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Asbury Automotive Group (NYSE:ABG)
Q2 2019 Earnings Call
Jul 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Asbury Automotive Group Q2 2019 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matt Pettoni.

Please go ahead, sir.

Matt Pettoni -- Vice President of Finance and Treasurer

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's second-quarter 2019 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's second-quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with us today are David Hult, our president and chief executive officer; John Hartman, our senior vice president of operations; and Sean Goodman, our senior vice president and chief financial officer.

At the conclusion of our remarks, we will open the call up for questions, and 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, and 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 2018, any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today.

We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measure on our website. It is my pleasure to hand the call over to our CEO, David Hult. David?

David Hult -- President and Chief Executive Officer

Thanks, Matt, and good morning, everyone. Welcome to our second-quarter 2019 earnings call. We achieved solid results in the second quarter, with record adjusted EPS of $2.38, a 14% increase over last year. We continue to experience new vehicle margin pressure, however, we were able to grow our total front-end yield by over $50 per vehicle, grow parts and service revenue by 10%, and decrease our SG&A as a percentage of gross profit 60 basis points to 68%. We are making good progress executing on our vision to be the most guest-centric company in the automotive industry.

Our omni-channel approach is multidimensional and encompasses all aspects of the business. As a reminder, in late 2015, we began changing our marketing approach starting with the creation of an in-house digital marketing team. This team has transformed our social media, online and mobile marketing, which has improved the efficiency and effectiveness of our marketing spend. In 2016, we revised and relaunched our online service appointment tool to provide a more convenient option for our customers to schedule service. In the first quarter of 2017, we launched our online sales tool called PUSHSTART, which enables our customers to complete a transaction online and take delivery at home. This year, we added an online loan marketplace.

This functionality allows customers to select their preferred financing alternative from specifically tailored offers from multiple lenders. This is an industry-first. In late 2017, we launched our guest experience center, which consists of brand-certified digital sales specialists that are able to effectively manage online and telephone customer interactions. Last year, we launched our online collision estimator app, giving customers a user-friendly way easily get collision estimates from their mobile device. Earlier this year, we dedicated a store to become our pilot dealership of the future, where we are testing alternative technologies and processes to optimize the model for the future. Some of the innovations that have been implemented include: a tablet-based buying process, enabling guests to purchase a car in a fraction of the time that would typically take at a traditional car dealership; self-service kiosks in the service lane that allow our customers to experience improved speed, convenience and transparency during the check-in process; we also recently added a service tracker software that allows our customers to track online the progress of their car through the entire process.

We expect this software will enhance both transparency and the guest experience, while at the same time, reducing the number of inbound status calls. This holistic transformation of our business involves changes to almost every aspect of our business, including the culture and environment in our stores. While we are focused on being at the forefront of innovation in our industry, we believe that success is driven by a well-designed plan and thoughtful execution rather than simply speed of implementation. We are confident that our investments in creating an unrivaled guest-centric experience will continue to yield attractive returns. I will now hand the call over to Sean to discuss our financial performance. Sean?

Sean Goodman -- Senior Vice President and Chief Financial Officer

Thank you, David, and good morning, everyone. The second quarter marked another record performance with adjusted earnings per share of $2.38. Overall, compared to the prior-year second quarter, our revenue increased by 5%; gross profit increased by 6%; gross margin of 16.4% was 30 basis points higher than last year; SG&A as a percentage of gross profit improved by 60 basis points to 68%; adjusted operating margin increased 10 basis points to 4.7%; adjusted income from operations increased by 8%; and adjusted earnings per share increased by 14%. Net income for the second quarter of 2019 was adjusted for an $11.7 million pre-tax gain or $0.45 per share on divestiture of our Nissan store in Houston at a $300,000 pre-tax gain or $0.01 per share on sale of vacant land. As a reminder, in the second quarter of 2018, we adjusted for an approximately $700,000 pre-tax gain from legal settlements or $0.03 per share. Our effective tax rate was 25.3% for the second quarter of 2019, compared to 25.8% in the second quarter of 2018. Looking at expenses.

SG&A as a percentage of gross profit for the quarter was 68%, an improvement of 60 basis points over last year. When comparing this quarter to the prior-year second quarter, it is worth noting that last year, we experienced losses from two hailstorms. Efficient SG&A management is in our corporate DNA. Note also that many of our investments, including our omni-channel development costs and our investments in benefits for our front-line associates flow through the SG&A line on our income statement. SG&A expenses in the second quarter reflect a favorable business mix, solid returns from our omni-channel investments and certain investment timing adjustments as we fine-tune our ideas and test alternatives with the goal of optimizing the return on investment. While we expect SG&A as a percentage of gross profit to be higher in the second half of the year than the first half, given the results for the first half of the year, we now expect our annual SG&A as a percentage of gross profit to be between 68% and 69%. With respect to capital deployed, during the quarter, we spent $12 million on capital expenditures and $4 million repurchasing our common stock.

Our remaining share repurchase authorization stands at $70 million. We continue to optimize our store portfolio. During the quarter, we divested our Nissan store in Houston. This store generated approximately $90 million in annual revenue. In the third quarter, we expect to close on two acquisitions, which we anticipate will generate approximately $175 million in combined annual revenue.

One of these stores is in Indianapolis market, our eighth store in this market, and the other is in a new market for us. We plan to enter this new market using the store as an anchor, and we plan to follow a similar market rollout strategy to what we have achieved in the Indianapolis market over the last two years. At the end of the quarter, our total leverage ratio stood at 2.8x and our net leverage ratio at 2.2x. While this is below our target net leverage range of 2.5 to 3x, we do believe that the additional financial flexibility positions us well to opportunistically capitalize on expected attractive future capital deployment opportunities. Our floor plan interest expense increased by $2.5 million over the prior year, driven by increases in both the LIBOR rate and inventory levels. From a liquidity perspective, we ended the quarter with $10 million in cash, $87 million available in the floor plan offset accounts, $116 million available on our used vehicle line, $235 million available on our revolving credit lines and $177 million of undrawn mortgage facility. And I would now like to hand the call over to John to walk us through the operating performance in more detail.

John Hartman -- Senior Vice President of Operations

Thank you, Sean. My remarks will pertain to our same-store performance compared to the second quarter of 2018. Looking at new vehicles. While SAAR for the quarter was at 17 million units or 2% below last year, we focus on retail SAAR, which was down 3% for the quarter. In this lower retail SAAR environment, new unit sales decreased 1.6% outperforming the market.

Overall, our new car margin was 3.9%, down 50 basis points from the prior-year period. Although we experienced margin pressure across each brand segment, our high import brand mix pressure the margin. We were able to offset the margin pressure by strengthening F&I. Our total new vehicle inventory was at $895 million and our days supply was 86 , up 14 days from the prior year and above our target range of 70 to 75 days. Turning to used vehicles. Unit sales were flat from the prior year, and our gross profit margin of 7.1% represents a gross profit per vehicle of $1,554, down $13 from last year.

Our used vehicle inventory of $162 million is at a 33 days supply, up two days from the prior year and within our target range of 30 to 35 days. The used vehicle results this quarter fell short of our expectations, and we are focused on operational improvements to profitably grow this part of our business. Turning to F&I. Total F&I gross profit increased by 7% and gross profit per vehicle increased by $128 or 8% to $1,659 from the prior-year quarter. When we think about gross profit per vehicle, we look at the total front-end yield, which combines new, used and F&I gross profit. This provides the best view of our true profit per vehicle sold.

In the second quarter, our front-end yield per vehicle increased to $3,150 from $3,096 last year. Note that our total front-end yield has remained stable over the past decade. Turning to parts and service. Our parts and service revenue increased 8% and gross profit increased 6%. This was achieved with a 5% increase in customer pay and a 19% increase in warranty. Finally, I'd like to share a brief update on our omni-channel initiatives.

Our PUSHSTART online sales are up 29% from the prior year and represent approximately 9% of our total retail unit sales. We believe that this is partly attributable to new functionality that we have added to PUSHSTART. This includes the online loan marketplace that David described earlier, the ability of customers to scan driver's license, registration and insurance documents and the ability to upload trade-in photos for an appraisal. We continue to grow traffic utilizing our digital parts and service scheduling tool and we reached a record of 128,000 online service appointments this quarter, up 26% from the prior year. In addition to our omni-channel strategy, the other part of the equation is our people.

As previously announced, at the beginning of this year, we put together an industry-leading benefits package for our front-line associates, including subsidized medical plans, equity grants, education grants, a 4-day work week, extended vacation time and paid maternity leave. The early indications are that our enhanced benefits packages are having a favorable impact on both recruiting and retention. We are excited about the continued development of our omni-channel-driven growth strategy that allows us to leverage our brick-and-mortar assets to be the most guest-centric automotive retailer in the industry. In conclusion, I would like to take this opportunity to express appreciation to all our teammates in the field and our support center who continue to produce best-in-class performance. We will now turn the call over to the operator and take your questions. Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] We'll now take question from Rick Nelson with Stephens.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks. Good morning. Nice quarter, guys. So there's been a lot of progress in the quarter, again, and year-to-date with SG&A. And I know, Sean, you would have guided to bigger second-half SG&A.

Is that a step-up in omni-channel spending? Or are you making some different assumptions about gross profit that might be different in the second half of the year? Is it exactly what that drivers might be?

Sean Goodman -- Senior Vice President and Chief Financial Officer

Yes. Good morning, Rick. The driver of the increase in SG&A in the second half of the year will be increased investments in our omni-channel initiatives. This quarter, we did benefit from the favorable business mix, the volume growth and the return on some of these investments because much of the return manifests itself in reduced costs in other parts of the business.

But really, the driver of the increased SG&A in the second half is the additional investments in our omni-channel initiatives.

Rick Nelson -- Stephens Inc. -- Analyst

Got you. Also, used cars, I'll follow up on that. We've seen now a couple of quarters where you haven't kept up with a peer group. I'm curious what the drivers are there.

I think last quarter, you pointed to some personnel issues. Is that still problematic?

John Hartman -- Senior Vice President of Operations

Hey, Rick. This is John. Now we're past any personnel issues. When you look at the history, the company has performed well in used cars over time.

We realized used volume is a great opportunity for us. We're good operators, we have a good team with a lot of right people. And we're working to grow this part of our business.

Rick Nelson -- Stephens Inc. -- Analyst

OK. And then if you could provide some color around the two new acquisitions, one at tuck-in, one at new market. Any input in terms of brands or multiples? Or are these -- is a tuck-in a turnaround situation or is that a well-run...

David Hult -- President and Chief Executive Officer

Rick -- I'm sorry, Rick. This is David. As far as Indianapolis goes, we spent a lot of time a few years back, researching that market and felt like we would be a great fit and a good steward for that market. And we wanted to start there with an anchor store and we did that with a Hare Chevrolet store and we built that market out nicely. This particular store that we're adding, we anticipate closing in the next week or so, will be an import brand.

One that we do very well with and we're excited and kind of look at that we probably filled out the market there for us as much as we want to. This particular other market is a new market to us. It's also a different brand for us as well, but it also is that anchor-type store, referring back to the Hare Chevrolet example, and we really did a lot of research and homework and feel like this is a good opportunity and another good state for us to grow. And so we're very excited to look forward to that opportunity coming up soon.

Rick Nelson -- Stephens Inc. -- Analyst

OK. And finally, if I could ask you about the GPU pressures, especially in the import segment, $632 per unit this quarter. Is there specific brands that are driving that or is it across the board? I noticed the advertising PVR is also up, I think I calculated 16%. One of your peers has drawn a line in the sand, given up volume to improve margins.

I'm curious maybe you're taking a different attack here.

David Hult -- President and Chief Executive Officer

Yes. I'll do the best I can in answering that. Mid-line import is not all the same. When you look at the size of our company and the number of stores we have, Nissan is a meaningful size brand to us, and we're certainly weighted percentage-wise heavier than any of our peers with that brand.

Their model has been to chase volume and they have aggressive incentives. Our Nissan stores outperform the markets that they're in, but fell dramatically short of reaching the potential opportunity or missed incentive money. So that had a material impact on our import number. As it specifically relates to the other mid-line imports, I would say we're similar to our peers. We're looking at that business differently, but their models are different than Nissan's.

So it's really looking at each individual brand and assessing what is your best opportunity. And currently, or at least in the last quarter, with that particular brand, if you don't chase that incentive money based upon the market and where that brand is performing within the market, it could be a heck of a lot worse, in my opinion.

Rick Nelson -- Stephens Inc. -- Analyst

OK. Great. Yes, it makes sense. Thanks a lot, and good luck.

David Hult -- President and Chief Executive Officer

Thank you.

Operator

We'll now take a question from John Murphy with Bank of America.

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

Good morning, guys. I want to ask sort of a slightly bigger picture question here, David. When you look at what's going on with retail sales, there's certainly a 3% decline as you kind of highlighted in the quarter, was a little bit worst in the first quarter and it was in the same zip code last year, in 2018. You grew earnings pretty dramatically last year, we just saw a 14% growth in earnings per share when you had retail sales down 3% in the second quarter of this year. As you look at this, if we continue to see a fade in retail sales, let's say, sort of low to maybe mid-single digits for the next few years, if we're really in a sort of a real downturn here, do you think you can continue to outstrip this with the other business segments and discipline on SG&A? Because you're doing a great job so far and I think this is really kind of the proof that the model is playing out.

Just curious on your thoughts on how severe a negative in retail sales would actually bring earnings down or you can just continue to chug along here and keep your earnings even flat to up in this kind of environment.

David Hult -- President and Chief Executive Officer

Sure, John. I'll try to answer at the best I can. Please circle back if I miss something. I'm sure like all our peers, we model this thing out all the way down to an $8 million SAAR, if you will.

And we're confident in our model that we can continue to grow the business. We are also working diligently on what we see is the new way of selling automobiles a few years from now, and we look at that as another opportunity to create more potential opportunity in SG&A while offering a higher level of service. We're excited about some of the software, but we look at it as balance between software and people. We have a lot of great people in the field that are passionate about trying new things and in software that's coming along. So I think there's more future opportunity in SG&A, especially as we advance more into the model.

As you can see, we're not performing well in pre-owned right now and we're still performing overall pretty well. So when we figure out pre-owned, and we will, we just see that there's a lot of opportunity for us to continue growing.

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

OK. So you're saying all the way down to an $8 million sort of shock SAAR, like what we saw in 2009, you could think you can continue through the other segments to offset that and even grow earnings or maybe just stabilize earnings? That's a big statement.

David Hult -- President and Chief Executive Officer

Yes. Well, I guess a little bit out of context. We model it down that far, but I would tell you, and I think back to the '08 SAAR and what went on there, the one big differentiator with the downturn that happened then that hadn't happened in previous cycles, the lending institutions were in a pretty tough spot. So at that moment in time, as bad as SAAR was, we actually had a lot of people that wanted cars that couldn't get loans.

So when we model these things, assuming that the lending is available, we think we can come pretty far down from a SAAR number where we're at and continue to grow our business as long as the lending is available for loans.

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

And just maybe to try to put a simple point on this to try to kind of bracket stuff. And if we saw about a 5% decline in retail sales for the next two or three years, a tough cycle but plausible. Do you think even in that kind of environment, giving all your efforts, shifting the business structure, focusing on parts and service and used that you still will be able to slowly grow earnings at least?

David Hult -- President and Chief Executive Officer

Yes.

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

OK. That's great. Then maybe a second question on SG&A and all the efforts here. Sort of my rough rule of thumb is that about half percent of SG&A is fixed and half is variable, of the half it's variable, 15% or so is advertising, 85% is sales comp.

When you think about that, is that about correct? And as you're talking about this new age of retailing and still servicing the customer very well, but shifting SG&A cost to something that is more systematic as opposed to personnel-based? How much opportunity is there may be on the half that's variable and maybe even the half that is fixed? Is that correct?

Sean Goodman -- Senior Vice President and Chief Financial Officer

John, this is Sean. So firstly, when you think about our SG&A expenses at the moment, we think of the SG&A expenses are being about 20% to 30% fixed and the balance to be variable. Now some of that variable expenses varies directly, some we need to make adjustments to allow those expenses to be variable. But generally, we think of SG&A as being 20% to 30% fixed in nature.

So it obviously gives us some flexibility in a downward scenario. So to your second question, the business is evolving and as it evolves, we think that the model will change and there will be opportunities that will impact our SG&A cost structure, but it's fairly early days because of a number of different variables there. So I hesitate to give any specific numbers around that at this point in time, but we do think that there's opportunities for the SG&A structure to change as the business model evolves.

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

OK. I mean I hate to be a wise guy and push you on this a little bit, but is that the kind of a couple of hundred basis points improvement? Or are we talking about focus of 10% or more down the line? And is this five -- I mean it sounds like this is three to five-plus years out at least.

Sean Goodman -- Senior Vice President and Chief Financial Officer

Firstly, it is multiple years out, it is three to five years out. And as we said in our prepared remarks, we have this dealership of the future where we're trying out different models, we're trying out different cost structures and seeing how that develops. So I feel it's still too early days to throw out a specific number there, but as we learn and we refine the work that we're doing there, we'll be in a better position to give a more specific number.

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

OK. And then just maybe lastly, rates are heading in the opposite direction and we kind of all maybe expected six to 12 months ago. Just curious how that's impacting your ability to sell, right? I mean, I guess it has probably not changed too much but if there might be some help on the horizon on consumer rates, and also what it means for your floor plan financing and maybe your willingness to make a take on a little bit more inventory as well.

Sean Goodman -- Senior Vice President and Chief Financial Officer

I'll start on the floor plan, and then I'll pass it on to John to talk a little bit about the impact on the consumer side. From a floor plan point of view, we have around $900 million of floor plan debt. And when you think of our capital structure, floor plan debt is essentially floating rate and the rest of our data is fixed rate. So based on the $900 million, a 1% change would impact our interest cost by about $9 million.

So I think that's the impact on the P&L of changes in interest rates. From a consumer point of view, the lending environment at the moment is very favorable. We haven't had any issues obtaining financing for our consumers. But I think as interest rates decline, that can only be positive for the consumer and for our F&I on our portfolio. And then, John, if you wanted to add anything on that.

John Hartman -- Senior Vice President of Operations

Yes. I can just add that the sub-prime market is still OK. Right now, it's about 8% of our total business. The lenders there are cautious, but there's still plenty of available credit for the consumers.

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

And just one follow-up on that, is there been any change in floor plan assistance or anything like that? Or the auto makers are still taking and there's been no pullback there at all?

John Hartman -- Senior Vice President of Operations

There's been no pullback there.

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

OK. Great. Thank you very much, guys.

Sean Goodman -- Senior Vice President and Chief Financial Officer

Thank you, John.

Operator

[Operator instructions] We'll now move to Bret Jordan with Jefferies.

Bret Jordan -- Jefferies -- Analyst

Good morning, guys.

David Hult -- President and Chief Executive Officer

Good morning.

Bret Jordan -- Jefferies -- Analyst

A question on the used side of the business, and I guess sort of competitive landscape. Are you seeing maybe any structural GPU pressures as some of your peers get into the used-only space and seems to be sort of driving really low GPUs in exchange for the F&I attachment? And I guess, is that changing market pricing at all?

John Hartman -- Senior Vice President of Operations

Hey, Bret, this is John. The used vehicle pricing is very transparent. The information's out there for the consumer, so it's really to keep the margins. It's really about your acquisition strategy and where you're acquiring the vehicles to keep the margin high.

In the old days, that information wasn't available to the consumer. But now with the Internet and all the third-party sites out there, it's very transparent, which I think it's a good thing. We just have to be diligent on our acquisition strategy and making sure we're acquiring the cars for the right money and putting the right conditioning in to them. And we may still maintain a decent margin.

David Hult -- President and Chief Executive Officer

We've been pretty consistent at maintaining our PVRs and we tend to ride toward the upper end of the sector with our PVRs. So we're thoughtful and while volume is important and needed to grow and it's out there, we certainly look at the transaction meeting to be a profitable one. And there's certainly a lot of cost of sales associated with selling a vehicle. So while we want to sell the vehicle, certainly, we certainly want to make a fair return on what we sell.

Bret Jordan -- Jefferies -- Analyst

Right. So if it's something that's out there giving units away, obviously, there's price transparency. And does that -- so that doesn't just drop the entire market. Even if you're sourcing better the out-the-door costs, the price is going down.

So you're not seeing sort of structural margin erosion?

David Hult -- President and Chief Executive Officer

You know when you think about new, it's called race to the bottom with someone in the marketplace that will put a low price out there on a certain model. When it comes to pre-owned, every car is really unique. No two cars are alike. As far as other equipped with the miles and the conditions are, and it's a much larger pool to sell into.

There's certainly some pressure on it because of the transparency that's in the marketplace. And for lack of better terms, and now with software, the markets -- all the pricing in each individual market that anyone does business in is really set by the software and what the consumers can see. The question isn't so much about the sale price, it's about the acquisition. How profitable you're going to be in pre-owned is really where you're going to acquire the car and what you're going to acquire it for, because the market price is already set.

Bret Jordan -- Jefferies -- Analyst

Great. Thank you.

David Hult -- President and Chief Executive Officer

Thank you.

Operator

We'll now take a question from Armintas Sinkevicius with Morgan Stanley.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Good morning. Thank you for taking the question. I just wanted to get more color on your digital initiatives, just any sort of context on website traffic or how many units you've sold.

Any sort of color you could provide would be helpful.

John Hartman -- Senior Vice President of Operations

I can start. This is John. For the quarter, the PUSHSTART sales were about 8% of our total retail volume. We sold just over 4,000 that started here an application.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. So it includes new and used then?

John Hartman -- Senior Vice President of Operations

Correct.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. And then anything on website traffic or any other commentary that suggests it's gaining traction or anything of that nature?

David Hult -- President and Chief Executive Officer

Our web traffic is growing at a double-digit rate month over month, year over year for the last three years. Our marketing team has done a fantastic job there. With the addition of the loan marketplace on that PUSHSTART tool, it is an industry-first. What I would compare it to, it's almost like a rocket mortgage-like experience.

A consumer fills out the application, they're seeing five or six different lenders at once coming back with what the rates and the terms are. That has certainly made an impact. And what John stated in his script earlier, with the addition of being able to upload the driver's license, insurance card registration, photos of the trade, again, all making it more convenient and saving time for the consumer. When John said 8%, I think closer to 9% of our total sales in the quarter. So to us, it's a meaningful number.

The traffic playing with that tool is significantly higher than the 9% close, but we will -- we're confident that we'll continue to grow over time. And we liked the technology features that have been added to make it more convenient.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. And correct me if I'm wrong, but I believe PUSHSTART is a bit of a deployment on a smaller scale. How do you think about expanding that for the rest of your store base and the timing around that?

David Hult -- President and Chief Executive Officer

So it's a little complex because we have obviously, franchise agreements with each individual brand that we have. The loan marketplace that I talked about is in about 69 of our stores of the 87. And as far as the uploading of the insurance card, driver's license and trade stuff, that's actually on all of them. Now the limitation of the loan marketplace is some of the OEMs not actually allowing that.

But the other stories, it's actually on there. So it's on the majority of our stores at this point.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK. Great. Much appreciated.

David Hult -- President and Chief Executive Officer

Thank you.

Operator

We'll now take a question from Chris Bottiglieri with Wolfe Research.

Chris Bottiglieri -- Wolfe Research -- Analyst

Hey, guys, thanks for taking the question. To clarify one first, the $175 million of acquisition revenue, is that a year one revenue number? Or is that like a terminal revenue multiple number?

Sean Goodman -- Senior Vice President and Chief Financial Officer

That's an annualized year one revenue number.

Chris Bottiglieri -- Wolfe Research -- Analyst

OK. That's helpful.

Sean Goodman -- Senior Vice President and Chief Financial Officer

Those transactions will close during the third quarter for expenses, yes.

Chris Bottiglieri -- Wolfe Research -- Analyst

Got you. OK. Perfect. And then financial questions.

Just curious if you're seeing kind of impact from tariffs in your parts and service business. I'm not sure what the aftermarket mix is or even if the OE parts have tariffs on them. Realized that parts really have the COGS. But given I would take a pretty powerful labor inflation in the markets, any of pricing power, just trying to get a sense for how much tariffs and labor are helping your parts and service.

If you have any way to contextualize, that would be helpful.

John Hartman -- Senior Vice President of Operations

What I -- we have -- yes, this is John. We haven't seen any significant increases in our parts prices due to tariffs.

Chris Bottiglieri -- Wolfe Research -- Analyst

Got you, guys. So low aftermarket exposure there. OK. That's helpful.

And I want to ask more about the parts and service in general. The whole industry is pretty -- growing pretty prolific right now. Is there a way to, I guess, one, like how do you feel the statability of kind of the warranty growth right now? Is there something structural change in it that should allow the industry to support this level of warranty growth or is it a couple of kind of like one-off campaigns that seem to be popping up? And then second, I was doing some math on your slide deck. It would seem to suggest that the incremental margins at parts are about 25% to 30%.

Is that a reasonable assumption as we think about kind of like the growth of parts and services? And any thoughts there will be helpful.

John Hartman -- Senior Vice President of Operations

I want to tackle the warranty question first. So as you can see, we're up 19%, there was a growth in warranty. You know the warranty kind of comes with those. It's mostly due to the spikes or due to the recalls.

Acura, Kia and Hyundai had some pretty significant -- some recalls going on last quarter. As the cars get better, the warranty dollars tend to fade. So I think the spikes you see are really the recalls. And the great thing about the recalls to me is it gives you an opportunity to generate another customer pay or pay order.

We've been pretty consistent with customer pay. If you look over the last five or six quarters, like to grow that more. We have plenty of opportunities still as far as capacity to grow that.

David Hult -- President and Chief Executive Officer

I'll just jump in and add a couple of quick things. We're actually excited about the future with electrification and the hybrid vehicles. They tend to be a higher retention customer and you make pretty good dollars on those. So we see a good upside in the future as that goes. As far as warranty, very, very difficult to model.

With technology increasing in these cars and the competitive nature of technology, there's a ton of recalls out there, and it's just -- they are always going to shift and take a different place of who's in first and who's in last, depending upon technology that's been implemented and put out there. Very hard to model, but we see that staying consistent over time just switching between brands. Your last point about the parts margin, it varies by brand. You're not far off, but it typically runs in the mid-30% range, 35% to 40% range on the parts margin.

Chris Bottiglieri -- Wolfe Research -- Analyst

That's crazy. It's such a great business. And sorry, not to be greedy, one last one. You kind of triggered a thought there.

Within hybrids, if you think about the brands that have high hybrid exposure, have you seen any material shift in market share from where you think your -- does this proportionally taking share relative to the independent channel? Starting to getting a sense for like -- as we have more electrification on the car fleet, how that could potentially impact franchise dealers at the expense of independent dealers? Any data you're willing to share or thoughts to help us, that will really be helpful. Thank you.

David Hult -- President and Chief Executive Officer

Well, and this is horrible to say but good for all the independents that are out there, but that's one of the things we're most excited about. With the technology in these vehicles, these independents don't have the tools to work on them nor the training. And it's actually very tenuous to work on these vehicles. So we see service retention numbers in the next five to seven years getting at rates that this industry has never seen, and quite honestly, the scale level coming up within the technicians in training. So we actually see it as a positive, the retention numbers are always higher with these customers.

For lack of a better term, they really have to come back to a brand-certified dealer to work on these vehicles. If you're going to an independent, it would not be a smart choice.

Chris Bottiglieri -- Wolfe Research -- Analyst

Really helpful. Thank you for all the thoughts.

David Hult -- President and Chief Executive Officer

Absolutely.

Operator

We'll now take our next question from Rajat Gupta with JP Morgan.

Rajat Gupta -- J.P. Morgan -- Analyst

Hi, thanks for taking my question. Just had a question on F&I GPUs. I mean it's pretty strong this quarter. A lot of the peers are seeing pretty good growth here despite good used volumes.

How should we think about the second-half trajectory year for as we gave used vehicle units from these kinds of pickup for you guys? And then I have a follow-up.

John Hartman -- Senior Vice President of Operations

We had a good quarter with F&I. The finance penetration was up 2%, the SC penetration was up 1%, and we did a good job on increasing our PVR on cash deals was up about $16. So when we look at F&I, we always kind of focus on lifting the bottom half of the group up. So I still think there's some opportunities there to improve.

And I think I missed the second half of your question, I'm sorry.

Rajat Gupta -- J.P. Morgan -- Analyst

I was just wondering, I mean, in the second half of this year, as your used units start to pick up again, should we still expect this kind of GPU growth? I'm assuming mix should have -- or mix should be a little bit of headwind.

John Hartman -- Senior Vice President of Operations

Yes. I would say if you look at our peers, we have room to grow. We're excited about our F&I but we're not satisfied in a sense that we know there's potential there and we're missing it. So we're hoping to be more aggressive and get more F&I dollars to specifically say, can we model it in? It's very difficult to say what's going to happen.

Generally speaking, and it varies by brand, we make a little bit more F&I dollars on new than we do pre-owned. Some of that has to do with the cost to sale, but certainly make good dollars as well on pre-owned F&I.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That's clear. And then on parts and services, just want to follow up. You should have pretty good revenue growth there, but it looks like margins were down a little bit year over year, not too much.

I didn't mean to nitpick here but is there -- is that just driven by mix? Or is there any impact from all the benefit packages that run out certainly this year? Just trying to get a sense of the trajectory here going forward in this.

John Hartman -- Senior Vice President of Operations

Yes. I would say, and I don't have it right in front of me, but I think if you looked in the table we sent out, it has really to do with our internal gross profit of the reconditioning. The lack of used car sales actually pull that gross profit down. I think if you pull out that internal piece and just look at CP and warranty, the gross profit growth was actually 8% on a same-store basis. So we like the direction.

I would call it a slow, sustainable, solid growth in our parts and service. It's not just capturing the dollars, it's making sure we're retaining a customer who can handle the level of service properly. That's what continues the growth into the future. But I think what pulled us down a little bit in the quarter was in total.

I don't know, Sean, if you...

Sean Goodman -- Senior Vice President and Chief Financial Officer

Yes. I'll just add to that and say actually, on our schedules, it shows that the parts and service gross profit, when you exclude the internal reconditioning, it's actually identical to the previous year at 48%. So it really is -- it's purely a mix of internal work versus external work.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That's clear. Thanks.

Operator

We'll now take our next question from Stephanie Benjamin with SunTrust.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning. Thanks for the question.

David Hult -- President and Chief Executive Officer

Good morning.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

I wondered if you could talk a little bit more about the omni investments you have or the SG&A investments you have in the second half to build out your omni capabilities. Which areas you're specifically targeting, whether it's more online tools for parts and service or just building out your capabilities? Any additional color will be helpful.

David Hult -- President and Chief Executive Officer

Yes. I would say it kind of goes back to my script a little bit when we talk about a solid plan and thoughtful execution. I think we get excited about these opportunities and talk about them a little bit, and we're a little bit slower to implement because we try to be very thoughtful to look at each one of our independent stores and how they're operating. When you start to scale these things, they have a cause and effect on them. So we've been a little bit slow this half -- of the first half of the year.

Not so much in launching the tools and within the individual stores but as far as scaling them out. The example I'll give you is the loan to marketplace one. That's really been in the last 45 days, that's scaled and went out to stores where six months ago, we anticipated in every store a lot faster. So we're a little bit slower to move and make sure we perfected because the user experience has to be there. Same thing that service tracker that I mentioned and I mentioned it on the previous call, it's out there, but it's not out there in scale.

So we're still playing with it and trying to perfect it, and then we'll scale that in the second half of the year along with some other things. So I think it's more of the ramp-up of expenses of scaling some of the tools we mentioned.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Great. That's helpful. It makes sense. And then just switching gears on just M&A.

Have you seen any kind of compression in multiples given this kind of continuation of declining SAAR or a bit of opportunity to be a little bit more aggressive on M&A? Thanks.

David Hult -- President and Chief Executive Officer

Yes. And this is David. We've seen a tremendous amount of M&A this year, some really big groups and small independent stuff. And really, the pricing has been all over the board.

Some of it is still unrealistic. Generally speaking, it's coming down and becoming more realistic, and we're excited about that. But for our organization, it's not about being the biggest. We don't see any economies in scale of being large.

That, to us, reflects in our SG&A and operating margins. It's really about thoughtful and being good stewards and making good acquisitions that are going to create great returns for our shareholders. So we're excited about what we're seeing. We see opportunities to grow, but we're trying to grow at a pace that makes sense and make sure that we don't fall in love with an acquisition. It's very easy to buy something a lot harder to run it, and we want to make sure that we're thoughtful about the acquisition, and it's a good future investment and asset for our company.

Operator

Stephanie did you have anything further?

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

No, I'm all set. Thanks so much for all the clarity.

David Hult -- President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from David Whiston with Morningstar.

David Whiston -- Morningstar -- Analyst

Thanks, good morning. I wanted to go back to used. You mentioned it did fall short of your expectations, I was assuming you were referring maybe to the 3% volume number and sort of relatively hot used market right now. Can you just talk about specifically, what was going on with the store level that caused you to fall short of expectations?

John Hartman -- Senior Vice President of Operations

Yes. This is John, David. So it's really just -- we didn't execute on some basic things and this is a fairly -- it's a complex business, but it's a simple business. So really, if we focus on doing the right things every single day, as far as acquisition, appraisal, merchandising, marketing, we'll be fine, and that's what we're focused on moving forward.

David Hult -- President and Chief Executive Officer

And I would say it's a little bit of the D&A discipline within the stores that's really trying to maintain that PVR. The easiest way to maintain the PVR is sell trade-ins, and the quickest way to lower that PVR is acquire a lot of vehicles from the auction. They're trying to stay disciplined in their purchase to do the best they can at maintaining that margin. We have to do a better job at acquiring vehicles because that's really what's about.

And you can easily acquire a vehicle but at the right acquisition prices is really about that. Each asset seems on its own, and we really focus on that return on the asset.

David Whiston -- Morningstar -- Analyst

So the issue is more on pricing rather than just not getting enough vehicles or not pushing used enough is what you're saying, right?

David Hult -- President and Chief Executive Officer

Yes. I would say, generally speaking, when you think about SAAR being depressed a little bit, that means you're selling a few less cars or flat, and the trade-ins, you're not seeing quite as many. So therefore, you're going to be a little bit depleted from an inventory supply there. How you supplement that is either through your service drive or through auctions.

And while it's easy to buy truckloads of vehicles at auctions, it's not just about acquiring the car. It's about making a fair profit on the car and does the investment makes sense. So I would say we're a little bit more conservative at acquiring cars at auction. I mean wholesaled less cars in the quarter than we did previously, so we're doing a better job at keeping them. But generally, we're lacking probably enough cars to really produce the results we need.

We're turning the inventory well, we're keeping the day supply well, the gross profits well. We just need to do a better job at acquiring more at the right price.

David Whiston -- Morningstar -- Analyst

OK. Thanks. And on light trucks, are you seeing even at the margin any weakness within crossover SUV or pickup? And looking out to next year, are you at all concerned that maybe the -- especially in the compact crossover area, is the market going to get too subdivided to over saturate in the supply when we have some -- even more models coming from the automakers?

David Hult -- President and Chief Executive Officer

Even the consumer has been heading toward that crossover like duty truck for a while, it's a great market. There's plenty of vehicles available. I don't see it arrowing the margin because there's more availability or options for the consumer.

David Whiston -- Morningstar -- Analyst

OK. And just last question on the Nissan gain on the store there, it's a pretty big gain. Is that entirely non-cash and was there some sort of big reserves that you have to write-offs and make the gain so big or what was going on there in the accounting?

Sean Goodman -- Senior Vice President and Chief Financial Officer

There's no big reserves that's being written of associated with that. But that store was an under-performing store. And as an under-performing store, over time, the intangible assets related to that store had been written down. And so as a result of writing those intangible assets down over time, which didn't happen in this period, happened in previous periods going back a while, there was a significant gain due to that.

David Whiston -- Morningstar -- Analyst

OK. Thanks, guys.

David Hult -- President and Chief Executive Officer

Thank you. Thank you very much. This concludes today's discussion. We appreciate your participation. Have a great day.

Thank you.

Duration: 55 minutes

Call participants:

Matt Pettoni -- Vice President of Finance and Treasurer

David Hult -- President and Chief Executive Officer

Sean Goodman -- Senior Vice President and Chief Financial Officer

John Hartman -- Senior Vice President of Operations

Rick Nelson -- Stephens Inc. -- Analyst

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

Bret Jordan -- Jefferies -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Chris Bottiglieri -- Wolfe Research -- Analyst

Rajat Gupta -- J.P. Morgan -- Analyst

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

David Whiston -- Morningstar -- Analyst

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