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Lithia Motors (NYSE:LAD)
Q3 2019 Earnings Call
Oct 23, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Lithia Motors third-quarter 2019 conference call. [Operator instructions] I would now like to turn the call over to Eric Pitt, vice president of investor relations, and treasurer. Please begin.

Eric Pitt -- Vice President of Investor relations, and Treasurer

Thank you, and welcome to the Lithia Motors third-quarter 2019 earnings call. Presenting today are Bryan DeBoer, president and CEO; Chris Holzshu , executive vice president; and Tina Miller, senior vice president and CFO. Today's discussions may include statements about future events, including financial projections and expectations about the company's products, markets and growth. Such statements are forward looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made.

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

Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an update in investor presentation on our website, lithiainvestorrelations.com, highlighting our third-quarter results. And with that I would like to turn the call over to Bryan DeBoer, president and CEO.

Bryan DeBoer -- President and Chief Executive Officer

Thank you, Eric. Good morning, and thank you for joining us. Earlier today, we reported the highest adjusted third-quarter earnings in company history at $3.39 per share, a 20% increase over last year. Our earnings were driven by record revenues of $3.3 billion for the quarter, with same-store revenue growth in all business lines.

Our team remains focused on creating convenient and transparent consumer experiences in order to achieve operational excellence. This remains the hallmark of our mission, growth powered by people. We continue to purchase and build strong businesses that have yet to realize their potential, while in new geographies, we look for strong operational teams. This results in increased market shares, significant cash flows and strong profits, all while maintaining low leverage.

Our biggest single asset is our amazing, experience and proven network of over 15,000 team members. As such, we want to take a moment to recognize our 11 store teams that were awarded the Automotive News 2019 Best Dealerships To Work For. Congratulations to you all. Our operational results from this point forward will be on a same-store basis.

We generate revenue from six distinct business lines, creating a strong, nimble and diversified model. During the quarter, total revenue grew 8%, and total gross profit was up 9%. We saw new vehicle revenues grow 5%, and our highest margin business lines saw strong increases similar to the past few quarters. Used vehicle revenues grew 14%, F&I was up 13% and service, body and parts increased 9.5%.

These lines accounted for approximately 42% of our revenues and 80% of our gross profits. Our operating model is built to provide a full spectrum of products and services throughout the vehicle ownership life cycle. For the fifth year in a row and the foreseeable future, we see new vehicles are remaining stable at approximately 17 million units. The economic environment is also strong with medium household income, near all-time highs, unemployment at historic lows and overall consumer confidence remains strong.

In addition, lower interest rate and widely available consumer credit are making cars more affordable than ever. These favorable economic conditions, combined with our unique growth strategy, makes Lithia a unique opportunity compared to most other competitors in specialty retail models. As one of the largest auto retailers in the United States, selling more than 335,000 vehicles annually, offering the second largest owned inventory marketplace online and servicing more than 3.5 million vehicles a year, massive opportunity to grow still remains. Our industry is highly fragmented with the top 10 companies controlling less than 8% of the U.S.

market, and no single company controlling more than 2%. Combined, the addressable new and used vehicle market is over $1 trillion annually, of which we represent only 1.2%. We have built a model that is powered by growth, people, capital, modernization, inventory and physical network and believe the combination of these differentiations can take us beyond 5% share of our nation's vehicle market. Our revenue has increased at a compounded annual growth rate of 24%, and earnings have increased at a compounded rate of 33% since 2010.

We continue to invest two-thirds of our capital into expanding our physical network by acquiring strong assets, targeting an after-tax return of 15%. We execute with an 80% success rate, and our five-year and beyond after-tax return is over 25%. As we continue to expand our national reach, we acquire, develop and retain strong teams to build out our networks. When moving into new geographies, our investment metrics consider the value of the right teams to become the foundation to execute our value-based acquisition strategy.

With more than $500 million in available liquidity, over $250 million in annual free cash flows and an adjusted leverage ratio below two times, we are well-positioned for continued growth through acquisitions and modernization. Using our targeted equity investment of 15% of revenues, our available liquidity in annual free cash flows could add up to $5 billion in revenues or 40% growth. More conservatively, if we choose not to add any incremental leverage and just utilize annual cash flows, we could add more than $1.4 billion in revenues or approximately 12% annually. The acquisition market remains extremely active as we have purchased seven stores, totaling over $470 million in revenue so far this year.

Earlier this month, we acquired Morgantown Chrysler Jeep Ram Fiat and Morgantown Subaru in West Virginia. In order to fully capitalize on the opportunities of our six business lines, we continue to look to expand our nationwide footprint beyond our current reach of 82%. In addition, we are improving the density of our network to better service our customers and grow our highest margin business lines. Our customers' proximity to our physical network is important as it enables us to supply convenient test points throughout the ownership experience.

This network also provides an infrastructure to deliver our digital solutions to further leverage our assets and expand our reach. Each customer's behavior is unique and ever-changing. We continue to leverage our most important assets of skilled personnel and a massive 70,000 vehicle-owned inventory through our physical network and digital solutions. We strategically invest in modernization that supports and expands our core business, with the goal of providing customers with choices that meet their desire for affordability, convenience and transparency.

This is evident in our same-store sales results with strong increases in revenue and profitability. As part of our holistic and incremental approach to modernization, we recently activated our own proprietary sell from home technology in the Pittsburgh market, allowing customers to sell a vehicle to us in just minutes. This experience provides consumers an instant offer with convenient pickup service at their home and expands our reach to procure used vehicles. This is a scalable solution that we believe our operational leaders will quickly desire and adopt.

Along with our buy from home technology launched earlier this year, this sell from home solution will help us improve our one to one used to new ratio to move closer to the national ratio of 2.3 to one. We believe that modernization can be profitable and by approaching solutions incrementally, our model will achieve both our short and long-term objectives. In closing, our diversified high-growth business strategy is complex, making it difficult, if not impossible, to replicate. In entrepreneurial culture that attracts and retains the best talent, world-class proprietary performance management systems, a proven growth strategy and a capital discipline with regenerating cash flows adds to the uniqueness of Lithia Motors.

Our industry remains ripe for considerable consolidation and our team's multi-decade track record of executing in both operations and acquisitions has positioned us to do just that. Notwithstanding any economic change, our milestone of $15 EPS is imminent. And now we look toward our longer-term goal or 5% national market share as our inspiration. With that, I'd like to turn the call over to Chris.

Chris Holzshu -- Executive Vice President

Thank you, Brian. Lithia's mission of growth powered by people continues to be the foundation of our high-profile culture as our team members engage each and every day to find ways to increase market share, exceed customer expectations and improve profitability. As we prepare for 2020, our store leaders are leveraging our core value of continuous improvement to set their annual operating plans to achieve earnings potential. They continue to identify the leverage to pull which in turn improve operating results and further season them in the Lithia platform.

With over $7 billion in annualized revenue purchased in 2014, significant opportunity remains. In the quarter, total sales increased 8%, gross profit grew 9% and pre-tax income improved 13%. Following is additional color on each of our six business lines. The new vehicle business line, which is top of funnel in automotive retail, grew 5%.

Our average selling price increased 6% and unit sales decreased less than 1%. Gross profit per unit was down slightly at $2,049 compared to $2,073 last year, a decrease of $24. Our store remains nimble and their strategies that balance volume and growth and adapt to local and regional market conditions. The used vehicle business line was up 14%, comprised of a 12% increase in unit sales and a 2% increase in average selling prices.

Used retail gross profit per unit was $2,257 compared to $2,205 last year, an increase of $52. Our used vehicle mix was 27% certified 59% core or vehicles three to seven years old and 14% value auto, or vehicles older than eight years. Our top-performing used vehicle operators achieve a used to new ratio of two to one or greater, with the value auto segment compressing nearly 30% of those sales. The recent activation of our proprietary valuation algorithm allows for consumers to receive an instant valuation online and sell us vehicles from the comfort of their own home.

A significant number of these vehicles fall into the core and value auto segment and will be prime merchandise as we further expand these offerings in more of our locations. This modernization in our stores expands our reach and our ability to procure more used vehicles, which translates to more sales opportunities in our network. As a result, we continue to target selling at least 85 used units per location per month. In the quarter, we reached 74 used units per store per month, an increase of 9% over the prior year.

Our finance and insurance business line remained strong at $1,471 per unit compared to $1,371 per unit, an increase of $100 per unit over the prior year. Overall, growth was due to higher penetration rates and per unit profitability in nearly all of our product offerings. At the vehicles we've sold in the quarter, we arranged financing on 73%, sold a service contract on 48% and sold a lifetime oil product on 22%. We continue to focus on capturing the additional earnings potential in F&I by improving the customer experience and seamlessly integrating the online and brick-and-mortar experience in our stores.

Strategically helping identify financing options for consumers while providing an integrated one-stop shopping experience, allows us to customize the right products at the right price and allows our consumers the power to choose what's best for them. Overall, new and used vehicles sales create incremental profit opportunities through the resale of additional trade-in vehicles, greater manufacturer incentives, F&I sales and future parts and service work. One measure of this is through the growth of our total gross profit per unit, which was $3,631 this quarter or an increase of $110 per unit over last year. We remain focused on our highest margin lines of business, service parts and our body shops.

As onboard technology in vehicles becomes increasingly complex and the car park continues to grow the need for our skilled certified technicians will continue to drive demands and create more recurring repair and maintenance opportunities. Our service, body and parts revenue increased 9% over the prior year, customer pay work, which represents over half of our fixed operations revenue stream, increased 9%, warranty increased 11%, our wholesale parts grew 8% and our body shops increased 11%. Same-store adjusted SG&A to gross profit was 68.8%, an improvement of 10 basis points compared to the third quarter of last year, bringing our year-to-date improvement to 100 basis points. Our seasoned stores have an SG&A to gross profit metric of approximately 60%.

And in acquisition, we typically see stores with an SG&A to gross profit metric of 90% or higher. This adversely impacts our overall SG&A performance until those stores are seasoned. Our teams continue to make progress on cost saving efforts and focus on personnel, advertising and facility costs which make up the majority of SG&A, considering over half of our stores are still unseasoned, significant opportunity to drive down our industry-leading leverage remains. In summary, Lithia's unique operating model leverages our team members to make decisions closest to our customers, allowing us to react quickly to evolving market dynamics and still leverage our scale.

Our people are taking the steps necessary to exceed their annual plans and carry this trend into 2020 and beyond. With that, I'd like to turn the call over to Tina.

Tina Miller -- Senior Vice President and Chief Financial Officer

Thank you, Chris. Our teams are the foundation to our high-performance culture and continue to execute our operating model of acquiring, integrating and growing our stores. In the past five years, we have acquired over $7 billion in revenue and have achieved an 80% success rate based on expected returns. Our teams embody the talents and discipline needed to execute this model through aligning our core values with the key metrics that drive success in operations and having support teams to standardize noncustomer facing processes we create a scalable, profitable framework that effectively leverages size.

During the third quarter, we generated free cash flows of $83 million and have generated $224 million for the first nine months of the year. We define free cash flows as adjusted EBITDA, plus stock-based compensation, plus interest, income taxes, dividends and capital expenditures paid in cash. In addition, we have approximately $276 million in cash and available credit as of the end of the quarter. Additional liquidity could be obtained through our un-financed real estate or accessing the debt or equity market.

This strong balance sheet position has us poised to support future growth. We target 65% investment in acquisitions, 25% investment in capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases. Earlier this morning, we announced the dividend of $0.30 per share related to our third-quarter results. Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization.

As of September 30, we had $2.3 billion outstanding as floor plan and used vehicle financing. A unique asset of debt in our industry is the financing of vehicle inventory with floor debt. As this financing is integral to our operations and collateralized by these assets, the industry treats the associated interest expense as an operating expense in our EBITDA and excludes this debt from our balance sheet leverage calculation. On adjusted, our total debt to EBITDA is overstated at 5.8 times.

Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is two times, at the low end of our targeted range of two to three times. Our adjusted tax rate was 27.3%, up 90 basis points compared to 2018, primarily driven by changes enacted in certain states last year. This concludes our prepared remarks. We would now like to open the call to questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Rick Nelson with Stephens. Please proceed with your question.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks. Good morning. Great. Great quarter.

I'd like to follow up on Baierl, any updates there where you were -- old technology out to some early learnings some -- any metrics you can provide on those stores, would be great.

Bryan DeBoer -- President and Chief Executive Officer

Sure, Rick. Thanks for joining us today. This is Bryan. The Pittsburgh market is progressing nicely.

As you know, our modernization strategy is incremental. But last month, we were able to further roll out some of the tools that we're building, primarily a sale vehicle to us from your home solution that's fully proprietary. In the past, we were using different engine. Now it's all built by us.

It took us about 60 days to do that. And we're very excited with the initial results in opportunity curves at a fairly good rate and there's definitely strong demand outside of Pittsburgh from our other leadership teams that are wanting to kick that off as well. In terms of buy from home or the digital solutions to be able to affect a deal and buy a car. From that comfort of your own home, that's been progressing since the start of the year.

It's doing well. It seems to expand our market share and our consumers are really enjoying that option. Though at the current time, it's still not being utilized in shares and by consumers as much as we believe that they will in the future.

Rick Nelson -- Stephens Inc. -- Analyst

OK. Also, I'm curious about shift, how you're using shift or plan to use shift from a technology standpoint?

Chris Holzshu -- Executive Vice President

Yes. Rick, this is Chris. I think the big thing, just leveraging off of what Bryan just said is, in the quarter, we provided over 70,000 online purchase offers for used vehicles that weren't actually tied to a customer purchase. And so those offers came from all three of the channels that we have right now, which is the sell.baierl.com channel, our partnership with Shift and then other solutions that are already available by third parties.

Rick Nelson -- Stephens Inc. -- Analyst

Great. And then a lot of progress on the SG&A front. You've been very acquisitive the last several years. I know DCH which saw nice tail there.

I'm interested where you think we are with those improvements with the acquisitions you've made? And where you think the most progress and where the laggards might be in terms of extracting value?

Chris Holzshu -- Executive Vice President

Yes, Rick. This is Chris, again. As we stated in our prepared remarks, we've acquired over $7 billion in revenue over the last five years. And as you recall, we normally buy strong assets that are under performing a lot of times in the SG&A front.

And it takes us typically three or five years to season those stores. So as we bring those stores in on day one, they typically run at 90% or higher SG&A to gross. And our seasoned stores are running in the low 60% range. So as far as the inning, I'd say.

we're in the mid-innings of kind of what we're at on SG&A and our goal is to continue to drive all of our stores down to a combined SG&A to gross in that low 60% range.

Rick Nelson -- Stephens Inc. -- Analyst

Great. Thanks, and good luck.

Operator

Our next question is from Steve Dyer with Craig-Hallum. Please proceed with your question.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Thanks. Good morning. Nice execution. If I could start on the used business, sales were obviously very strong in the quarter, but your GPU performed much better I think than one of your peers, who reported yesterday.

Just wondering, if there's any specific initiatives that are driving some of that improvement? Whether it's acquired stores or better inventory position, etc.? What are you seeing in used?

Bryan DeBoer -- President and Chief Executive Officer

Steve, this is Bryan. We're really pleased that our value autos were up 19%. We actually make about $100 more per unit on value auto. And as many of you know, our gross margins on those items, which is an eight year old and older vehicle, is almost 20%.

So some of the margin is coming from that, but that's really being driven on our ability to procure cars. And I think every day that we think about used cars, it's not so much of the offerings that we provide on a retail standpoint, it's our ability to go mine those cars when we talk about the five channels that we really have opened up. And I think there's a massive channel or about a third of the vehicles that are sold in this country to consumers are sold through private party. And I think that idea that we're going to be able to tap into that private party, we have the intellectual property, which means the facilities, as well as the people that understand how to do that.

And now we have the digital solutions to be able to perfect that and really be able to procure those cars and I think you'll see that our ability to get those front and center that will generate higher margin because we're able to screen cars and have more choices as to what we're going to put on our lot's retail.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

And then, I guess in terms of the online incitatives, is your plan sorted to roll out all of the different functionality of products in that suite in Pittsburgh and then move it nationwide? Or you -- I guess are you looking to move bits and pieces beyond Pittsburgh before you sort of have all that in place maybe what your cadence of rolling out some of those technologies beyond the Pittsburgh market?

Bryan DeBoer -- President and Chief Executive Officer

Good question, Steve. It's Brian, again. I think when we think about innovation and modernization, we don't look at it as initiative-based, meaning that if we do this we're going to do this in the next step, we read the play as it happens. We let things happen organically.

And we foster that there's growth and innovation throughout the organization. I think Pittsburgh is really looked at as the hotbed for our proprietary digital solutions that cannot only be deployed throughout the Lithia network in our entire 82% of the country reach, but it can also be put into a white-label type of scenario, where it's just utilizing a material network of stores to be able to do that as well. So I think when we think about whether Pittsburgh is that hotbed for that? I would say, yes, that it is definitely where we're doing most of the innovation on our programming and an application into our consumers. But I think that innovation in our organization is occurring anywhere and everywhere at any given time which is what's really special about the Lithia model that's really built around entrepreneurship and innovation within 185 locations, our stores, and then one shares best practices here in network.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Got it. And then, I may have missed this, but just to be the clear, your sell from home technology, is that something that you built yourselves proprietary in the last however many months utilizing someone else's technology on the back end of that?

Bryan DeBoer -- President and Chief Executive Officer

It's a 100% Lithia Motors built and driven. It took us about 45 days to build it, which we were shocked that we were able to do that. And that's kudos to George Hines and his team, our chief technology and innovation officer. We really have ramped up our ability to go to market and to be able to modify things quickly, and I think you'll see the same type of things as we move toward a proprietary solution on the sell side as well.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

And is your expectation on that side of the business that you will keep most of the cars that you procure and recondition them yourselves? Or we'll see some sent to auction, how do you sort of look at monetizing that avenue?

Bryan DeBoer -- President and Chief Executive Officer

Good -- great question. I think this is the thing we fight and try to endure in people every single day, and part of Lithia model is buying those underperforming stores. Typically, there's a belief in those stores that they can't sell deep into the model mix. Even outside of their like brand that they sale new.

And that's a mental state that usually takes time to get people past, but I think when you go to market and you're willing to buy a new vehicle, what's you quickly learn is that you have the ability to sell those cars when they are available, whereas most dealerships typically live off of the trade-in, which is not really defined or proactive, whereas now you're going to get so many vehicles that you can pick and choose, the vehicles that are going to have the best margin and going to turn the quickest and be able to meet our customers' needs at the highest levels.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

OK. I'll pass it along.

Operator

Our next question comes from Armintas Sinkevicius with Morgan Stanley. Please proceed with your question.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Thank you for taking the question. Maybe you can provide us with an update on the acquisition philosophy? You mentioned well-positioned to accelerate the growth strategy in the coming quarters you have the loan of the leverage ratio. I think you've been vocal about potentially targeting the Southeast maybe you can provide us with an update there.

Some of the perhaps obstacles that are delaying a deal or maybe not but any update would be helpful.

Bryan DeBoer -- President and Chief Executive Officer

Awesome. This is one of our favorite topics. So -- and it's is part of our core strategy, I've have had a value invest. There is considerable activity out there.

We've only done about 475 million so for this year in seven different deals. We went into a new state, West Virginia, we're kind of excited about that. We obviously are looking heavily into the Southeast, as well as some of this -- the central Atlantic states. A lot of metros there that we haven't really entered.

The acquisitions are plentiful. I would even go as far as to say that the deals are stacked up and we can be extremely choosy. Now obviously, our hurdle rates are always pretty high, targeting 15% return on our equity. Whereas beyond five years, we actually achieve about 25%.

So we have a fair amount of cushion there, that when we find the right geographies and management teams we should be able to step up and be able to put those transactions together. And I'd say stay tuned. I mean, you know how we believe in acquisitions and we have the operational teams and the culture to be able to really attract and add any type of business to our model and be successful at it.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Right. And just one separate question. How are you thinking about expanding into other adjacencies? Where does that rank among your priority being acquisition digital, etc.?

Bryan DeBoer -- President and Chief Executive Officer

I think when we think about the adjacencies or diversified-type of businesses, most of our strategies focus around the idea that makes us more competitive, with our consumers. And provides greater transparency and speed. And also, it helps us be more competitive on purchasing acquisitions because if we can extract more value out of that string, it allows us to maintain those 15 to 25% return thresholds, while still being able to grow at a pretty exorbitant rate.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Appreciate it.

Operator

Our next question comes from John Murphy with Bank of America. Please proceed with your question.

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

The first question is on sort of the connection with the parts and service and used. If you can just give us an idea the way that you're booking parts and service for recon for your used vehicles, how much of gross are you doing per vehicle on the way you're doing in your internal accounting? Is it in the ballpark of 1,400 to $1,500? Trying to gauge at what -- how much of a help that is to parts and service? And that seems like it's something that will continue to grow over time?

Tina Miller -- Senior Vice President and Chief Financial Officer

This is Tina, John. So for our internal reconditioning, we actually reclassify that gross profit into new and used vehicles, based on there -- where the internal work is done.

Bryan DeBoer -- President and Chief Executive Officer

John, we've done that forever as well. It's to --

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

Got it. So there's no internal recon in your parts and service whatsoever as far as what we're looking at.

Tina Miller -- Senior Vice President and Chief Financial Officer

Correct.

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

Got it. OK. Then a second -- that's helpful. Then a second question on floor plan.

Obviously, floor plan interest expense, that was a little bit better than what we were expecting. I'm just curious as you look at managing that going forward with rates coming down, how big an impact sort of the rate reduction or rates coming down will have on that are there any floors in your evergreen facilities and is there an opportunity to get potentially even a little bit leaner on inventory?

Chris Holzshu -- Executive Vice President

Yes, John, this is Chris. I mean obviously we continue to try to manage the inventory levels that we have, regardless of interest rates, just to make sure that we have a good day supply, but managing inventory appropriately in all of our stores. As far as the impact of interest rates, with $2 billion for plan line, 50 basis points reduction or increase can affect our P&L by about $10 million. So based on the current outlook in interest rates and I think we are anticipating some benefit in the future.

But at this point in time, it's TBD.

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

And on those lines, there's no -- are there any floors on some of the spread? Or what the reference rate is?

Tina Miller -- Senior Vice President and Chief Financial Officer

John, this is Chris. No.

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

Got it. OK. And then if we think about the used legal acquisitions that you're doing on liner in-home. As you look at your reference core value vehicles as a significant target for you as your purchasing vehicles from people who are sitting in their house.

I mean how accurate are the algos so far? And is there a larger buffer that you're putting in for sort of that appraisal given for the quality of vehicle has a huge dispersion as it gets older?

Bryan DeBoer -- President and Chief Executive Officer

John, that's a great question. This is Bryan. I think our valuation algorithms pretty tight. We tested them multiple times in different stores.

Based off the knowledge of used car managers and we were within a couple of hundred dollars, one way or another. I think when you think about conditions there is no question that you just nailed the most important thing which is as you move down the spectrum and price range, you start to get more disparity in quality. And I think that's something that the digital solutions can only do so much you have to have physical people that understand the quality of a vehicle that understand the touch, feel and smell of the vehicle, the mechanical operation and just the general appearance, that I think we've learned gets lost in a pure digital play. And I think we'll be more competitive most likely to be able to do that.

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

And is there any adjustment factor that you're allowing for, if you say you give somebody $10,000 bid online, you show up and the car has something else that's in the wear and tear, that's demonstrably worse that you could knock 500 or $1,000 off of that. I mean how tight or how committed are you to that actual number you've given to somebody online?

Bryan DeBoer -- President and Chief Executive Officer

John, I actually have numbers that are looking very similar in both shift, our partnership with the San Francisco Silicon Valley company, as well as what we're seeing in our early stages of our on purchasing digitally. And we're seeing that most vehicles consumers are pretty darn good about going through the 20-or-so condition questions. But we are averaging about $750 of disparity, up on a -- from when we give them the bid online and when we arrive physically to pick up the car. The exciting news is we're at about five to six out of 10 purchases on the Lithia's side.

Shift is higher than that, somewhere between seven and nine out of 10 purchases, while still being able to adjust condition at somewhere around $700 a vehicle. That's a really good insight that you saw there.

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

Got you. OK. And then just lastly, I mean, we're hearing some noise particularly around in terms of like Nissan that there is a little bit of pullback in dealer support incentives, cash in the trunk whatever you want to call it. Is that something that's sort of a trend that you're seeing from the automakers that they try to claw back a little bit of the profitability out of dealers or is this a very unique time and space situation with Nissan that we kind of heard about yesterday?

Bryan DeBoer -- President and Chief Executive Officer

This is Bryan, again. I think that we cherish our partnership with Nissan, we have a very small portion of Nissan. But I believe this is inherent to just Nissan, we're not seeing that within other manufacturers. It's not something that has been prevalent in the industry.

And I imagine they'll work through those opportunities as well to be able to adjust profitability in volume.

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

Very good to hear. Thank you very much.

Bryan DeBoer -- President and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Chris Bottiglieri -- Wolfe Research -- Analyst

Thanks for taking the question. I guess the first part -- first part, I kind of want to delve into a little bit, can you just walk us through a little bit what's being done at Baierl kind of at the local market level how deliveries perform like who does the delivery? And then two, like, if the unit economics are that much different than kind of the base brick and mortar or you think about if there's some offset overtime if that becomes more prevalent?

Chris Holzshu -- Executive Vice President

Yes. This is Chris. So as far as what we're doing, it's specifically relate to sell.baierl.com purchase offer is, you have really options do it the way that the customer chooses. So you can either come into one of our dealerships and deliver your car or we actually send a valet out to your home.

They do a quick inspection, a quick test drive. It typically takes 30 minutes or less. And then we actually give them an offer, that they can redeem if they choose from U.S. Bank.

So it's a very quick and seamless process that we have. And we're finding the early adoption from consumers is very positive. As far as the sell side is concerned, we're working on, as Bryan mentioned earlier, developing our own proprietary sell-side technology, that we can use on barrel in the future. And our other platforms currently right now, we're being supported by a third-party vendor on the sell side.

Bryan DeBoer -- President and Chief Executive Officer

Chris, one other quick thing, this is Bryan I think when we think a little longer term about, how do we go to market to really be able to meet our consumers' demand wherever, whenever and however they choose. We think about our nimbleness of being able to earn our own proprietary software as a key solution and I think when you think about how consumers respond and how they take action in today's retail environment, they are so different from one another. So we're really looking at how do we build and attract not only the traditional buyers that want to go through a traditional automotive retail channel. How do we attract those that are really looking for an experience that is different than the traditional automotive channel.

And I think as you see our technology and our strategies unfold, you'll see that we may have multiple brands, that attract different segments or consumer groups, that may have specifics that they're looking for. We may end up bifurcating things and find partnerships where we're able to spread our wings and really leverage the 15,000 great people that we have, that have the knowledge to the able to help consumers. And most importantly, those 70,000 vehicles and growing, that are really what drives our ability to sell vehicles and create experiences with consumers. Now we just have to find an affordable convenient and transparent way to do it.

Chris Bottiglieri -- Wolfe Research -- Analyst

Got you. That was my follow-up question, actually. The technology seems great. I guess what I'm -- like what's the drivers that you're alluding to.

But is there the possibility of creating like an online brand so you can maybe scale this quicker or just kind of benefit from kind of online traffic in all of the kind of flywheels that come with that? How do you think about that, given that kind of more decentralized model?

Bryan DeBoer -- President and Chief Executive Officer

Chris, this is Bryan. I think you're looking into our window to the future. But I think it's definitely is and I think when you think about the engines that drive the decisioning, whether it's valuation, whether it's pricing, whether it's the workflow management that occurs on digital solutions. I think that's where we think about that you have to the able to do these things internally.

You have to have good adjacencies and business lines and diversification to be able to be all things to all people. And I think we have that solution to be able to do that. And I think that you'll begin to see separation. And you won't hear from Lithia Motors that we're going to have 22 stores that are going to be on this system and then it's going to go to 30, that's not how we think, OK? It's incremental.

It's something that you will see in our same-store sales results. You'll see in our incremental information that we provide, which is the sell.baierl.com, which we urge everyone to go and try that. Think about it this way, we were able to achieve that in less than 75 days from start of touching those buttons and programming to where we sit today. So we think speed and the curve to be able to do these things can move pretty quickly.

And we're positioned nicely to the able to leverage that throughout network.

Chris Bottiglieri -- Wolfe Research -- Analyst

That's right. Thank you.

Operator

Our next question comes from Rajat Gupta with JP Morgan. Please proceed with your question.

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

Thanks for the -- Hi. Thanks for taking my questions here.Just wanted to follow up on the parts and services. Just curious as to with the GM strike expanding through October, I mean, have you seen any impact at all? Or do you expect to see any impact on your warranty business? And just -- if, yes, how should we think about growth in the fourth quarter here? And I have a couple of follow-ups.

Bryan DeBoer -- President and Chief Executive Officer

Sure, Rajat. Our -- as a whole, our service and parts business were very pleased that many of the things that we're doing whether it's our commodity of pricing of multiple different items are really growing our business at a more exponential rate than we initially planned, customer pay was up 9%, if you remember, and warranty was up 11%. So they're pretty static in terms of where they were at and similar, which we love that. Some of the digital solutions are starting to take hold as well in that area.

And I think as we look forward in parts and service, it sure seems like this is an area that with mobile service, we can really start to spread our wings and really touch more consumers the way that they are really asking to be assisted. Chris, do you want to elaborate?

Chris Holzshu -- Executive Vice President

More specifically on the GM side is, as I'm sure you're aware, GM makes up less than 10% of our overall revenues -- net revenues base, when in total, we we're up over 18% in the quarter in General Motor's revenues. And our warranty trends, if you ask specifically about that, were actually up over 13% in the months. And 11% in the quarter. So we actually saw positive trend in the warranty work rolling into the full year.

We have plenty of inventory, there's no issue on days' supply related to new vehicles. And on the parts and service side, what we are finding is that on delayed repairs we are able to schedule lots of work or use aftermarket parts to supplement what we traditionally would have used for the OEM parts and other warranties. So our big focus is get the contract signed with General Motors. And look forward to seeing them move forward with the exciting products that they have to offer us in our dealerships down the road.

So, get this behind us and move forward.

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

Great. Thanks for clarifying that. And just a follow up on the Sell-From-Home technology. I mean as this starts to expand into your stores or in other regions, how should we think about the impact on just the retail GPUs here? Is there -- I mean, I know you have a lot of upside from the acquisitions that you're seasoning, but just from this technology extending across other regions, how should we expect that to impact GPUs longer-term?

Bryan DeBoer -- President and Chief Executive Officer

Rajat, this is Bryan. I actually believe that it doesn't affect GPUs a lot, it really just effects volume. So pay close attention to our same-store growth. We'll be able to provide you more information in details on whether it's a certified vehicle or core product or a value product, as we get further into this.

And as we have more data to be able to query to be able to see what's really happening what is the propensity for consumers to really utilize this tool from home.

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

Got it. I would assume that just sourcing that from auction and direct, I mean, wouldn't that help in some ways? Or is it just not -- given the mix you are already selling probably not incremental. Is that the right way to think about it?

Bryan DeBoer -- President and Chief Executive Officer

Yes. This is Bryan, again. I don't think -- I this is all incremental. Right now, only 6%, a little over 6% now of our procurement of used vehicles is coming from direct to consumers, from consumers.

So we don't think that it will be an adjunct to auctions or away from buying from wholesalers or buying from other dealers, that's -- we want incrementally more business. And I think what you'll see is us be able to expand those five channels, where we typically have procured vehicles from. And I think ultimately, it will make us better at procuring trade-ins, better than we had in the past and even at auctions, where I believe there is -- that most people believe when we buy stores that auctions are a bad place to buy cars. I think they're a great place to buy a car if you're looking for one to five year old vehicles.

I think if you're looking for five-plus-year-old vehicles, where the heavy lifting and all the money is made, that's another story. That's very difficult to be able to do that. Our best stores are able to do that. And as Chris said, they're selling two to one used to new ratios and selling a massive amount of core product, that works up 30% of our -- their mix and doing a nice job.

And I think that's the vision that we inspire all of our stores to achieve.

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

Got it. That's helpful. Just one last one on F&I. I mean, what's been the key driver of the GPU increases? I mean, is it mainly coming from seizing of the acquisitions? Or is this penetration of three or more products.

I mean, have lower rates started to help in any way in 3Q?

Chris Holzshu -- Executive Vice President

Yes. This is Chris. I mean, I think the No. 1 thing is really around awareness.

As we've said, when we do acquire stores, typically, we're seeing F&I averages from the prior dealers in the $700 to $900 range. And so the first thing that we do is show what our other stores are doing. I know hypothetical, but actually stores in same mix, same model, same regions that are 1,600 to 2,500 a copy in F&I. And I think that wakes people up.

It makes sure that we have the right people that -- and then we bring in the right products and we do because of our size to get leverage pricing that does make our products more competitive. And actually more profitable for our stores. And then the last thing is just to make sure that we deliver to market at the right price. Now the other big thing when I come back to people is that, 71% of the transactions have negative equity of over 5,100.

And so we have to make sure we look at our F&I team as professionals that have to be able to help customers meet their buying needs. I think a lot of awareness around F&I is what's really driven us to bring our F&I PVR's up consistently over the last several years. But at the same time, when we still have several of our more recent acquisition platforms in the 1,000 to $1,200 range, we know that there's significant opportunities to us to continue to capture as they season.

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

That's super helpful. Thanks so much.

Chris Holzshu -- Executive Vice President

You're welcome.

Operator

[Operator instructions] Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.

Bret Jordan -- Jefferies -- Analyst

Hey, good morning guys. A question I guess on the Sell-From-Home again. The conversion rate, I think you said 50 to 60% of folks on the sell from home platform ultimately sell to you. Is that the 50 to 60% of those logging in? Or 50 to 60% of the offers that you make transact? And do you lose people in the appraisal process or in the filling out the questionnaire?

Bryan DeBoer -- President and Chief Executive Officer

Brett, this is Bryan. The 50 to 60% is of the people that said, yes, I want to sell my car. We're closing 50 to 60% of those, OK? On the Shift side, they are closing 70 to 90%, about seven out of 10 initially, and then another two within about a week, where they go back to home or they haven't delivered to a store's location. Outside of that, we definitely see attrition before that.

So I think Chris mentioned that we're getting over 70,000 unique requests for people to sell their cars, so which is helpful. But a lot of that is -- it's FEO and FEM and we're having to pay for those leads to the able to find those cars. But I think as we build more proprietary solutions, a lot of that will become more cost-effective. I think if you look at our advertising we were down almost 5% year over year in same store, as a percentage of growth in advertising, which is some early signs that we'd like to see, while our traffic was still up almost 23%.

Bret Jordan -- Jefferies -- Analyst

OK. So the 50 to 60% are those people who have received the bid, brought their car down to your lot, you've made them an offer you -- I think you said the average is about $750 below what they originally saw on the screen, once you've seen it and touched it, and they still transact?

Bryan DeBoer -- President and Chief Executive Officer

Yes. that's -- so they don't necessarily have to bring it down to us. We give them an offer within seconds, OK? It's doing it automatically on the algorithm. OK so, really quickly they're able to respond yes, or no if they hit yes, OK, then we reach out to them or they schedule a time, OK? So once they hit yes, we're saying that five out of six times, we're able to get that car.

Bret Jordan -- Jefferies -- Analyst

OK. Great. And then a question on the body shop side of the business being up 11%, obviously, a lot better than repairable claims growth. What -- what's driving that? Is it always certification programs that are pushing more volume to you or is it you getting better labor access than some of the independent competition?

Bryan DeBoer -- President and Chief Executive Officer

This is Bryan, again, Brett. I would say it's a couple different things it's our direct to repair partnerships with our insurance companies that's typically the biggest driver of body shop business. We've done a pretty good job about building national contracts with theirs and really reaching out to the different insurance providers to get that mainstream of leads coming in to us. I would also say this if you look at our same-store sales last year, and body shop it was down, OK? So we probably had a fairly easy comp and it's nice to see that our body shop and the people running those body shops are really starting to take hold and really believe in that growth powered by people and reaching for the sky on high performance.

Bret Jordan -- Jefferies -- Analyst

Thank you.

Bryan DeBoer -- President and Chief Executive Officer

Thanks, Brett

Operator

Our next question comes from Derek Glynn with Consumer Edge Research. Please proceed with your question morning.

Derek Glynn -- Consumer Edge Research -- Analyst

Thanks for taking my question here. Big picture, given the success you've had today, what do you view as you competitive advantage with respect to pursuing or sourcing these M&A opportunities. I'm just curious what you think your public peers haven't tried to replicate the Lithia model or pursue these types of acquisitions as aggressively as you have?

Bryan DeBoer -- President and Chief Executive Officer

This is Bryan, again. This is not a one answer question. So I'm going to give you a five or six different reasons why it's unreplicable. I think first and foremost, it starts with an acquisition strategy, that has been developed over 20 years and targets specific acquisitions that are going to yield the returns, that create that cash flow engine, that make it very affordable and keeps the leverage low.

Secondly, you have to secure manufacturer support, which I believe starts with that value-based acquisition strategy and the only way you're going to be able to do that is to have a culture and a team of people that are high-performing and that understand and are ready for a challenge to buy things that are broken sometime on average and probably, even in the southeast, that are operating pretty darn good and not try to imprint on them to make them you. But rather try to stay focused, that we care about pretty simple things, OK? We care about customer loyalty, expanding market share to grow profitability, OK? And that discipline is built into our proprietary measurement systems that are highly crucial to our ability to grow and expand the business, Chris spoke to that a little bit earlier. It's not something that anyone should take lightly. They're simple, but they are very complex and wrapped around our value-base of customers for life taking personal ownership, continuously improving and having fun.

And there's a levity there that creates and attracts and grows amazing people that can do great things with great assets, OK? And I think you just have to be able to find those assets. We also have an executive team that is a 100% aligned, that believes in the strategy and more importantly, believes that there's more. Their income's the 5% national market share and the inspiration that we believe we can achieve. We have the capital discipline to be able to make sure that we don't go off the rails, and that we're able to always be able to find the capital to be able to fill the shoes of the people that are ready to go do the next things, OK? And I think most importantly and probably lastly is we have digital solutions now that allow us to leverage the things I just talked about that we've never been able to leverage before.

And I think that roadway to that 5% of the nation, it's probably clearer than ever because of that ability to really expand groupings and areas, where our network currently doesn't touch. Or isn't dense enough.

Derek Glynn -- Consumer Edge Research -- Analyst

Great. Thanks for all the commentary.

Operator

Our next question is from David Whiston with Morningstar. Please proceed with your question.

David Whiston -- Morningstar -- Analyst

Thanks. Good morning. A little bit surprised to hear you say your sell from home tech was 100% Lithia-developed. I was wondering if your partners at shift contributed in any way to that development?

Bryan DeBoer -- President and Chief Executive Officer

Great question, David. I would say that the best practice sharing between our two organizations is amazing. We've had a full year together. And we're really excited about that future sharing of ideas to continue to grow.

I would say definitely, what we learned is that consumers -- there's many buckets of consumers that are thirsting for a new way to the able to interact with their mobility needs. And I think more than anything we saw that there's only light resistance when it comes to being able to interact. And I think that idea sends us down this pathway, that we had already been working on in partnership with other third parties, but what we quickly realized is our ability to respond and be nimble was probably more important than working on the partnerships because ultimately, we can do what we see is best, which means we're going to come up with multi-faceted solutions, rather than a one-size-shoe-fits-all because we ultimately believe that consumers are all wanting something a little bit unique to them.

David Whiston -- Morningstar -- Analyst

OK. Did I hear correctly that only 6% of your used procurements for your inventory come from the consumers, so it's 94% auction?

Bryan DeBoer -- President and Chief Executive Officer

OK. Let me back that up. You know what, let me give that to Chris. It's not 94% auction, we have five channels that we get it from.

Go ahead, Chris.

Chris Holzshu -- Executive Vice President

Yes, Dave. So trade-in vehicles represent 63% of the used vehicles we sell, auctions are only 12%. We do buy used vehicles from a lot of other new car dealers that aren't in the used car game, that's -- and then wholesalers bring us about 7% of our vehicles. And then our off the street vehicles are approximately 6%.

But I would also say that we're adding a new channel from the five channels with our online digital solutions and so really the six channels, we have we'll provide more color on No. 6 in the quarters to come.

Bryan DeBoer -- President and Chief Executive Officer

I love that, Chris. We're growing all the time, aren't we, exactly?

David Whiston -- Morningstar -- Analyst

OK. So on sell from home, if you pick up the vehicle -- you agree on a price and you pick up the vehicle from a person's home, and then once you're in your recon bay, you realize there's a much more serious problem. Do you have any recourse to the seller -- with the seller at that point that you can get any of your money back or are you stuck with with what you sold at?

Bryan DeBoer -- President and Chief Executive Officer

David, this is Bryan. I think if we look at things pretty broadly, meaning that we're mature buyers, we have experience and knowledge that we should know certain things. So no, we would not go back to the consumers, OK? If they choose to sell vehicles to us what we see is what we get just like we've been doing for -- well, for that matter in my career, for three decades, OK? We're grown-ups that understand the risks, as well as understanding the rewards in those instances where it doesn't work out fortunately there is enough good that comes through. And in growth and used vehicle sales is at all applicable.

Chris Holzshu -- Executive Vice President

David, this is Chris. As Bryan mentioned earlier, it only takes a couple of minutes to actually get the offer on your vehicle. And I encourage you to go to sell.baierl.com and actually, if you do have a license plate or your vehicle VIN, you can get an offer on your existing vehicle in minutes and see how the process works. It's pretty slick.

Bryan DeBoer -- President and Chief Executive Officer

And we won't make you sell it to us, you can just test it, OK? Even though we probably want the car, OK?

David Whiston -- Morningstar -- Analyst

OK, cool. Last question. Chris, I think the past two calls, you've called that negative equity, and it's great that looks like you are still getting that stable end of vehicles, but these negative equity numbers are pretty high. Aren't you concerned that at some point lending partners are going to pull back on writing that on paper?

Chris Holzshu -- Executive Vice President

Yes, David. This is Chris. Believe it or not, that hasn't changed much over the years. So while we we're calling it out, we just wanted to call it out in the context of the amount of work that goes into our finance and insurance teams and what they have to do other than just providing us new solutions.

This job takes a lot of work and as we continue to train and season our teams, they get better and better at it. What I do think that having the advantage of the new vehicles and the incentives that come with it. And rebates that are available for consumers all of those come into play when you actually work to finance a consumer and take advantage of being top of funnel and we keep getting better at it.

David Whiston -- Morningstar -- Analyst

OK. Thanks guys.

Operator

Ladies and gentlemen, we've reached the end of the question-and-answer session. I would now like to turn the call back to Bryan DeBoer for closing comments.

Bryan DeBoer -- President and Chief Executive Officer

OK. Thank you, everyone, for joining us today. And we look forward to updating you on our fourth quarter results in February. Bye.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Eric Pitt -- Vice President of Investor relations, and Treasurer

Bryan DeBoer -- President and Chief Executive Officer

Chris Holzshu -- Executive Vice President

Tina Miller -- Senior Vice President and Chief Financial Officer

Rick Nelson -- Stephens Inc. -- Analyst

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

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

Chris Bottiglieri -- Wolfe Research -- Analyst

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

Bret Jordan -- Jefferies -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

David Whiston -- Morningstar -- Analyst

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