Good day, welcome to the Asbury Automotive Group Q1 2016 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Matt Pettoni. Please go ahead, sir.
Thanks, operator, good morning, everyone. Welcome to Asbury Automotive Group's first quarter 2016 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with us today are Craig Monaghan, our President and Chief Executive Officer, David Hult, our Executive Vice President and Chief Operating Officer, and Keith Style, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions, I will be available later for any follow-up questions you might have. Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature.
All forward-looking statements are subject to significant uncertainties, actual results may differ materially from those suggested by the statements. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2015, any subsequently filed quarterly reports on Form 10-Q, our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. It is my pleasure to hand the call over to our CEO, Craig Monaghan. Craig?
Good morning, everyone. This morning, we announced record adjusted earnings per share of $1.36 for the first quarter, a 5% increase over last year. From an industry perspective, the quarter started out relatively robust. However, the SAR for March fell off substantially to 16.6 million units. We believe that the industry performance in March was negatively impacted by Easter weekend, which typically falls in April, but occurred in March this year. Despite relatively flat retail sales and continued new vehicle margin pressure in the quarter, we are seeing some positive signs. Our used vehicle margins improved substantially versus the last few quarters as a result of operational improvements we made in the fourth quarter of 2015. Our F&I business continues to deliver excellent results. Our front-end yield continued to improve sequentially, is up approximately $100 per vehicle from our low point in Q2 of last year.
Finally, our operations team delivered exceptional parts and service customer pay gross profit growth of 11%, with overall parts and service gross profit up 8%. As always, we are focused on becoming a stronger and more efficient company. We continue to work closely with our general managers to make sure that we are achieving our operational metrics and maximizing the potential of our stores. We have made great progress in the areas of used vehicles, F&I, and parts and service, and we expect to deliver continued growth in these areas. From a capital allocation perspective, we repurchased $102 million of our common stock during the quarter. In April, we repurchased an additional $60 million of our stock, bringing our year-to-date repurchases to approximately 10% of our outstanding shares. Finally, I want to take a few minutes to discuss our progress with Q Auto.
As I'm sure you are aware, in February, we closed one of our three Q Auto stores. This was our largest format store, where we struggled to achieve profitability. We are pleased with the progress of our two remaining stores, which were both profitable for the quarter. Overall, our Q Auto initiative broke even after giving consideration to the associated overhead. Based on the progress we have made and our continued expectation that we can achieve excellent returns on investment, we have decided to expand our Q Auto operations. We will focus on increasing our market presence in the greater Tampa area and expect to launch two additional small to mid-size format stores by the end of the summer. We look forward to sharing our progress with you in the future as we continue to expand the Q Auto brand.
In summary, we continue to execute on our two-part strategy, driving operational excellence and deploying capital to its highest returns. Now I'll turn the call over to Keith to bring us to our financial highlights. Keith?
Thanks, Craig. Good morning, everyone. This morning, we reported record first quarter adjusted EPS of $1.36. This represents a 5% increase from last year. Our results for the quarter were adjusted for a $3.4 million pre-tax real estate-related charge, or $0.09 per diluted share. There were no adjustments to income for the first quarter of 2015. For the quarter, same-store revenue increased 1%, and same-store gross profit increased 2%. Turning to SG&A, our ratio as a percentage of gross profit came in at 69.5%. As a company, we had difficulty adjusting our expense structure to the significant decline in March retail sales, As a result, our SG&A ratio for the quarter increased 100 basis points from last year. There are a couple of expense items worth discussing as it relates to the quarter's performance.
First, insurance expense was up $1 million due to the impact of a significant hailstorm in Texas. Second, employee benefits costs rose $500,000 due to increased enrollment in our employee health insurance plans. While we consider the hail damage to be an isolated event for the quarter, we expect that the increase in employee benefits costs will continue to impact our future SG&A expense. It goes without saying that competing against quarters with significantly higher new vehicle margins is difficult from an SG&A perspective. Taking a look at our sequential performance better demonstrates the progress we are making on our cost structure. With first quarter gross profit relatively flat with the fourth quarter of 2015, we reduced our SG&A ratio 100 basis points. We expect to further improve our expense ratio as we head into the summer selling season.
In terms of capital deployment, CapEx totaled $10 million for the quarter. For 2016, we are planning for $80 million of CapEx, which includes $45 million associated with our core annual CapEx plan and $35 million of CapEx associated with acquisition renovations and construction, which will enable us to move out of facilities that are currently under lease. In addition to executing on our CapEx plan, we also purchased property during the quarter totaling $7 million, the majority of which was previously leased. Going forward, we will continue to seek opportunities to purchase real estate currently under lease and acquire properties in connection with future dealership relocations. Turning to share repurchases. During the quarter, we returned $102 million to our shareholders through share repurchase.
With the additional $60 million of shares we repurchased in April, we now have 22.2 million shares outstanding, and our current board authorization stands at $138 million. From a liquidity perspective, we ended the quarter with $4 million in cash, $93 million available in floor plan offset accounts, $100 million available on our used vehicle line, and $165 million available on our revolving credit line. We ended the quarter with $946 million in outstanding debt. As a result of our $200 million bond add-on in the fourth quarter and additional mortgages in 2015, our interest expense was up $3.1 million in the quarter. Our total leverage ratio stands at three times, which is at the higher end of our targeted range of two and a half to three times.
On a net basis, our leverage ratio was 2.4 times, and adjusting on a pro forma basis for our April share repurchase activity, our net leverage is closer to 2.6 times. Going forward, we are committed to remaining in our targeted range while maintaining flexibility to deploy capital on an opportunistic basis. Now I'll hand the call over to David to discuss our operational performance. David?
Thanks, Keith. Despite a challenging market, we increased total revenue 1%, grew total gross profit 2%, increased our total gross profit margin 20 basis points to 16.8%, and delivered an adjusted operating margin of 4.7%. For the balance of my remarks, I would like to remind you that all comparisons to the first quarter will pertain to same-store retail performance compared to the first quarter of 2015, unless otherwise noted. Our new vehicle unit sales were relatively flat with last year due to a softer than expected March. We continue to operate in a very competitive market with new vehicle margins down 70 basis points from last year. Specifically, a number of our domestic stores chased, but failed to achieve very aggressive stair-step programs, resulting in significant declines in our domestic grosses.
Both our luxury and import new vehicle margins have continued to increase on a sequential basis from the fourth quarter of 2015. We ended the first quarter with $808 million of new vehicle inventory or an 81-day supply on a trailing 30-day basis. Our overall inventory levels were negatively impacted by a slower than expected March and having $16 million of stop sale vehicles and inventory. Looking forward, we believe we are well-positioned for the spring and summer selling months. Turning to used vehicles. Our unit sales were down 2% from last year as the quarter presented a few challenges, including a disrupted sales pace in March and many of our operators working through the stop sale issue, which tied up approximately 10% of our inventory.
Despite these challenges, with better used vehicle management, we were able to improve our gross per unit by $19 to $1,761, our highest level in over a year. Taking into consideration our improved wholesale performance, total used gross profit was up 2%. Our used vehicle day supply was 33 days, which is in the middle of our targeted range of 30-35 days. This includes $14 million of stop sale inventory. Turning to F&I. Our team continues to deliver strong results, delivering F&I per vehicle retailed of $1,425, up $43 from last year. The lending environment remains favorable. Before I turn to parts and service, I'd like to summarize our front-end performance. During the quarter, we were able to offset a portion of our new vehicle margin decline with better execution on used vehicle grosses and improved performance in F&I.
Despite new margins being down, our total front-end yield, which includes new, used, and F&I gross profit, was down only $67. More importantly, on a sequential basis, our total front-end yield was up $20 from the fourth quarter of 2015. Our goal is to build on this momentum as we head into the summer selling season. Turning to parts and service. In the first quarter, we delivered parts and service revenue growth of 9% and gross profit growth of 8%. Our overall gross profit performance was driven by an 11% increase in customer pay, a 4% increase in reconditioning cost, and a 7% increase in warranty. For the full year 2016, we believe we can continue to grow our parts and service gross profit in the mid-single-digit range.
Finally, we would like to express our appreciation to all of our teammates in the field and in our support center who continue to produce best-in-class performance in many areas. Again, thank you. We'll now turn the call over to the operator and take your questions. Operator?
Ladies and gentlemen, at this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may remove your question from the queue at any time by pressing the pound key. Again, if you'd like to ask a question, please press the star and one keys now. Our first question comes from Rick Nelson with Stephens. Please go ahead, your line is open.
Thanks. Good morning.
Good morning, Rick.
I'd like to follow up on the inventory as it stands today, where you're light, where you're heavy, and how long you think it's going to take for the industry and Asbury to reposition the inventory.
Rick, this is David. I actually think we're in an overall good position, even with the stop sale vehicles. Since the last quarter, our ratios have improved as far as our car-truck mix and our total inventory, we feel like we're pretty well positioned overall, for the upcoming quarters.
You made reference to a weak March. Any commentary on April would be helpful. I know we've got five weekends here in April. Is that tracking stronger than March?
Hey, Rick, it's Craig. Let me take a shot at that. David might want to follow up and maybe a little more about our inventory levels. We ended the quarter inventory 81 days, I think we've got to remember that March was disrupted. I think that makes 81 days look a little higher than it might really be. Add to that we've got all the stop sale inventory, that's probably another three or four days. I think if you were to make the adjustments for that, our inventory levels effectively would be in the 70s, that's why we say that heading into the summer selling season, that we don't feel like we're in that bad a shape. Of course, there are some brands and some models where we have far too much inventory. Broadly speaking, we think we're okay.
April, I would say it started off pretty well. We all see the analyst forecast in the industry talking about numbers in the mid-17. Feels a whole lot better than what we saw at March in the mid-16s. I'd add to that not only do the sales feel a little better, the margins continue to be stable. I think we feel like we're in pretty good shape. Don't know that that continues for the quarter, but right now we feel good about what we're seeing.
Great. Thanks for that color, Craig. Finally, if I could ask you about Q Auto, how that performed in the quarter, and I see you're going to add two more units there. If you could provide some of the economics around that business, that would be helpful.
Sure, Rick. Q Auto, we just feel strategically with all of our knowledge about used cars, the capital that we can bring to play, the marketing expertise we have in-house, IT, what we can do with the websites, it just seems to be an initiative that makes a lot of sense. It's very much worth our time and effort to try to figure out that model. Just to give you a sense, the large format store just didn't work. We couldn't generate enough volume through that store to get it to break even on a standalone basis. The smaller volume stores seem to be working. In fact, the store that we've had open the longest, our store in Brandon, has been profitable now for four quarters. Our store in Fort Myers has been profitable for two quarters.
This quarter, those two stores made enough money to essentially completely offset the overhead that they're carrying. That's what led us to break even. We're learning. We're learning that brand is far more important than we thought it was. We can make up for some of that lack of brand with effective internet marketing. We think SEO is very important in that world, we're spending a lot of our efforts on that. We think putting a couple of more stores in the Tampa market where we can start to get some mass, could prove to be very beneficial. We can bring those two additional stores online in that market without really spending a lot of additional money on advertising. One of the stores is essentially a satellite store that'll come online, and we're very interested to see how that plays out.
We think that that'll bring us some efficiencies. We continue to be excited about it. Like Keith said, we think it's a model that we can generate an attractive ROI. We're still learning. We still got a long ways to go, we think as shareholders, it's a good use of capital, and we're going to continue to see if we can make this successful.
Thanks a lot, Craig, good luck moving forward.
Thank you, Rick.
Our next question comes from Irina Hudakovsky with KeyBank. Please go ahead. Your line is open.
Actually, this is Brett Hoselton standing in for Irina. Good morning.
Brett.
Let me just start off with a Q Auto question and just kind of longer term. Okay, I'm thinking about CarMax and some of these skills that they've built up over time, their ability to call a car, their ability to manage inventory, et cetera. Obviously, a lot of data there, a lot of databases, et cetera. Do you think that you can develop a system and maybe a brand that is as robust as CarMax is?
Brett, CarMax has been at it well over 20 years. They're the 800-pound gorilla. We're not trying to duplicate CarMax. That's beyond us. I think we look at it a little differently, we send almost 40,000 cars a year to auction. A large percent of those cars are retail cars that, quite frankly, end up on a CarMax lot or another competitor's lot. Fundamentally, the question we ask is, with all the skills that we've got in-house, isn't there some way that we can build a distribution channel and retain those profits for the Asbury shareholders? We don't have to duplicate CarMax to do it. I think we just need to be smart. I would tell you that fundamentally, what we're learning is brand is important, we think we can augment the lack of a brand with an intelligent web-based approach to the market.
We're seeing some real success there. We've also learned that it's very important to restrict the amount of capital that we invest. We think the key to this model is to have a relatively small format where we don't tie up a lot of capital, we move a lot of inventory through that store. The third critical leg of this thing is sourcing inventory. We source some of that inventory essentially from our core stores that we believe would have gone to auction otherwise, we're also sourcing inventory in the local market in the way of trades, and we do get some cars from auction. We like what we see. We feel like we're making very good progress. We want to see how this Tampa market experiment that we're moving forward with plays out.
If it works, if we think it's a model that we could take to other markets, it's still in its infancy, but it's making progress.
Along the lines of the airbag recall, again, first, can you just quickly remind how much of your new car inventory was tied up? Secondly, more broadly speaking, do you think it had a negative impact on your new and used vehicle sales? Is there any sense of how you might be able to quantify it if it actually did? Also, I know I'm asking a multipart question here, but also timing of parts. We're hearing mixed spots. Some dealers are telling us that it may be a year before they actually get parts or airbags for their Audis, for example. Finally, the OEM stepped up and said, "Hey, we will actually compensate you in some way, shape, or form for the fact that we're tying up inventory here.
This is David. I'll hopefully remember all the points in there and take my best shot at it, others can jump in if I miss something. Please let me know, Brett. On the new car side, it's essentially a couple of days supply for us that we have tied up. It's not a significant amount. It's impacting certain brands more than others, Acura being one of them. We feel like it certainly hurt us a little bit in sales. Tough to quantify how much. We really think March is more to do about the four weekends in Easter than anything else. Really, April feels like March. It almost feels like the months have flipped.
On the used car side, we do think it was more of an impact because that affected all of our stores as far as cars coming in and what they had on the ground. It did have an impact on our sales. It was 10% of our inventory. I'm not sure how to quantify what we would have sold had we not had it's fair to say we did miss opportunities because of them. To touch on the inflators that are coming in, we have started to receive them in small quantities from Honda and Acura so far, not from any of the European brands. We're told later in this quarter, we'll start to see more significant volume from both Honda and Acura with those inflators.
We think that'll pick up fairly quickly in the second quarter, it'll be a little bit slower roll for the Europeans. Mid to late summer is our best guess, they're going to service the states with the hot and humid weather first. Potentially, it could certainly go into fourth quarter or first quarter next year, depending upon where the store's locations are.
Yeah. Finally, just from an OEM standpoint, obviously, this is a big issue. Have the OEM stepped up in some way, shape, or form and offered you floor plan assistance or slush funds, et cetera?
Correct. On all the stop sale vehicles, we are being compensated. They all vary a little bit depending upon value, depending upon model, depending upon age. There is compensation across the board on all stop sale vehicles.
Okay. Thank you very much, gentlemen.
Thanks, Brett.
Our next question comes from Bret Jordan with Jefferies. Please go ahead, your line is open.
Good morning. I was a little slow on the sign in. Did you say anything about the M&A environment, maybe what you're seeing out there as far as opportunities, or is anything changing as sales have slowed for the independents?
This is Craig. We're not seeing a lot of activity on the M&A side. There's always a conversation happening somewhere. It feels to us that with the prices of the publics where they are today, and we'll speak specifically to ours, and you see it by our action, we think we're far better off buying our own stores via share repurchase than we are going out and paying a significant premium for somebody else. We're buying our stock at a seven times EBITDA but multiple. We hear about car stores coming to market with blue sky numbers that are bigger than that.
Wow.
We are happy to buy our own stock when that situation happens.
Okay, thanks. One question, this is obviously probably not a big issue for you guys given your exposure, but how do you think about the Tesla Model 3 as it comes to market, and obviously 400,000-plus people have committed or hope to commit to that, its impact longer term on maybe the 3 Series BMW and the Mercedes-Benz. Are you seeing, I guess, on a shorter term, maybe less interest in those cars because people have committed to some car out on 18- or 24-month future?
Well, I will start with the whole electric hybrid market is 3% of the total market. Still to this day, it is a very small portion of the market. Obviously, we do not sell Tesla. We do not feel at this point that it is really having any significant impact on our stores.
Right. 400,000 people who might have been 3 Series buyers in that sort of entry luxury now going to that product is not changing any customer interest or traffic, is it, on your side?
From a bigger perspective, at any given point in time, there's going to be a hot model that's going to displace other models. That's just the nature of the industry. The i8 is not as hot as. The i8's a great example. Came out red hot, and in a six-month period, it cooled down. Right now, it's the Tesla that seems to be red hot, but who knows where that'll be in six months, and who knows what the next vehicle one of the other major manufacturers might bring out that's going to go head to head with the Tesla. I just think there's so many unknowns out there that it's hard to say what's going to happen.
Okay, great. Thank you.
We'll take our next question from Michael Levin with Deutsche Bank. Please go ahead, your line is open.
Good morning, guys. I wanted to just dig into the customer pay growth a little bit. The 11% number was bigger than I can remember going back a couple of years. Was there anything in there in particular in the comp or any kind of one-offs around getting customers in who are on recall or anything like that we should think about for Q1?
No. This is David. I would just tell you, Mike, since the first quarter of last year, as a team, we've been very focused on fixed operations and customer pay. I think we're just starting to see the benefits of the plan that's been put in place.
Got it.
Hey, Mike, I just got to hop in here and say, the work that David's done and the team have done, they've just done a phenomenal job. What you don't see is the work that they've also done on the collision side, where the growth is even better than the 11%.
Got it. Okay. You mentioned the domestic stairsteps in Q1 and saw gross profit decline similar to Q4. How should we think about what brings stabilization to the new margins going forward, and how does that progress over the next couple quarters?
This is David. I'll take a shot at that. It changes month by month, so it's kind of tough to predict that. I'll tell you where we are in April. We feel really good. We see April as positive and up from a margin perspective on domestic at this point. That could change in any given month, depending upon what the targets are that are put out there in front of us.
Understood. Then I guess just lastly, looking at the current demand and competitive environment, are you guys comfortable being at the high end of your leverage range, or are you thinking that something closer to the 2.5 is maybe a little bit better moving forward?
Hey, Mike, this is Keith. We've always said 2.5 to 3 times is where we want to be, we've worked over the last year and a half to get there. Like I said, with the share repurchase in April, we're at about 2.6. We're pretty comfortable at that level, we're just going to remain flexible and opportunistic going forward.
Appreciate it, guys. Thanks.
Thank you.
Our next question comes from Anthony Cristello with BB&T Capital Markets. Please go ahead, your line is open.
Hi. Thank you. Good morning. First question I have is sort of a bigger picture. It has to do with hearing more and more about the leasing of CPO and used vehicles. I just wanted to get your understanding. I imagine it would be good from your standpoint. How does that over the long term, potentially influence new vehicle sales? How does that influence just the general thought of how you approach the business longer term as well, if that is adopted by most of the manufacturers down the road?
Yeah. This is Dave. We've seen this before with Toyota and Lexus. Anytime you can have an alternative in financing something and give someone the opportunity for lower payments, that's obviously a positive thing. It's tough to quantify down the road what the impact is on new. Traditionally speaking, these cars coming off lease, for the folks that do end up leasing these vehicles, we view them no differently than any other pre-owned customer. We see them as a good parts and service customer, a good finance customer, and clearly a good potential future customer. Whether that translates back into a new vehicle or used, I'm not sure at this point.
When you look at the opportunity for service, I heard commentary here on the customer pay side, and I'm assuming that you're going to see more business as these recalls continue to be repaired. How do you view the service opportunity with Q Auto and isolating that as a used only, knowing that a lot of those customers may not identify going back to the dealer for service, but how do you approach that and try to capture that market share as well?
At this point, the service business within Q is immaterial. Again, we got to step back. Q is in its infancy. We're still in the process of developing the brand. We are starting to see repeat customers and referrals. That's primarily on the sales side. We are starting to see some repeat business in the service drive there, but quite honestly, most of the work we do in the service drive at Q is essentially reconditioning. I think that can come over time. The stores that we've put in place have the capacity to do service, but we're way too early in the game for that to be a material part of that business model.
Do you offer a warranty product, and is that warranty then serviced at that location, or are you sending those customers to your other dealerships to have that type of warranty work performed?
No, we do offer a warranty product, and it can be performed at those locations.
Okay, great. One last question. When you look at your ability to adjust, and you talked about April doing better, should we think about the SG&A as a percent of gross to then come back from the levels we saw in the prior quarter, or are there still some inefficiencies related to sales and inventory that will just sort of prolong until you can get a sell-through of all this stock sales that are sort of pent up?
Hey, Tony, this is Keith. I'll start, and maybe David might want to jump in. We've always been a very cost-conscious company. You can see that in our ratios compared to our peers. We're not going to stop that process. It's a constant process of measuring and monitoring productivity and setting our expectations. That goes from a store-based level and also goes from a shared service perspective as well. I think everybody knows we've had our shared services in place now for about a year, and we're seeing some incremental efficiencies as we go forward with those teams. There's still more technology we could deploy to improve our processes, support of our stores, and also improve our efficiencies in that area as well.
The only thing I would add to that is Craig has created a great culture with the operators in the stores, and they're fantastic at what they do, and they're constantly looking for ways to improve, both on the production side and on the expense side. They're always ahead of it, and the culture is out there to constantly get better at what we do. They're focused on it.
Very helpful. Thank you for your time.
Thank you.
Our next question comes from Michael Montani with Evercore ISI. Please go ahead. Your line is open.
Hey, good morning. Just wanted to ask, if I could, on the improvement that we've seen in GPUs, particularly on the used side. I think there was a comment earlier that there was some changes that may have been made operationally in the fourth quarter of 2015. I just wanted to try and understand a little bit better how sustainable is this level of improvement, and is it wholesale? Is it reconditioning? Just if you could give some added color on what's changed there, it'd be helpful.
This is David. We haven't changed anything as far as our internal perspective on how we handle that or how we come to market with our vehicles. It's just been really more of a focus internally at growing our margin, and we may have suffered a few sales or lack of sales from that, trying to find the right balance. Again, it speaks to the talent that we have in the marketplace and in the stores. They're the ones that are producing these fantastic results, and clearly, they should get all the credit. Our key now is to keep that momentum on the GPU that we have and find a way to increase volume at the same time. With that, we'll get the finance, we'll get the internal parts and service business, and we think we're well positioned to move forward.
Okay, got it. Then if I could just follow up. David, you mentioned some perhaps encouraging signs. It's still early, in April, from the domestic GPU front on new. Is there anything you could add in terms of luxury as well as imports, just because I was a little surprised to not see further improvement on the import side, given some of the feedback has been pretty positive on RAV4 and some of the crossover product there.
Some of our import lines did increase quarter-over-quarter. I understand overall you're seeing a different situation than that, again, I think the domestic has improved and will improve year-over-year in April for sure. We are seeing positive signs when we compare April to last year to April of this year from margins across the board, both in luxury and in import as well. We think it's a timing issue, too, a little bit with luxury. There's been a lot of lower entry models that have come out with less margins involved, later this year, coming into the second and third quarters, there'll be newer models coming out with a little bit more margin. We see some opportunity.
Thank you.
Our next question comes from James Albertine with Stifel. Please go ahead. Your line is open.
Great. Thanks, good morning, apologies in advance for the background noise here. Hopefully, you can hear me okay. Wanted to ask on the Q Auto side, if I may, very quickly, what can you share, if anything, at this point on the return on invested capital metrics of that business, given that you have made some comments that the smaller store has been profitable for the last few quarters? Just maybe in context of your ROIC on the traditional sort of auto retail business.
We believe our target is to get to returns that are greater than what we can get if we buy a franchise in the marketplace. We're not there yet. We know from watching what some of the other competitors do in the space, it can take up to four years for a store to reach maturity. We're trying to hold ourselves to a higher standard. We'd like to get to double-digit returns sometime in the 2nd to 3rd year, that's what we're targeting. We're not there yet, like I said earlier, we're making progress think this is something that's worth seriously pursuing.
Hey, Jamie, this is Keith. Just to give you a context of these two stores. You look at these two new stores, we're going to invest a total of $10 million, including working capital investment in those two stores. Really, once again, as Craig mentioned earlier, minimizing the amount of investment in these stores pushing the volume. We think we can get to the ROIs we expect, like Craig said, within a couple of years.
Okay, great. Just wanted to clarify, you made some comments, Craig, I believe in your prepared remarks as it relates to the importance of brand, some SEO, I believe investments. Just want to know, should we be modeling in incremental either SG&A in the coming quarters as it relates to that, not only the existing Q Autos, also the new stores you've got planned?
I don't think you need to do that. The store is broken. Like we said, the stores and the associated overhead was a push. It was a break even in the first quarter. Yeah, there will be some incremental costs as these two stores come on, but we think the two existing stores will continue to make progress. I think for modeling purposes, you can almost ignore it and just give us some time to continue to see how this plays out.
Okay. Thank you for that. Again, your patience for one more question, if I may sneak one in. We have received a lot more questions in the last few months on recession sort of proofing our models or at least sensitizing to a potential recession, not necessarily believing that one exists or is looming. One of the things that we've had a trickier time understanding is, you've been making a lot of improvements on the F&I side from an execution perspective. If we did see a reduction in demand for new vehicle sales, hypothetically, how do you think F&I would trend over the course of that downturn? Because it's hard to look at history and use it as a judge, given that you're a much improved company since the last time we went through this.
Sure, Jamie, this is Keith. I think keeping in mind F&I, one-third is financing and two-thirds is related to product sales. I think what it comes down to in a recessionary environment is the customer's ability to pay. That's going to come down to employment levels, the overall economy, how much money people have in their pockets, and what they're willing to afford as far as a monthly payment. It's a monthly payment aspect that potentially could impact our ability to push warranty sales volumes.
The only thing I would add to that, in looking back to the last recession that was very steep, and clearly we don't see anything like that coming anytime soon. The consumer's ability was still there to pay. It really comes down to the financial institutions and their ability to lend, and it certainly appears that they're in much better shape now than they were back then. I don't think the impact from an F&I per vehicle standpoint would be significant.
That's all extremely helpful color. Maybe, Keith, you and I can follow up on some more details offline. Thank you again, gentlemen, for taking the question.
Thank you.
We'll go next to John Murphy with Bank of America. Please go ahead. Your line is open.
Good morning. Just a first question. The discussion around the lost Easter weekend, or the sort of the placement of the Easter weekend in the first quarter as opposed to the second quarter, has been largely isolated to the new vehicle business. I was curious if you could just maybe talk about what impact you thought it might have had on the used vehicle business, as well as losing a weekend on service bays and parts and service
John, I haven't honestly calculated down to that point in time. I can tell you traditionally, what we normally do on an average weekend compared to that particular weekend, our sales were down almost 40% for that particular weekend. On the fixed operations side, there wasn't much of an impact at all because of Easter.
Got you. Okay. Then just a second question, Craig. The capital allocation here seems to have gotten obviously a lot more aggressive on buybacks, there was a great opportunity, probably still is, in your stock. Obviously, you're bumping up against sort of your range on leverage. Would you consider, given where the stock is right now, getting even more aggressive, potentially going to the high end of the range on your leverage targets, could you even go above that?
John, I think Keith said it well. We've committed to this two and a half to three times leverage number. We look at it on a net basis, so including any excess cash we might have on the balance sheet or floor plan or unutilized used vehicle line. Like Keith mentioned, we're at 2.6. I think in the market that we're in today, where there's still a lot of uncertainty, I would just go back to the first quarter, I would tell you that January started weak, then we saw a very strong February. It almost felt like we were off to the races in February, then March got sloppy again. I think in this environment, we've got to maintain our flexibility. Net leverage at a 2.6 number, I think is a good place to be. We're comfortable there.
We've got a lot of dry powder. If we see great opportunities, whether that be to buy our own stock or we see an opportunity to pursue an attractive acquisition, we've got the flexibility to go after it. So I'd come back to what Keith was saying earlier. I think we're in a good spot, let's just see how things play out from here.
Okay, great. Thank you very much.
Sure thing.
Our next question comes from Paresh Shah with Morgan Stanley. Please go ahead, your line is open.
Good morning, everyone. Some of my questions have been answered, but a broader industry-level question. Are you seeing OEMs, particularly luxury OEMs, starting to adjust production schedules in any way or even adjust their production mix? Sorry.
We've definitely seen and felt production mix. From the last quarter, we've improved 4% on the truck side and decreased our car side 4%. That was a nice shift for us, and we'll certainly feel the benefit of that. From a production standpoint, it doesn't feel like the foot has been taken off at all. We're not seeing that with any of the OEMs.
That's good color. A follow-up on Q Auto is clearly a preference for smaller format stores. However, in-store inventory selection is perhaps what makes the larger store format work for one of your bigger peers in this space. Could the smaller format cap your share gains in the long run?
That's a fair argument, when we concentrate stores in a market and we can quickly move inventory between stores, I think that becomes less of a concern. It gets back to why we want to concentrate these stores in a given market and see what we can do there. When we're online, we can offer all the inventory across all the stores within that marketplace to the consumer. Even though the store's format might be small, we can show them a much broader breadth of inventory.
Got it. Thank you so much.
Our next question comes from David Whiston with Morningstar. Please go ahead, your line is open.
Thanks. Good morning. Continuing with Q Auto, Craig, you had mentioned earlier that there's still some things to learn. I was just curious if you could point out some key strategic areas. Somewhat related is on the large store versus small store format. If down the road Q Auto had a much bigger brand equity in a market or even within a whole region of the country, is a larger store something you're willing to revisit at that time?
I'll go back to my days at AutoNation, where we had 20-acre used vehicle mega stores. Those aren't going to work. They didn't work for AutoNation. I don't think they're going to work for anybody in this marketplace, you will never see us build anything like that. When we say small or medium-sized format, one of the things that we'll be experimenting with in this Tampa market is one of these stores will actually really be a satellite store. It will not have any on-site ability to do parts and service work. There is a moderate-size or medium-size store within 15, 18 miles where we will do that work. Even though that's a moderate-size store, it's got enough base sitting behind it that it can do the work to take care of Brandon, and it can do the work to take care of the satellite store.
We think that could be a very attractive model for us. We've got to minimize the capital that we tie up, and we've got to utilize those service bays. Ideally, you'd be utilizing them seven by 24. If we can drive that kind of productivity, I think these things can work, and that's what we're trying to do.
Okay, thanks. Over to domestic gross profit per unit. I think it was David, in your prepared remarks, you were talking about some sort of stairstep issue, and I just didn't quite catch that. Could you repeat that real fast for me?
Sure. With all our domestics, we have our targets that we have to hit and there's substantial money tied on a per car basis, up to $1,000 a car. When those targets are set at a store level, we chase those sales from the beginning of the month with hope that we catch it by the end of the month to have that money wash back through. When we do not hit the targets and don't receive that money, there's a substantial impact. We had a lot of stores that just didn't get there in the first quarter. Again, April, it's the opposite scenario at this point.
David, I could add some color if I could. You're running a large domestic store. You've got $1,000 a car that's retro back to the first car that you sold. You take off on the month, and you're trying to drive volume, and you're taking lower front-end grosses because it's all about volume, and you think you'll get an extra $1,000 at the end of the month. It'll all work out. When you don't hit the stairstep, you're punished twice. One, you didn't get the $1,000 stairstep, and two, you spent the entire month giving, not giving away, but selling cars at price points below what you might have done otherwise. It's brutal, and that's what you saw in our domestic PVRs.
Okay, could you elaborate at all on why you weren't able to hit the volume?
They were tough targets, we just didn't get there.
Okay. Thank you.
That wraps up our conversation for today. We appreciate all the questions and the conversation and look forward to getting again with you at the end of next quarter. Have a great day.
This does conclude today's program. You may disconnect at this time. Thank you and have a great day.