COVID-19 levels that feels like the right number of what the what what supply and demand will once it eventually levels out will look like.
I would say in the shorter term I think the 100 dollar reduction or about half of what we originally expected throughout the rest of summer and probably into early fall is a good number in terms of GPU reductions on new cars I think once we hit October November December again, and we get normal seasonality I think.
$200 helps take us back closer to that normalized state that I spoke to at the start Chris you weren't talking about inventories, yes. Good morning, Daniel This is Chris.
The inventory question is hard to answer only because when you look at an average days' supply the split on that goes from six days supply on a mainline import and then an 83 day supply on a large domestic and so you know what it is is that given that takes between all the EMS that make an average but what we do know is.
The lower price vehicles that are affordable for consumers and the affordability is a big piece of this that are on the ground are turning faster than heavy content vehicles and more expensive vehicles. So.
That's where inventory sits today.
Great. That's helpful and then from a follow up on touch on SG&A, maybe Tino or Brian you know SG&A really impressive beat our numbers, even as Gpus normalized was there anything anomalous.
This quarter to call out that was one time or are you just capturing more efficiencies and if you are maybe could you talk about when we think about the stores other than head count reductions can you offer examples. It anywhere you are improving the cost structure, just as we try to underwrite or think about sustainability.
Hi, Daniel This is Brian there are no anomalies in the SG&A in the quarter more.
More importantly, the 150.
And the stores that we had earmarked what three quarters ago, and the $15 million in support services are pretty well underway.
We think that we've got that now all under control I think the thing that maybe was slightly different than what we expected we did see a little bit better strength in what we call our region to which was the southwest which.
Which was nice to see and if you remember last quarter, we were getting hit pretty hard in the upper Midwest and the two western regions now we're only getting hit.
<unk> been in the upper Midwest and the northwest so that's.
That's good signs I think when you think about the structural changes that we can make in the business going forward I think it boils down to the two thirds of our SG&A costs.
Our variable personnel expenses and I think what driveway does and what our other strategies employee or are thinking about the cost and improving the productivity of those people, but we know as we have the best people in the industry, they're very efficient they understand how to respond to the marketplace.
And maybe most importantly, they they measure their success.
Not solely by the financial.
Results, but also by the trust they earn in their customers and that's a little different of how to get there and when you focus on that you do start to focus on high performance and you're able to then reduce those bottom third of associates that maybe arent getting there and redeploy them or move them on to to some other some.
Another place you know.
So whatever whatever our future holds it is focused on the personnel costs and making sure that we leverage the best talent within our organization at a higher level, you know and I think that's what you're what we're really seeing and in the quarter.
Our next question is from Rajat Gupta with Jpmorgan. Please proceed.
Great. Good morning, Thanks for taking the question I wanted to ask you know the first one on the used car.
And used cars.
Obviously like to Daniel's question like it rebounded the Gpus rebounded off a lower base.
We saw that a totally independent peers as well, but any way to think about the trajectory.
The trade off between volumes within Gpus.
For the remainder of the year you get more trades.
Lower lower leases.
Is there any opportunity to do more active sourcing to drive more volumes.
That would be helpful.
Hey, Roger Good morning, it's Chris.
Great question I think all of this right now really comes back to the whole idea of the consumer and the affordability for consumer I think the example that we see on that on new as you know our luxury sales were up 15% import sales up five domestic down six I mean that tells you kind of where the consumers are out on the new car side and what we're seeing on volumes. We see the same thing on the used car side.
When you look at your CPO volumes, they were down 2%, but our core product or that kind of three to seven year old product, which is 60% of our sales is down 18% and that really comes back to your point on procurements. So really those high demand vehicles, which I think are the most competitive set right now that you have not only for new car dealers, but also a stand alone.
Used car dealers.
It's a procurement opportunity for us in a time when consumers are kind of taking a headwind a little bit on where things are going with interest rates, where they're at with negative equity being that they bought a lot of vehicles three to four years ago.
I should say one to three years ago. When the market was really hot on the new car side, it's trying to figure out how do we provide the right vehicle to the right customer at the right time, and I think thats the huge benefit that we have as an omnichannel retailer, we have 1400 finance specialists that help.
Identify the right vehicles with the customer that they can afford at the right time and so procurement is a big piece of this as.
As we mentioned 70% of our our used inventory is coming in off of trade. So the 30% that we have to go get outside of the trade channels is what we need to continue to focus on.
And accelerate.
Got it got it did you see the used cars com.
We're getting better here going forward.
Do you think like it is going to remain light.
Quite a bit.
No I mean, it sounds like some of the procurement initiatives that you have.
Rajat. This is Bryan again, I think definitely if you remember it was two quarters ago that we said that we had difficult used car comps coming in when we had a shortage of new cars all of our stores converted to selling used cars, which inflated those numbers. If you think about it from a supply chain as well, we've got 8 million vehicles.
<unk> that arent in the marketplace that are used so as supply comes back more people can trade in cars that they've held on to a year to two years longer than they typically would hold on to them. So really important thing to realize is that as sark returns back to $17 million that frees up the used car inventories in the core product that Christmas.
Speaking to.
Our next question is from John Murphy with Bank of America. Please proceed.
Good morning, everybody.
Just a first question you said something very interesting about the success of your acquisitions in an externally it looks like everything is going very well in.
Larry is going pretty well, but you mentioned you had 98% success rate I'm, just curious how you measure that and call and acquisition success.
And what the other 2% it may not be consider success, what does that mean and when you think about what's going on with the integration of <unk>.
Maybe you can give us an update of how that is how thats going on progressing.
Great Hi, John This is Bryan.
It's important to remember that we've always established a 15% after tax return as the definition of success typically where we're running at about 85% success rate.
We optimized our network, meaning we sold what 34 stores over the last three years, which took out a lot of what we would call. The underperforming smaller stores I think our average store size other than two was about a $20 million revenue store when our average revenue in currently of our business is about $100 million.
Okay. So we got rid of the stores that were underperforming. So we do measure the stores that are currently within our network not the stores that we divested. So there is another 5% to 8% that that came through the selling of those stores, but today, we do sit at 98%, Yes earnings may be still a little bit high.
But generally speaking virtually all of those stores are considerably above the 15% I mean, we have we have transactions that are returning today, okay at almost 80%, 90% after tax okay, meaning that we paid six months to eight months of revenue or earnings for those businesses.
Like those key stores in Texas, Okay, and Theres, a theres a number of examples so when we think about the success rate. It is truly of the portfolio that's sitting there.
In terms of jar D and I think that was the second question.
I think it's neat to see that the that the trough Saar is recovering we are a big tailwind that's occurring in the United Kingdom, which is nice to see I think there is some supply issues. We're getting some early reads on what agency could look like with Mercedes efforts in the United Kingdom, which is great.
<unk> in terms of the entire customer lifecycle, and how a manufacturer and a retailer can work together to create better experiences for our consumers, it's great Chris and I were actually over in the United Kingdom or was it three weeks ago, three weeks ago and Neil.
Neil are our CEO , our president in the United Kingdom had a leadership conference that he invited us to and we got to do a really fun song song and dance on stage with.
With Neal and then hang out with his leadership team, but we bought a wonderful organization that is culturally a perfect fit for our organization in fact, Neil brought his family over for two weeks and was really excited to be able to go to Redding, California, because he has a reading U K anyway, he didn't actually end up going there but.
Really good combination of people and we really look forward to the continued development of its customer base and growth in Western Europe , and the United Kingdom over the next half decade or so.
And if I can squeeze in one follow up you mentioned that it sounds like Chrysler inventory or slant inventories on the high side.
I'm, just curious if you're seeing any pricing pressure or incentives coming in to help move that or is it clear to you that this is sort of buffer stock in front of a potential UAW strike in September .
I think the big thing to keep in mind, there John that that debt UAW strike it could help stabilize.
Our margins, which is quite nice it may be part of the reason why I mean.
<unk> hedged a little bit of that 100 dollar declines.
<unk> declines.
If we do get that strike with certain manufacturers it could be a nice thing to help stabilize those gpus for a little bit longer but all in all I mean, they are on the right pathway.
They may they it's Chris do you have anything to add on that no.
John I didn't actually say Atlanta, so a good guess on that one and I really think it is about inventory mix and incentives that they continue to recover we are seeing a recovery, but the general incentives are down still 50% of what they were kind of pre COVID-19. So I think as you see supply come back Youre seeing and fleet kind of rebuild thats the other side of it.
As a fleet cycle gets filled I think youre going to see a lot more incentives come back to consumers, which goes back to supporting the affordability question that our finance specialists continue to try to answer for each of our consumers.
John .
Our next question is from Colin Langan with Wells Fargo. Please proceed.
Oh, great. Thanks for taking my questions, maybe just to follow up on that and any color on how the mark the Gpus on new for domestic import and luxury are trending I mean, if inventory is pretty close to back to normal or the domestics kind of back to pre COVID-19 levels and the imports are where margins are key.
All of it elevated margins.
I think again this is Chris it's a mixed bag I mean, when you look at what's happening on.
Let's say general Motors General motor sales up.
Up 3% versus Chrysler sales down 14 for us and so the Gpus kind of followed the general trends.
That you're seeing based on supply and demand and so.
More inventory generally means more discounting.
And.
We're kind of watching it out like I said Theres a day supply shift of our differential between six days on an import and 83 days on a domestic and so kind of everything falls out in between there. We can give you we can give you some basics on domestic.
Gross profit this is not Gpus. This is gross profit.
Oh this is GPU oh, great domestics are down 9%.
Imports were finally, starting to get a pretty good amount of supply.
I think in the month of May we were up 53% and Honda sales and <unk> sales were quite strong in June . So there their recovery was quite nice too, but our import gpus are down 25% a lot of that is just having the supply to loosen up loosen things up a little bit in luxury is down about the same as imports.
Yes, if you think about the big push that we have right now from our Oems. It's turned so as they're building more inventory were expected to turn it. So as soon as vehicles are on the ground in order to earn your allocation in the way. The system works is you have to move them faster than your competition. So there's a lot of incentive right now to meet that affordability equation for consumers.
Got it thanks for that color.
Can you if you could talk about Dfc I think the last guidance was a 40 million loss now.
50 to 55, I think you're close to 40 already so does that mean, we start seeing improvements already in Q3 and any color when that actually we should kind of think of it is turning positive.
Yes.
Thanks, Colin this is Chuck.
Your numbers that you quoted are correct.
Last quarter, we were giving loss guidance of around $40 million and now we've moved that up to 50% to $55. It's really being caused by three primary issues. The first of which is just.
The decline in used car wholesale values and if you look at sort of some of the used car indices year over year used car values are down about 10% and we're definitely seeing the effects of that on some of our recovery trends, which is really driving the majority of that moving off the.
Profit guidance.
In terms of when this will turn around we still feel very confident that it'll.
It'll be next year, when we start to see.
Really our breakeven point for DSC, and then that puts us well on our way to achieving the end state goal of $650 million that we still confirmed in our comments.
Thank you dawn.
Our next question is from Ryan <unk> with Craig Hallum Capital Group. Please proceed.
Good morning, guys just want to ask one more on used I know, we've talked a lot about it but when I look at you guys versus the peers that have reported this quarter I mean, very divergent trends here with nice sequential improvement for you guys contrary to them and what we're seeing in the industry I guess.
Any finer point that you can put on kind of your outperformance on that used GPU side.
I think Ryan most importantly, we continue to grow our e-commerce business and even though driveway is 98% all new customers. It does set a new bar for our stores and how they think about optionality and their offerings to their consumers which is.
Helping them expand their reach and their local markets as well, meaning that they'll they'll deliver cars I think we delivered 6% of our total vehicle population.
To People's homes, which is different than it was four years ago, which allows us to expand that reach which is the original intent of this strategy. It's neat.
Thank Ryan about our future because it's filled with massive opportunities and determination and I think most importantly, it's both and Iterating and an unwavering commitment to our strategy. That's what lithium driveway is all about and you're bringing up is are there other things that we do is used.
I think most importantly, the lithia strategy, though you know maybe back in 2020, it sounded complex where it execution phase today, Okay. The things that Chuck talked about are part of who we are today, okay, and it's going to bring in additional 20, 30% profit, which which builds that flywheel effect of what lithia and driveway or all.
About which allows us to be more competitive on acquisitions provide greater service through the lifecycle to the consumers and ultimately build a model in an industry. That's totally unconsolidated that's different and is going to be more difficult as time goes on and as our strategies to begin to take hold and become profitable.
The ball that competitors, we'll eventually see that the plan that we've developed and are now fully executing on is a good strategy a right strategy, a safe strategy and ultimately a great strategy for the consumer.
Brian I would add to that just kind of more on the tactical side operationally Brian's pretty humble in this but he was a big used car dealer in the DNA in the organization that we had as Bryan kind of transitioned into his leadership role was really to focus us all and every one of our locations on used car used car procurement and so the idea that used cars.
Big part of the focus that we have operationally in every single meeting in every single store, it's a big part of the DNA that we that we have across the organization now in North America with Canada, and then now into the U K with Neil So I think it's a big focus area for us as well so thanks for that Brian .
Thanks Ryan.
Our next question is from Kate Mcshane with Goldman Sachs. Please proceed.
Hi, good morning, Thanks for taking our questions.
We were wondering if youre seeing any issues with prospective customers getting approved for financing at current rates or if youre seeing just more cash buyers in the current environment.
Hey, Kate this is Chuck from a financing perspective, we're not really seeing a major shift in terms of cash buyers versus finance buyers I mean, our overall credit quality as it tends to be more in the mid tier Prime segment and that segment is stressed but the reality is is that on.
Average loan the average monthly payment increase on a 30 dollar vehicle is only about 40 box and usually a consumer can can still cash flow that so we haven't really seen a big shift towards more cash buyers. Most of our consumers are able to get financing, but we are seeing a little bit higher.
The percentage of shift vehicles, where they might have to move off of the vehicle that they initially started out onto a more affordable vehicle and that really goes back to what Chris talked about earlier about the shift more to affordable vehicles. So we don't really see a big trend, though in the and the financing mix.
For your question.
Our next question is from Bret Jordan with Jefferies. Please proceed.
Hey, good morning, guys.
Hey, Brandon could.
Could you talk about what you're seeing in lease origination trends as inventory comes back are you seeing more of the OE push to lease cars.
Yes. This is Chris again, I mean, absolutely I think that is a really big focus that we have from all of our Oems right now to try to get back to leasing penetrations that we lost really kind of in that COVID-19 environment and so on.
Yes across the board leasing is a big focus because everybody is focused on this whole idea of customer lifecycle and loyalty and leasing definitely gives you a higher propensity to stay attached to that consumer and regenerate future sales as you transition into leasing there's another interesting nuance.
About pricing by giving incentives on ltvs or or at least multiple factors, which is the equivalent interest rate. It it's not as conspicuous as it is to put $2000 on the hood of a drug are you. Following me. So it is a way to be able to stabilize margins and maybe.
Help create an experience for the consumer that's more focused on the product and a little less focused on the negotiations which is a really important thing that we're all working on to try to come back the effects of the direct to consumer manufacturers that really get to just sell the product okay.
I think the more that we can do as an industry to align with our manufacturer partners to take away the price negotiation as much as we possibly can and focus it on how great. Our products. Our manufacturers are building because they are quite special in <unk>.
As we commented on we're now at 10% sustainable vehicle sales as a company and it's actually close to 15% on new vehicles, which is totally faster than I think any of us thought that that could happen now were obviously fairly centered in the west coast, which has higher penetration rates as well.
Our next question is from Adam Jonas with Morgan Stanley . Please proceed.
Hey, Brian .
Thanks, everybody.
Everybody and congrats on you and the team for.
Making the skeptics look like total fools.
It comes naturally to me, Brian that comes naturally to me.
Thanks, Adam Yeah.
Two questions first on used it seems like a bit of a buyers' strike at the margin and.
In the market due to higher prices.
I would be interested in what your team prioritizes going forward in terms of.
If I gave you the choice between boosting affordability, while sacrificing some GPU versus looking to protect.
The nice GPU and sacrificing some of the volume or to do so I know you can toggle, but just curious where you would be leaning.
I think Adam the way that we designed our model is to make sure that we have all levels of affordable affordability covered so we're not in that category that if they don't buy a new car, we don't get the business. If they don't buy a certified car we get the business right. They moved to core product like Chris talked to if they can't afford our core product.
Then they moved to value auto, which goes all the way up to 20 years old. So we as a as a retailer and as a broad band retailer I think don't worry as much about the affordability cycles, because we do offer such a different range of affordability I mean, you're at the top end of the range you've got <unk>.
They're averaging about what.
About $900 a unit if their lease and about $800 a unit on a payment basis, if they're if they're if they're financed. So then you go all the way down to the over eight year old bucket, which is an average of less than 380 dollar payment. So a lot of different abilities to be able to maintain custom.
Within the Lithia driveway and green cards portfolios.
We're not where we don't have to deal with that quite as much as a retailer as maybe a manufacturer does when they're thinking about their product cycles seven years out.
Our next question is from Ron Josey with Citi. Please proceed.
Great. Thanks.
Hi, Ron.
He is underutilized network.
Ryan your phone is cutting out we're not hearing you very well.
I'm sorry.
Now better.
Yes, yes, yes.
Okay, sorry, Chris I was wondering if you can just talk a little bit more about the improvements you've made to the.
The broader network.
For online just Lithia does.
Okay.
And then I just had a question about 14% and e-commerce.
Okay, well, we heard part of that I think you were asking the question. This is Brian about our underutilized network.
I think most importantly, when we did our original design eight nine years ago.
And this is pre COVID-19 levels of inventories remember this okay. We were utilizing about 50% of our storage capacity in our company, okay, meaning that we could sell twice as many cars through the same infrastructure part of our design thesis part of why we went online part of why we're expanding expanding our customer reach with driveway and green cars.
On the service side, we were only use utilizing about a quarter to a third of our total capacity, meaning we can recondition a lot more cars or gain our conquest a lot more.
Our service business by going and home to consumers and I think that's where we really sit today I think in terms of the network outside of that we have tried to diversify away from the west which is one of the least profitable regions domestically in our country in a normalized basis, Okay and tried to focus a little bit more of our <unk>.
Tensions on purchasing businesses in the southeast and the South central and that's working out real well I Couldnt I Didnt hear that 14% number of what he was saying.
Maybe if you can hear me now better.
Otherwise he is asking that.
Oh, sorry about that connectivity I think I heard working with growth in E. Commerce unit I was wondering if this was a result of just the transition to a more national advertising spend and greater awareness overall, given I think the comment was 80% have never stopped.
So any insights on that 14% growth in ecommerce units would be helpful. Thank you guys.
Yes. Thank you. Yes. This is Chris I mean, I think our big focus continues to be on how do we leverage the whole omnichannel experience for the consumers and so that the 14% that we were referring to was with both our driveway channel or Green card channel and our store channels that.
Also do a lot of e-commerce business and a lot of online advertising and direct to consumer advertising and so as we continue to figure out the right way to do exactly what Brian said was leverage our facilities and the most effective way possible we can be.
B kind of where our customer want us to be.
Any point in time that whole idea of wherever whenever and however, and so that'll be a continued push for us I think it's a continued trend that we're going to see is we will get more e-commerce transactions for the for the entire lithium driveway platform overtime.
Our final question is from David Whiston with Morningstar. Please proceed.
Hi, David.
Hey, Brian Hey, everyone.
Yes.
<unk>.
On your call.
All Youre Lithia partners group.
And then recently and how the store GM gets a large one at Lithia sockets may qualify for that I am just curious beyond the stock award what are the main incentives for our store team to want to be and that is it is it all monetary that prestige with senior leadership that you just talked about that a bit.
You bet David.
The key monetary factor is what you said they get about twice as much ownership in the store and in our stock.
As special most importantly, though they are our guiding light for all stores. So they get to do like an in store visits.
They get to mentor new people they get to.
To go on a on a trip, which is a big deal once a year.
Get to set the tone when it comes to policy or it comes to consumer Optionality, we look to them to help guide our future. They also get to be involved with anything to do with their manufacturers or they can choose to go and be part of.
Sir Nicholas Campbell Twenty's groups.
They basically get to behave and act like a dealer like they own the store. The neat part is now most many of the LPG members are now multi store leaders, meaning that they have an assistant GSM GM or something underneath them that they are growing.
Which is helping us reduce our ultimate costs so that additional.
Cost that comes with the stock that we give them now theyre starting to distribute their costs and we're leveraging them to oversee 234 or five stores. There are also great recruiters of people because of that autonomy that goes back to our value of of growth are our mission of growth powered by people and the value of take parish.
Ownership, they epitomize that and our goal is at a 100% of our stores and businesses achieve partners Group award level today, we're at about 41% of our qualified stores you have to be with us for a full year before you actually qualify okay and then once you're a partner you have to win once every three.
Years to be able to maintain the level of LPG member or Lithia partners group member that you currently reside at so it really fun opportunity. Thanks for your question, David and thanks, everyone for joining US today, we look forward to talking to you again in October .
I would like to turn the conference back over to Amit for closing comment.
I guess, Brian My words.
Thank you for joining us.
Thanks, Phil.
Okay.
Got it.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Yes.
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