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Autonation Inc  (NYSE:AN)
Q1 2019 Earnings Call
April 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome and thank you. Welcome to the AutoNation's First Quarter 2019 Earnings Conference Call. At this time, all participants are on listen-only mode. After the presentation, we'll 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.

Robert Quartaro -- Vice President of Investor Relations

Thank you. Good morning and welcome to AutoNation's first quarter 2019 conference call and webcast. Leading our call today will be Carl Liebert, our Chief Executive Officer and President and Cheryl Miller, our Chief Financial Officer. Following our remarks, we will open up the call for questions. Chris Cade and I will be available by phone following the call to discuss 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 charges -- 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 Chief Executive Officer and President, Carl Liebert.

Carl C. Liebert, III -- President and Chief Executive Officer

Thank you, Rob. Good morning everyone and thanks for joining us. Before we dive into our first quarter results, I'd like to take this opportunity to give you some highlights of my first 45 days. Let me start by thanking our 26,000 teammates, who gave my family and me such a warm welcome. It's truly meant a lot to us. Over the last 45 days, I've been in our stores and visited with several of our OEM partners and vendors, along with meeting many of our customers and engaging with our AutoNation teammates. We walked a lot and the customer care service space just as I did at Home Depot's 2,000 stores not that long ago. It was a great experience, which I will continue to do regularly.

Before I discuss first quarter results, I'd like to thank Mike Jackson for his guidance, as I transition into my role. I refer to Mike as founder 2.0 given the tremendous leadership he provided over the last 20 years to both the Company and the industry making AutoNation, the nation's premier automotive retailer. It is my honor to work with such a visionary leader.

We are committed to executing our operational strategy and our Drive Pink efforts to fund research to cure cancer, while enhancing the legacy of this great AutoNation team. Turning to our first quarter results today, we reported record first quarter earnings per share from continuing operations of $1.02 per share, versus $1.01 per share during the first quarter of 2018, a 1% increase on a per share basis. However, the first quarter 2019 results include restructuring expenses of approximately $3 million after tax or $0.03 per share. Going forward, my comments are on a same store basis, unless otherwise noted. In the first quarter, we made a strategic decision to focus on new vehicle margins and continued growth in penetration rates of customer financial service products.

This strategy optimized our total variable gross profit per vehicle retailed, which was up $200 or 6%. And our new vehicle gross profit per vehicle retailed which was up $134 or 8% compared to a year ago. Moving forward, we will remain committed to running our play, while seeking the optimal balance between new vehicle pricing and volume. The team delivered another record quarter in customer financial services gross profit per vehicle retail, reaching an all-time record of $1,904, which was up $124 or 7%. First quarter 2019 revenue totaled $4.9 billion compared to $5.1 billion in the year ago period, a decrease of 5%.

Gross profit of $836 million increased by 1% compared to $828 million in the year ago period. Customer care gross profit was $391 million, an increase of 4% compared to the same period a year ago, driven by our growth in customer pay up 5% and warranty of 7% compared to the same period a year ago. I'm extremely proud of our AutoNation teammates for running the play in delivering a solid quarter. We remain committed to executing our strategy and being driven to serve our customers.

I will now turn the call over to Executive Vice President and Chief Financial Officer, Cheryl Miller.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Thanks, Carl and good morning ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $92 million or $1.02 per share versus net income of $93 million or $1.01 per share during the first quarter of 2018, a 1% increase on a per share basis. The first quarter 2019 results include restructuring charges of approximately $3 million after tax or $0.03 per share. During the first quarter revenue decreased $278 million or 5% compared to the prior year and gross profit increased $7 million or 1%. SG&A as a percentage of gross profit was 73.4% for the quarter, which represents a 100 basis point improvement compared to the year-ago period. Strong new and used gross profit per vehicle retailed and our previously announced restructuring and cost savings plan drove solid SG&A leverage in the first quarter. We continue to expect full-year 2019 SG&A to gross profit to improve year-over-year compared to 2018. The pace of the year-over-year improvement will depend on gross margins, seasonality and the timing of certain brand extensions. The provision for income tax in the quarter was $34 million or 27%.

Floorplan interest expense increased to $39 million compared to $28 million in the first quarter of 2018, driven primarily by higher average interest rate, which rose in line with one month LIBOR and higher average Floorplan balances. Non-vehicle interest expense decreased to $28 million, compared to $32 million in the first quarter of 2018. The decrease was primarily due to lower average debt balances, as we paid down debt from free cash flow and lower average interest rate, as we refinanced higher cost senior notes with lower rate commercial paper in April of last year.

At the end of March, we had $2.4 billion of non-vehicle debt, a decrease of $161 million compared to December 31st, 2018. Other operating income was $8.7 million in the first quarter of 2019, compared to $10.3 million in the prior year, a decrease of $1.6 million. First quarter 2019 other operating income was primarily comprised of gains related to store divestitures. During the first quarter, we repurchased $1 million shares for $34 million at an average price of $34.34 per share. AutoNation has approximately $230 million of remaining board authorization for share repurchase.

As of March 31st, there were approximately 89 million shares outstanding, not including the diluted impact of certain stock awards. Capital expenditures were $40 million for the quarter compared to $79 million in the prior year. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our leverage ratio decreased to 2.9 times at the end of the first quarter compared to 3.1 times at the end of the fourth quarter and our total liquidity was approximately $800 million at the end of March. Our strategy delivered solid results in the first quarter. We will continue to focus on operational execution in our core business, while executing on our brand extension strategy and allocating capital to drive long-term shareholder value.

I'll now turn the call back over to Carl.

Carl C. Liebert, III -- President and Chief Executive Officer

Thanks, Cheryl. It's been energizing 45 days and I've learned a lot. As we continue to move forward in this next chapter and develop our story, we will focus on customer service, accelerating innovation through our brand extension and digital strategies and most of all, execution. We are growing and learning together as one nation, one team with one purpose to serve and delight our customers.

Operator, we will now open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question will come from Bret Jordan. Your line is open.

Bret Jordan -- Jefferies -- Analyst

Hey, good morning, guys.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Good morning, Brett.

Carl C. Liebert, III -- President and Chief Executive Officer

Good morning, Brett.

Bret Jordan -- Jefferies -- Analyst

A question on the pricing strategy around new, I mean obviously some great improvement in gross profit per unit, with a negative impact on units. Is there sort of a level of new unit trend that you're comfortable with, I guess to some extent if you were to shrink units to the point where it hurt fixed leverage I guess that would be a problem. But could you tell us, maybe how you're setting this price model?

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah, I'll start and then Cheryl can jump in. I think one of the things in this industry and you know as well as we do, we're going to continually balance price and volume throughout this process. What I'm really proud of the team though is, it's easier to do that when you're managing your inventory. And we -- as we speak about how we serve our customers and manage that price volume equation, it's ensuring that we have the right vehicles on our lots to serve our customers. And we're not relying on discounting and we're not reliant on into the quarter place from the OEMs in order to deliver that. That gives us the flexibility to serve those customers.

But I think the key aspect of that effort though is being able to leverage a strong customer financial services offering and deliver that to our customers in a unique matter that only AutoNation can do. And Cheryl, you want to talk a little bit about the mix related to it?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, but we like the balance that we struck in the quarter and certainly when you look at the $200 improvement in total variable gross, you saw a great outcome from that. At those levels, you also saw the benefit that we got in SG&A leverage with that improving 100 basis points year-over-year. To your point, we are careful with the units, because we don't want to lose too much of the F&I on a dollar basis, if we go deeper down in units, but we do feel comfortable with the play that we struck, love the fact that we had the highest new vehicle PVR that we've had in about two years. So really like the results from that perspective. And we'll continue to make sure we hit that right optimal balance between units and gross profit on the new side.

Bret Jordan -- Jefferies -- Analyst

Okay, great. And I guess a quick second on the brand extension strategy, you know sort of maybe where you are around some of the parts initiatives and I always ask that question, but is, is there a way that we can sort of start maybe hitting that from a -- how much is it contributing to revenues -- from a revenue standpoint or just sort of give us some perspective of where you are?

Carl C. Liebert, III -- President and Chief Executive Officer

Okay. Well, I tell that where we are and I'll let Cheryl take the second part of that is, well, I'm pleased, we have six distribution centers now that are up and operating for our parts business, with two forward stocking locations. We'll open our seventh distribution center in May. And we continue to see the brand extension strategy as significant-- significant both in serving our own stores in the customer care and service side, but also serving our 83 collision centers and executing that. So it is in the early innings, but we are pleased with what we see. And building out a global supply chain to support where we're going, it's something I've done in prior life with a brand similar to AutoNation called Home Depot, we're excited about it, but we are in the early innings. And Cheryl, if you want to talk about the revenue profit split, you move ahead.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, Bret when I look at it, the biggest marker to me is really the improvement in customer care growth as a percentage of revenue. So when I look at margin structure, that's up 60 basis points year-over-year. So we're still investing in that. I think the great thing was, we were able to pull through SG&A leverage even while we continue to invest. But I do like the improvement in margin you've seen that over the course of several quarters with us with that type of margin expansion, particularly driven by the parts initiatives that we have in place when we started off with the brand extension in brakes, batteries, et cetera.

Bret Jordan -- Jefferies -- Analyst

Okay, great. Thank you.

Carl C. Liebert, III -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Derek Glynn with Consumer Edge Research.

Derek Glynn -- Consumer Edge Research -- Analyst

Yes, good morning. Thanks for taking my questions. I just want to dig into F&I a little bit and despite a mix shift to use, you were really able to push that PVR number to new heights during the quarter that -- during the quarter. And can you just elaborate on that on what's driving it, and how sustainable that growth is in F&I?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes, as you guys recall, F&I was our first brand extension. So two-thirds of profitability comes from the product side with roughly a third coming from the finance side. And as we pushed into the AutoNation branded products which were really well received by the customer, you see the continuation of the profitability in that segment. As you correctly point out, when you look at total PVR, we do expect potential pressure there only from a mix perspective. So we feel very good about the continued pull-through of the F&I products. But just keep in mind that when you stepped in more used units than new, the dollar could weigh down potentially as a result of mix shift. So we feel very good about the broad sustainability of the products and financing for our customers.

Derek Glynn -- Consumer Edge Research -- Analyst

Got it. And then, Carl, can you just discuss the key learnings you've had over the last couple of months on the job and walk us through and elaborate on for near and medium-term priorities?

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah, it's great. Well, first and foremost, what we want to do is set out and get into the stores and spend some time there. My first week on the job though, we took the Executive Committee and we started with Waymo on the West Coast. And really spent some time with them and our partnership with them and then what we're doing, followed by store visits in the West, followed by market reviews where we -- I was able to dive into the performance of most of our stores in the West. From there we were out back with several of our OEM partners.

I still have a long way to get through -- to get through them. I'm probably a third of the way through at this point with next two or three weeks accelerating more. And then I've had the opportunity while back here in Fort Lauderdale in our South Florida stores to spend time both with customers and teammate. I would describe right now is -- for me as I am in a listening journey and that listening journey is to kind of harness the power of our 26,000 teammates more or less though these General Managers who run our stores for me, they are the center of our universe.

So what we spend a lot of time is asking those general managers, what can we do to help you serve customers better, what do you need from us to help you execute the play. And how do we accelerate this effort that we have around brand extensions. And so that's where we spent the bulk of our time turning in Q2, I've got to spend some time with Scott Arnold and our team in the collision centers, I'll be out in stores here as much as I can. And I think by the end of Q2, it would it be a great opportunity for me to give you the layman's version of what it means to move from retailing at scale to automotive retailing at scale and I'm excited to share that.

Derek Glynn -- Consumer Edge Research -- Analyst

Got it. Thank you.

Carl C. Liebert, III -- President and Chief Executive Officer

Yep.

Operator

Thank you. Our next question is from Armintas with Morgan Stanley.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great, thanks for taking the question. Carl, just curious here with your background in digital. If you have any incremental thoughts on the digital strategy, I know it's early days, but any sort of things floating around your ahead after this 45-days in?

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah. Great, thank you very much and just a great question. One of the things I'm fortunate is, prior to me AutoNation had made some commitments to invest in digital and invest in the online experience with autonation.com.

So I feel great about what I'm inheriting. And the opportunity though as we talk to the team is to look for ways where we can move from a dot.com type of experience to a mobile type of experience and mobilizing that for both our customers and our teammates. And so early 45 days in, there's opportunity to digitize the inside, that's all the things that our teammates have to go through that are either paper-based or manual and process. And then opportunities to mobilize the digital experience for our customers, specifically as it pertains to service, how to set up a service experience or service appointment, as well as how to shop and find and inventory that the customer would want.

So I'm excited and energized around that effort. We've got several thoughts and we're working on several pilots that we could use as spreads in a natural way to go test and learn some new capabilities down the road and look forward to sharing those with you, when we have those up and running.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. And Cheryl, maybe for you, $8.7 million of gains related to store divestitures. How do we think about that opportunity through the rest of the year?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, as you know, it's a little challenging to forecast the exact cadence of those. I think broadly though, we continue to optimize the portfolio, you've seen us do that over the last several years, as we raised capital to reinvest in brand extension. We still have some further to go, but I would say that the pace of that has likely flowed from prior. So I would think of that as opportunistic going forward.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay, thank you so much.

Operator

And thank you. Our next question is from Stephanie Benjamin with SunTrust. Your line is open.

Stephanie Benjamin -- Suntrust Robinson Humphrey -- Analyst

Hi, good afternoon. I just wanted if you could talk a little bit about...

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Good afternoon, Stephanie.

I'm sorry, please continue Stephanie.

Stephanie Benjamin -- Suntrust Robinson Humphrey -- Analyst

Okay, sorry. Thank you. I was hoping you could talk a little bit about your used before -- portfolio, your ability to continue to drive good service and F&I on that side, as well as with your USA stores if there is any update or anything you're seeing just with the overall used strategy. Thanks.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes, we like the improvement year-over-year in used gross profit. So as we look at total used growth, we feel very good about that. We are very focused still on the one price strategy. So as you saw us, when we first implemented that, we needed to get that settled within the organization and that is going extremely well. So we like the momentum that we're seeing on that part of the business. Certainly, that's an area of opportunity for us on the service side. And as we continue to improve our service offerings, as we pull for additional cards within our business that we see a lot of upside opportunity, not just in the reconditioning other units, but also in carrying for those units for our customers, same as F&I. So when we think about the total cycle of used, we like the potential profitability that we continue to see in F&I which remained strong, as well as the incremental opportunities we see in servicing these vehicles. We've continued to service vehicles that are further out on the age curve and you heard the industry on the dealer side talk about this several years ago where we are focusing on the in warranty period and we continue to push on ways to extend out that service cycle used for our customers.

Stephanie Benjamin -- Suntrust Robinson Humphrey -- Analyst

Great. Thank you so much.

Operator

Thank you. Our next question is from Rick Nelson with Stephens, your line is open.

Rick Nelson -- Stephens -- Analyst

So F&I another new high $1,900 (ph) a unit, can you discuss the drivers there and the opportunities to expand that and are there any limits as to where you see that potential?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes, on the F&I side, Rick, certainly we continue to see the opportunity to increase penetration at certain stores. So we always work in quartiles and there's always an opportunity to focus on the stores as we talked about. You have to consider the fact that with used units growing faster than new units which have hit plateau, certainly the dollar mix will wait differently on used, which is typically $300 less on a per vehicle retailed basis than the new side. But we still view there is good opportunity and very solid potential. And again, with that being our first brand extension, you see the success in the customer acceptance of the AutoNation brand.

Rick Nelson -- Stephens -- Analyst

All right. I got you. Also the strategy shift to push marginal versus volume, how are you pleased with the outcome, is that a long-term strategic shift in (inaudible)?

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah, I guess excellent question, it is the play and execution model that we're running now. And the way I caveat that is, we want to be very thoughtful and mindful to what we're doing at this stage of the economic cycle that we're in. And really staying close to our new vehicle inventories and making sure we have the right vehicles to offer to our customers, especially when you look at retail being down, we want to make sure that we're not left on hand with a lot of inventory that we have to play a lot of games at the end of the month or into the quarter to move that through. So it was really economic driven. And what I'm pleased about is that the team responded in a significant way in Q1. And so you can expect us to run that for the next quarter and it continue to until we get a little better handle on what economic climate might look like.

Rick Nelson -- Stephens -- Analyst

Fair enough. Thanks a lot and good luck.

Carl C. Liebert, III -- President and Chief Executive Officer

Thank you.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Thanks, Rick.

Operator

Thank you. Next question is John Murphy, Bank of America Merrill Lynch.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. Just a another follow-up question on the change in strategy here, Carl, I mean, the automakers are looking always deliver more and more vehicles and hopefully you sell them through. So when you run the strategy of preferencing your new GPU over volume, it kind of might create some friction with the automakers and historically has. How is the -- how are your early discussions been going with the automakers in D.C., that kind of was a risk in being able to keep this strategy up.

Carl C. Liebert, III -- President and Chief Executive Officer

Well, I kind of start with my early conversations with many of our OEM partners, I've been extraordinarily transparent on the play that we're running and why we're running that play. I believe we share the same passion and that is to create loyal customers in those brands for life. And how we do that when customers come into AutoNation store with regardless of franchise is creating a great experience that is both transparent and trustworthy.

I know this conversation having run manufacturing in highly dependent overhead businesses like appliances or a Wild Go at GE, you want to run your factories all out and you want to make sure you're hitting your targets at as they see fit. I think it's a balance that we have to strive because of the customer experience we want to deliver in our stores. And it's one of the reasons I'm so proud of our operating team is, we are very careful and mindful of having the right inventory at the right time. And I anticipate those will be more friction filled conversations down the road and we're going to have to make those choices with our OEM partners. But the intent we have is to deliver a peerless customer experience for AutoNation customers. And I think the manufacturer share in that and that will be the conversation we have. I'm guessing it will continue to ramp based on our current performance.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, John I think it was great to as that the breakeven for the manufacturer it is much lower than it what -- than it was previously, so as we think about getting into this plateau with retail units down single-digits across the industry, we feel like the manufacturers in many cases have their houses in order. And so comparatively we feel like the dynamics are much more orderly and gives us an opportunity combined with interest rate being lower right to the fact that we're not getting interest rate hikes into this year, gives us a great opportunity to continue to focus on an orderly like bring down of inventory that makes sense for the manufacturers as well.

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah and I'd add to that Cheryl, the conversations I've had so far, the OEMs have embraced the fact that we really and our efforts around satisfying customers in delivering that customer experience. They've been extraordinarily -- I'll call it supportive this early stage. And what I've asked each one of them that have net worth is if they want to pilot or experience or try something different, we want to be the brand they come to because we want to learn alongside them on how to serve customers better with regardless of brand. And we want to be the laboratory that helps them sharing that vision we have for our customer experience.

John Murphy -- Bank of America Merrill Lynch -- Analyst

It sounds very logical and good. Just a second question, as we look at the segments here, it looks like domestic was particularly challenge in the quarter relative to everything else. Is there anything specifically going on there, or is this maybe the strategy that's driving this. I'm just trying to understand you had a big revenue and profit decline there more so than any other two segments..

Carl C. Liebert, III -- President and Chief Executive Officer

Yeah, I'll -- this is one of the that Mike would love to weigh in on, he is not here with us today, so he's handed the reigns over, but this is -- a lot of the domestics are in the transition from sedan to SUV and you specifically think about what Ford is trying to do. And you heard their earnings yesterday, they -- it was great to see them talk about the strength of trucks and what the play they called and what they're running. It's going to take time though to as kind of that I'll domestics move away from sedans into the SUV model. One of the things that we're really ensuring -- we're focusing on with them is, do we have the right inventory, can we operate in our environment to support that. But they're going through a little bit more of turmoil with how they thought about their strategy to serve customers and I use Ford as that example.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great. And then just lastly and Cheryl I apologize because my phone broke up, I think when you're talking about this, the SG&A on a year-over-year basis, I think you were saying might be a bit lower, I just want to make sure I got that right. And if there's anything on cadence through the year with investment, I apologize you may have talked about it, but my phone broke up for a second?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

So what we said was we expect -- we said on last quarter then we've reiterated, is that we expect this year's total year SG&A as a percentage of growth to be lower than last year. So last year's was just under 74%, so that's the broad expectation. Certainly in the first quarter when you saw the increase in total variable growth of $200, you get a lot of leverage off of that. So we had the 100 basis points of year-over-year improvement in Q1. We did expect more of the improvement to come toward the second half of the year. And as you know, it's not linear during the course of the year.

So we do expect definitely improvement during the year and we have -- when you think about the $50 million of restructuring action, those are already in place. So you did see the benefit of some of those in Q1 already. And you'll continue to see some of that throughout the year. But as you know, we're also still investing in brand extension. So that's why we haven't given a particular guide below last year's level at this stage.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And is it fair to say that the incremental investment that was -- is pressuring SG&A will be is -- be completed this year and then as we look at forward years, this will ease and the benefits will come through, is that a fair statement? Or is there more to come?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, what I would say is, I'm hopeful that we'll continue to do more brand extension investment next year, but hopefully what we put in place and start to see as the flywheel effect of those starting to generate returns into equation, as we've talked about the repair and the collision parts side we're still in ramp phase there. But I'm hoping to be further invest in brand extensions next year, but to be reaping the benefits of leverage during the course of this year into next year.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great, thank you very much.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Thanks, John.

Operator

And thank you. (Operator Instructions) And our next question comes from David Whiston with Morningstar.

David Whiston -- Morningstar -- Analyst

Thanks, good morning. Cheryl, I wanted to start with the balance sheet. You've got or $600 million worth of bonds due in -- under two years. Can we expect to refi transaction this year when the markets are open and is that debt load why you're being less aggressive on buybacks and then I think I don't like where you to be given where your stock was recently.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, so the great news is, we have a great cash flow generating business. So we certainly with our investment grade ratings and one of the things Carl for his estimates in his tour was he went to the rating agencies, there we had a chance to visit all three investment grade agencies, as they rate us. And so we feel extremely comfortable with the bonds exactly how we choose to finance that we'll see over the next couple of quarters here. And we certainly have plenty of time, we have an outstanding reprice commercial paper facility, where we issued very favorable rates because of our investment grade ratings in that market and certainly the bond market with our supportive bank group and great fixed income investors is always fully opened up.

And when we think about capital allocation, certainly that something we spend a lot of time on, you see us currently allocating capital toward the brand extension investment. You've seen us do share purchase opportunistically. So we certainly feel like we've got a great balance sheet with 800 million of liquidity and we will continue to put it toward the highest ROI. You've seen us scale back a little bit on general capital within the dealership base, so we're making sure that our stores are in great shape. What we've already passed through some of the major OEM imaging cycles over the past couple of years. And so we're very bullish on our ability to access and look at the total capital picture as we go forward.

David Whiston -- Morningstar -- Analyst

Okay, thanks. And Carl, I wanted to ask you a long-term question about how you feel about making investments that can be really not have any benefit for many, many years out, an example of course is USA stores and I'm asking this in light of what Sonic reported yesterday with their Aquapark project which is finally hitting some traction after a long number of years. And I'm just curious, are you that patient generally speaking with investments?

Carl C. Liebert, III -- President and Chief Executive Officer

Well, look patience to a certain degree, I think we're going to be disciplined with our investments and Cheryl was smiling, Cheryl looked at me that first thing to do is take me up to see the rating agencies, probably because I came from a AAA or AA plus company like USAA and wanted to put me out there before that whereas -- that shine wears off. I do believe though as we think about test and learn and running pilots, we want to do that in a responsible way as we go forward. But I also want to make sure that we show that disciplined execution of putting quarter after quarter of results on the board and delivering on what we said we would do before we entertain those kind of, I'll call it strategic bets for the long term, I think we owe that and that builds credibility. And I think by building credibility it fits in those conversations where we want to go do some things that won't pay back in the current year, but will pay back in the planning cycle. But we have some work to do with the current play we're running right now first.

David Whiston -- Morningstar -- Analyst

Okay, very helpful. Thanks everyone.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Next question is from David Tamberrino with Goldman Sachs.

David Tamberrino -- Goldman Sachs -- Analyst

Great, thanks for taking my questions here. First question is on the parts and service side of the business, I know there's been an uptick in warranties. Do you expect to see an acceleration in that business for the remainder of the year?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, warranties are always challenging to predict. So as you know last year, those were a drag on comps because warranty levels were down, the industry did see some decent warranty comps in the first quarter, but it's extremely hard to predict those based on recall and warranty cycle.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. Then maybe on the supply side, how is your technician retention tracking? Where are you in terms of capacity utilization if you will for your service base and what are the challenges if any are you seeing from that, again the technician retention side.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, the great thing for us is, I think from a physical plant capacity standpoint is something we continuously work on. So we feel really good about our plans there and if there's locations where we see great opportunities we will add service base and that's one of the capital uses that we think can be very favorable and have a good ROI, where it makes sense. From a technician retention standpoint, the nice thing about selling over 30 different brands and having a large technician workforce is that we can work with our different technicians and offer them additional opportunities, whether it's in market, whether it's additional certifications and training or transferring between location. So we feel good about the capacity that we have today certainly in collision, capacity and tax always are a bit of a challenge, and that's something that we continue to work through. But from overall customer care, we feel very good and particularly with the wage grid that we have in place, so, one of the things that we've done between training and some areas of focus such as that is we really provide a good upward path for our technician population.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. Last question from me or last line of questioning is just looking at new day supply, 77 days the end of the quarter, it's up from 69 sequentially up from 60. Do you expect that to be were down, you know I understand the line of question earlier with focusing on new gross profits, maybe a little bit less on units. But curious to hear your thoughts on -- if the industry and the OEMs are really going to work with you or look at themselves and say we need to shut or cut some production or if maybe they're going to continue to look to turn on incentives in order to help work down those dealer inventory levels.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Well, I will take that and Cheryl please feel free to jump in. I think we're pleased that where we are, we have one less selling day in the quarter this year than we had last year. We think we've done a great job of having not only that day's supply inventory, but having the right inventory to do that. And we know we're ahead of the rest of the industry in that regard. And so what we're focused on is that discipline that eliminates or prevent us from getting into the end of the quarter and having to discount heavily, which we know creates all sorts of anx not only in our stores, but it creates friction in paying for the customer and if they feel like they're getting serviced the right way.

And I think our ops team certainly has a lot of experience, we've had to manage through cycles where inventory was too tight and they've had to manage through that and we've had to manage through cycles where we had too much. And I think certainly with the single digit slight type declines that the industry has started to see a new something that we expect and I feel very comfortable that our ops team is well positioned to work with the manufacturing partners to get us to normalized inventory levels.

David Tamberrino -- Goldman Sachs -- Analyst

Okay, all right. Thanks for the additional color.

Carl C. Liebert, III -- President and Chief Executive Officer

Thanks. I think we have time for one more question.

Operator

And our last question is from Rajat Gupta with JPMorgan.

Rajat Gupta -- JP Morgan -- Analyst

Hi, good morning. Thanks for taking my question. Just wanted to follow-up on both the SG&A and parts and services space, just starting with parts and services. Based on the other brand extension strategies are in place, I mean it is -- so what is the outlook for the remainder of your income in gross profit drill down, do we see an acceleration from the 4% level that you had in the first quarter. Just trying to understand what the outlook is baked in for the full year?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, we continue to be optimistic about that part of the business. Certainly, it's approaching 50% top of the company and when you think about that compared to broad retail, that's a fantastic thing we have from cash flow generation perspective. So when we think about the components of it certainly there were some pressure in the quarter, the loss of some of the pre-delivery inspection income with the new units being down. So that puts pressure and now you see pretty solid pull-through on the margin side, with a 50 basis point increase in gross margin. So as we look at that business on a go-forward basis, not just this year but into next year, we feel like that's a critical component for us and it's also a critical differentiator for our company versus broad retail.

Rajat Gupta -- JP Morgan -- Analyst

Got it and makes sense. Just to follow up on John's question on SG&A, I mean it looks like 1Q was below what one would have expected from a seasonality perspective, I mean saw the restructuring benefits coming through, but for the rest of the year from a modeling perspective, I mean is modeling off 1Q based on a normal seasonality a good way to look at the rest of the year, you talked about some brand extension initiatives potentially later in the year. So just trying to get a little bit more granular on how should we see that progressing through the year?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yeah, the broad guide that we provided is below last year. So we would expect to see a below that 74% level. Certainly Q1 came out with strong performance driven by in part some great leverage that we saw with the $200 increase in total variable gross profit. We do have the restructuring plan in place, those actions are completed. They're not disproportionately into Q1, we do expect to see some of that throughout the year, but I always -- I'm cautious with the seasonality in our business and the timing of brand extension to extrapolate one quarter trend.

Rajat Gupta -- JP Morgan -- Analyst

Understood. Thanks for taking my question.

Carl C. Liebert, III -- President and Chief Executive Officer

Thank you very much. Thanks everybody for joining us. We appreciate it. Have a great weekend.

Operator

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

Duration: 44 minutes

Call participants:

Robert Quartaro -- Vice President of Investor Relations

Carl C. Liebert, III -- President and Chief Executive Officer

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Bret Jordan -- Jefferies -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Stephanie Benjamin -- Suntrust Robinson Humphrey -- Analyst

Rick Nelson -- Stephens -- Analyst

John Murphy -- Bank of America Merrill Lynch -- Analyst

David Whiston -- Morningstar -- Analyst

David Tamberrino -- Goldman Sachs -- Analyst

Rajat Gupta -- JP Morgan -- Analyst

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