Lithia Motors Inc

NYSE:LAD

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to the Lithia Motors Third Quarter 2020 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session.

I would now like to turn this call over to Mr. Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

[Eric Pitt, Vice President, Investor Relations and Treasurer]

Thank you, and welcome to the Lithia Motors Third Quarter 2020 Earnings Call. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.

Today's discussions may include statements about future events, financial projections and expectations about the Company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made.

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

Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our third quarter results.

With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

[Bryan DeBoer, President and Chief Executive Officer]

Thank you, Eric. Good morning, and welcome, everyone. Earlier today, we reported the highest quarterly earnings in company history at $6.89 per share, a 103% increase over last year. These results were driven by strong used vehicle revenues, combined with record gross profit levels and continued sequential improvements in new vehicle and service, body and parts sales.

In addition, we restarted our acquisition engine, closing nearly $1.5 billion in expected annualized revenues during the third quarter. We would also like to welcome all of our new partners that participated in our equity and debt offerings last month and look forward to our future growth together.

Our performance this quarter demonstrates the success of our highly diversified, highly complex growth strategy that sets Lithia part from its competitors. Our digital home solution Driveway coupled with our existing network of over 200 locations, allows us to meet customers on their terms throughout the entire lifecycle of mobility ownership.

Lithia's ability to offer both in-home and in-network solutions provides consumers experience that satisfy the broad range of customer needs with a commitment to affordability, transparency and convenience. This omni-channel strategy led us to this historic quarter of record earnings and is solid progression towards our 5-year plan of $50 billion of revenue and $50 in earnings per share.

During the quarter, total revenue grew 9%, and total gross profit increased 28%. New vehicle revenue, a key driver of our ability to source high-quality used vehicles and the catalyst to growth in our higher-margin business lines increased 3% for the quarter. Total used revenues increased 19%, F&I increased 18%; and service, body and parts increased 6%. Chris will also be sharing same-store information in just a few moments.

The substantial improvements in gross profit of over $1,000 per unit compared to third quarter of 2019 are largely attributed to high level of incentives from our OEM partners and a perceived inventory shortage in the country. These record gross profit levels, coupled with sequential improvements in all business lines and strategic cost-saving measures executed earlier this year allowed us to eclipse a $250 million of adjusted EBITDA in the third quarter.

As consumer behavior evolves, the $2 trillion market of automotive products and services is more ripe for consolidation and disruption than ever before. Our 5-year plan to achieve $50 billion in revenue focuses on the most expansive addressable market of any retailer and the $350 billion of gross profit to ensure strong profitability along the way.

This plan was designed to address both the full vehicle ownership lifecycle and all levels of affordability. It includes new and certified vehicle sales from 30 manufacturers, a full spectrum of non-certified used cars, plus the high-margin F&I and aftermarket businesses including service, body and parts.

Our national brand and foundation for disruption Driveway, begins by combining our proprietary technology with the scale of our people, inventory and network to profitably modernize the industry. As we continue to market additional digital home solutions, our teams are ready to serve not only our traditional customers, but also incremental e-commerce customers through our new offerings.

During the quarter, we unveiled Driveway as our e-commerce and in-home national brand. Alongside our proprietary selling technology perfected over the past 16 months under the barrel.com regional brand, we reached our second functionality milestone with the launch of our in-home Driveway service experience in the Northwest or Region 1. This experience allows consumers to schedule service work with free home pickup and delivery, including free loaner vehicles within a predefined geo-fenced area.

This key differentiator in our omni-channel model allows for more than 10 times the brand impressions compared to digital used vehicle only experiences that sell a customer vehicle once every six years. This service offering allows consumers to pay as they go, subscribe to in-home services for the lifetime that they own their vehicle or as we like to say, have your vehicle serviced in your swipers.

Earlier this month, we soft launched our third milestone, the used vehicle revenue stream, both still in its infancy. Driveway now has over 20,000 high-quality used vehicles available for purchase and delivery anywhere in the United States. By the end of this quarter, this solution will be upgraded to provide customers with an end-to-end digital solution with functionality rivaling all other digital platforms.

Our selection of scarce shoes vehicles spans the entire age from certified used vehicles to 20-year-old value autos. All vehicles have a seven-day return policy, free delivery within 100 miles fulfilled by our existing logistics teams and other brand guarantees to reassure consumers of their purchase. The purchasing process is a one price digitally-enabled experience that will include immediate financing and in-home finance subscriptions by the end of the fourth quarter.

Our data science shows us that although consumers will have the option to purchase and finance their vehicles fully online, the complexity of their own finance ability and desires will usually require the assistance of our Driveway care center and network. Our VCEs, or Virtual Centers of Excellence, include our finance specialists from our existing network behind the scenes as partners with our Driveway care centers to provide solutions and expertise for customers who are unable to be automatically approved.

These experts are using their relationship with over 150 lenders throughout the United States to structure the consumers' transactions in the way that they can be approved. Though we look forward to the days when our automation and APIs can solve for a larger portion of consumers, our history in science tells us that this will move slowly. In the interim, our VCEs greatly expand our ability to finance 2 to 3.0 times more consumers than other digital competitors.

Lastly, our new vehicle revenue stream, which will include an industry first seven-day return policy, will launch early next year and will add another approximately 30,000 vehicles to the Driveway Online Selection. With over 200 existing reconditioning and vehicle storage locations, 500 inventory procurement specialists and 8,000 associates that currently perform in a negotiation-free environment we are competitively positioned to support the Driveway national brand.

In addition, our 5 million paying customers will soon have access to the My Driveway portal, a customer experience hub. Simply put, the My Driveway portal will allow consumers to shop, sell, service and manage their vehicles. In this single location, a customer can control their vehicle ownership lifecycle, from vehicle information, scheduling in-home or in-network service, viewing their maintenance history and F&I product subscriptions and even more.

By constructing the portals under the Driveway URL, organic search and marketing dollars will be much more effective than any current or future competitor. The combination of Driveway is difficult to replicate offerings allows consumers to complete all of their vehicle ownership experience in the convenience of their own homes, and if they choose, never set foot in the traditional dealership again.

The foundation to our omni-channel plan is the growth and expansion of our physical network. With no company having over 1.5% of the $2 trillion market, the opportunities for consolidation within our industry remain plentiful, and our pipeline remains full. Our planned models acquiring approximately $4 billion in revenue annually over the next five years, this highly fragmented market has allowed us to consistently invest in increasing the reach and the density of our physical network by acquiring strong assets.

Building our network with new vehicle locations positions Lithia and Driveway to leverage massive competitive advantages over used-only retailers, these advantages include upstream procurement of new and certified vehicle trade-ins, a more distributed reconditioning network that eliminates logistics costs and is closer to the customer, and access to the highest margin service body and parts businesses, all at a relative network costs similar to used only retailers.

We've added a new comparative slide on Page 16 of our investor deck that illustrates the cost of our network relative to revenue and gross profit as well as our current utilization rates. With more than $2 billion in cash and available credit, unfinanced real estate that can add an additional $225 million in liquidity, over $700 million in EBITDA production annually and an adjusted leverage ratio of approximately 2 times, we are well positioned for accelerated growth.

Assuming an average equity investment of approximately 25% of revenues, our available liquidity and annual free cash flows could add $8 billion in revenues or more than 50% growth. During the quarter, we completed the acquisition of San Francisco BMW, the 10 store, John Eagle Auto Group in Texas and a CJDR Store in Knoxville, Tennessee.

In addition, earlier this month, we completed the acquisition of Latham Ford in Albany, New York. These acquisitions are anticipated to generate $1.5 billion in annualized steady state revenues. For the year, this brings our total network expansion to $1.75 billion and expands our density in key geographic areas.

We continue to seek acquisitions to improve our reach more conveniently serve our customers and grow our highest margin business lines. Our customers' proximity to our physical network is a key element of our growth strategy and design as it enables us to supply convenient touch points throughout the ownership lifecycle.

We have approximately $2 billion of revenue under definitive purchase agreements that are expected to close during the quarter. In addition, we have approximately $3 billion under LOI that are expected to close in early 2021 for a total of $5 billion more.

Coming off our highest earnings in company history and more than doubling our quarterly earnings over the prior year, we remain humble, never quite satisfied and acutely focused on our growth aspirations. Our diversified high-growth business strategy is highly complex and difficult to replicate.

Our growing network composed of our people, inventory and physical network, combined with our Driveway Digital Home Solution, completes our unique omni-channel strategy. Our mission of growth powered by people and our values of improving constantly and taking personal ownership are the driving forces behind our ability to outperform and compete any environment.

This strategy and culture positions us to continue to lead our industry's transformation and progress us towards our five-year plan of $50 billion in revenue and $50 in EPS.

With that, I'd like to turn the call over to Chris.

[Chris Holzshu]

Thank you, Bryan. As we enter the final months of 2020 and reflect on the strongest quarter in our company's history, our store leaders continue to challenge our teams to exceed customer expectations increase market share and improve profitability. The demand from consumers for transparent in-home solutions has shifted the mindset of our teams and accelerated adoption of Driveway and Driveway type services throughout our network. The following discussion about our quarterly results is on a same-store basis.

For the three months ended September 30, 2020, total same-store sales increased 1%, driven by a 4% decrease in new vehicle sales, an 11% increase in used vehicle sales, a 7% increase in F&I revenue and a 3% decrease in service, body and parts revenue. As previously reported, we have seen continued sequential improvements each quarter as our leaders have adjusted to the impacts in their local markets and focus on providing safe, convenient transportation solutions to our consumers.

The new vehicle business line was down 4% for the quarter, but improved to an increase of 6% for the month of September. Our average selling price increased 6% and unit sales decreased 10%. Gross profit per unit increased to $3,022 compared to $2,079 last year, a $943 increase or up 45%.

Total new vehicle gross profit per unit, including F&I, was $4,778, an increase of $1,116 per unit or 31%. At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with an 11% margin, similar selling cost per unit as used vehicles and inventory carrying costs that are subsidized by our manufacturer partners.

For used vehicles, we saw an 11% increase in revenues for the quarter. Gross profit per unit for the quarter was $2,971, an increase of 30% or $685 over last year. Total used vehicle gross profit per unit, including F&I, was $4,606, an increase of $1,278 or up 38%.

As Bryan mentioned earlier, our strategy is going deep into the used vehicle age spectrum and our ability to procure the right scarce vehicles remains the catalyst for the future success and growth of our existing network and Driveway.

New and used vehicle sales are supported by our experienced finance specialists that continue to find better ways to match the complexity of a consumer's financial position with lending options at over 150 financial institutions.

In the quarter, our finance and insurance business line showed substantial improvements, averaging $1,617 per retail unit compared to $1,473 the prior year, an increase of $144 per unit as consumers continue to take advantage of the product offerings available to protect their mobility investment.

Overall, new and used vehicle sales create incremental profit opportunities through the resale of additional trade in vehicles, greater manufacturer incentives, F&I sales and the future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $4,690 this quarter, an increase of $1,027 per unit or over 28% over the last year.

Our stores remain focused on the highest margin business lines, our service, body and parts, which decreased 3% over the prior year and improved to an increase of 2% in September. As Bryan previously mentioned, our service, body and parts business see millions of paying customers and brand impressions annually that generate over 50% margins and remain a huge competitive advantage for Lithia.

The decisive cost savings measures taken earlier in the year continue to take hold and are expected to continue into 2021. Combined with the increases we saw in new and used gross profit margins, same-store adjusted SG&A to gross profit was down to 59.1% in the quarter, an improvement of 910 basis points over the prior year.

The SG&A opportunities ahead provide significant earnings opportunities as we look to our highest-performing stores that consistently maintain an SG&A to gross profit metric at these levels. In addition, opportunity to leverage our existing cost structure will continue as our digital home solutions, Driveway creates additional incremental sales and leverage in our existing network of locations. This strategy allows us to profitably modernize the consumer experience.

In summary, our teams continue to meet the ever-evolving preferences of consumers wherever, whenever and however they desire. As each store team begins the process of setting their individual annual operating plans, or AOP, the information provided by our data science continues to allow them to be nimble and responsive to the changing environment and the opportunities available to continuously improve.

We are innovating and meeting consumers increasing digital and home expectations through incremental and pragmatic modernization and are poised for continued growth in 2021 and beyond. Our ability to achieve high-performance in any environment continues to be the foundation of our culture as we remain focused on our longer-term goals.

With that, I'd like to turn the call over to Tina.

[Tina Miller]

Thank you, Chris. For the quarter, we generated over $265 million of adjusted EBITDA and over $125 million of free cash flow. As a result, we ended the quarter with over $694 million in cash and available credit. Earlier this month, we raised gross proceeds of $805 million through a follow-on offering of Class A common stock. Concurrently, we raised $550 million through issuing 4.375% senior notes due in 2031. Together, this brings our current total cash and available credit to fund our growth to over $2 billion.

In addition, our unfinanced real estate could provide additional liquidity of approximately $225 million. As of September 30, we have $3.5 billion outstanding in debt. Of which $2 billion was floor plan, used vehicle and service loaner financing. A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt. This financing is integral to our operations and collateralized by these assets. The industry treats the associated interest expense as an operating expense in EBITDA and excludes this debt from balance sheet leverage calculations.

On adjusted, our total debt-to-EBITDA is overstated at 5 times. Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 2.1 times. Our capital allocation priorities, which support our diversified, high-growth strategy remain unchanged. We target 65% investment in acquisitions, 20% internal investments, including capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases.

Earlier this morning, we announced a $0.31 per share dividend equal to the increased dividend amount announced in July. Our adjusted tax rate was 27.5% in the quarter. However, we continue to anticipate our full year tax rate to be between 29% to 30%. As Bryan mentioned earlier, with over $2 billion in available liquidity, we are well positioned to accelerate our growth strategy in the coming quarters while maintaining strong capital discipline.

We plan to continue to pragmatically invest in modernizing the consumer experience through Driveway and building the teams needed to support our growth. With a robust balance sheet and a massive regenerating capital engine, we remain laser-focused on achieving our 5-year plan of $50 billion of revenue and $50 of earnings per share.

This concludes our prepared remarks. We would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Rajat Gupta with JP Morgan. You may proceed with your question.

[Rajat Gupta, JP Morgan]

Just a question on just the used vehicle volume in the third quarter, plus 4% same-store, can you give us a sense of how that progressed through the quarter, like in July, August, September? And then like how has October looking on that front? And just how should we think about the volume scenario for the remainder of the year, especially as you start to see some traction on Driveway as well?

[Bryan DeBoer, President and Chief Executive Officer]

Sure, Rajat. If you remember, I mean, we came out of June at almost 20%. So we did -- that did stabilize a little bit. We saw weakness in our day supply that really troughed in the August time period around 43 days. That's actually back up to almost a 60-day supply today, so we like what we see there.

And I think when we think about how we procure cars and how we think about moving into Q4 and into Q1, it's important to always balance inventory supply with margins. So, we were up almost $1,000 in unit economics in used, whereas we were only up $150 when we were at that 22% run rate back in June.

So I think it was a good choice. And going forward, I don't think that the persistence of $1,000 per unit on used will be maintained. But I think through Q4 and maybe even into Q1, that we'll still see some strength there.

[Rajat Gupta, JP Morgan]

Got it. Are you comping positive volume growth right now? Or are you still -- or is it like -- is it down year-over-year, like as you exit the third quarter based on like how much our making unlike the gross profit side?

[Bryan DeBoer, President and Chief Executive Officer]

Rajat, this is Bryan again. Yes, the trends in early Q4 are very similar to Q3.

[Rajat Gupta, JP Morgan]

Got it. Okay. And just a follow-up question on parts and services. Miles driven looks like it's likely to be structurally lower here going forward, and you're obviously expanding your product selection, the home service is coming up. Is it reasonable to assume that your parts and services business organic -- on an organic basis can come back to 2019 levels in 2021? Or just curious as to how we should be thinking about that and what you're seeing on the ground there in terms of demand?

[Bryan DeBoer, President and Chief Executive Officer]

Sure. I think that we're very pleased with the return to positive same-store sales levels in September, where we were up 2% year-over-year. And if you recall from last quarter, we were talking about being down around 20%. So that's nice improvement. So the quarter, we were still down 3%. We are seeing customers return. Now there obviously is the chance of a COVID relapse or something like that that we think we're very well positioned to be able to go in home. And I think that's a good tailwind moving into 2021 as well.

[Rajat Gupta, JP Morgan]

Got it. So you think you can grow the business despite miles driven overall likely being down? Is that more -- is that more due to company-specific actions? Or just seems like there's like enough pent-up demand out there that can continue to like offset weakness?

[Bryan DeBoer, President and Chief Executive Officer]

Yes. I think if you reflect back on miles driven, I think that's important to think about. But I also know that our offerings in different commodities being a full maintenance and repair and now in-home. We think that any softness there that we can offset in our forecast, we're assuming about a 5% to 6% same-store growth rate within our service body and parts businesses over the next five years.

[Operator]

Our next question comes from the line of Adam Jonas with Morgan Stanley. You may proceed with your question.

[Adam Jonas, Morgan Stanley]

Couple of questions about digital, and I guess, if I were to ask the question broadly. What percentage of your used sales last quarter were digital, and tell us how you define digital? And then I'd like to also know within that, how -- what percentage would you describe as digitally fulfilled or really truly touchless or pari passu with a Carvana experience? I know it's a very low number. But we're going to start asking questions and expecting transparency and disclosure on comps at some point. So I wanted to give you a chance to at least give us a starting point.

[Bryan DeBoer, President and Chief Executive Officer]

No problem, Adam. About 80% of our consumers use digital forms in some way during the process. We actually only sell about 1.5% of our cars today on a truly digital end-to-end type of solution and even Driveway today is not an end-to-end solution, now it will be by the end of the quarter. So that's important to keep in mind. And we agree with you that as we move further into the second and third innings of our e-commerce strategies that by mid-2021, we should be able to give you clear data specifically to Driveway or our existing legacy business in terms of those digital strategies.

[Adam Jonas, Morgan Stanley]

That's very helpful, Bryan. Any year-on-year on those comps on that 1.5%, I realize it may be an unseen year-on-year, but I didn't know if you had a one, if I asked you the same question a year ago?

[Bryan DeBoer, President and Chief Executive Officer]

This is a little bit of a guess, but I would say it's probably double where it was a year ago. And that's really coming from the best practice sharing from the two channels that we think will gain momentum throughout 2021.

[Adam Jonas, Morgan Stanley]

And just finally for me, any color on -- and again, I realize it's early days, and 1.5% is an awfully small number, although we all know that's going to go up a lot. Any color on GPU of the -- of that pure digital versus your brick-and-mortar attachment rates, gross profit, anything you could add on that color right now where you see it trending?

[Bryan DeBoer, President and Chief Executive Officer]

Sure, Adam. I think to start with, our base assumptions on our five-year model is, that there's no acceleration or deceleration in front-end unit economics in Driveway. Except for in F&I, we're assuming $600 lower per unit around $1,000 within the Driveway strategy because consumers are really using digital consultation to make those decisions rather than face-to-face consultation. And I think that's where we really sit today.

Our data science is telling us that there's $600 better unit economics when we sell a car through Driveway. In other words, today, we negotiate -- we over negotiate what we need to relative to transaction prices in the market, and we get that data by scraping the independent used car or whether one price dealers to be able to extrapolate that.

[Operator]

Our next question comes from the line of Rick Nelson with Stephens. You may proceed with your question.

[Rick Nelson, Stephens]

It's a challenge, right, both the new to used cars that's elevating the GPUs and having some positive impact on SG&A. When do you think supplies normalize? And if you could discuss the outlook as we look into next year in terms of GPUs and SG&A?

[Bryan DeBoer, President and Chief Executive Officer]

Rick, Chris has got some perspective on that.

[Chris Holzshu]

Rick, as Bryan mentioned already, from a used vehicle perspective, we feel like our day supply is that where we needed to be. Obviously, with pricing going up, late in the second quarter, our stores reacted and went more for a growth versus volume model, but definitely back on the procurement trail.

When 51% of our vehicles actually come in outside of trade, meaning we have to go find those vehicles, our stores did a wonderful job getting ready for the fourth quarter and being prepared with used cars. As far as new vehicles are concerned, I think we've seen kind of a steady trend off of what Bryan alluded to, which is about a 50-day DSO. And we anticipate that to continue probably at those levels into next year.

[Rick Nelson, Stephens]

Okay, great. So a follow-up. Any early learnings since you launched Driveway in Region 1. What sort of marketing did you do around that launch and your marketing plans here for Driveway going forward?

[Bryan DeBoer, President and Chief Executive Officer]

Sure, Rick. Maybe I'd start with it. So far in the first 40 days, which the early stages were only inventory procurement or sell as well as service from home. And we just now recently launched the used vehicle inventory. It's not really being supported by marketing budgets yet. Because, obviously, our functionality on the used vehicle side is still limited to about halfway through, meaning that we don't have full end-to-end functionality on that site to buy a used car.

Now we have end-to-end functionality on selling a vehicle as well as servicing a vehicle. We've seen 25,000 visits to the site since the launch, which is far ahead of our projections, considering that it's only in a portion of Region 1, which is nice. I do believe that we will have to work on some of our pricing thought processes on the service side, and a lot of our learnings are more in that vein.

There's definitely a propensity for higher income or luxury product consumers to lean towards in-home service offerings at the current time. But also remember that we're offering them at premium pricing, okay? And over time, I think and we -- as we gain volume, we can become more efficient in pricing because of scale.

So outside of that, it's like we said, I mean, we're really in the early innings of our projects. And the sale of used vehicles and new vehicles, which comes out next quarter are imminent will teach us a lot more about what consumers are really looking for and how we can respond to convenience, affordability and empowerment for them.

[Rick Nelson, Stephens]

Okay. Got you. Curious to -- you've got this end-to-end capability in the works. What is the time line for that and the rollout down across the other regions?

[Bryan DeBoer, President and Chief Executive Officer]

Sure. So there's only -- there's two components that allows the consumer to go all the way through to end and click buy and have the financing components included in that, where we print paper work and take the car to their home, okay? And that is the finance ability, meaning the APIs that are attached to each of the initial six to eight lenders that we will have by the end of this quarter, okay, as well as the menu pricing of finance and insurance subscriptions that can be in-home, okay?

So we don't have the F&I offerings on there as well as the finance ability, but those will both come by end of quarter, okay? We may get lucky and get a few new cars on there as well, if they don't have consumer incentives, okay, because we can solve for them within our data, in our algorithms, when we don't have incentives for the consumers just like we do for used cars, okay?

But ultimately, really, we're targeting in the middle of Q1 to have those other 30,000 new cars, which is about 75%, 80% of our new car inventory that can go live and also be available for delivery anywhere in the country.

Remember also that when new cars come live, we'll have a seven-day return, and that will be an industry first on every brand. And those cars that we end up taking back for consumers, those are really what support our fleet of service loaner vehicles that are free within our Driveway and home service offerings.

[Operator]

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. You may proceed with your question.

[Ryan Sigdahl, Craig-Hallum Capital Group]

Congrats on the strong results and the early evolution of the business here. First, just one follow-up on Driveway, you talked a lot about it. But curious what percent of customers of that 1.5% are repeat customers or how else are you driving traffic to the site?

[Bryan DeBoer, President and Chief Executive Officer]

So the 1.5% isn't specifically Driveway, okay, that's in our entire business model of both channels. So that's not -- and of that, a good portion of it is repeat business, okay. And if I had to guess, I'd say two thrids of that is repeat business.

[Ryan Sigdahl, Craig-Hallum Capital Group]

Good. Then just switching over to M&A. The recent acquisitions you've made, how do those compare to past ones as far as SG&A to gross profit, profitability, acquisition multiples, et cetera? And then a follow-up is Bryan, you mentioned $5 billion of targets under LOIs. How do those compare to kind of historicals? Are they bigger in scale? Or is it just an acceleration in the number of deals?

[Bryan DeBoer, President and Chief Executive Officer]

Sure, Ryan. So most importantly, the Eagles and the Williams acquisitions performed at mature state or a seasoned level of typical Lithia stores in the 3% to 4% margin range. It's surprising that our initial partnerships with both organizations, we've still been able to expand late or older used vehicles or core or value auto, which isn't something that either organizations spent a long time doing, and they quickly adapted to the logic and are both doing quite well, which is great.

Now when we think about the five-year plan to grow at $4 billion annually for an aggregate of $20 billion, of which the $5 billion that you mentioned that we've tentatively announced, okay, I can run back through that. But we really look at that our typical strategy of buying value-based strong assets that aren't really performing at the strong level. We're only going to be able to buy about $1 billion to $1.5 billion of that, which is our traditional model levels of growth, okay? So about 3/4 of the future growth will come from these Williams and Eagle type of acquisitions that are better performers.

So the return dynamics still will be over the 15% after-tax return thresholds. Because doing the value type investings, we've achieved over 25% after-tax returns over the last 10 years. And there's some -- we have the ability to still be able to do that while buying a lot better acquisitions that are much easier to integrate and have a much higher probability of success.

[Operator]

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

[John Murphy, Bank of America]

First question, we're hearing from one of your big competitors that they're accelerating the growth of their stand-alone in the used vehicle stores as well as their omni-channel efforts. And you guys are going out there and building a franchise network, it's larger and just -- not just, I mean, like exclusively going online with Driveway. So I'm just curious if you ever see the opportunity or the need to have stand-alone used stores, I mean, I know we went through this L2 back in '08, '09. But I mean, is that something that you would explore? Or you think you need to do or from your store network on the franchise side, do you think that this Driveway app will give you enough leverage and those stores just become that much more productive?

[Bryan DeBoer, President and Chief Executive Officer]

Sure, John. Great question. I think when we think back three years ago, our strategy design was based on the foundation that we need to center our growth of our network as well as our offerings around the consumer and the thirst that the consumers have for transparency, empowerment and convenience, okay? And that didn't lead us down the pathway about a network being built in a different way than new car stores.

New car stores are highly, highly, highly accretive, as I just mentioned, at 15% returns. And for every $1 billion that we get, it adds somewhere between $0.50 and $1 of EPS, okay, with a similar capital structure to what we shared during the offerings, okay? But those three things of transparency, empowerment and convenience didn't require our used vehicle network. We really looked at that the new vehicle network had so many competitive advantages that I mentioned earlier, like upstream trades, like high-margin service, body and parts, because our foundation and thesis was that the battleground of used cars was going to be where we're going to win or lose.

So to have more upstream trades and higher-margin businesses, we felt that, that strengthened our ability to provide consumers that transparency, empowerment and convenience. So a little bit different logic, but remember, it is a $2 trillion industry, and there's 40 million used cars sold a year, and no one player has more than about 1.5% of that market yet. And I'm sure that there's many strategies that can be successful.

[John Murphy, Bank of America]

That's very helpful. And just a follow-up on that, though, when you think about Driveway getting fully launched and operational in the coming quarters, how much more productive do you think a single store become, as you think about new parking service and used? I mean, maybe it's a geographic reach or other metrics that you think about, how much more productive that physical asset can become for you as it's leveraged online?

[Bryan DeBoer, President and Chief Executive Officer]

John, it's Bryan again. I think most importantly, when we did our design two years ago, it was built off the foundation that our existing network is only utilizing about 25% of its service capacity, okay? And as we think about growth, we're assuming not quite that low level of capacity on new acquisitions, because they will be more metro and they will be better performing. But let's -- maybe you could double that on the future acquisitions, but our existing network is only utilizing 25% of its service capacity. It's also only utilizing about 50% of its storage capacity for the sale of vehicles.

Now we are assuming a little higher velocity on our turn rates, okay, in that number, but when we made that assumption, we really looked at that our ability to have to grow the network outside of new car franchises didn't really need to happen that way. And I would point to the strong results of the quarter and the resiliency of not only in automation or a competitor that you mentioned or next week, the high level of performance that some of the others have already announced that the new vehicle business is pretty strong, it's stable. It has a lot of levers to pull that we think are hyper crucial to our ability to maximize throughput through that network.

[John Murphy, Bank of America]

Got it. And then just maybe a last quick one. I mean, what's the variability of your SG&A? I mean, what portion do you think roughly as a rule of thumb is fixed and what portion is variable?

[Chris Holzshu]

John, this is Chris. I think for the last 10 years, we've always talked about the incremental growth that we generate to translate to about 50% throughput, mean 50% of that would fall to the bottom line. And what we saw in the quarter was an incredible response team to manage through both supply and demand issues and obviously, the COVID environment that they're in, and we saw almost 100% throughput in our stores throughput mean 50% of that would

And so I think over time, what we anticipate is that with margins likely coming down as supply returns, that we should see some permanent savings in the 200 to 300 basis point levels of what we saw kind of prior to this year, which would put us in the mid- to high 60 percentage range on an SG&A to growth, but 50% throughput is still our target long-term.

[Operator]

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

[Bret Jordan, Jefferies]

Your comment on Region 1 Driveway service experience, I think you said you need to rethink pricing. Could you talk a little bit about what you are seeing in that home delivery and pickup in service is margin better or worse than the average service margin? And I guess is the customer you're getting an incremental customer? Were these people who were using your service base previously? Or are these new users given the convenience?

[Bryan DeBoer, President and Chief Executive Officer]

So initially, we set the margins pretty high just because we needed volume levels to be controlled for the fulfillment network or the six stores that are in the Portland area. So, we are seeing that there is demand at the high level of luxury, okay? And it is new types of customers that wouldn't typically go into a new car store that are looking for true convenience, which is good initial signs.

We are also seeing and you have to remember this, that we have what's called ASRs or additional service requests, okay. We are seeing in the initial stages at the ASRs are somewhere around 1.5 to 2 times higher, and we do about $170 in ASRs within our network today, okay, so that's an improvement.

So it is margin expansion. We don't think that it's going to be permit margin expansion, like we're going to need to bring pricing into a more reasonable level to ensure that the Toyota, Honda, Dodge, Jeep and Subaru customers are also able to do that within the Portland market as well, okay? So it's early stages. Like I said, we're in at 45 days, but we're definitely learning and know-how to pull those levers pretty quickly to be able to adjust on the pull those levers pretty quickly to be able to fly to expand our revenue streams.

[Bret Jordan, Jefferies]

Okay. And then a follow-up on new unit GPUs, you called out higher OE incentives as well as the inventory situation in the quarter. Could you kind of bucket given the growth in GPU, what was OE versus maybe from a supply demand standpoint, just what you got on pricing?

[Chris Holzshu]

Yes, this is Chris. So I think from an OE perspective, what we saw was a continued strength in incentive which were somewhere around the $4,000 range, which if you think about that from a supply and demand issue when incentives are usually used to balance out inventory, seeing a $4,000 incentive has been very strong in the current environment.

And then as far as consumers are concerned, the average cash down that we saw in the quarter was somewhere around $3,500. And when you think about where that's been historically, there's like a $600 lift over where consumers cash down has traditionally been.

So what we're really seeing is we have a supply constraint, coupled with good incentives from our manufacturer partners. And then consumers are, I think, allocating some discretionary income that they may have used historically for vacations, moving houses, other purchases and they're directing them right now into automotive, which is really helping us on the margin side.

[Bryan DeBoer, President and Chief Executive Officer]

Bret, one other fun fact is also our lift in average price of a new car went up $3,500 year-over-year, which is a massive amount, which means that their checkbooks are probably fuller, and they're not able to fly to travel. They're driving the travel. And even though miles driven have been soft, I think we'll see that start to return by the end of the year as we move into the holidays where people are still wanting to hopefully see their families.

[Bret Jordan, Jefferies]

Okay. And you guys have commented on negative equity average per transaction. Do you see anything changing there as far as the profile of car coming in?

[Bryan DeBoer, President and Chief Executive Officer]

Yes. Bret, we actually saw some differentiation in the quarter, but it also could be driven off of the $1,000 more margin, okay? We've typically been running at $5,100 in negative equity for the 70% of consumers that had negative equity. The 71% grew a little bit, but the average just equity grew to $5,400, okay? So just small nuances, but I think it's mainly driven off of that belief that there was a shortage in product.

[Operator]

Our next question comes from the line of David Whiston with Morningstar. You may proceed with your question.

[David Whiston, Morningstar]

I guess, first on shift now being public, does that perhaps make you want to exit that investment sooner to avoid the mark-to-market fluctuations on your earnings? Or is that really not relevant because it's noncash? And with that adjustment, if I remember, large enough to be called out as a special item or will it always just be included in adjusted earnings or GAAP earnings?

[Tina Miller]

Yes. In terms of the volatility with the shift investment and what that looks like through the P&L, we do plan to call that out. Obviously, there's some gain that we'll see with them going public. And then in terms of exit, I think Bryan is going to talk a little bit about that.

[Bryan DeBoer, President and Chief Executive Officer]

Yes. I think, I mean, we love our partnership with shift. I mean we're sharing of best practices among the two organizations is highly beneficial, I think, from both of us. And I think they would say the same. So our intent isn't to exit that is to continue the relationship and continue of sharing of personnel and resources as we see the two companies grow.

[David Whiston, Morningstar]

Okay. And last night, as you know, GMC unveiled the Hummer EV pickup truck, the performance model, especially starts at an extremely high price point over $100,000. And you guys saw a lot of pickup trucks, especially in rural markets. And do you see that niche that's being carved out by both start-ups and incumbent OEMs of the BEV recreational pickup truck rather than a work truck. Do you see that being really just the domain of very wealthy consumers? Or do you think there's a lot more appeal here beyond very loyalty people?

[Bryan DeBoer, President and Chief Executive Officer]

David, I think it's really early for us to comment on the expectations of the market with the General Motor's new product. But I can tell you, we've got more -- I got more activity on that launch than I have seen on a product in a very long time. And then it is a halo vehicle. It is expensive, but I think the idea is to generate interest.

And then, obviously, like everyone else has tended to do is bring in lower-priced, affordable vehicles in that class over time. And so I think we're very excited for General Motors to have a product like that, that will generate some activity in the showrooms. And then hopefully, over time, bring that affordability down. I hope Bryan has some color on that as well.

[Bryan DeBoer, President and Chief Executive Officer]

I think the overarching concept of electrification I think it's highly important. And obviously, with our greencars.com strategies in the 4,000 vehicles that are online there. We really want that to happen. I mean we're pleased as to what California is doing with the 2035 plan. But ultimately, you still have to go back to affordability. And if you go on our greencars.com, you can look at the education that talks about affordability. That's the limiting factor. There's only a small portion of consumers that can really afford a car that's more than $20,000 to $25,000.

Let alone, when you start to talk about $100,000 vehicle. And we know that our manufacturers have wonderful concepts of whether it's hydrogen fuel cells along with electric and now maybe even the invention of solid-state battery power and those type of things and trust that our manufacturer partners will be able to bring electrification into affordability levels, whereas it's not just the ability to sell them a used car that's sustainable to be able to meet the needs of most of the consumers.

[David Whiston, Morningstar]

Okay. And lastly, what percent of your new car customers roughly are subprime now versus a year or two ago?

[Bryan DeBoer, President and Chief Executive Officer]

So, we sell about a quarter of our used car business, or what we call value auto is older cars, but that doesn't mean they're subprime. Our major subprime customers are really in the one-to three-year-old vehicles that we can buy way back a book, okay, and still deal with the disequity that's there on their trade as well as the cash down availability that they have, okay. And today, it sits at about 15% of our total business is subprime.

That nuance is very important to remember because as you move to older cars, you get into scarcer vehicles, which means we have 50% cash buyers in the value auto bucket and 50% finance buyers. And those finance buyers are a higher credit tier because the car is a higher value and relationship to book, which means people have to have more down payment or better credit to be able to finance overbook. Okay?

The exact opposite holds true on certified and new where 85% -- 80%, 85% of the consumers are financing the car and only 15 to 20 are truly paying cash. So some different things to be thinking about, but hopefully, that gives you some insights, David.

[David Whiston, Morningstar]

The 15% of total, that 15% of total used or total used a new combined or?

[Bryan DeBoer, President and Chief Executive Officer]

Combined, new end used, our total business is about 15% subprime.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn this call back over to Mr. Bryan DeBoer for closing remarks.

[Bryan DeBoer, President and Chief Executive Officer]

Thank you all for joining us today. We hope everyone remains safe, and we really look forward to updating you again on our fourth quarter and full year results in February of next year. Goodbye. Have a good day, everyone.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great rest of your evening.