AutoNation, Inc. (AN) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the AutoNation's Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Robert Quartaro, Senior Manager of Investor Relations for AutoNation. Sir, please begin.

Good morning, and welcome to AutoNation's Fourth Quarter and Full Year 2013 Conference Call and Webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; Cheryl Scully, our Interim Chief Financial Officer; and Jon Ferrando, our Executive Vice President responsible for M&A. Following their remarks, we will open up the call for questions. I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release, which is available on our website at investors.autonation.com. And now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thank you, Rob. Good morning. Thank you, everyone, for joining us. Today, we reported an all-time recorded adjusted quarterly EPS from continuing operations of $0.83 for the fourth quarter, a 24% increase on a per-share basis as compared to $0.67 for the same period in the prior year. Fourth quarter 2013 revenue totaled $4.5 billion, an increase of 8%, driven by strong performance in all our major business sectors. We also reported an increase of 20% in operating income to $203 million. For the full year, adjusted EPS for continuing operations of $2.98 was an all-time record, up 17% from prior year. Revenue for the full year was $17.5 billion, up 12% over prior year. Operating income was $740 million, an increase of 15% over prior year. In Q4 2013, we repurchased 1 million shares for $48.6 million at an average price per share of $48.16. From January 1 to January 29, we have repurchased an additional 2.3 million shares for $111 million on an average price per share of $47.90. Planning assumption for 2014 industry new vehicle unit sales is 3% to 5% growth, with total units above 16 million for the year. We believe that replacement demand, attractive products and strong consumer credit will continue to support sales as we return to the normal selling rate of 16 million units. I'd like to point out this marks the 1-year anniversary of the launch of the AutoNation brand, unifying our former local market brands under one flag, AutoNation. The coast-to-coast rollout of the AutoNation brand involved 23 manufacturing brands and 210 franchises. Also, during this rollout, AutoNation has had 4 consecutive quarters of all-time record adjusted EPS from continuing operations. I congratulate each and every one of our 22,000 associates on an outstanding job. I'd now like to turn the call over to Cheryl Scully.

Thank you, Mike, and good morning, ladies and gentlemen. For the fourth quarter, we reported adjusted net income from continuing operations of $102 million, or $0.83 per share, versus net income of $83 million, or $0.67 per share, during the fourth quarter of 2012, a 24% improvement on a per-share basis. Our fourth quarter 2013 results exclude $4.5 million, which is $0.04 per share of net gains related to property dispositions. Our fourth quarter 2013 results also exclude $3.4 million with just $0.03 per share of income tax adjustment. There were no adjustments to net income in the prior year period. Adjustments in net income are included in the reconciliations provided in our press release. In the fourth quarter, revenue increased $352 million, or 8%, compared to the prior year, and gross profit improved $71 million, or 11%. SG&A as a percentage of gross profit was 68.6% for the quarter, which represents 130 basis point improvement compared to the year-ago period. Net new vehicle floor-plan was a benefit of $11.8 million, an increase of $4.9 million from the fourth quarter of 2012, primarily due to higher floor-plan assistance. Floor-plan debt increased approximately $489 million during the fourth quarter to $3 billion at quarter end due to increased inventory levels. Non-vehicle interest expense was flat for the quarter at $21.7 million compared to the fourth quarter of 2012. At the end of December, we had $300 million of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $1.8 billion. This was a decrease of $16.4 million compared to September 30, 2013. The provision for income tax in the quarter was $60.6 million or 35.6%, which included the previously noted net income tax benefit of $3.4 million related to a favorable adjustment. From October 1, 2013 through January 29, 2014 we repurchased 3.3 million shares for $160 million at an average price of $47.98 per share. Today, we announced that our board authorized the repurchase of up to an additional $250 million of AutoNation common stock. AutoNation has approximately $405 million remaining board authorizations for share repurchase. As of January 29, there were approximately 119 million shares outstanding and this does not include the dilutive impact of stock options. As continued evidence of the strength of the cash flow generation capability of the company, our leverage ratio decreased from 2.4x at the end of Q3 to 2.3x at the end of Q4. The leverage ratio was 2.1x on a net debt basis, including used floor-plan availability, and our covenant limit is 3.75x. Capital expenditures were $43 million for the quarter and $141 million for the full year of 2013. Capital expenditures are on a pro basis, excluding operating leased buyouts and related asset sales. Our quarter end cash balance was $69 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $974 million at the end of December. We are well-positioned to continue to maximize company value and shareholder return. We continue to demonstrate strong operating leverage, robust cash flow generation, a healthy balance sheet and disciplined expense management. Now, let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Cheryl, and good morning. In the fourth quarter, AutoNation delivered record adjusted EPS from continuing operations for the fifth consecutive quarter. Additionally, we delivered a 4.5% operating margin that when adjusted for the net gain on property dispositions, tied our previous record of 4.3%. And we grew revenue, gross profit and margins across all business sectors. We're very proud of this performance. Starting with sales for the fourth quarter, same store total gross profit for variable operations increased 8% on a combined new and used same-store unit volume increase of 4%. This was driven by the seasonal strength of Premium Luxury, and a particularly strong quarter for AutoNation in this segment. I'll note that on a total store basis, our Premium Luxury segment income increased 28% compared to the period a year ago, due in part to a lift from new product launches and the resulting shift in mix within the segment. I'll also note that Premium Luxury accounted for 46% of our total segment income in the quarter. Also contributing was a solid performance in used vehicles and another strong showing at customer financial services. As I continue, my comments will be on a same-store basis and compared to the period a year ago, unless noted otherwise. Looking at new vehicles in the quarter, same store new vehicle revenue increased $55 million, or 2%, to $2.5 billion. On new vehicle, sales volume of 71,149 new vehicles, an increase of 465 vehicles or 1%. New vehicle gross profit of $163 million grew $9 million, or 5%, in the quarter. Gross profit per new vehicle retailed at $2,292 was up $105, or 5%, with the Premium Luxury segment more than offsetting continued pressure in the Import segment. Sequentially, gross profit for new vehicle retailed increased $280, or 14%. Turning to used vehicles, we retailed 47,174 used vehicles in the quarter, up 4,300 units or 10%, with increases across all 3 segments. We saw a nice lift in certified preowned vehicles retailed in the quarter and continue to work aggressively to acquire used inventory, both internally through increasing appraisals and winning more trades, and externally, through our we-buy-your-car guaranteed offer program, as well as various third party partnerships. Our used vehicle team is keenly focused on executing on the fundamentals of this business, and they are delivering results as evidenced by retail used vehicle revenue of $872 million being up $87 million or 11%. Retail used vehicle gross profit is $75 million, increasing $8 million or 12%, and gross profit per used vehicle retailed at $1,598, increasing $27 or 2%. Relative to inventory, both our new and used inventory are in good shape. At the end of the quarter, new vehicle days supply was 62 days versus 58 days sequentially, and 54 days a year ago; and compares favorably to the industry, which we calculate to be at a 77 days supply. We remain disciplined with inventory and are well-positioned for the spring selling season. Our used vehicle days supply was 35 days, even with a year ago. I'll note that on a same-store basis, our combined new and used vehicle volume was up 12% in Arizona and Florida, and was stable in Texas and California. Rounding out the variable side of the business is customer financial services, a name change for F&I that we made last quarter to better reflect the services provided. In the quarter, customer financial services gross profit per vehicle retailed was $1,378, an increase of $71 or 5%. Total gross profit of $163 million increased $15 million or 10% compared to the period a year ago. We continue to be extremely pleased with our performance here. That's driven by a combination of our preferred lender network, OEM service contract alliances, store-level execution, product penetration and the customer experience, where we believe full transparency is a differentiator and value-added products help drive long-term customer retention. As mentioned earlier, total variable operations gross profit increased 8% year-over-year. On a per vehicle basis, total variable operations gross profit of $3,394 increased $132, or 4%, in the quarter compared to a year ago, and was up $217 per vehicle, sequentially. Next, customer care or service parts and collision, where in the fourth quarter, customer care revenue increased $29 million, or 5%, to $629 million, and customer care gross profit increased $14 million or 6% to $266 million. At 42.4%, our Customer Care operating margin was up 30 basis points as the business continued to grow across the board for customer pay, warranty, internal, wholesale parts and collision for both revenue and gross profit. In the quarter, we noted impressive year-over-year increases of 13% for both warranty gross and internal gross, and 3% for customer pay gross. This marks the 14th consecutive quarterly increase in customer pay gross. Our customer care team remains focused on operational improvements in the area of traffic, appointments and customer satisfaction, as well as margin improvement and driving sales effectiveness. At December 31, our store portfolio numbered 269 franchises and 228 stores in 15 states, representing 33 manufacturer brands. As I close, I'll reiterate that we're extremely pleased to have delivered record adjusted EPS from continuing operation for the fifth consecutive quarter, and a record tying adjusted operating margin of 4.3%. It's a fitting end to a perfect year for AutoNation where we re-branded over 200 of our franchises, grew with that was acquisitions and add points, made significant investments in our digital capabilities and sharpened our operational focus. We feel that we're well-positioned to grow our brand and take advantage of the opportunities ahead in 2014. As I turn it over to Jon Ferrando, I'd like to thank our 22,000 associates for their commitment and dedication to AutoNation. Jon?

Thank you, Mike. During the fourth quarter, we completed the previously announced acquisitions of O'Hare Honda and Hyundai in the Chicago market. The closings were well executed and the stores are now operating as AutoNation Honda O'Hare and AutoNation Hyundai O'Hare. During 2013, as previously announced, we also completed the acquisitions of Honda and Hyundai stores in the Phoenix market, and a Toyota Scion store in the Dallas market. In addition, we were awarded Mercedes-Benz franchises in the Atlanta and Tampa markets, which we expect to open by early 2015. Our 2013 acquisitions and ad points align with our strategy of offering our customers the full range of cars and trucks in our key markets. Over the last 6 quarters, we acquired 12 franchises and were awarded 4 new Premium Luxury franchises by the manufacturers. The 2013 annualized revenue for the 12 acquired franchises, together with the expected annual revenue of the 4 franchises awarded to us once they are fully operational, is approximately $1.1 billion. Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our existing markets. We will continue to be selective and prudent with our capital, with a focus on investing to reduce strong returns and long-term shareholder value. I will now turn it back to Mike Jackson.

Thank you, Jon. We'll now take your questions.

[Operator Instructions] Our first question comes from John Murphy with Bank of America Merrill Lynch.

I have a lot of questions because there's a lot of good things to ask about in the quarter, so I apologize, I might be a little bit verbose. Just on SG&A, it's 68.6%. I mean, back in our model, we go back to 1999, we don't have anything that's even within 50 basis points of that. It was a really good performance in the quarter. Is there anything that's unique to the quarter? I know there's obviously seasonality and some things that can happen in the fourth quarter, but is this a bogey we should be thinking about for 2014 estimates? And can you do better than this? Which it's very good already, I'm just trying to understand how far you can go.

Yes, Jon. It's Cheryl. We remain focused, certainly, on the cost side of the business, but we are going to continue to invest in digital. And as you pointed out, the fourth quarter does benefit from strong Premium Luxury sales, so we're going to continue to focus on that number. As we've talked about, there's some seasonality built into that as well, so don't think it's all one direction from there. But it certainly is a continued focus for us.

Okay. And then just a second question on the share buybacks. I mean, it seems like you're getting very aggressive in the $48 range. But as your earnings grow, you know that number might go up over time. I'm just trying to understand your thought process on allocating capital. Is $48 sort of the magic number on the stock price or might that creep up over time?

Jon, it's Mike Jackson. Our capital allocation philosophy remains unchanged. First, investments in existing business and greenfield opportunities. Then we take a close look at the pricing in the acquisition market, whether there's strategic fit. And then on the stock, if you look at our track record, it's pretty much when we think there's a buying opportunity relative to where we think the stock is going to be in the future. And clearly, with the distress in the markets for -- in the last 6 weeks, we viewed that as a buying opportunity and took that step. So I cannot give you a magic number, I will not give you a magic number. But I think if you look at our -- if you look at AutoNation as a company, I think we're really good at 3 things: operational excellence, we're in the nitty-gritty retail business, we never lose sight of that, look at our performance during the downturn; investment in strategic capabilities, even if they add cost for an interim period; and finally, capital allocation. And those are the 3 things we put our energy into and I'll stand on our track record.

Okay. And then just one more on floor-plan assistance. It seems like the assistance has gone up relative to the expense. Is there anything going on where floor-plan assistance has gotten a little bit more robust as inventories have crept up?

Yes. Part of that, Jon, is volume, but then also, there was a hinge in a Premium Luxury manufacturer floor-plan program. So those are the 2 combined factors that you see resulting in the higher assistance.

Okay. And then just lastly on F&I, PVR $1,370, at [indiscernible] there's a lot of buzz about the CFPB and how this is all going to be dealt with. I mean, what's -- and, Mike, what's your -- well, your view or all of your view on what can happen as far as rate caps, or do you just go to straight flats? Or what kind of impact this can have on your business? I know you've dealt with this kind of stuff in the past. I'm just trying to understand what your current thinking is there, and how far this $1,370 could potentially go?

Yes, so within the $1,370, about $500 of that is the fees that we're receiving from the bank, so that's step 1. I think the business model absolutely is a winner for all parties, and all parties acknowledge that, and that includes CFPB. So I don't expect a structural change in the business model. Now, everybody's trying to find common ground where the amount of discretion at the store level can be restricted to the point that the CFPB feels much more comfortable that the possibility of discrimination has been restricted. Whether that leads to more caps, I don't see flats or a solution like an NADA proposed, which we're going to try at a few stores. I call it the Pacifico model where it's a markdown model where management has to sign off on it. I think there's a lot of discussions. I think at the end of the day, though, the business model serves the marketplace, the lenders and us extremely well. It's very effective, very efficient for everyone. There is a reason that 80% of auto loans are originated through the dealers, it's because we're very good at it with a lot of added value, it saves the customers a lot of money, and do very effectively for the bank. So I don't know the end of the story yet. And I think it will be on ongoing story, but there'll be common ground and I do not expect the fundamental business model to change. And really, our progress on improvement in financial services is around other products. Mike, why don't you talk about that, rather than the fees from the banks?

Yes, John, Mike called it out. I think 67% of our gross there is generated from products, and our real focus is on vehicle service contracts and prepaid maintenance products. And we've dramatically improved our penetration there, a lot of our focus, our paid plans are driven toward those 2 products and they drive people into our service drive and really make a difference in customer retention. So the whole organization's focused on providing value-added products there and I think doing a very good job.

Okay, that's great. Just one last question on same-store sales up a little bit less than 1% on a unit basis for new vehicles. That seemed a bit lower than your monthly releases would have indicated. Is there anything going on, on timing there? And also, are you making the trade-off on lower volumes in the market to get the higher grosses that you got, which were pretty impressive in the quarter?

John, just to be clear, our monthly reporting is based on the manufacturer calendar, which is quite different than a GAAP calendar. Sometimes, it could be 2 or 3 days off. I think in the fourth quarter, we had 2 additional selling days according to the manufacturer calendar. So that monthly figure is what we reported to manufacturers in their retail reporting system, the same -- it's the same number that they're announcing and it's on their calendar. Then when we announced our financial results, of course, it's on a GAAP calendar with very strict revenue recognition standards. And from time to time, they're not going to line up precisely.

There is a question from Rick Nelson with Stephens.

A question on margin improvement in new cars. It's the first time we've seen that, actually, and I think going back 10 or 11 quarters. What do you think drove that and how does that jive with the comments that you made about inventory creep in the industry?

Rick, it's Mike Maroone. The improvement in the fourth quarter is, in part, seasonality of -- most fourth quarters have a heavier weighting of Premium Luxury. There was a mix shift even within Premium Luxury and then there was some spectacular product launches, and we'll call out both the CLA and the S-Class with Mercedes, and to execute those 2, and we have a big Mercedes footprint, it really helped. But the whole Premium Luxury segment was strong, and it really helped to offset some real pressure in the Import segment and the Domestic segment, which was quite stable and pretty pleased with our margin management. But certainly, the quarter was influenced by the Premium Luxury side. We'll also call out that the Premium Luxury segment was like 46% of our segment income. So it's a really strong Premium Luxury quarter and we got a lot of benefit from it.

And, Rick, it's Mike Jackson. On the inventory situation, first, our inventories are in line. But when I talk about the industry inventory, I'm really talking about the Detroit 3. And the Asians are fine, and Premium Luxury -- the German inventories are fine. But we're looking at industry Domestic inventory at retail of 100-plus days. Now, they'll tell you it's something much lower than that, but that's because when they calculate retail inventory, they're including their fleet sales into the selling rate, which, of course, you should not do. You should divide retail sales into retail inventory, that's the real world. And there, we're saying, hey, look, 100 days, I'll give the Detroit 3 and they should probably have the highest inventory because they have the broadest and most complex product offering, particularly in trucks, and there's a lot of specific trucks you have to offer, so I'll give you that. But 100 days is too much, and I certainly don't want to wake up and all of a sudden, it's 130 days or 150 days. So I think it's an appropriate subject to start the conversation about and that over time, I think it's very manageable. As Mike said, there's no -- the front end grosses on the Domestics are fine, there's no trouble yet. But we all know that if your inventories get out of control, the marketplace dictates you, you no longer control the marketplace. And so it's time to rate the subject and have an appropriate conversation.

Okay, so that's helpful. It's more of a warning sign than a current product.

Right, correct.

I got you. Any comments on early 2014 sales? I know we've had other challenges in a lot of the country.

No, we release next week, and I've learned my lesson never to comment on current month's sales. We give the most visibility of anybody in the auto retail space by announcing each month, a new high bar number next week with our thoughts on it.

Here's a question from Michael Ward with Sterne. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Cheryl, first of all, on the acquisitions in 2013, it doesn't look like there was much of an impact from the transaction made in the second quarter in Dallas and in Arizona. Is there something with the accounting or am I missing something?

You'll see that difference in the total and same-store, I think. When you look at the year, we had the Boardwalk acquisitions, which occurred, and that was a lot of transactions than the one that we've done this year. So they are flowing through the numbers. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Okay. So what's a good target like revenue impact from the second quarter acquisitions in 2014?

If we haven't got out the specifics related to each acquisition, I think when you think about it in the aggregate, we've got that extra $1.1 billion of revenue that you can expect in over time as the add points also come up to speed as well. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Okay. So that -- but some of that doesn't kick until '15, correct? With the new...

Correct.

Correct.

With the add point build-out, particularly some of the finality, add point build-out and then 2 additional Mercedes that we're going to be building out as well. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Okay. Mike or Jon, can you talk a little bit about maybe the bid as spread for acquisitions? Because it seems like the acquisition pace is accelerating. Has the bid as spread come together or the quality of stores? Is it -- am I right in assuming that it is picking up?

Yes, Mike, this is Jon. There's a solid pipeline out there right now, and I think we'll see it for the next few years. I think there's a good balance on price. What I would say is that it's very deal-specific. We look at a lot of deals, and first, of course, we're looking to make sure they fit within our footprint and our brand and market criteria. And then when you get down to price on individual deals, there are sellers out there that have completely unrealistic expectations. And then certainly, we also run into sellers with reasonable expectations where we can put a fair price on the table for them that also works within our return criteria, and then we're able execute and get those deals done. But I think the next few years, there will be sellers, a good flow of sellers entering the market. And I think there'll be good balance on purchase price. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Just one last thing. How was showroom traffic and the closure rates in the fourth quarter versus last year?

It's Mike Maroone. Mike, showroom traffic was up. And, of course, the e-commerce channel was extremely active, so was the phone. And the shopping parents have changed some, but all in all, our showroom traffic was up about 3% and we were able to convert at a very strong rate in order to get the volume we did. So we're pleased with our traffic, you'd always like more. Michael P. Ward - Sterne Agee & Leach Inc., Research Division: Do you think that's a reflection of your branding strategy or is it just the overall market?

I think the overall market. It reflects the overall market. And I think you'll see continuing strength with our branding strategy. We did our first branding a year ago, we didn't complete the branding until June. So I think you'll see us continue to gain momentum there, but still work to do.

Our next question comes from Patrick Archambault with Goldman Sachs.

Two questions for me. First on the used side, if you just look at the used to new ratio, it's been kind of up slightly in previous quarters and it seems to have really kind of taken off here. I have like, maybe like up 0.1, 0.2, and then some sort of 0.6 up this particular quarter. So maybe you could just elaborate how much of that is AutoNation's specific efforts, how much of that is maybe some shifts within the segment, used versus new, that you're seeing in the market? That would be my first one.

It's Mike Maroone, Patrick. There's a lot of interest in the used segment, and I think our execution is better than what it's been in the past. We've really worked hard in acquiring vehicles, both winning trades in the showroom and using other methods outside the store to acquire vehicles. And I think it's helped us a lot. We've also wholesaled lots, so we're retailing higher mileage vehicles and continued to perform at a higher level. So to us, it's both volume and margin. And this is our second straight quarter, I believe, of 10% same-store growth and we're pleased with that. So I think there's still more opportunity in used, you just have to really work hard to get the right inventory at the right time and the right price. I'll also add that the CPO business was stronger. So I think 32% of our vehicles sold and used were CPO, and that was like 29%, a year ago. So more strength in CPO as well.

And that's helpful. I just -- I mean, tying that together, is that ratio, which is, I think, how a lot of people sort of model and think about it, is that something that can continue to rise, in your opinion, in subsequent years and quarters?

We think it's a continued opportunity for us, yes.

Okay, great. And yes, I mean, I guess one minor clarification from my end as well. There was a question relating to the additional leverage on SG&A. I think technology was mentioned as being a part of that outlook, and I wasn't quite sure whether that was, be careful because there's going to be some investments so we may not get the same level of SG&A leverage on a year-on-year basis in subsequent quarters, or was the commentary, technology investments we've made will allow us to be more efficient and we'll continue to be able to grind that ratio down?

So they're both true -- this is Mike Jackson. They're both true, you just have to get the order right. We're in the investment stage where I would say, we're adding more cost than for what we're getting back. But ultimately, we are absolutely convinced it's going to drive tremendous productivity in the business. It's sort of like that phase we went through with the shared service center where we had an extended period where we're investing that took our cost higher, that then gave us tremendous capability and a lower cost basis. So we're into one of those phases for digital, and I think that'll continue for all of 2014.

There's a question from Rod Lache from Deutsche Bank.

This is Dan Galves for Rod. Just on the used market, just looking for your view on positives and negatives on used volumes going forward. It seems like lease terminations -- an increase in lease terminations could be a positive. Maybe a recovery in scrappage rates could cause more churn in the used market. Do you agree with those? And what other positives and negatives should we be thinking about?

It's Mike Maroone. I think you called out the right positives. Certainly, there's more of lease returns. You've got select manufacturers that near the end of the recovery, really used leases and lever to get volume. We love that, and those vehicles come in at a very sweet spot in terms of age and mileage. I can't think of many negatives in the used business other than it's still competitive trying to buy older vehicles and really competing to win those trades. It's a very competitive business. As you know, we buy them one unit at a time, but we do -- we're very optimistic about the used business and really are continuing to work to make sure that we're operating at an optimal level.

How much volume are you getting from kind of the direct buy of used car programs without the customer buying a new vehicle?

Well, it's a series of different things that we're testing. I mean, we use a -- we're buying trade-ins from Tesla. We're doing guaranteed offers. We've got a centralized buying team. There's probably 1,000 units a quarter that we get from new sources and we're continuing to mine for other methods of getting vehicle. So to us, it's about building a capability, and I think our capability of buying vehicles outside our stores is one that's very important to grow long term.

Okay, great. And then just a couple on customer care. As we look at when you sell a used vehicle, I'm just wondering if you're getting better take rates on the -- or better retention on the service business from the used cars that you're selling now versus maybe historically? Do you see that as an opportunity to drive excess growth in parts and service over the next couple of years?

It's certainly a big opportunity, and I would say, traditionally, the industry has not been great at converting those customers. We put a lot more emphasis in it. The obvious target is a certified preowned because that is often a new vehicle and tender who has similar purchase and servicing characteristics. So we're putting a lot of effort there, and I think it's a continuing growth opportunity for us. We really appreciate that business, and I think our customers appreciate the levels of service we're able to provide and how competitive we are, pricewise.

Okay, great. And just one follow-up. If we look at the last 3 years of your retail sales volume, it's quite a bit higher today than it was, let's say, a year ago, maybe 10%. But then if we look at maybe a 6-year proof of vehicles, it's kind of flat. So what's the bigger driver for your customer care business over the next year or 2? I'm just looking for your sense of kind of what the population of vehicles is going to do for you over the next couple of years.

It's Mike Jackson. I think when -- if -- depending how far back you go, you have to recognize that we had a structural shift in our mix of stores. We reduced our Domestic presence and increased our German Premium Luxury presence. We think that is a better balanced portfolio going forward. Obviously, the volume is lower in German Premium Luxury as far as unit volume goes. But the business model is very compelling and the customer care business is very compelling. Overall, we're optimistic about the customer care business that we can throw it in the mid-single digits going forward for the next few years, and then we'll see where the cycle really is.

There's a question from Colin Langan with UBS.

You talked earlier about overall new vehicle margins and highlighted Luxury. But the Luxury margin itself looked like it expanded quite a bit, almost like 100 basis points year-over-year. Anything that's driving that, that the actual Luxury margins would be so much better this quarter?

Well, it was, in particular, a very good quarter for Mercedes-Benz. They had the simultaneous launch of a new S-Class and the CLA. Both products were extremely well accepted in the marketplace and having both ends of the price spectrum, having new products at the same time, drove tremendous traffic into the stores. And we're basically sold-out on those products going into 2014, going into this year. So it -- that certainly -- and the fact that we're -- of our Premium Luxury business, almost 9% to 10% of it is Mercedes-Benz, was a big factor in our performance. But the entire Premium Luxury business was excellent. But on the cadence of new products, Mercedes hit it just right.

Okay. And any color -- there is a press release here you're selling AutoUSA. I mean is that a fairly -- would that be meaningful at all until next year? It seems like a very small business, right?

It's Mike Maroone. It is a small business. It's a business that served us well, but it's not a core business to us. And we felt that it was better off in other hands. We appreciate the contribution they made, but again, it's strategically, we believe we can acquire the leads we need through other sources, including the company we sold it to, Autobytel.

And the profit impact was very, very small?

Profit impact's small.

Okay. And then in terms of -- I'm not sure if I heard the numbers for parts and services, I believe you said it was warranty was up 13% year-over-year. I mean, is that anything unique in the quarter that's driving the strong warranty?

I think that what we -- we've seen strong warranty every quarter this year. I think it's the number of new product launches. Also, the other thing that's influencing that is a number of manufacturers have moved to providing prepaid maintenance at no charge or included in the warranty. So that number is growing. And that number, you could argue that's customer pay or warranty. It's officially categorized as warranty. And I think that boosts that number somewhat. But we're happy to have those customers and look forward to retaining them.

And it was up 13%, that's the right number?

That's correct.

And just one last question. You talked earlier about the CFPB. Have you noticed any changes on the lenders you've worked with in terms of their policies? And when would you expect that you maybe would see some of the changes? Is that something coming shortly or is that more towards the end of the year?

Well, I think what's very interesting is there have been no changes. And if you look at the Ally agreement, there are no operational changes in that agreement, whatsoever. So you would think that is something significant was coming. We're certainly -- the government has a lot of leverage with Ally, it would have happened then, but it didn't. And our discussions with the lenders are a bit they're so satisfied with the current business model and how it works that they feel there'll be some other solution to find common ground with CFPB. So it's interesting, nothing's changed yet. And you have the first enforcement action. And from an operating point of view, nothing changed.

There is a question from Brett Hoselton with KeyBanc.

Can you comment on the gross profit per unit, on the new vehicle side, your expectations for the trend going forward? Obviously, there's been some pressure on the Import side. It looks like it continued on a year-over-year basis. I think last quarter, you commented on it possibly stabilizing. And then I think in your comments in January, you're suggesting that there could be some additional pressure maybe on the Domestic side going forward. But what are your expectations for the gross profit?

It's Mike Maroone. I think the Domestic side, we're going to manage our inventories in a very disciplined way, and we're hoping that the manufacturers, too. So we're not concerned with that. I think we can maintain those. I think Premium Luxury is a good opportunity for us, and there's certainly a lot of pressure on the Import side, really, in specific models. And that's where the challenge is, and it's difficult to predict how that plays out, so you almost have to look quarter-by-quarter as to what the mix sends up, and that will help drive the margin. But we're working very hard at managing our margins, getting lots of data, supplying our stores with lots of data and what we believe the profit -- what the prices are in the market. And I think it helps them to manage those margins. But it's a big challenge, that's for sure.

And then switching gears, just on the outlook for acquisitions, 12 franchises, 4 Premium Luxury awarded, $1.1 billion in incremental revenue as they roll out. Do you think that, that's a pace that you can sustain going forward? Do you think that it diminishes from where we're currently at or do you think it actually accelerates?

Brett, this is Jon. I think similar to share buyback and in the acquisition arena, there is a good pipeline out there, but it's difficult to predict. So we know that in the markets, where we're looking to add brands that over the next 5 years, there will be attractive acquisition opportunities that come to market. So we feel good about over the next few years, there's going to be a solid pipeline, and hopefully, we'll be able to execute on those, getting to the right price. But it's difficult to predict when a seller that we're targeting will enter the marketplace and when the deal will get done. So we'll continue to be active, but I can't give you a prediction on deal flow this year or how to compare to what we've done.

Yes, this is Mike Jackson. We view it very opportunistically and in a very disciplined way. I mean, we could do a lot or we could do none. It really depends on the quality of the deals and the price. Same thing with share repurchase, there is no fixed plan that we go into the year with. And we're in the right position that we could do it all. We're going to invest in stores, do acquisitions, do greenfields, repurchase share. But if the opportunity isn't there, from a price value point of view, we'll be very patient and very disciplined. That's why it's hard -- we don't have a meeting where we set a goal and say, this is what's going to happen. We really take them a deal at a time, and if it's right, we do it. If there was a lot of deals that are right, we'll do a lot of deals. If there's no deals that are right, then we won't do any deals. So it's hard to predict.

And there's a question from Brian Sponheimer with Gabelli & Company.

Mike, I just want to go back to your comments about industry inventories, and specifically, that of the Detroit 3. Taking a little bit deeper dive, particularly from a product standpoint, is there any corresponding relationship between where perhaps the imports have become more aggressive from a pricing standpoint and where you're seeing a little bit more slack from the American manufacturers?

No, I think the Detroit 3 have done a very good job of marketing their vehicles in a very professional way and a very disciplined way. I think they hit, by and large, most their sales targets. All I'm observing is though that they produce enough vehicles, not only to support the growth, not only to support an appropriate increase of inventory for higher sales levels, but inventory beyond that. There is absolutely no reason to take inventories up to 100 days. And the reason it works that way, we all know, because they use a calculation that includes fleet sales to artificially understate how much inventory's out there, and they have revenue recognition on what they wholesale us. So far, it's fine. But it's something we should watch this year because if it goes to 130 days or 150 days, that will be a problem.

Understood. Switching gears a little bit and talking about some of the new product introductions by the luxury manufacturers, kind of in the value luxury market, whether it's the CLA, the A3, et cetera, what kind of trade-ins are you getting on these cars as they're coming in? And is it pulling from the Acuras of the world or is it -- are you finding a different buyer?

I think the -- they're very successfully attracting new buyers that are significantly younger and are coming to the German brands for the first time. And whether that's coming out of the used car or from another brand. So we see a lot of strength in the German Premium Luxury. It's impressive that they're able to introduce products on the full range of the spectrum, from $30,000 through $200,000-plus products that have a unique positioning in the marketplace. Admittedly, unique pricing, but they're very differentiated products. We have a lot of optimism and confidence there.

Yes. Over time, do you see this as possibly being brand dilutive 5, 10 years out?

No, I do not. I think if they were compromising the product, that would be another story. If they were getting to the price point by trying to do it on the cheap, there's no question that would be a problem. But whether you're looking at the very innovative and creative i3 from BMW, which is getting -- there's a lot of anticipation for, or to the CLA that the customers are absolutely delighted. They don't feel they bought a cheap Mercedes, I think they bought the right car for them that they could afford at that price point. So when we see that kind of customer satisfaction around these products at a different price point and a different age, they've got it well thought out, they're executing it well.

Our last question is from David Whiston with Morningstar.

For Mike Jackson, can you just comment on why you're not rolling out the NADA proposal at all? So it's all once or you're just waiting to see how Washington reacts?

We will be piling it or taking it into certain stores in the next few months to see exactly how it works, how difficult it is to roll out and how disruptive it this, and what kind of issues we would have to roll it out on the broader basis. That's the way we do everything. There's no way I'm subjecting the entire company to a rollout of something from one day to the next when we haven't figured out exactly how it would work and what the results would be. And because I don't know, you don't know for sure whether it really takes you down to the road of achieving the objectives and how disruptive it is. So I think it's very prudent. I applaud NADA for putting it together. I think it's a step in the right direction. We're going to take it into stores and see how it works. And also, we know we don't have any systemic issue with, certainly, our company. We've seen the test results. So I think we have time to do this in a prudent manner.

Okay, that's helpful. Back to share buybacks one last time. I'm just a little bit surprised that you didn't buy -- hardly any shares throughout '13, then all of a sudden accelerates in Q4, and again, early this year. Did something change in the M&A pipeline relative to the first half of the year? Because just it would've made more sense, I think, to buy it back when the shares were lower, you know?

Well, I'm not going to give you a window into the inner workings of all the factors we look at. I'll stand on the record that we've now invested $7 billion in share buyback at an average price of $17 a share. So I think that we have that pretty figured out. We've rebalanced our portfolio by divesting stores that we feel couldn't fit our model, and bought other stores instead. And here we are at earnings per share of $2.98. And considering everything that the economy has been through, the auto industry has been through, to achieve that over these last 5, 6 years, really took this combination of operational excellence, strategic initiatives and very shrewd, smart and disciplined capital allocation. But you'd have to come work here if you really want to know the inner workings of how we do it. But I stand on our record.

Okay, that's fair. Just one final question on Luxury mix shifts. Mike Maroone, you mentioned, I think, earlier in the call that there was a mix shift improvement in that segment. I'm just surprised on that given the CLA launch. So did the S-class just right all the -- any mix headwinds from CLA?

I don't see any headwinds at all. I just wish we could get more of them. The customer acceptance has been phenomenal. I think the mix shift that helped drive it, really, is the S-class. And the S-class is just an incredible car. And everyone we got, we sold. And we have -- as Mike Jackson said, we have a waiting list for them as far as you could see. So I think that's part of it. There was certainly some other new product introductions that we benefited from, but those are the 2 that really come to mind.

Thank you, everyone, for joining us today.

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