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Autonation Inc  (NYSE:AN)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to AutoNation's Third Quarter 2018 Earnings Conference Call. At this time, participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the call over to Robert Quartaro, Vice President of Investor Relations for AutoNation. Sir, you may begin.

Robert Quartaro -- Vice President of Investor Relations

Thank you. Good morning, and welcome to AutoNation's third quarter 2018 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, Chief Executive Officer and President; Cheryl Miller, our Chief Financial Officer; Lance Iserman, our EVP of Sales and Chief Operating Officer; and Scott Arnold, our EVP of Customer Care and Brand Extensions. Following their remarks, we will open up the call for questions. Taylor Williams and I will be available by phone following the call to address any additional questions that you may have.

Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings including our most recent Annual Report on Form 10-K, and subsequent Quarterly Reports on Form 10-Q and current reports on Form 8-K.

And now, I'll turn the call over to AutoNation's Chairman, Chief Executive Officer and President, Mike Jackson.

Mike Jackson -- Chairman, President and Chief Executive Officer

Good morning and thank you for joining us. First, I'd like to take this opportunity to thank our AutoNation family across the country that rose the support our fellow associates during and after the devastation of Hurricane Michael. Today, we announced an investment in Vroom, a leading online car retailer. Our investment of $50 million represents ownership stake of approximately 7%.

Turning to our third quarter results. Today we reported EPS in continuing operations of $1.24, an 24% increase in earnings per share compared to the same period in the prior year. Net income from continuing operations for the quarter was $112 million, a 15% increase compared to the same period a year ago. Third quarter 2018, same-store gross profit for the quarter totaled $838 million compared to $824 million in the same period a year ago. Same-store used vehicle gross profit was up 6% compared to the third quarter 2017 and same-store retail used vehicle unit sales were up 3%. Same-store Customer Care gross profit for the quarter increased 7% compared to same period a year ago. We continue to prove that our brand extension strategy, particularly in Customer Care was the right decision.

Over the last several quarter AutoNation's fixed gross profit has consistently outperform than peers average. We remain committed to increasing our focus on Customer Care brand extension and driving results.

I now turn the call over to our Chief Financial Officer, Cheryl Miller.

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Thank you, Mike, and good morning, ladies and gentlemen. For the third quarter, we reported net income from continuing operations of $112 million or $1.24 per share versus net income of $98 million or $1 per share during the third quarter of 2017, a 24% increase on a per share basis. During the third quarter revenue decreased $83 million or 1.5% compared to the prior year and gross profit grew $9 million or 1%.

SG&A as a percentage of gross profit was 73.2% for the quarter, which represents a 140 basis point increase compared to the year ago period and a sequential decline of 20 basis points from the second quarter. In October, our Ford store in Panama City, Florida suffered extensive damage due to Hurricane Michael, which will impact our fourth quarter SG&A expense. We currently expect fourth quarter SG&A to gross profit to be in a similar range to the third quarter of 2018. Additionally, we no longer expect a flat year-over-year SG&A to gross profit for the full year 2018 due to expenses related to Hurricane Michael, pressure on new vehicle margins and continued investment in our Customer Care brand extension initiatives.

The provision for income tax in the quarter was $33 million or 22.6%. During the third quarter of 2018 and in connection with the finalization of our December 31, 2017 federal tax return, we adjusted our deferred tax assets and liabilities for the income tax rate change associated with tax reform, resulting in a 340 basis point favorable impact on the third quarter tax rate.

For the full year 2018, we expect our effective annual tax rate to be in line with our previous guidance. However, due to the possibility of negative adjustments, including market fluctuations on certain of our income tax items, we may experience a slightly elevated tax rate in the fourth quarter. Floorplan interest expense increased to $33 million compared to $25 million in the third quarter of 2017, driven primarily by higher average interest rates.

As we saw initially during the second quarter of 2018, our net floorplan carrying benefit has turned into a modest cost due to rising rate. As a reminder, our floorplan facilities are based on one-month LIBOR, which has risen approximately 70 basis points year-to-date and approximately 100 basis points over the last 12 months.

Non-vehicle interest expense decreased slightly to $28 million compared to $30 million in the third quarter of 2017, primarily due to lower average debt balances and lower average interest rate, as we refinanced higher cost debt with lower rate senior notes and commercial paper toward the end of last year.

At the end of September, we had $2.6 billion of non-vehicle debt, a decrease of $93 million compared to June 30, 2018. Other operating income was $17 million in the third quarter of 2018, compared to $14 million in the prior year, an increase of $3 million. Other operating income was comprised of gains, related to store and property divestitures. We did not repurchase any shares in the third quarter as we focused our investments on our existing business, including our brand extension strategy as well as our strategic investment in Vroom.

We continue to see strong investment opportunity in our Customer Care brand extensions, where we are allocating more capital toward the capital expenditures as well as operating expenditures. Capital expenditures were $81 million for the quarter compared to $39 million in the prior year. Capital expenditures are on the accrual basis excluding operating lease buyouts and related asset sales.

AutoNation has approximately $264 million of remaining Board authorization for share repurchase. As of September 30, there were approximately 90 million shares outstanding. This does not include the dilutive impact of certain stock awards. Our leverage ratio was 2.8x at the end of the third quarter, down slightly from 2.9x at the end of the second quarter and our quarter end total liquidity was $1.2 billion at the end of September. We remain fully committed to our brand extension strategy and additionally to other forward-looking opportunities in our efforts to maximize long-term shareholder value.

I'll now turn the call over to Lance Iserman, our Executive Vice President for Sales and Chief Operating Officer.

Lance Iserman -- Executive Vice President, Sales and Chief Operating Officer

Thank you, Cheryl, and good morning. My comments today will be on a same-store basis as compared to the prior year unless otherwise noted.

Gross profit for variable operations was $455 million, down 1%. Vehicle gross was $3,303 on a per-vehicle retail basis compared to $3,255 same period last year. Same-store retail unit volumes were down 3% compared to the third quarter last year.

Our One Price strategy continued to drive growth in our pre-owned business. Used vehicle gross profit was $88 million, up 6% compared to the third quarter of 2017. Used vehicles retailed were $58,700, up 3%; used vehicle gross profit was $1,456 on a per vehicle retail basis, up 2% compared to the third quarter of 2017.

We expect the continued growth in the supply of off-lease vehicles and our We'll Buy Your Car, efforts to support used vehicle sales in 2019.

New vehicle gross profit was $123 million, down 13%, we retailed 78,300 new vehicles, a decrease of 6% versus the industry retail sales, which were down 4%. Partly driven by our difficult year-over-year comparisons in Texas, which benefited from strong replacement demand after Hurricane Harvey, last year. We anticipate difficult year-over-year comparisons to continue in the fourth quarter as well, new vehicle gross profit was $1,571 on a per vehicle retail basis, down 7%.

As we mentioned last quarter, we continue to experience significant margin pressure and we expect to see continued pressure for the balance of the year. Customer financial services, total gross profit was $244 million, up 4%. Our first brand extension AutoNation branded Customer Financial Service products has enable us to drive industry leading PVRs. Customer Financial Services gross profit on a per vehicle retail basis with $1,781, an increase of $107 or 6%.

We want to provide an update on our five AutoNation USA stores. We are encouraged by current progress and are continuing to evaluate the existing stores. The investment in AutoNation USA stores adversely impacted third quarter of 2018 by less than $0.02. We do not currently have plans to expand AutoNation USA in 2019 and we'll continue to evaluate our initial five stores.

Finally, I'd like to congratulate to 18 stores that were recognized by Automotive News and are part of the 2018, Top 100 Best Dealership store report. These stores exemplify the strong culture and leadership presence at each of our stores from coast to coast.

I'll now turn the call over to Scott Arnold, our Executive Vice President of Customer Care and Brand Extensions.

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

Thanks, Lance, and good morning, everyone. We are encouraged by the results of our brand extension strategy and see the strongest investment return opportunity in our Customer Care business. We've increased our focus on Customer Care brand extension initiatives, which includes Precision Parts, collision centers, collision parts and AutoGear.

Turning to our third quarter 2018 results. My comments today will be on a same-store basis and compared to the same period a year ago, unless otherwise stated. We continue to demonstrate industry leading results in Customer Care with AutoNation gross profit growth continuing to double the public peers, Customer Care gross profit for the quarter was $382 million, up 7% compared to $358 million in Q3 2017.

We remain on pace to earn approximately $100 million of incremental gross profit from our parts initiatives in 2018, which is evident in our solid customer pay gross profit growth. Customer pay gross was $160 million, up 7% year-over-year and warranty gross was $79 million, up 3% year-over-year. As part of our next steps in Brand Extensions, we've introduced a private label credit card powered by Synchrony. Customers will have the opportunity to use the credit card for the purchase of AutoGear products, automotive maintenance and repair services, and select Customer Financial Services products. In 2019. we are increasing our Customer Care Brand Extension initiatives, including dealer link collision centers, collision parts Precision Parts and AutoGear.

I'll now turn the call back to Mike Jackson, our Chairman, Chief Executive Officer and President.

Mike Jackson -- Chairman, President and Chief Executive Officer

Thank you, Scott, very much. With our investment in Vroom and strategic partners with innovations like Waymo AutoNation remains uniquely positioned to lead our industry, as the future of the consumer mobility experience. We're now happy to take your questions.

Questions and Answers:

Operator

(Operator Instructions) First question comes from Chris from Wolfe Research. Your line is open.

Chris Bottiglieri -- Wolfe Research -- Analyst

Hi. This is Chris Bottiglieri, thanks for taking the question. So if you can talk about the Vroom purchase is this is a fairly passive stake or do you have formal plans to collaborate, are there any purchase options that you have embedded with the deal if it hit sort of like thresholds or targets, how are you thinking about all of this ?

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes. So what caused us to make the decision to invest in Vroom was first, they have very admirable and accomplished and professional executive management team, put together on their leadership of their CEO, Paul Hennessy. And Paul has very impressive credentials in the whole digital technology space as you all know between priceline and booking. He also was a car enthusiast, so we have that in common to talk about. And Vroom has a very impressive journey in building the business to where it is. Therefore, we're very excited to make a $50 million investment in Vroom. Now with that obviously, since we're both in the automobile business, we can talk about are there possibilities to do other things together, but that is at the very beginning of discussions, nothing has been decided and that is firmly in the -- we will see category.

Chris Bottiglieri -- Wolfe Research -- Analyst

Got you. And then how are you thinking about the AutoNation USA initiative longer term, like given this partnership, do you view this is kind of a hedge, if that's the way the market moves in the future or maybe just how are you thinking about it ?

Mike Jackson -- Chairman, President and Chief Executive Officer

So to talk about the USA stores, I put it all in the Brand Extension category. And during the quarter, we were looking very closely as to where we invest time management and capital more aggressively and you can't do everything at the same time and we're then to be take a bit more patient view. Certainly in the Brand Extension in the whole field of parts and accessories, it's a great success and we have more demand than we're able to deliver. So the brand has accepted, the demand is there, the market assessment was correct, we have somewhat a mismatch with our sales history as to achieving a fill rate that realizes all the potential we're at 50% fill rate and Scott can talk in a minute, but -- but our plans to where that -- to take that you -- where you fully realize that the demand is there. Lance, has already mentioned that we have a -- we're at a progressed to the point where we had about 2 -- less than $0.02 loss in the quarter on the USA stores. But when you look at -- what we can do over in Customer Care, we decided to push our plans there, let another year unfold on the USA stores. And to your point, yes, make a $50 million investment with Vroom, have discussions with them over the course of 2019, see what comes from that, there's no decisions today, nothing to talk about today, but you put that all together, that's our approach for 2019.

Operator

Thank you. The next question comes from Michael Ward, Williams Research (ph).

Michael Ward -- Williams Research -- Analyst

Thank you, Can you hear me OK?

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, we can Mike.

Michael Ward -- Williams Research -- Analyst

Two things. First I'll share on the SG&A in the second quarter, was there anything unusual there or was that just some of the cost for the investment continuing on the AutoNation USA?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, the two things really impacting it are the Brand Extension investments, particularly in the Customer Care area. We continue to aggressively ramp in that area as well as some of the compression in new vehicle margins, which as you know, effects the denominator. So we feel like we're getting close to peak on those expenses and look to get to more normalized levels into next year.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes. And there is very important and that it was part of the the Vroom review we took during the third quarter where the Brand Extensions that we will emphasize in 2019 have the highest returns versus any investments -- incremental investment that was required that our SG&A can begin to move to more normal or traditional levels into 2019 and then where they were in the past couple of years, as we invested in Brand Extension.

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, Mike, and you can give core store OSGA and there is we're very comfortable there and what you're seeing flow through right now is the ramp up, particularly on Customer Care.

Michael Ward -- Williams Research -- Analyst

Okay. That's OK. And then you mentioned about Panama City is it just one store that was affected or were there others?

Mike Jackson -- Chairman, President and Chief Executive Officer

No, it's just one store. We haven't -- we had a fourth store there that was absolutely devastated...

Michael Ward -- Williams Research -- Analyst

I am sorry to hear that.

Mike Jackson -- Chairman, President and Chief Executive Officer

And our employees were significantly impacted, nothing that can't be fixed. But a lot of misery to go through. And a lot -- I think probably the highest damage we've ever had on any digital store, Cheryl?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, from a hurricane impact I think the great thing though, unfortunately having -- had experience in the area, feel like we have very good continuity plans in place and what was the third-worst storms that's hit the US. So we feel very good about that, we continue to pay associates through, as we have a really good plan in place that ensures continuity of associates happy to say that the stores reopened already. And I think given the state that it was then that's a significant accomplishment, so kudos to Lance's team and Scott's team for getting them operational as quick as possible in addition to our fantastic show from our facilities team.

Michael Ward -- Williams Research -- Analyst

And then Scott, you mentioned about AutoNation USA and I wasn't sure what you were talking about, you said there are currently five locations. Now it was that just for the auctions or was that some of the pre-owned sales?

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

Yes, that was Lance actually. We have five USA stores up and running, which as we already said in the third quarter loss less than $0.02 and we've made the decision not to build more USA stores in 2019. We'll let these stores continue to develop and move our emphasis over on Customer Care Brand Extension that's where we'll get the highest return next year with the least incremental investment.

Michael Ward -- Williams Research -- Analyst

Okay. And those are...

Cheryl Miller -- Chief Financial Officer, Executive Vice President

And Mike, we have four auctions open currently and there a branded under AutoNation Auto Auction.

Michael Ward -- Williams Research -- Analyst

Okay. So the five stores you're talking about are the pre-owned?

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

That's correct.

Michael Ward -- Williams Research -- Analyst

Okay. Thank you very much.

Operator

Thank you. The next question is from John Murphy, Bank of America.

Jourdain -- Bank of America -- Analyst

Good morning, guys. This is Jourdain, so I'm here on for John. So first question on your portfolio optimization effort. I think your original goal was $200 million in proceeds for this year. So just wanted to get a sense of where do you stand on that year-to-date and how should we think about the pace of divestitures for 4Q in next year?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes. So year-to-date, we've generated about $162 million of proceeds we are on pace to hit the $200 million mark. And then the pace in the future will depend on broader Brand Extensions, we will continue to look at select divestitures and we'll continue to provide updates on that as we get this next year, but we do continue to be on pace to hit the $200 million for this year.

Jourdain -- Bank of America -- Analyst

So is this mainly -- are you guys divesting under performing stores or is it geographic -- geography or brand-based?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Typically under performing stores.

Mike Jackson -- Chairman, President and Chief Executive Officer

It's really all of the above. We haven't sold anything with meaningful earnings, and then it's all of the above.

Jourdain -- Bank of America -- Analyst

Got it. And then on capital allocation, you guys have been pretty active on the share buyback front over the past few years, but it appears the pace has slowed materially recently, is this representative in anyway of a change in the capital allocation strategy, are you guys shifting away from the traditional path of buybacks and acquisitions for your strategic and future investments. I mean, how are you guys waiting those different investment opportunities?

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, the same as we always have. We've repurchased shares opportunistically, we always have to balance what we're currently looking at from an investment point of view. Cheryl, can talk about the investments that we made during the third quarter and the fact that we did the Vroom deal decided during the third quarter, so that was significant amount of capital that was committed in third quarter.

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, if you look at some of the capital that we spend during the quarter, you have Vroom, which happened just after the quarter, but obviously we were looking at that. Additionally, if you remember, we had some premium luxury add points to some of the capital we're spending is continued build-out of some of the stores in place where we had add points in the past. As well as Brand Extension and an uncertain additional IT investments in the digital space as well.

Jourdain -- Bank of America -- Analyst

Okay, great. Thank you for the color. And then, lastly, can you talk about profitability trends you've been seeing by segment and particularly for light truck, crossovers and SUVs. I mean, it doesn't have to be specific, I'm just trying to understand, how competitive these segments have become compared to earlier this year.

Mike Jackson -- Chairman, President and Chief Executive Officer

You're talking about the new vehicle business?

Jourdain -- Bank of America -- Analyst

Correct.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, I would say the competitive in the marketplace is very competitive from regardless of segment and affordability is an issue with rising rates with the consumer. You can tell them all day long that these are very attractive rates, all I know is money used to be free and now they have to pay for it. So that's an adjustment period that they're going through. I think for the manufacturers, shift the trucks is extremely profitable and we'll be fine.

Jourdain -- Bank of America -- Analyst

Okay.

Operator

Thank you. The next question is from Jamie Albertine, Consumer Edge. Your line is open.

James Albertine -- Consumer Edge -- Analyst

Great. Good morning, thanks for taking the question. And Mike, one to just say thank you for everything and certainly wish you the best as you're moving on here, I wasn't sure if this would be your last call or not, but you've done a great job over many decades and just want to say, we appreciate it and wish you the best in your next venture.

Mike Jackson -- Chairman, President and Chief Executive Officer

That's very nice. Thank you very much.

James Albertine -- Consumer Edge -- Analyst

As it relates to very quickly, just on the Vroom side and maybe I'm asking the same question in a slightly different way. Vroom has been around for a few years, as we understand it, you've talked about the last few quarters slowing the store growth for AutoNation USA stand-alone. Just wondering if we should be reading into here, or call that you're making, or something you're seeing in the data that suggests that maybe there is more online only demand than we thought prior and perhaps an omnichannel approach is the best next step for companies like yourselves. Just wanted to understand what you're seeing in terms of the metrics on the demand side for services that similar to what Vroom provides?

Mike Jackson -- Chairman, President and Chief Executive Officer

So we're certainly watching how all the developments in the automotive environment. And so if you look at how we approached autonomous service, we looked at all the players in there and came to conclusion, that we thought Waymo was in the lead by far with great leadership, great ownership and we felt they were the company we should partner with and that partnership came in the center, we're investing in capabilities to support Waymo vehicles without any near-term goals on profitability. And that relationship is developing in a very positive way, which I feel over time will open doors, very interesting. So that's our basic approach. And I would put Vroom very much in the same category. Now in this sense, we began with an actual investment in the company and that's all we have to talk about today. But I feel the same way about it that you look at the two companies, it could be an interesting development, but I could be sitting here a year from now and say to you, well, it was a great investment that was it. So you just don't know. And so it's firmly in the -- we will see category, but the way I think about it is the pre-owned market segment is approaching 40 million units a year. I think it's clearly going to the segment vis-a-vis new for the next several years. I've been saying that, so we want to be in it in a meaningful way. And I like to create different paths to success and I think this investment in Vroom is a possibility. But for today, it's an investment, I think it's a great investment. I'm excited about the investment, but I like the other factors around it. And so discussions will happen and we will see, but it's literally an investment today.

James Albertine -- Consumer Edge -- Analyst

Understood and that's very helpful. If I may just Cheryl from a modeling perspective, just to help us make out maybe the next few quarters, I know you don't provide guidance. But it does seem to be quite a theme here building new vehicle gross margins have been under quite a bit of pressure on a per unit basis. You've already been on absolute terms, one of the best among the dealers on F&I PVR, should we assume that what comes in terms of the expense, the losses on the new vehicle GPUs, should we assume you're making up at least a portion of that, if not all of that and F&I PVR going forward? Or am I drawing too much into that relationship?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, if you look at variable over time and we've had very good stability in overall variable, when you take into account the opportunity in CFS and we've always had best-in-class CFS and continue to feel very strongly about that area, new vehicles are competitive. So we really managed to total variable and then we want to make sure we continue to focus on Customer Care to grow that very stable part of the business and provides a nice counter cyclicality over the long term. So that's how we really think about the business and I think what you see right now in flow-through, is really the surge in the investments to continue to position in Brand Extensions and particularly in Customer Care Brand Extensions and a portion that is also digital investments, direct digital as well as investments similar to Vroom for optionality in the marketplace. And that's the broader context that we think about. But we do look at total variable as opposed to certainly we manage each through line items, but we do make sure that based on customer and market, we're being competitive in the way that brands and customers are approaching the market, which does change over time.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, so I could I couldn't agree with more with what Cheryl just said, we anticipated headwinds coming in the new vehicle business and to balance that we launched branded products in F&I, which are succeeding very well. And then we said, OK, there will be a shift from new toward pre-owned and have to realize that success. We said, OK, well One Price across the country. So that was quite an effort to centralize our entire pre-owned business and create the technology to run a One Price pre-owned business, but the customers love that's the report card. And we went down this unprecedented road of Brand Extension in Customer Care around Precision Parts accessories and AutoNation collision parts. And the demand is extremely high and to build the infrastructure and we had -- we have learnings from sales history now to do better ordering going forward, so that gives us confidence. Now we had to elevate SG&A to do all that, you can't -- there is no magic wand to create all that and not have the elevated SG&A. So -- but we're through all that. So next year, you will begin to see benefit of having those brand extended capability with the trend line back toward normalized SG&A. And of course I shouldn't leave out the USA stores, where we're up and running and are progressing about where we thought, but considering the other investments that we decided to make in the third quarter and the fact that those stores needs still time to maturity that we will not build additional USA stores in 2019. So that's the conclusion report card that we had promised you on this call for Brand Extension.

James Albertine -- Consumer Edge -- Analyst

Understood, thanks again. And best of luck.

Mike Jackson -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Armintas from Morgan Stanley. Your line is open.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Morning, thank you for taking the question. Maybe you could walk through some of the pros and cons that you've seen with AutoNation USA, some of the learnings as well as areas where you're excited about?

Lance Iserman -- Executive Vice President, Sales and Chief Operating Officer

Yes, I think so and this is Lance. So I would say some the areas that we've seen success is a couple of areas are, our average recommissioning and the process that we use a slightly different than our traditional stores and we've been able to drive our recommissioning cost down on several $100 over -- or below our traditional stores. This is also a One Price, one person selling environment. So we have one person take you from front to the back including paperwork and through CFS process. So we've been able to replicate near the original OEM stores results on used cars are very closed to replicating our profit margin in CFS. So those are the things we're very encouraged by and look forward to continuing to develop. And we have to -- some of our stores have sourced -- used cars very well from more by your car, Phoenix store is averaging 40 cars a month and we need to get the other stores up to that. So those are cars that they were buying out the streets from individual customers, which are typically drive the best margins just as trade-ins do in our traditional store. So those are the things, those are the areas we're really concentrating on and continuing to improve upon.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. And then you mentioned with the Brand Extension that the demand is there, but there is a mismatch on the fill rate, can you elaborate on that a little bit?

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

Sure. This is Scott. When we look at that obviously, we would direct with our own sourcing on parts. And when you look specifically at AutoNation collision parts, we're a large wholesaler of OEM parts. But on the aftermarket parts, we don't have as much of the demand history. We put together our own charting of demand and made assumptions to do that, but every month we get better with fill rates and inventory levels. So we're maturing quickly on that. And as Mike Jackson said earlier, as we get our fill rate up and our breadth of inventory up, the demand continues to stay in front of us and our sell rate continues to increase. So we're very excited about that.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Got it. Thank you for taking the questions.

Operator

Thank you. The next question is from Mike Montani, MoffettNathanson. Your line is open.

Ioana Alecsiu -- MoffettNathanson -- Analyst

Hi, thank you. This is Ioana Alecsiu on for Mike. Cheryl, so your 4Q guidance implies that the full year SG&A to growth ratio would be about a 100 bps higher year-over-year in 2018, just given the hit from the hurricane. Can you give us any sort of guidance on this metric for 2019, should we expect that step down and the rate closer to the 2017 levels?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Yes, we said, we expect the normalization and I think as you start to see us peaking here toward the end of this year on Brand Extension investments as you start to see that begin to trail-off next year and expect to see a normalization. We'll also need to see where the new vehicle market comes in because obviously, margins can pressure the denominator on that. But I think, overall, we'd expect that normalization. And even when you roll back previously, we had expected the surge Brand Extension investments, we've talked about that previously, you've seen that come through in the numbers, but again, we expect some reductions in that into next year.

Ioana Alecsiu -- MoffettNathanson -- Analyst

Okay. Thank you. And then I have one more quick one on the new GPU still seems under pressure. Can you give us any color on the outlook for 4Q or maybe something into 2019?

Mike Jackson -- Chairman, President and Chief Executive Officer

I'm sorry, what was the question, about new gross margin?

Ioana Alecsiu -- MoffettNathanson -- Analyst

Yes, new GPU.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, I think we saw strong replacement demand in Texas. And with that, we saw some better margins last year and in Q4, both in new and used. And I think they continued stair-step programs that we're seeing this year. We continue to have to make decisions on a store-by-store basis depending on where our targets are and where we think the tangibility of those targets. So it's a balance that it's very difficult because it's constantly changing from brand-to-brand and from store-to-store. So it's just about that we're trying to reach and it's -- so we continue to see the -- we feel like we're going to see the same thing continuing into next year.

Ioana Alecsiu -- MoffettNathanson -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) Next question is Rick Nelson from Stephens. Your line is open.

Rick Nelson -- Stephens -- Analyst

Thanks. Good morning. So you announced the Vroom investment today, previously the partnership with Waymo, Mike, I'd like to get your latest thoughts on how you see the future of the dealership model, how you see that evolving?

Mike Jackson -- Chairman, President and Chief Executive Officer

Well, I think the dealership is as relevant as ever over the next decade with high added value for its consumer and for the manufacturer. And retailers have proven to be very adaptable, and resilient, and willing to embrace the changes. If I look at it though, I think having scale and brand is a tremendous advantage more so today than ever, because of all the issues that retailers are going to be concurrent with. So I'd like our position and I'd like the investments that we've made over the last several years. I think it put us in a very good position. So I see us with taking scale, brand and digital capabilities to create these new opportunities and forming these partnerships, that investments the way we want to describe it, puts AutoNation in a unique position to perform in the years ahead.

Rick Nelson -- Stephens -- Analyst

Thank you for that. Also like to learn about your early progress on a CEO search and hopefully this isn't d last call Mike, it's been -- i'm working with you a number number of years.

Mike Jackson -- Chairman, President and Chief Executive Officer

So there is no update on the CEO search and there will not be an update on the CEO search until the announcement of the new CEO. There was no interim report.

Rick Nelson -- Stephens -- Analyst

Fair enough. Thank you. Good luck.

Mike Jackson -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Stephanie Benjamin from SunTrust. Your line is open.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Hi, good afternoon. Thank you for the question. I was just hoping if you could just provide a little bit more color on the Customer Care in investments and kind of decision to double down a little bit next year or focus the attention, if you could just maybe speak to some metrics or performance you saw during the quarter and kind of led to that decision, so just a

little more color there would be great? Thank you.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, the main thing that we're excited about is the high demand or our best regional parts and our collision parts it's always nice to have. Now we have somewhat of a mismatch that we will sort out between what people want to buy and what we put in inventory. And we have to make some adjustments and some additional steps in our logistical capability to get everything to the marketplace and we're putting in a bigger footprint than what we had originally envisioned because of the demand. And -- but if you look at the margins and the returns, it's definitely very exciting and we'll get the emphasis of our focus to make sure that all gets done and we finish to build that and it has to be done, which was already under way, which we accelerated already in the third quarter through year-end.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Got it. All right. Thanks so much.

Operator

Thank you. The next question is from Colin Langan, UBS. Your line is open.

Colin Langan -- UBS Securities LLC -- Analyst

Great. Thanks for taking my question. I think the initial guidance for parts and services just private-label strategy was about $100 million in incremental gross profit. I think year-to-date it's only around $50 million, I mean is the -- and that's actually without the core business, I mean -- so is it coming up shorter or would it be down if not for that or am I incorrect on that target?

Mike Jackson -- Chairman, President and Chief Executive Officer

I think it's on track. Scott?

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

We are on track. So we still are on pace for approximately $100 million. We are in the -- currently right now we're in the $70 million range. So we're very bullish on it.

Colin Langan -- UBS Securities LLC -- Analyst

And so would that imply that the core business actually will be down if it wasn't for this program? If I look at parts and services gross it's only $50 million year-to-date?

Mike Jackson -- Chairman, President and Chief Executive Officer

I'll do the math on it, but I think the underlying growth for the peer group was around 3% something like that, right? And we're at 7%. So you say the peer group is the base and we are different than the peers group because we have Brand Extensions. So we're outperforming the peer group by more than double.

Cheryl Miller -- Chief Financial Officer, Executive Vice President

The $100 million that we're talking about in Q wasn't all incremental this year, there were some of it into last year when we mentioned that. And I would also say if you just look at margin performance, we're over 45% for the last two quarters and it's -- that's historical highs for us to be in that range on it. But just the $100 million is on pace, some of it included the end of last year, because as you remember, we ramped up.

Mike Jackson -- Chairman, President and Chief Executive Officer

Get the exact calculation in front of me and we'll give you a phone call. I think it's close.

Colin Langan -- UBS Securities LLC -- Analyst

Got it, OK. All right. thank you.

Cheryl Miller -- Chief Financial Officer, Executive Vice President

But I think on warranty obviously is under pressure. And I think you've seen that throughout the sector. But I would say if you look at the broader performance for the year from where people expected it toward the end of last year. I'd say warranty has been a big negative factor and we had discussed that previously.

Mike Jackson -- Chairman, President and Chief Executive Officer

Yes, but that has -- Cheryl is absolutely right, so there is nothing to do with Brand Extension. So if you say something like warranty be down, more that's for every publicly traded group, faces headwinds in warranty. So just back in the envelope, we say, OK, what are the publicly traded groups growing their gross profit in Customer Care at the baseline that takes into consideration the fact of where the economy is, where the customer is, where warranty is going sort of just like a baseline, and it was AutoNation, where -- so the baseline is plus 3% and more plus 7%. You can just do the math on that differential. I -- we'll double check and get back to you.

Colin Langan -- UBS Securities LLC -- Analyst

Okay. And it came up a lot already, but SG&A, have you ever given color on the investment costs, the share that you're spending with the numbers. And what is the long-term target, if you could just remind us in terms of SG&A to gross?

Cheryl Miller -- Chief Financial Officer, Executive Vice President

The long-term target. We've talked about getting back below 70% and we think as we press Brand Extension investments as we get some additional efficiency and digital over time. We think that that's very achievable to get back below 70%. And then with respect to Brand Extension, we haven't called out discrete direct investments in distinct periods in the past.

Colin Langan -- UBS Securities LLC -- Analyst

Okay. All right. Thank you very much for taking my question.

Mike Jackson -- Chairman, President and Chief Executive Officer

Well, thank you everyone for joining us today. Thank you for the interest in our business very much appreciate your questions. Thank you.

Operator

Thank you. This concludes today's conference. Thank you all for joining.

Duration: 46 minutes

Call participants:

Robert Quartaro -- Vice President of Investor Relations

Mike Jackson -- Chairman, President and Chief Executive Officer

Cheryl Miller -- Chief Financial Officer, Executive Vice President

Lance Iserman -- Executive Vice President, Sales and Chief Operating Officer

H. Scott Arnold -- Executive Vice President-Customer Care and Brand Extensions

Chris Bottiglieri -- Wolfe Research -- Analyst

Michael Ward -- Williams Research -- Analyst

Jourdain -- Bank of America -- Analyst

James Albertine -- Consumer Edge -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Ioana Alecsiu -- MoffettNathanson -- Analyst

Rick Nelson -- Stephens -- Analyst

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Colin Langan -- UBS Securities LLC -- Analyst

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