Lithia Motors, Inc. (LAD) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John North, Vice President of Finance and Corporate Controller. Thank you, Mr. North. You may begin.

Thanks, and good morning. Welcome to Lithia Motors Second Quarter 2012 Earnings Conference Call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially due to certain Risk Factors, which are outlined in the company's filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements. During this call, we may discuss certain non-GAAP items, including adjusted selling, general and administrative expense, adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operations and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. These presentations are not intended to be provided in accordance with GAAP, and should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We have also posted an updated investor presentation on our website, lithia.com, highlighting our second quarter results. Present on the call today are Sid DeBoer, Founder and Executive Chairman; Bryan DeBoer, President and CEO; and Chris Holzshu, Senior Vice President and Chief Financial Officer. At the end of our prepared remarks, we will open the call to your questions. I am also available in my office after the call for any follow-up questions you may have. It is now my pleasure to turn the call over to Bryan DeBoer.

Good morning. Today, we reported record second quarter adjusted income from continuing operations of $19.9 million compared to $14.4 million a year ago. We earned $0.76 per share on an adjusted basis in the second quarter compared to $0.54 per share in the second quarter of 2011, an increase of over 40%. We grew revenue 26% compared to the prior period. Total same-store sales were up 25% in the quarter, reflecting increases in all business lines. All comparisons from this point forward will be presented on a same-store basis unless otherwise noted. New vehicle sales increased 34%. This increase was on top of a 22% increase in new vehicle sales in 2011. On a unit basis, we sold approximately 13,900 new vehicles, an increase of 3,500 units or 33%, well above national average of 16%. Our stores are focused on driving new vehicle sales and increasing market share. In the quarter, our domestic sales increased 35%, while import and luxury were up 33%. Our team is outperforming national results and market share growth. We are targeting a 3% to 5% growth in market share during 2012 on top of the underlying market recovery. Many of the markets we operate in still have not seen a meaningful recovery in new vehicle sales from the levels experienced in 2006. For example, Reno, Nevada registered 21,000 new vehicles in 2006 and only 9,000 new vehicles in 2011. Boise, Idaho registered 26,000 new vehicles in 2006, compared to only 13,000 last year. Similarly, Fresno, California is down approximately 50%. Eugene, Oregon is down 38% and Spokane, Washington is down 39% from 2006 levels. The national SAAR projections in the marketplace are approximately 14 million to 14.5 million for 2012, 13% lower than the 16.6 million SAAR experienced in 2006. This demonstrates the additional opportunity for sales recovery that many of our markets have yet to be experiencing. To be fair, some of our markets such as Texas and Iowa have returned to normal. But on the balance, we believe significant sales increases remain to be seen in the West. Used vehicle retail sales increased 20% in the quarter. We sold approximately 11,500 retail used vehicles, resulting in a used to new ratio of 0.8:1. We sold a monthly average of 47 used vehicles per store in the second quarter of 2012, up from 39 used vehicles per store in 2011. Our current goal is to sell an average of 60 used vehicles per store. We are concentrating on capturing as many trade-ins as possible. The new vehicle dealer remains on top of the food chain when it comes to procuring used vehicle inventory. This is a key competitive advantage as we maximize our used vehicle retail opportunities. We focus our store leaders on a significant opportunities to retail more core product or used vehicles between 3 to 7 years old. Our performance in this segment has been improving, but it still remains the best avenue to increase our used vehicle sales per store to 60 units per month. In the quarter, our Value Autos or vehicles over 80,000 miles performed well. This segment grew 30% year-over-year with a gross margin of 21%. Although these vehicles have lower selling prices, overall, the average selling price on our retail used vehicles increased 2% due to underlying market strength. In the quarter, our F&I per vehicle was 1,063 per unit. On a GAAP basis, we arranged financing on 76% of the vehicles we sold. We sold 40% of our customers a service contract and 36% of our customers a Lifetime Oil product. Our service, body and parts sales increased almost 7% in the second quarter. Wholesale parts and body shops showed significant increases of 11% and 15%. Customer pay work increased 8%, which is the 12 consecutive quarter of same-store sales improvement. Warranty still faces a headwind as it declined 7%. We anticipate lower warranty revenues for the remainder of 2012 and into 2013, but we can more than offset this headwind by concentrating on selling more vehicles, retaining more customers in our Service departments and offering a broader spectrum of products and services. Regarding regional performance. All states posted double-digit increases. Our gross profit for new vehicle retail was 23.94% compared to 24.39% in the first quarter of 2012. Our new vehicle gross profit per vehicle declined $45 per unit from the first quarter of 2012, primarily due to the termination of the Chrysler standards incentive program earlier this year. Gross profit per used vehicle retailed was 26.66% compared to 25.25% in the first quarter of 2012 or an increase of $141 per unit. Our stores are focused on total gross profit dollars generated in each department, while increasing market share for new and used vehicle sales. Over time, this may result in some margin percentage contraction. However, increasing units in operations, attaching more insurance products, taking in more trade-in vehicles and leveraging our fixed cost structure, are all critical to our continued success. In the quarter, our overall gross margin was 16.3% compared to 17.4% in the same period last year. Increases in new and retail used vehicle sales outpaced our other business lines and explains the majority of the decline in overall margin. Despite a lower margin percentage, overall gross profit dollars increased 18% over the second quarter of 2011. Now to update you on our corporate development activities. We seek exclusive domestic and import franchises in mid-sized rural markets and exclusive luxury franchises in metropolitan markets. In April, we acquired a Chevrolet Cadillac store in Bellingham, Washington, with an estimated revenues annually of $40 million. In June, we purchased the GMC and Buick franchises in Fairbanks, Alaska, to combine into our existing Chevrolet facility. Additionally, we were awarded a Dodge and Ram franchises in Las Cruces, New Mexico. The Las Cruces and Fairbanks franchises add annual revenues of $35 million. Our guidance includes the impacts of these additions. With that, I'll turn the call over to Chris, our CFO.

All right, thank you, Bryan. As it relates to operations, we are seeing a steady recovery and availability of credit for our customers. New banks are entering the retail automotive finance sector and competition for retail contracts remains healthy. Credit trends are positive as trade-in values increased and borrowing rates decline. Of the vehicles we financed in the second quarter, 14% were the sub-prime customers, up slightly from 13.7% in 2011. However, the absolute number of contracts originated for some prime customers increased 31% year-over-year. The expansion of sales to this segment represents the next leg of recovery in new vehicle sales. Over our entire customer base, the average credit score in the first quarter was 711. At the end of the quarter, we had $16 million in cash and $76 million available on our credit facilities, bringing our liquidity to $92 million. At June 30, excluding floor plan, we had $232 million in total debt, of which $175 million is mortgage financing. In the quarter, we refinanced approximately $70 million of mortgages, extending the maturities and fixing the interest rates. We also retired approximately $23 million in higher rate mortgage debt. As a result of these actions, 52% of our mortgages are now fixed and we have no mortgages maturing until 2015. Our non-floor plan interest expense was $2.5 million in the second quarter compared to $2.7 million in the first quarter of 2012, a reduction of $200,000. These savings are a result of the new credit facility we put into place in the second quarter, coupled with strategic mortgage retirements and refinancings to reduce our interest burden. As these transactions were completed throughout the quarter, most of the reductions was weighted to the back end of the quarter. However, we still anticipate approximately $430,000 per quarter and interest rate reductions going forward. As a result of the new credit facility we signed in April of this year, we are fully for all our new vehicles and used the proceeds to pay down the balance in our higher rate revolving credit facility. The movement of this floor plan financing has an impact on our statement of cash flows, which I want to point out. Floor plan financing from a manufacturer-controlled lender is classified as an operational cash flow, while floor plan financing from a bank is classified as financing cash flow. Our new facility has transitioned almost all of our manufacturer-controlled floor plan financing to a bank syndicate. As a result, negative operating cash flows associated with their retirement, were offset by positive financing cash flows from the re-borrowing, even though total floor plan outstanding was unchanged. As detailed in today's press release, on an adjusted basis, our operational cash flow with an increase of almost $100 million year-to-date. Finally, we were in compliance with all debt covenants at the end of the quarter. In terms of overall debt levels and our current leverage, we do not have any high yield debt outstanding and have approximately $93 million of real estate that is unfinanced. Although we have no current plans to increase our leverage from current levels, we have the ability to strategically borrow as opportunities arise. Our free cash flow, as outlined in our investor presentation, was $26 million for the first 6 months of 2012. We estimate this number to be approximately $45 million for the full year of 2012. Our capital expenditure estimate is $48 million for 2012, and this budget is based on new facilities, facility improvements and remodels, the consolidation of our headquarters facilities into a single location, strategic acquisitions of leased facilities and other business development opportunities that are currently in progress. We focused on the prudent allocation of capital and believe a balanced strategy of acquisitions, internal investment, dividends and share repurchases is appropriate. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid long-term investments in Lithia's future. In the second quarter, we repurchased approximately 741,000 shares at an average price of $24.23 per share or 3% of our outstanding flow. Today, we announced that the Board has increased our repurchase authorization by 1 million shares, bringing the overall repurchase authorization to 1.9 million shares. We will continue to evaluate strategic share repurchases based on our internal hurdle rates. In the quarter, adjusted SG&A was a record low of 69.6% of gross profit. Incremental throughput or the percentage of each additional gross profit dollar over the prior year we retain after selling costs adjusted to reflect same-store comps was 43%. Our throughput in the second quarter of 2012 was reduced by insurance items totaling $1.7 million. Excluding these items, our same-store throughput would've been approximately 52%. We believe that incremental throughput is a way to measure our cost control efforts and that our target of 50% incremental throughput remains attainable for the remainder of 2012 and beyond. As of June 30, new vehicle inventories were at $457 million or a day's supply of 74 days, an increase of 6 days from a year ago, which was lower than normal due to the impact of the disasters in Japan. Used vehicle inventories were at $133 million or a day's supply of 52 days, this is 4 days lower than our day's supply levels a year ago. Import inventories are back to normalized levels at the current time, although acquiring late model of used vehicles remains challenging. We have increased our guidance for 2012. Our EPS estimate for the third quarter is in the range of $0.74 to $0.76 a share, with a full-year expectations of $2.69 to $2.75. For additional assumptions related to our earnings guidance, I would refer you to today's press release at lithia.com. This concludes our prepared remarks. We'd now like to open the call to questions. Operator?

[Operator Instructions] Our first question is coming from Steve Dyer from Craig-Hallum Capital Group.

Just, I guess, taking a step back big picture, how do you guys kind of think about the rest of the year, I mean, your guidance is obviously impressive and speaks to some of that. But Mike Jackson, I guess, has spoken a little bit about worries maybe around the election or the fiscal cliff, and I know you don't have a crystal ball. But generally, how are you feeling, kind of, about the cadence of sales going into the back half?

This is Sid, Steve. Thanks for being on the call and following us. Basically, we gave those examples of specific markets where we have a huge improvement that should be taking place, as we speak, regardless of all this noise that's going on in the national scene between Spain being in trouble and the euro and all these issues. I mean, the U.S. economy is chugging along and improving. But more than that, many of the markets we're in are improving. And so that's why we haven't blinked on our guidance.

Steve, maybe to add to our guidance specifically. I mean, the most difficult thing is that the recovery in our eyes isn't linear. So it doesn't just happen consistently month-over-month. And so it makes it very difficult to lay out clear and concise guidance for the full year, which is something that we're going to continue to do. But when you look at the guidance that we started with the beginning of the year, we've raised it to over 40% already since Q1. And we're going to continue to monitor each of our markets, continue to look at each of our stores and continue to give guidance that's based on the current trends that we see.

Okay. And then within your markets, do you feel as though you're gaining share in your markets? That you're obviously exposed to some very good ones and some not so good ones, but Texas, for example, doing very well. Are you gaining share within the markets that you're in?

Steve, this is Bryan. Good question. That is 100% what we focus on each and everyday in our guys in the field. It's not as important to us that the market recovers, it's more important to us that when it recovers, we get a bigger portion of that market. So we measure what's called MSR, manufacturers sales responsibility. Our guys in the stores and on the desk that are working with customers directly know what their market shares are, and they're pushing that. We actually achieved, in the second quarter, our highest individual performance in the quarter from market share that our company has ever experienced at a little over 180%, which is moving the right direction. And we still believe there's lots of opportunity in the future.

Great. How are you feeling about inventory levels right now? Is it -- you have enough used? Late model used? How are you feeling, just overall?

Yes, we're in good shape on used cars. We're ready for the third quarter, which is typically the largest unit sales. Additionally on new cars, we look really good in the domestics. We got plenty of vehicles on the lots. Most of the mainstream imports we're pretty good with. Some of the lesser imports, such as Subaru and Hyundai, still have some pretty serious shortages, but we're doing what we can to really track those vehicles down in markets where they're not quite as attractive.

Okay. Last question, I'll hop back in the queue. Used pricing in margins kind of combine, I mean, I think used is coming back a little bit, pricing maybe not quite as aggressive, or I should say, high as it was for a while. Can you see the ability to start to maintain margins there, going forward, even given this dynamic?

Yes. I mean, we're not seeing any anomalies. It's pretty typical out there. We did see that used car pricing has kind of peaked a couple of months ago. So we're able to actually purchase cars and I think that differential between late model, used and new is starting to come back into a reality where there's a larger gap, which will help sustain margins. Because that's really your lowest margin business that can drag it down. Now obviously, our core product is our big push, which is the 3 to 7 year-old vehicles. And it makes, obviously, good solid margins as well. And then our Value Autos just continue to grow and new car sales, those certified sales and even core sales, really drive those trade-ins in the value, which is obviously that mid-20% margin, which brings everything up and we think that the stability there being at the top of the food chain gives us a great advantage to be able to keep those margins strong.

[Operator Instructions] Our next question is coming from Simeon Gutman from Credit Suisse.

First, on the incentive picture. Absent that, the Chrysler incentive that Bryan mentioned that went away, can you characterize the gross profit environment and how it should move -- I mean, should it just flex with mix of business maybe some imports? And then thinking a little bit down the line, given sort of the protection that you have in your markets, should we start to see the dollars on a per-unit basis stabilize or even move higher over time?

Simeon, this is Bryan again. If we look at incentives, there's really no anomalies other than that facility incentive or that standards incentive that really went away in the first quarter. Other than that, we're seeing typical moves. It appears that there is some aggressive marketing out there. There's new creative ideas by General Motors that's coming through more of a fixed pricing model and the ability to bring vehicles back. That could affect margins a little bit, but right now, it's looking like they're staying pretty stable. We're able to take in trade-ins, we're able to make it up in F&I, it seems to be in pretty good form. If we look forward at the rest of the year, we believe inventories look pretty good. There's some shortages coming in a few of the manufacturers truck productions. It sounds like General Motors may have a little bit of a shortage that we're going to have to work through, which should keep margins strong. And I think we'll have enough trucks to maintain our same-store sales growth as we've been predicting. Outside of that, I mean, we focus each and everyday in our markets and make sure that we're competitive against our surrounding dealers. Now it's imperative to remember, though, that we don't -- we typically have 2 or 3 guys that are dominant players that we're competing against, not the 20 or 30 that you typically have in a metropolitan area. So yes, there is more control of our margins than in the typical instance of most car dealers within the country that are competing with a much greater amount of unknowns.

Yes, and just to kind of follow-up on that. I mean, the essence of the question was -- and in your prepared remarks, I think you mentioned there is innovation, good innovation happening, and I think that's also pushing inflation a little bit. And so in that environment, you'd hope maybe some of that flow through or the gross profits stays sticky or -- and it helps, especially with your model, which is more protected, I think we're hearing from some of the other dealers that there may have been some slightly more competition, some of it's mixed because of imports. But in your case, when you hear that there's innovation happening, prices are moving higher, it sounds like gross profits could actually move higher at some point.

It's funny because 10 years ago, we would've sat here and said that the Lithia model of controlling things in the stores and making decisions from corporate, now that we've become, I would say, a centralized, decentralized company, which means we found the benefits in the economies of scales within our model. We have many centralized functions. Our guys in the stores are very empowered to get the job done within their own individual market. And I think more than anything, gross margin will be driven because of their understanding of their marketplace and their customer's desires, and knowing where the opportunities are to expand their business. And when we look at margin, I think it's crucial always, and commented this in the prepared remarks, well, specifically total gross dollars is what we focus on. We don't focus necessarily just on deal average or margin as a car dealer. Now obviously, as a large company, we look at margin pressures and look at the implications of that, but we focus on how many gross dollars can we push through that individual business within that individual market and finding the leverages on those fixed cost within those stores. And I think that's where we're starting to see our sweet spot start to really take hold and not approach any situation the same. And I think our guys in the stores, and our gals in the stores are doing nice job finding those opportunities and were there to really help support and foster that knowledge and that innovation that you're speaking to.

Okay. And then following up to an earlier question, can you say -- I think you mentioned market share growth expectation. Can you say what the expectation or what's built-in from a SAAR perspective? And then connected to that, the markets you mentioned that are depressed, are you seeing more rapid rates of recovery there or they're still just sitting along the bottom?

Yes, Simeon, we have the basic assumption that we believe the second half is going to be similar to the first half. It's going to be in the 14 million SAAR to 14.5 million SAAR. We're pretty confident with those numbers. Outside of that, I mean, we're going to keep our head down and continue to do what we know how to do. And that's operate stores and grew people that can expand our business and expand our understanding of our customers.

Okay. And then, how about the markets, I mean, can you speak to the markets in which you mentioned where there's a depressed selling rate? Are you seeing signs of recovery there or are they growing more rapidly than others?

Actually, our fastest growing markets in the quarter, I believe, were Texas, Montana and Alaska?

North Dakota.

North Dakota and Alaska. Okay, so our Western markets are recovering. They're just still, they're not recovering at the same speeds, so they were lower double-digits rather than those higher double-digits in the 25%, 30% range those markets I mentioned. So the West is still not recognizing the growth that they have the potential to accomplish and I think that's where we wake up every morning and get excited at what the potential is and look back at that '05 or '06 time period when we were doing pretty good. But we're in a lot lower overall markets within those areas, and we're still performing profit levels because we're able to keep that money. And our people in the stores, I believe, are really better and more prepared to approach our customers and our competition.

Okay. And then the last question, the throughput on an adjusted basis was strong, I guess, was consistent with where we saw them close to last quarter. But if you look back in the prior-year, you were more in between the 50% to 60%, I think you even push past that 60% number once. Was that last year more of a function just because the gross profits on a per vehicle basis were elevated and that provided the overall leverage, or is there something that could still be improved upon as we get higher volumes in the system that you can still get back to those levels?

Yes, Simeon, this is Chris. When I look back on the prior year and when you're just doing this comparability for the throughput calculation on a quarter-over-quarter basis, you're going to have some variability and things that come in and come out when you're doing that comparison. In the prior year, our throughput calc, I think, was 62% and what you saw there is there was some adjustments that we made to our insurance reserves that came in, in the quarter. And because the expense of those reserves is taken on a quarterly basis, we don't pro forma those out. And so that was the anomaly that you saw in the prior year. The recurring expenses are benefits but they come in inconsistently over time. So going forward, our goal is to continue to maintain a 50% incremental throughput target. We think that's very attainable. When you look at our SG&A as a percentage of gross, it's 69.6%, that's a record for the company. But on a full year basis, we're still going to drive that number down to the low 70s, that's our target. But we do think that -- yes, on an annual basis but we do think that over time, we can improve that number as well. But let's take the first step and get to the low 70% and then work on another target after that.

Simeon, this is Bryan again. One quick additional -- when we look at opportunities, I think it's imperative that you always look at, as well, even though you're getting 50%, 60% throughput within your stores, you also have to look at your base of other expenses. So and I will say this that part of that throughput comes from improving your current base as well. So as you improve that other base and I will say this, our productivity in many of our stores is still not wonderful, changing compensation plans, which is our single biggest expense within our stores, is a difficult long-term fix. And I think the only way to change those is over time. So you don't loss your people to the competition. And then you're able to gain and extract some of those benefits and lower your cost structure. I think a lot of the things are in place and I think that's what helps us maintain that 50%-plus throughput. And I think we're going to be able to maintain that in the future and many of our stores, obviously, can do much better than that. However, like we always talk about, we have many opportunities in these stores, and I think it's going to be exciting to see how we approach this in the future.

Our next question is coming from Rick Nelson from Stephens.

Can you comment on acquisition, pricing, and the pipeline and it's a step up in the stock buyback authorization and all, a reflection of lessening acquisition opportunity?

Rick this is Bryan. Acquisitions are, believe it or not, probably the most active that we've in a number of years. It's really occurred over the last number of months because of a couple of different things. I think it's fair to say that our dealer body is still aging at the same rate and many of the dealer body had hunkered down for the last 3 or 4 years and weren't willing to sell their lifetime investment in the lowest market we've seen in the last number of decades. So that, compounded with the fact that there's this uncertainty about tax rates and the long term capital gains, and so on and so on. It's creating the activity that we haven't seen before. Now I will say this, just because there's activity, doesn't mean that Lithia's changing our discipline. We still are only going to purchase stores if they meet that 75% for the key imports and luxury, 100% for the key domestics and the other imports, and then 125% ROE, and this is on a 5-year basis for some of the domestics that we are pretty heavy in. Okay, and I think that's how we look at things. I think that there's going to be opportunities, but I think there's also an additional pressure that when we, as a company, trade at less than 10x earnings, it behooves us to protect our shareholders and not invest in new opportunities, but invest in ourselves, and I think at these low multiples, it makes it even more difficult to really find attractive acquisitions that are better use of our capital than buying our own stock back. So it's an interesting quandary, but I think we're built for growth. We want to grow, we have people sitting on the bench, and I think that will ultimately drive and fulfill these opportunities in the coming months and quarters.

It kind of makes sense. It seems like some parts of that same-store growth really accelerated this quarter, I'm wondering what's behind that strength and do you think that's sustainable?

So, Rick, we talked a lot about commodity sales, which is really that one-stop shopping experience. I believe that that's taking hold. I believe that our people interacting with our customer on the frontlines get that, and they understand that when you're a one-stop shopping experience, you have to be multiple things to multiple customers. Meaning, some people come in because of speed, some do come in because of a value pricing, some come in because we're the only of that brand within the marketplace and they want that part. And I think helping your people on the frontlines understand what the drivers are for that customer, and then responding specifically to those needs, are what's creating a better action. And I think we're going to see even more of that in the future, and I know that our teams out there have their ears wide open to be able to grow their market share.

Finally, if I could ask, what you might be seeing in July from a traffic and sales standpoint?

So this is Bryan, again. Actually, the second quarter was -- it started out in April very, very strong. It still finished strong in June, but it wasn't quite as robust as the first part of the quarter, and I think July is looking similar. It's on forecast, but it's not robust like it was in the start of the year. I think we're used to these jumps from 13 million SAAR to 14 million SAAR and now that it's kind of flattened again at this 14 million to 14.2 million, we're going to look back at our discipline and make sure that we can extract more out of what opportunities are there to attract market share and continue to grow. So I would say that it's tracking as we expected.

Our next question is coming from James Albertine from Stifel, Nicholas.

If we could just isolate, for a minute, some of the drivers or potential drivers of consumer demand, a lot of conversation around replacement, whether it's fuel efficiency or quite frankly, just simply market stabilization in particular, the home market and some of your bigger exposed markets. But I'm wondering -- sort of an idea for you guys, if you could rank, based on what you're seeing, those different kind of facets of demand?

Jamie, this is Chris. I mean, first of all, let me just touch on credit. We believe that the credit markets recovering is a big driver and returning SAARs to prerecession levels. And going along with that is job creation, which we monitor, but don't have as close of a feel for us. So when we continue to monitor and watch in each of our markets is what's happening with that non-prime and sub-prime customers. And we talked about as a percentage of our portfolio, things haven't changed much year-over-year. I think our sub-prime customers make up about 14% of our financed portfolio, which is consistent with the prior year. However, with the increase in sales, you see those numbers get skewed a little bit better in the favor of those non-prime, sub-prime customers. For example, our sub-prime customer sales on a unit basis were up 31% and on a near-prime basis, we're up 44% when our overall sales were up 25%. So there's definitely a bigger rate of the sales recovery coming in that non-prime and sub-prime segment. And we think that's going to continue. When you look, again, prerecession, that sub-prime customer made up about 25% of our overall sales mix. And while we don't expect to get back to 25%, we think 20% or so would be kind of the normalized level in the future.

Jamie, this is Sid. Jamie, if you look at those reasons people trade, obviously, the aging car they currently have and its reliability and both its safety and that's a big one is the old air bags you're picturing your kids riding round in and not having a modern car and if you actually had an accident, you're way better off in a modern car and the fuel efficiency is huge. And then seeking the new technologies that are in these cars, all those things with Bluetooths and all these things that people think they have to have. And they'll buy a new car to get it rather than buy a new iPad, I guess, but it's wonderful. I mean, those are drivers that are out there.

That's very helpful. I appreciate that additional color. Looking at your brand and your sort of vehicle mix historically, you tended to do more in the truck and SUV segment, arguably, and as fuel efficiency becomes one of those key drivers that you mentioned, cars obviously are going to become a growing part of that mix. Now looking at your results, obviously, you're doing a lot of great things in cars, but how do you see that sort of mix shifting over time and sort of your ability to shift with it, if you will?

Jamie, this is Bryan. I think we talked a lot about our strategies in our individual markets where we are more in a more rural/agricultural markets that are truck and SUV-dependent. We are seeing a shift, which is wonderful, and I think a lot of our domestic manufacturers, as well as the imports manufacturers, have shifted into this newer world. But I think it's always imperative to remember that SUVs and trucks still get a better gas mileage in today's generation of cars than they did in the old generation of car. And I think both Sid and Chris were speaking to the fact that there's this deferred pent-up demand that's occurred at I think it's been pushed out now rather than a 4-year trade cycle. A lot of people haven't been out in the marketplace. So I think now we're looking at people that are 6 or 7 years old on cars. They're talking 2 generations of cars, so there's a lot of opportunity over the next 3 to 5 years on being able to pick up this fuel efficiency or the safety that Sid spoke to. And I think our brand mix of what we hold at about 55% domestic now, really fits our marketplaces. And fortunately, some of our manufacturers now have also moved into that car segment and our stores are learning how to really respond to customers within that car segment and compete in that environment whereas before, they really were really good at selling SUVs and trucks. So it's a new anomaly to us, and I think it's exciting in many of our markets to see how we're going to be able to respond to that. But I think the key is to remember that those SUVs and trucks that are now one or 2 generations old still have huge gas mile improvements in their new models.

Our next question is coming from John Murphy from Bank of America Merrill Lynch.

This is Liz Lane on for John. Your new guidance reflects improvements in, really, every area of the business, and the one area where outlook is lower is in the new vehicle margins. Can you just explain what's changed between last quarter and now to lower that full-year margin guidance on new vehicles by 30 basis points or so?

You bet, Liz. This is Bryan again. I think there's a conscious effort within our teams in the stores that they are going to get market share. We have set very modest goals in most of our marketplaces and if it means that we have to sacrifice a little bit of margin, I think you're going to see and like what the results are because that leverage on that expense structure, and that total gross package that we talked about is going to bring to the bottom line. And we believe that, that is the single best way to be able to expand your market presence and expand your market share.

Okay, so that's more of a Lithia-specific strategy than a market-driven issue?

Yes.

Okay, great. And it also sounds like the acquisition environment has a lot of opportunities. Are there -- are the franchises mostly small, independent-owned or are there any opportunities for larger groups or potential geographic expansion?

This is Bryan again, Liz. There's no question that the markets improved, there's opportunities out there. Typically, Lithia is purchasing one or 2 stores from individual sellers, they're usually in small or medium-sized markets like we talked about. However, we are actively pursuing some larger groups, especially when we look east of the Mississippi because we believe that if we have the ability to find a talented management team that's really like Lithia was in the mid-90s that was bursting at the seams ready to grow and ready to take on that next challenge, we're going to look at those opportunities as well. And I think that our innovative approach to our customers and to our competition, I think, we can make a big difference in that venue as well.

Okay, great. And just one more, which is on the used vehicle market. Some of the other dealers have mentioned that they're seeing consumers opting for new vehicles rather than late model used because the pricing differential is getting a lot smaller. I know late model isn't really your big focus, but are you seeing any of that, kind of, trade-up in your markets?

We're actually not seeing that, our certified used vehicles is up 26%. If you recall, our overall used vehicles was up around 20%. So it's tracking at a higher rate than our normal used vehicles. And it would seem like that now that the late model used cars have started to subside on the pricing, so the gap between the new and the used is a little larger, that would accelerate some of that. And it could just be our markets. I mean, I don't know what the differences would be, but so far, we're not seeing that driveback to the new vehicles. We're seeing more that the certifieds now are becoming a little bit more attractive because there are more of a value in relationship to a new car.

Our next question is coming from Scott Stember from Sidoti & Company.

Just focusing back on the mix shift to cars from pickup trucks and SUVs. Related to Chrysler, can you talk about how some of their newer brands like the 300, the 200 and maybe even the Dart are doing?

Scott, this is Sid. Cars for Chrysler are not going to be their strongest suit. The 300 is doing well, the 200 is doing especially well so the Chrysler brand itself has done a ton. But the biggest change is people are buying that crossover vehicle instead of an SUVs. It's not so much a car and they're still counted as trucks, so you're not seeing a huge shift, but they want a little smaller, a little more fuel economy, but they still need the space and the safety. So I don't think we've got a trend there that's irreversible. It's too early to tell on the Dart, I mean obviously some of our stores don't even have one yet. I mean there were a few drive outs and they didn't offer automatics to start with. And I mean, it's a slow ramp up. So it's too early to tell but we have a lot of confidence in that car. But it's entering a very competitive segment, there's all kinds of vehicles, but it's definitely cutting edge in that segment. So it will definitely take some share.

Sid, you used to talk about the PT Cruiser as it was Chrysler's car that they could actually go after the marketplace in because it was a value-oriented small car that had a little bit of personality, different than others and I think the Dart, our stores are looking at it as such, and I believe that they're going to be able to take market share with that product, which in the past, we really haven't had a competitor in that space. So the opportunity is good and it's really what we do with it.

I think Jeep will do the lot with crossover and they obviously have the brand anyway that people really have a high regard for. So Chrysler is not at risk in terms of change over to truck, to car and going to lose share. I mean those guys are running the company better than anybody that runs a company, and probably the world right now, as far as using strategy, using marketing, using what they have, selling it well, dressing it up, making it attractive, putting features and then putting better interiors in it, I mean it's all of those things that make it happen.

Great, and as far as Chrysler plans to rollout, I guess the 6-cylinder engine to more of their SUVs and pickup trucks and with this hp transmission, have you seen any traction from that?

Yes, definitely. At hp, a lot of ton for their volume and at V6 they can make 1 million of those engines a year. I mean, that was a truck plant that, I mean an engine plant that was underway when Marchionne and the group took over. And he initially said, "Gee whiz, too bad that wasn't a 4-cylinder plant." But now that it's working out, that thing is highly efficient, wonderful modern V6 and it fits is definitely into the truck, in the crossover and all of those heavier rigs that you'll see it even in the 0.75 ton.

Excellent. And last question on the F&I. You had a pretty sharp jump in your penetration rates for financing. Was there anything specifically related to that?

Scott, this is Chris. 2 things that really drove that number. One, we talked a little bit already about what's happening in the finance markets, with credit availability, it allows us to do a little bit more penetration on or arranging financings. Our finance penetrations is up to 76% of our retail customers. And so there's some benefits to that as far as your F&I per unit. The other half of that is an increase due to our service contract offerings. We've been challenging ourselves with making sure that we have the best products available in our stores at the right prices. So we've been benefiting from changing some deductibles and lowering some pricing in certain segments and raising some prices in some others to make sure we have the right mix at the right price offering. And that has benefited us and we hope to continue to see that benefit through the rest of the year.

Our next question is coming from Adam France from 1492 Capital.

Just 2 quick questions here. With respect to the -- I believe it was a $1.7 million insurance item, is that something we should expect to recur going forward here? And then what's your rule of thumb in terms of when you build a new store, how long does it take to become profitable?

I'll take the first question on the $1.7 million. This is Chris. It's not -- I can't say it's not a recurring item, it's going to happen on a year-over-year basis, possibly, depending on what happens with our insurance risk. And when we have recoveries that come in, we're going to take them into the quarter that we've taken but we also pay out the premiums on a quarterly basis as well. So when you're comparing quarters, there are anomalies that create some variability. But again, back to our target, our 50% incremental throughput is the way that we measure our gross-to-net retention and we believe that's sustainable for the long term.

Adam, this is Bryan. Your comment on -- your question on building a new store. So we actually just entered the Las Cruces marketplace and maybe that's what you're referring to.

Right.

Yes, that was an open point that we received from Chrysler. We actually didn't have to build a store. We purchased -- we actually leased -- excuse me, the old Saturn store. We're in the process of giving it a facelift in the front for a couple $100,000. That's our total investment. Our rent is very low, we have a short-term rent in that store. And it typically takes in the 4 to 6-month period to ramp up the sales to an adequate level. Now there hasn't been and a dealer in that marketplace for a little over a year. And we saw a great thirst within the marketplace where consumers were coming in immediately and they had a decent first 25, 30 days of business. So we're excited to see what happens there. Now traditionally, if you're looking at building a new store, it's typically a 12 to 15 months process from start to finish. And then again, when there's not a manufacturer like that within that marketplace, it can take longer to build your sales rates and get to a breakeven or stability standpoint within that store. Now acquisitions, we expect acquisitions to be right out of the shoot, accretive and that we're making higher profits than what our previous sellers were. Does that cover what you were looking for, Adam?

Absolutely.

[Operator Instructions] Our next question is coming from Jordon Hymowitz from Philadelphia Financial.

I have 2 questions. One is the gross margin question that people have asked, and that is, for a long time when sales were falling and gross margins were falling, everyone said when sales come back, gross margins will come back, and yet that hasn't been the case across the industry. Do you think, instead, maybe it's just the continuation of gross margins that have continued down for the past 15 years or so? I mean, do you really think there will be some industry bounce-back in gross margins in the next year or 2?

Jordon, I think it's always -- and this is Bryan again. It's imperative to remember that your mix of vehicle sales to fixed department sales is the primary driver of margins. And I think we saw the margin expansion where we went to 18%, 19% overall margins during the recessionary period because our mix of new and used vehicle sales was down. Now that we're seeing our mix of new and used vehicles sales grow at a faster rate, in the 20% to 30% range rather than the 6% to 7% range in service and parts, you're starting to see that what appears to be margin pressures but...

No Bryan, I'm sorry, I apologize, I'm strictly referring to new vehicles.

Okay, okay. So on new vehicles, it has appeared to be continuing to decline. And I think that, that may continue, but you still extract the other benefits in service and parts with that longer-term customer and getting additional units in operation. So we may still see some margin pressures and I think from my standpoint, what we care about is growing bottom line net. That's what we care about. And if it means that we have to reduce our margins in certain instances to be able to accomplish that, to improve our net, we're going to do that. Because ultimately, we know that services parts is going to pick up that slack over that 3 to 6 years that, that customer owns that car. And then most likely, we'll get them back again and the efficiency start to take hold within the model and you're able to then generate business with lower advertising costs, with lower personnel costs and a more efficient streamline model.

So would it be fair to say that you see a gradually continuing trend towards the lower new vehicle gross margins and a greater percentage of business coming from service and parts?

I don't think it's going to be dramatic. If there is margin pressures, I think we'll sacrifice margin to be able to expand our net. And I think that's how we look at it and I think it's a conscious effort but there's no macro issues right now that are forcing margins down. I don't believe that that's happening. I don't believe that will happen in the future.

Okay. And my second question is, the Manheim have started to rollover a little bit in the past couple of months after being incredibly high. And you guys have done a much better job than almost -- in fact, than any other dealer on the wholesale side. If the Manheim starts to, or continues to roll over towards the 110 number, what is your target for wholesale profit or is it breakeven for used car on just the wholesale used side?

Yes, so when we manage our individual stores, each of them manage things differently. What we care about is that their new and used vehicle margins stay strong, there's no question. But they're getting their sales volumes. So wholesale is just -- it's really the end-result of all of that happening. So we don't manage whether or not you should make a profit or whether you should lose money in wholesale. What we manage is the overall business and as long as they're keeping their inventories clean, they're moving their inventories and they're expanding their market share on the top-end. That's what we look at. So I don't know that the wholesale pricing at Manheim is really a driver of future profits or losses within wholesale. I believe that the driver on that is how quickly you turn your cars on the retail side and what the end-result of that is.

Got it. And do you continue to see weakness for wholesale in the month of June?

No.

It's just stabilized?

Yes, I mean, pricing is coming down but remember, wholesale car is taking it on trade-in and sold 5 days later. So it's not like we're holding on to these cars and we're feeling the pressures of that. When the market adjusts, we adjust. So if there's big changes, we're going to adjust quicker. And if we're seeing that trend grow at a steeper rate or decline at a steeper rate, we're going to be more conservative. So, and I think, that's the beauty of our model.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Thank you, everyone, for joining us today. I look forward to updating you on the results in October.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.