AutoNation Inc

NYSE:AN

Earnings Call Analysis

AutoNation's Q4 Performances and 2024 Outlook

AutoNation anticipates first quarter per-vehicle retail (PVR) figures to be at or slightly below Q4 levels, as used PVR improvement is forecasted late in Q1. Customer Financial Services (CFS) gross profits remained strong, with new vehicle finance penetration increasing amid a leasing uptick to 23%. After Sales gross profit rose significantly, representing 44% of total gross profit, with store revenue increased by 11%. Adjusted operating income decreased year-over-year to 5.4%, but adjusted free cash flow dropped significantly to $969 million from $1.5 billion. Inventory levels grew by roughly $1 billion, supported mainly by increased financing. Capital expenditures grew to $410 million due to investment in franchise store capacity and IT. The company continues to focus on growing AutoNation Finance, streamlined operations, and prudent capital allocation for sustained shareholder value.

Resilient Consumer Demand Amid Economic Headwinds

Despite mixed economic indicators and concerns around affordability, the company maintains a positive outlook on consumer demand. New Vehicle revenues increased by 7%, unit sales by 8%, and there was a significant uptick in import and luxury sales. However, New Vehicle margins are on a declining trajectory, a trend that is expected to persist into 2024.

Changing Dynamics in the Used Vehicle Segment

The company observed normalizing price bands in the Used Vehicles segment leading to decreased demand for higher-priced models, partially attributed to New Vehicles becoming more accessible and financially appealing. Consequently, Used Vehicle margins are projected to align with those of Q4 into the next quarter.

Record Performance in After Sales

After Sales delivered a record in revenue and margin with an 11% growth in store revenue, reinforcing the company’s strong foundation. This financial strength enabled the company to enhance shareholder value through the repurchase of over 1.1 million shares.

Inventory and Profitability Adjustments

New vehicle inventory levels rose significantly, potentially signaling the necessity of further margin adjustments. Used vehicle inventory also increased, highlighting proactive efforts to improve sourcing and anticipating an uptick in profitability towards the end of Q1.

Adjusted Earnings and Operational Efficiencies

Total revenue increased slightly, while adjusted operating income decreased by 22%, influenced by increased interest expenses and a modest reduction in income tax expenses. Despite this, the company has maintained solid earnings per share (EPS) through strategic share repurchases.

Customer Financial Services and Loan Origination Growth

The Customer Financial Services (CFS) sector continued its industry-leading performance. Leasing gained traction, constituting 23% of new sales, while used vehicle financing faced minor declines due to higher interest rates. AutoNation Finance lending has expanded, with loan originations increasing significantly from Q3 to Q4.

Strengthening of After Sales Business Segment

After Sales contributed significantly to gross profit, with revenues rising 11% to $1.1 billion. Technician workforce growth supports this segment’s future expansion as the company leverages its high-margin business for ongoing customer engagement.

Capital Allocation and Shareholder Returns

The company showcased strong free cash flow and a robust balance sheet, with a significant portion of cash returned to shareholders via share repurchases. The capital allocation strategy will continue to prioritize maximum shareholder value, balancing reinvestments with returns while sustaining investment grade credit ratings.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome to the AutoNation Inc. Fourth Quarter 2023 Earnings Conference Call. My name is Bruno, I'll be operating your call today. [Operator Instructions] I will now hand over to your host, Derek Fiebig, Vice President of Investor Relations. Please go ahead.

[Derek Fiebig, executive]

Thank you, Bruno, and good morning, everyone. Welcome to AutoNation's Fourth Quarter 2023 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call for questions.

Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website at investors.autonation.com. With that, I'll turn the call over to Mike.

[Michael Manley, executive]

Yes. Thanks, Derek, and good morning, everybody. Thank you for joining us today. I'm on Slide 3, and I'm going to provide some opening remarks before I hand over to Tom, who's going to take you through our fourth quarter results in greater detail.

Now as we know, there continue to be mixed economic signals in the economy and concerns our affordability. But from our perspective, consumer demand for New Vehicles remains robust. Now during the quarter, our total New Vehicle revenue increased 7% and unit sales increased 8%, and this reflected strong import growth as well as the seasonal uplift in Premium Luxury sales. New vehicle margins continue to decline, with the rate of moderation in the fourth quarter, which is approximately $120 per month was more modest than earlier quarters. Total New Vehicle inventory levels of 36 days increased from 19 last year and 31 in the third quarter. We have 66 days of domestic brands, 29 days of luxury and 24 days of import brands. Inventory levels are expected to continue to grow in 2024, and as such, we expect to see a continued moderation of New Vehicle margin, which we anticipate will be roughly the same pace as we experienced in Q4.

Turning to Used Vehicles. Same-store units decreased 8% a year ago, while total units were down 4%, which reflects the growth of AN USA stores in the year. The more recent sequential comparisons have a slightly better than the market. Now we're managing several critical variables in the used market at the moment. Firstly, we continue to see tight availability, and this has been with us throughout 2023, and with no doubt continue into 2024 and notwithstanding the inventory availability, we're seeing Used Vehicle depreciation, which is broadly back to normal and historical levels.

Mix between price [ bands ] is also normalizing. And as a result, we've seen lower demand in higher price Used Vehicles, partly because of affordability and partly because New Vehicles are becoming more available with lower net transaction price, which is often accompanied by subsidized lending rates, which makes new products more compelling for a number of our customers.

Tom is going to give you some of the specifics on unit sales by pricing [ band ]. Our inventory turns on Used Vehicles declined modestly during the quarter. The mix change I just noted, combined with slower turns moderated our used PVR and we expect these market conditions to continue into 2024 and as a result, we expect our Q1 2024 used margins to be in the same range as our Q4 results.

Now we maintained our industry-leading performance in customer financial services in the quarter as the team continues to do an outstanding job to overcome a higher interest rate environment by maintaining solid growth in product sales per unit sold compared to a year ago. This performance, combined with a 2% increase in total retail units sold resulted in higher [ CFS ] gross profit. After sales delivered a record fourth quarter for revenue and margin. Total store revenue was up 11% and our gross profit was up 13%. Growth came from all major categories. The greater complexity of vehicles is leading to higher values per repair order and this, coupled with increased numbers of repair orders from a year ago, resulted in what I think is an excellent performance.

The strength of our balance sheet and cash generation, which Tom will discuss allowed us to deploy an additional $150 million towards share repurchases during the quarter, repurchasing more than 1.1 million shares.

Now aside from the solid quarter from a financial perspective, there are a few other highlights I'd like to touch on. We continue to focus on our customers and are working to garner a greater share of customers' wallets. As such, during the quarter, we continued integrating AutoNation Finance across our portfolio including the launch into nearly all of our franchise stores. We also continued with the rollout of our AN USA stores, opening locations in [ Plano ], Texas and Fort Myers, Florida during the quarter. And we opened additional stores in Florida early this year with Wesley Chapel, Sanford and Jacksonville, adding to density in these markets. I think our business model is resilient, working well, and we continue to deliver strong financial performance.

Now this performance is, of course, made possible by our 24,000-plus AutoNation associates who take care of our customers every day. And I think the team efforts continue to be recognized by outside parties because of this. And this year, AutoNation once again made Fortune's Most Admired list, jumping 4 spots to #3 in the Specialty Retailer section. Congratulations to everybody. Thank you for the things that you do for us. And with that, Tom, I'm going to hand over to you. Thank you.

[Thomas Szlosek, executive]

Okay. Perfect. Thanks, Mike. I'm turning to Slide 4 to comment on our fourth quarter P&L. Total revenue increased slightly as growth in New Vehicle and After Sales revenue more than offset lower Used Vehicle revenue. As expected, gross profit was down 5% and margin was 18% for the quarter as strong growth in After Sales partially offset declines for New and Used Vehicles, which I'll address in a later slide.

Adjusted SG&A increased 5% to $791 million with stable core spending and incremental costs related to our growth initiatives. This resulted in adjusted operating income of $368 million for the quarter, which decreased 22% from a year ago. Below the operating line, our fourth quarter results were impacted by higher interest expense for both Floorplan and non-vehicle debt and benefited from lower income tax expense. The fourth quarter Floorplan interest expense of $47 million was up from $20 million a year ago, a reflection of higher rates and inventory levels as expected. As a reminder, we reflect Floorplan assistance received from OEMs in gross margin. And in the fourth quarter, the increased assistance helped to offset partially the increase in Floorplan interest expense.

Interest expense from non-vehicle debt was $46 million for the quarter, up from $38 million a year ago. The increase reflects increased borrowing and higher rates. Income tax expense for the quarter was $62 million compared to $91 million in 2022, reflecting lower taxable income and a modestly lower income tax rate. All in, this resulted in adjusted net income of $216 million compared to adjusted net income of $319 million a year ago.

The impact of our share repurchase activity partially offset the EPS effect of the lower net income. Total shares repurchased over the year decreased our average shares outstanding by 14% to 42.9 million shares in the fourth quarter. Our adjusted EPS was $5.02 for the quarter.

Starting with Slide 5, I'd like to build on the color Mike gave on the performance in our various revenue categories for the quarter. New vehicle volumes were up 8%, which includes increases of 16% on Imports, 3% on Premium Luxury and flat Domestic units. New vehicle gross profit PVRs continue to moderate. While selling prices were stable, vehicle costs were higher. The rate of decline for the fourth quarter in gross profit PVRs was about $375 per unit, which slowed from the approximately $600 per unit sequential decline in recent quarters. This reflected the higher seasonal Premium Luxury mix and a more stable although still less an ideal environment for battery electric vehicles.

New vehicle inventory levels, including vehicles in transit have increased from 18,100 units in 2022 to 35,300 units at the end of 2023.

I'm moving on to Slide 6. In Used Vehicles, we had a unit volume decline of 4% from a year ago, as Mike mentioned, on a total store basis and 8% on a same-store basis. There continues to be a shift to lower-priced used vehicles. Our same-store unit sales of used vehicles priced under $20,000 increased 7% while used vehicles over $40,000 increase 20% and used vehicles priced from $20,000 to $40,000 were down 11%.

From a segment standpoint, Used unit volume performance was strongest in our Import brands. Year-over-year unit sales and gross profit PVRs in Used Vehicles were adversely impacted by the pricing band mix I mentioned and reflect an overall softer used car pricing environment. Used Vehicle inventory levels increased sequentially and year-over-year, reflecting our stepped-up buying activity in anticipation of the customary spike in first quarter Used Car volume. As Mike mentioned, we expect our first quarter PVRs to be at or slightly below fourth quarter levels, reflecting a conscious effort to align inventory levels and turn rate with the market.

Used PVR improvement is expected late in the first quarter as the fourth quarter inventory is fully turned. Used Vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing and speed while optimizing customer satisfaction.

I'm now on Slide 7. In Customer Financial Services, our industry-leading performance continued. As you can see, gross profit PVRs for CFS remain strong and would have been even stronger absent the shifting of economics related to AutoNation Finance lending. The upfront we previously received from nonrecourse third-party lenders is now deferred over the life of the AutoNation Finance loan.

New Vehicle product attachment and finance penetration in CFS remained strong and increased from a year ago. We have seen an increase in leasing, which represents 23% of new sales in the fourth quarter compared to 13% last year. This is a minor headwind for [ CFS PVR ] as leased vehicles historically have a lower CFS attachment rate.

On Used Vehicles, there were slight decreases from a year ago on both the finance and product side of CFS as higher interest rates consume more of our customers' monthly payment capacity. As Mike mentioned, in addition to fully supporting all AN USA stores, we now have AutoNation Finance present in nearly all franchise stores. In the fourth quarter, we originated approximately $110 million in loans, up from $63 million in the third quarter. The AutoNation Finance business continues to improve in all dimensions, including penetration in our stores, profitability and delinquency rate.

Let's move to Slide 8. After Sales represents about 44% of our gross -- our total gross profit for the quarter and continued to grow with total store revenue increasing 11% to $1.1 billion or 9% on a same-store basis. Customer Pay, Warranty and Internal all experienced double-digit year-over-year growth. The value for order is improving and our total number of repair orders has also increased. Gross profit grew 13% year-over-year on a full-store basis and 12% on a same-store basis. Total gross profit was up double digits for Customer Pay, Warranty and Internal and our gross profit margins were up more than 70 basis points to 47%, reflecting higher repair orders -- higher value repair orders and scale benefits from the increase in the number of repair orders.

For the full year, our After Sales gross profit was more than $2.1 billion, which is up more than $500 million from 2019. This high-margin business is a key part of our continued engagement with our customers and we're focused on capacity utilization, technician development to support the continued growth of the business. Importantly, our total technician workforce increased 6% from a year ago on a same-store basis and 11% in total.

Moving to Slide 9. Our adjusted operating income was 5.4% for the quarter, down from last year, but up more than 150 basis points from pre-pandemic levels. The decrease from 2022 mostly reflects the moderation in New Vehicle unit profitability, which was expected and is consistent with the industry as well as higher SG&A. The growth in SG&A reflects investments for growth, increased advertising spend and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic levels.

During the fourth quarter, we recognized about $7 million of severance expenses as we streamlined our regional field team and rationalized some support functions.

On Slide 10, you can see that our adjusted free cash flow for the year was $969 million compared to $1.5 billion a year ago. The change year-over-year is consistent with our change in EBITDA. A reconciliation for adjusted free cash flow is included in the appendix of this presentation. Year-over-year, our total inventory increased by approximately $1 billion, which was largely funded by higher trade floorplan financing and nontrade floorplan financing, which increased $424 million from a year ago. While we expect the continued normalization of new inventory levels, we are focused on the velocity with which we turn our overall vehicle inventory.

Consistent with the expansion of AutoNation Finance, our net auto loans receivable increased by $230 million, and we expect continued growth in this portfolio. CapEx for the full year was $410 million compared to $329 million a year ago, reflecting primarily capacity growth at franchise stores, IT spending and facility electrification infrastructure. This resulted in an adjusted free cash flow of $969 million and a strong conversion of 94% of our adjusted net income.

Slide 11 shows our capital allocation for the years 2022 and 2023. In 2023, we had a balanced mix of reinvestments and return to shareholders. CapEx of $410 million was about $80 million higher than 2022, as I mentioned. M&A investments, which occurred earlier in the year totaled $271 million. With significant cash flow generation and a strong balance sheet, we returned $864 million to shareholders via share repurchases, reducing our shares outstanding by 13%. We have an additional $320 million remaining under our current board authorization for share repurchases. At quarter end, our leverage was 2.19x EBITDA, the lower end of our 2 to 3x target, and we continue to maintain our investment grade credit rating.

Moving forward, we'll continue to allocate capital to maximize shareholder value, considering both near-term market conditions, the M&A landscape, particularly for core franchise operations and the longer-term direction of the industry. Now I'll turn the call back over to Mike to provide some commentary regarding 2024.

[Michael Manley, executive]

Yes. Thanks, Tom. Yes, we thought it would be helpful just to provide some thoughts regarding '24 and how we see things may be progressing. On the new side of the business, as we know vehicle supply is going to continue to return to pre-pandemic levels. And I think leasing and retail incentives are clearly going to pick up through the year. But I think we'll remain below pre-pandemic levels in total.

So inventory levels will continue to increase over the course of '24, but we expect demand to be robust. Actually, electric vehicle product introduction and customer interest in these vehicles is clearly going to be a key dynamic this year. As widely reported, [indiscernible] PVRs consistently fell during 2023 and in most instances, are lower than similar combustion engine vehicles. And as with all things, it's about balance and it does appear OEMs are adjusting their plans and actions to match demand more closely. And frankly, this will be well received. [indiscernible] are doing well in the marketplace, and we have good exposure to this portion of the market based upon our brand mix and we expect our new margins to continue to moderate over the quarter '24, but at a somewhat slower pace than we experienced in '23.

Used vehicle market will likely remain constrained as late model used vehicle availability remains limited and additional new vehicles are available. The key is going to be our effectiveness as always, in purchasing, pricing and turning our inventory and we're going to remain nimble in our approach to those things in the market as it develops. I expect our CFS to continue to perform well even with pressures coming from overall monthly payment, vehicle mix and OEM actions to support unit sales. And as you've seen, it's a very consistent and clear strength of our organization.

After Sales has been and will remain a significant area of focus for us. You saw the results in our Q4 outcome. And after strong growth in 2023, obviously, our year-over-year comps will moderate, but we expect this area of our business to continue to grow attractively and we will, as always, be focused on managing the controllable variables which includes cash flow and capital deployment. And with that, Tom, let's hand it over to Derek to get some questions.

[Derek Fiebig, executive]

Bruno, if you could please remind the audience how to get in the queue for question and answer, please?

[Operator]

[Operator Instructions] We do have our first question. Register comes from John Murphy from Bank of America.

[John Murphy, analyst]

Just wanted to ask the first question, Mike, on aftersales. I mean it's obviously a bright spot. It seems like the efforts there to do higher tech is really paying off. You keep talking about share of wallet increasing. It seems like the area where share of wallet for the consumer is -- there's obviously the most opportunity other than getting to the second and third turn of the used vehicle. So as you think about this in '24, maybe even just beyond in sort of a strategic standpoint, what do you think you need to do to continue to drive that significantly higher? Is it just a function of hiring more techs? Is it an increase in connectivity? Is it getting involved in the second and third used vehicle turn? What's the key strategy there? And what are the opportunities to drive that faster or farther?

[Michael Manley, executive]

So John, it's probably a combination of all of the above. If I think about our franchise business firstly, we have a penetration in the vehicle parks that we're responsible for. So that's our areas of operation that our franchises represent probably around 50% plus/minus. And what we know is that customers move on to other sources for that service when the vehicles get 7 years old or they're 25 miles beyond the [ radius ].

So there's a lot of opportunity within the territories that we have, and then we're providing channels and access to our customers who would have migrated to a different source for their servicing and repairs through things such as our mobile service, which, as you know, is a new addition to us. So I think partly in terms of our installed assets, we have sufficient bay capacity. We saw -- from [indiscernible], I think it was a 5% or 6% increase in our technicians during the period. There is opportunity for us to continue to grow that, adding services onto it, and then we'll backfill with mobile services for those customers that don't, for whatever reason, and moved away from the franchise environment. So that's going to be a big focus for us this year. There's plenty of opportunity.

It's not easy to unlock because once a customer is migrated, they obviously form a relationship, and that leads me to the last thing, and that is we have a fantastic brand. I think last time we checked our brand, which we do relatively regularly. It was the most known automotive brand in the United States. And I think we can do a better job of communicating all of the products and services to our customers to help them understand that we can increasingly look after a broader set of needs that they have, not just for themselves, but also in their family.

[John Murphy, analyst]

Okay. That's helpful. And then just a second question on the Used Car business. Obviously, GPUs are down. It sounds like there's a little bit of mix going on, also sort of a little bit of inventory management. Is this the kind of thing that you think is really a function of the next couple of quarters and then you get back to normal GPUs? Or is there something happening here sort of cyclically or on a secular basis that we keep these numbers low?

[Michael Manley, executive]

No, absolutely. As Tom mentioned, I think one of the things that -- as we came into 2023, our inventory levels were very low, and we felt that we missed out on some of the marketplace. We put in place a number of initiatives middle of last year through the end of last year to enable us to source the vehicles that we need and we did that very, very effectively. At the same time, I think some of the market dynamics were changing. One of the things that had increased dramatically during the COVID period was the percentage mix of vehicles above say, [ $35,000 ] and Tom gave you the mix. And we're seeing those customers who maybe came into the high end of the used car market because they couldn't get new, now returning back to the new car market with lower transaction prices and more incentives and manufacturers.

And what we need to be is very, very agile to make sure that as the market changes, and I think it will continue to change, that we are ahead of those mix changes. And we have some work to do. We did -- we started that work in -- before the end of last year, continued through January. I think that work will be largely completed by the end of Q1, very early Q2. So in my mind, it's transitory. The good news is that each one of those unit sales comes with phenomenal CFS performance and obviously is going straight into our After Sales database for us to be able to look after them. So every customer comes now with -- from our perspective, with a great opportunity not just in the sale.

[John Murphy, analyst]

So Mike, when you get the turn and earn back being efficient, would it be fair to say that, that $1,800 range on PVR is something that we should think about sort of mid- to long term as we get through the course of this year and beyond?

[Michael Manley, executive]

Yes, I think that's a very -- I think that's an achievable number for sure, yes.

[Operator]

Our next question comes from Daniel Imbro from Stephens Inc.

[Daniel Imbro, analyst]

Mike, I wanted to start maybe on the new GPU side. Obviously, a little bit lighter moderation. Your commentary suggested that's going to continue i 2024. Curious if you [indiscernible] how the OEM conversations are going? Are you seeing any change in tone and especially at some of the brands where inventory maybe has built. And then I'm curious, given your experience on the OEM side, what levers do you think [indiscernible]? Do you see them cut MSRP? Kind of how do you think they navigate through some of the heavier inventory situations out there?

[Michael Manley, executive]

Well, even though -- and I mentioned this in my opening commentary and [indiscernible], we're seeing some increases in terms of retail incentive rates and leasing back up to 23%. We're still not at the levels that we have seen before. And I think as you -- as we begin to see inventory build, we will see continued action in that area from the OEMs. Leasing, in my view, by the end of this year, early next year, will be back to pre-pandemic levels. And I think we've seen much more subsidized finance is obviously with the interest rates that we have. And that will continue as we get deep into '24.

When I think about overall days of supply, obviously, it's very different depending on the manufacturers and the brand partners that we have. But clearly still well below in many instances, the level we saw. And from my point of view, as the industry develops this year, I think we will truly see hopefully, how the manufacturers are thinking about the balance of their inventory and prevailing market conditions because we talked a lot about this when we were deep in the pandemic. I think this year, we're going to see how each OEM is going to address that, and some will be more disciplined, some will be less.

[Daniel Imbro, analyst]

Got it. That's helpful. And then maybe, Tom, on the finance side. I think, Mike and you both mentioned that you've rolled out AutoNation Finance into all the franchise stores. Curious if you could maybe [indiscernible] provide some stats around the loan growth in the quarter, maybe the [indiscernible] you're taking or provision for losses and then how those loans are performing as we think about the changing consumer kind of back drop today?

[Thomas Szlosek, executive]

Thanks for the question, Daniel. As everybody knows, we bought AutoNation Finance in October 2022, we closed. It started out entirely as a third-party lender mostly to [ subprime ]. We've, over the course of the last year, completely converted that to now supporting AutoNation exclusively, both AN USA stores as well as the franchise stores, very little in terms of [ subprime ]. So it's really gone through a nice transition. And we love the platform. We love the team. The trends are -- have been very, very strong. We've got, as I said, an improvement in the origin mix with all AutoNation customers, FICO scores have improved between 50 and 100 basis points in terms of what we're originating.

On the credit quality trends at 30-day delinquencies has been really strong. I mean in the third quarter, we were probably 7.5% delinquent. That's improved by about 200 basis points through the end of January. So team is doing a nice job in what is not an easy environment for consumer credit. So we're happy with that. The penetration rates amongst our stores where we're present has been growing, has been very strong. So it's about a $450 million portfolio, and that is after a sale of chunk of the business in the third quarter, which was about $80 million. We're excited about 2024. We think the originations could double and we just couldn't be more pleased with how the business has developed over time.

[Daniel Imbro, analyst]

Appreciate that. Just a quick accounting follow-up. Where do those CECL reserves, as the loan balance -- you said they're going to double the loan growth. I guess where does that flow through the income statement as we think about modeling out the growth in the finance business?

[Thomas Szlosek, executive]

It's all in that 1 line, Other income and expense on the P&L. While growing, like I said, it's probably not material enough for us to break that out. I think at some point, we'll address that depending on how the growth is. But it's all basically collapsed in that 1 line.

[Operator]

Our next question comes from Rajat Gupta from JPMorgan.

[Rajat Gupta, analyst]

Thanks for all the color on 2024 expectations around the new business, the used as well. But curious, is there a range you're targeting for SG&A to gross for the year in context of the steady [ GDP ] decline, some of the pressures in the used business. How should we think about SG&A to gross [ allow ] for 2024. And I have a quick follow-up.

[Michael Manley, executive]

Rajat, the way that we're thinking about this is obviously, in what I would call our core businesses. The things that we have put in place over the last few years continues to have, I think, clear benefits. Our SG&A also includes some of the investments that we have been making progressively in the last 2 years. So the percentage that we see doesn't represent the core businesses themselves. But I think the range that we sit in now is the range that we're going to continue to target going forward. And it will fluctuate, as I said, based upon the additional investments that we are making, for example, in mobile services, for example, in our parts commerce business as we grow those businesses. So that's kind of my view on SG&A at this time.

[Thomas Szlosek, executive]

The thing I would add to that, as Mike mentioned, we do have some investments in AN USA. As those stores roll out, you don't get to a full run rate of profitability for about a year. So that can dampen the SG&A rate and also the investments that Mike has mentioned, strategic investments. And also advertising is -- we've seen some inflation there. I would say we probably would be in longer-term basis, mid-60s kind of level relative to gross profit. But we are paying close attention. As we mentioned, we've done some -- we've taken some modest actions in the fourth quarter to address and take advantage of some delayering opportunities in the regions as well as economize some of those support functions. So it's a pretty important [indiscernible] and we continue to drive productivity where we can.

[Rajat Gupta, analyst]

Got it. Got it. That's helpful color. And just on capital allocation, obviously, [indiscernible] looks like very steady and like pretty elevated [indiscernible] buybacks over the last few years. Curious like how that toggle between M&A and buyback looks today based on what you're seeing in the pipeline for deals and related multiples. I'm curious if we should expect any shift in strategy there, maybe more get toward M&A versus historically black.

[Thomas Szlosek, executive]

Yes, great question. Thank you. The great news, Rajat, is that we generate a lot of cash. So it gives us optionality. And you're probably very familiar with how we've allocated capital the last 2 or 3 years. I don't think there is a material change in how we're looking at it. It's -- the focus is on maximizing shareholder return. When we do see allocation opportunity or [ internally ] to CapEx or to M&A opportunities, I think we're pretty disciplined in terms of our analytical evaluation and our incorporation of synergies and where the deals look like both be accretive and meet our hurdle rates, and we'll go after them aggressively. We also have had great success with new share repurchases and feel that that's going to continue to be an important part of our capital allocation [indiscernible].

[Rajat Gupta, analyst]

Are you seeing any changes in like the multiples sort deals the last few months? Any change in general? Or any increasing propensity like for sellers to offload? Curious like if something in the [indiscernible] you've seen that shifted on the M&A side.

[Thomas Szlosek, executive]

Can you clarify? You were muffled a little bit in your point, I'm sorry.

[Rajat Gupta, analyst]

I just wanted to ask, like, have you seen any changes in the multiples or the valuation of some of the assets that are out there in the market from an M&A perspective over the last few months.

[Thomas Szlosek, executive]

Yes, you could -- yes. As you can imagine, sellers tend to have amnesia when it comes to where their prices used to be before all these run-ups in the last few years. But I don't think there's been any market change in valuations. Maybe here and there, but we're not seeing anybody walk away from last year's crisis per se or anything like that.

[Michael Manley, executive]

But it's also true to say that our conversations around the basis for people's valuations are heavily pointed at the last 12 months and trading conditions in our view [ albeit ] moving forward. And as we move, frankly, throughout last year and as we move further into this year, obviously, the [ TTM ] is going to reflect the reality of the fact that there's a normalization in margins and ultimately, it will impact values, and that's something we're very much looking forward and something that we're talking to people about. But as Tom said at this moment in time, obviously, people are holding on as much as they possibly can to '22.

[Operator]

Our next question comes from Michael Ward from [ Freedom Capital ].

[Unknown Analyst]

Mike, I think in your comments, you mentioned that on the parts and services side, complexity has led to higher content. Can you quantify either some of the content you're talking about or the retention rates you're getting on the parts and service side with the increased complexity vehicles?

[Michael Manley, executive]

So the work that [indiscernible] has been doing with his team shows us that even though the frequency of service and repair in our -- so let me say, service, I'll come back to repair comment in a minute, drops, loyalty goes up fairly significantly and the time that the vehicle is in the shop goes up significantly. So as we were thinking about this transition to electrified vehicles, we were very concerned as many people were about drop off on parts and services. There hasn't been what we've experienced so far for those 2 reasons.

In terms of repair, obviously, the profile of that is changing. Some of the repairs now are done remotely. And we really -- I think, are still looking at that and learning about that. But at this moment in time, if we look at the population, of our customers and their vehicles, the combination of higher loyalties and longer time in shop is outweighing or has been better than our expectation when we put it that way.

[Unknown Analyst]

Along with that, could you give an update on RepairSmith and where that stands and what are your growth objectives with it as you go forward?

[Michael Manley, executive]

Yes, absolutely. Well, we rebranded RepairSmith, which was not unexpected, and it's now AutoNation Mobile Services. It's integrated, it's progressively being integrated alongside AN USA because, as you know, many stand-alone used cars don't have an after sales provision. And in the same way as we aligned AutoNation Finance for AN USA, we were aligning RepairSmith to be the provider of refurbishment and service maintenance warranty needs for those customers. We've opened up now our relationships with multiple fleet customers across the country and introducing mobile services to those guys and expanding the products that the fleet offers.

I would say, at this moment in time, there's a lot of work for us to do. That integration work will probably continue through the balance of this year. We see a lot of growth, but we now need to drive up our returns.

[Unknown Analyst]

And just last -- 1 last question on the M&A front. You took a look at Pendragon. Does that suggest that as you look out over the next couple of years, that expansion outside of the U.S. could be in the cards?

[Michael Manley, executive]

I think it goes back to Tom's comments. I thought he summed it up really well. We are looking at opportunities that come across. That's been a very, very consistent way. We liked what we saw with Pendragon at the price that we had indicated in the marketplace. And at that point, we thought it was good, but clearly, that move was not for us. So I would tell you that we have an eye to a number of opportunities at this point in time.

[Operator]

Our next question comes from Bret Jordan from Jefferies.

[Bret Jordan, analyst]

On the mobile services question, I guess, you're talking about expanding the products offered. Could you talk maybe a bit about the logistics of the mobile services. What can you do in that format? And I guess from a staffing standpoint, cold rain days, probably not appealing to work outdoors. But what are you seeing as far as building out that model.

[Michael Manley, executive]

Yes. Well, the good news is that if you think about our geographic footprint, we are largely -- the vast majority of our business [indiscernible] in space where you can operate full 12 months without certainly [indiscernible]. But I take your point. So obviously, services, some maintenance and repair work is a given. We are in the process of expanding to tires. We're in the process of expanding to glass and as you know, we have a very good business in our collision centers, and that will include calibration. So there are multiple things that these bands so equipped can do and that's effectively what we're doing. We have already done some pilot work on glass, which was successful in some of our Texas businesses. So that's going to be expanded throughout this year. Tires, there is a demand for tires which can easily be done from a property at [indiscernible]. So there's quite an expansion in terms of products that you -- that we can offer. And as you can imagine, as we grow, AutoNation USA, and they are as successful as they have been in terms of CFS, many of those CFS products are associated with extended warranties or maintenance contracts and we're now able to completely fulfill them ourselves rather than those customers may be migrating to a competitor to have that work done. So I'm very excited about mobile services. It's a business that we -- as I said, are entering in those markets where we already have density in the customer base. It's now associated clearly with our brand, which I think does bring a degree of credibility, which is important when you think about and turning up on someone's drive. And I think it will help us. So let's see how we develop it this year.

[Bret Jordan, analyst]

Okay. And a quick question on domestic [ DSO ] of 66 days. Can you talk about the sort of spread between the manufacturers and that inventory exposure? And obviously, there's been a lot of talk about [ Silantos ] maybe increasing their promotional level or decreasing pricing. Are you seeing anything that's sort of changing as far as I guess, promotional cadence recently?

[Michael Manley, executive]

I'm not seeing any changes from my perspective. I think we're coming into traditional months where all of the domestics will focus heavily on their trucks. That's normal. That I think is something that will continue. The different [ fees ] in the year is not going to change. I think that if you think about the percentage of sales by vehicle segment, it is natural that those OEMs who have a very high percentage of sales in trucks, whether it's light, medium or heavy are going to have a higher day supply purely because of the selection required. And even though [ Stellantis ], the day supply has increased, it is significantly lower than it's been historically.

[Operator]

[Operator Instructions] Next question comes from Douglas Dutton from Evercore.

[Douglas Dutton, analyst]

Congrats on the quarter. Two quick questions from me. Just first on the new vehicle PVR point and the normalization that we continue to see, is it fair to think that there may actually be a higher trough cycle over cycle maybe remaining at about a 20% to 30% premium over 2019 levels? I'm just curious if perhaps you are beginning to see some structural reasons a decrease to pre-COVID levels may not be the reality, given the rate of change on profit per unit has begun to slow, like Tom mentioned, as the fourth quarter was actually the best sequential in 3 quarters.

[Michael Manley, executive]

A lot of moving pieces in that question, as you know. One of the things that I think we have to really watch closely this year is what's happening with battery electric vehicles and hybrids. And as you know, all of the OEMs at this moment in time are working towards a set of GHG targets which vary by state. And that may well change depending on what happens later this year and as we move forward. But there is and has been a significant impact on margin as battery electric vehicles have continued to grow in terms of the share that they represent. I mean the [ beds ] increased share, roughly double from the end of 2022 to 2023. And as a result of that, that's had an impact on the combustion -- on our total margins, obviously.

So the answer to your question is, truthfully, I expect a return to very similar margins to 2019. And by the way, that would include the impact, in my view, of battery electric vehicles and hybrid electric vehicles. How that happens is very much going to depend on how the OEMs are thinking about the mix of their [ beds ], their hybrids and their combustion engines through the balance of this year and how they're going to achieve their targets. It's a very -- it is not an easy question to answer. So that's my best effort.

But I would say what we are doing in our business is to really focus on those areas where we have more control and more opportunity. And those areas are CFS, Used, as we talked about, obviously, After Sales and how we can provide more products and services to the customers that we have won over many, many years of being in the marketplace. And then to make sure that our new vehicles, we're not an outlier either with lower margins or poor market share that we obviously control our costs because, to a large extent, how the new vehicle market develops as you can completely understand even though we're a very large player in this industry, we're still a tiny player in terms of the total new vehicle market. So I think we have to be realistic about the things we can do.

[Douglas Dutton, analyst]

Okay. That's helpful color. I appreciate you giving the detail there. Just to be crystal clear here, a slightly lower growth from EVs as a lot of us now [ stacked ] for at least '24 through maybe '25%, '26 would actually be a positive. That's the correct way to think about that?

[Michael Manley, executive]

Yes, based upon the margins we saw developed last year, that's exactly how I would think about it.

[Operator]

Our next question comes from Colin Langan from Wells Fargo.

[Colin Langan, analyst]

I think you mentioned in your comments, CFS is supposed to be strong. I mean how should we be thinking about that, though? Because I mean, I think if there's more leasing, I think that puts a little bit of pressure on -- there's possible normalization of vehicles, maybe don't [ mass ] market, we might put pressure on that. Is that still going to be up year-over-year? Or should we think of that just moderating a bit as we go into next year.

[Michael Manley, executive]

Yes. Thanks for the question, Colin. Yes, in my commentary, I was referencing a little bit higher lease penetration in the CFS commentary. I think on balance, leases are accretive to what we're trying to accomplish, yes. I mean maybe you sell a little bit fewer products on a CFS perspective, but it's not massive. I mean, it is outweighed by the fact that we have a shot at getting the used car once it comes off lease. It also helps with vehicle affordability. We have typically third-party financiers taking a residual risk. So it's net-net a win-win for us on leasing. And I would think of it that way. We've been able to manage through with CFS over the years with higher leasing volume.

[Colin Langan, analyst]

Got it. And then just going back to your comments to the last question on expecting profitability to sort of normalize to pre-COVID 2019 levels. Is that already pretty much there on the domestic? If I look at the Q4 margin, the percent margin looks pretty similar to pre-COVID. So is that kind of driving some of those thoughts is that those companies that have already kind of restocked a lot of the inventory already kind of back to normal levels?

[Michael Manley, executive]

Yes, the answer to your question is it's pretty much there for some of our OEMs.

[Operator]

We currently have no further questions. So I'd like to hand the call back to the management team for closing remarks. Over to you.

[Michael Manley, executive]

Firstly, thanks for your questions. I'm just going to touch on the margin question that I received earlier. One of the things that I think is relevant and important as you think about our performance going forward. AN USA, a valuable addition to our company, our organization, particularly where we have areas of significant density, their used vehicle margin does not perform in the same way for obvious reasons as our franchise businesses. So when you think about that $1,800 that we discussed, don't think about that in the context today in AN USA. The way that they source their vehicles is very different, the way that they can attack manufacture and OEM programs is significantly different. So their whole business model, including the capital invested very, very different. So as you think about my comments on $1,800 margin, make sure you factor in the impact of AN USA on our average margins going forward because they will not and have not been at that level and I don't anticipate that anytime going forward.

But with that said, when I think about '24, just that it's clearly going to have its normal mix of headwinds and tailwinds. But for me, after a very significant year in '23 planned leadership transitions, I'm feeling positive about our development as we enter this year. We have [ Jeff Peron ] joined our group, as you know, as the Chief Operating Officer. Tom came in last year. CMO joined us, Rich Lennox, who joined earlier in 2023. So from my point of view, our leadership team, that year of transition, which was planned is now complete. And I think all of the members that we've added bring vast experience to AutoNation. And these guys along with their colleagues who sit on our executive leadership team is certainly going to help us build on our success and position our company well for the future. And really, that enables us, I think, to really look at how the investments that we've made in various parts of our businesses are performing and understand how we can get to a period of growth in some of those and in others how we can make sure that we're driving up our margins.

So with that, thank you for joining the call. We'll see how the year goes, and I look forward to talking to many of you between now and most of you are next quarter.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.