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Autonation Inc (NYSE:AN)
Q2 2020 Earnings Call
Jul 23, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the AutoNation's Second Quarter 2020 Earnings Conference Call and Audio Webcast. First to speak will be Rob Quartaro, Vice President of Investor Relations. Please go ahead, sir.

Robert Quartaro -- Vice President, Investor Relations

Good morning, and welcome to AutoNation's second quarter 2020 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will be available following the call to address any additional question that you may have.

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

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

Mike Jackson -- Chairman and Chief Executive Officer

Good morning. Thank you for joining us. AutoNation delivered remarkable results for the second quarter compared to the prior year. Today, we reported an all-time record best ever quarter. Adjusted EPS from continuing operations of $1.41, an increase of 18% compared to last year. No question, the second quarter is certainly one for the history books. In early April, same-store retail unit sales dropped 50% compared to the prior year when the entire country shutdown due to the COVID-19 pandemic. For the month of June, thanks to the monumental effort of our associates, we recovered to achieve unit volume in line with last year. In April, same-store new vehicle unit sales were down approximately 50% and for the month of June only down 13% compared to last year.

Inventory shortages from the manufacturers' plant closures led to strong new vehicle gross profit per vehicle retailed. At the end of the quarter, new vehicle inventory was down 26,000 units or 41% compared to last year. We expect new vehicle margins to normalize as new vehicle inventories recover. At the beginning of April, same-store used vehicle retail unit volume was down approximately 60% and for the month of June increased 14% compared to last year. However, inventory levels are tight, demand is currently outpacing supply. We continue to focus on We'll Buy Your Car initiative, where we sourced over 6,000 units directly from consumers in the quarter. For July, we will source 3,500 units to help build our inventory.

Customer care is also seeing improvement. In April, our average same-store customer care gross profit per service day was down approximately 40% and for the month of June, it was down roughly 10% compared to last year. The pandemic has the accelerated -- a shift in consumer behavior toward digital engagement. Our AutoNation Express online selling tools enable customers to buy and sell vehicles online and our store-to-door delivery option allow customers to completely take delivery at home.

We're also investing in data and analytics. We have build a -- we have built a proprietary Equity Mining Tool, which leverages millions of sales and service transactions into a central system. The tool automatically appraises a customers' current vehicle and identifies a newer replacement vehicle for a similar or lower payment. It shows household vehicles, service history, propensity to serve -- to purchase and customer financial service product history. The Equity Mining Tool is linked to our recently launched Customers 360, which has over 8 million active customer sales and service records. Customer 360 allows our associates to see the lifetime value and transaction history of our customers.

We will continue to invest in digital capabilities that enable us to provide a truly comprehensive and personal experience for our customers. Over the last two years, AutoNation has taken an aggressive approach to streamline the business. The company's continued investment in digital created greater efficiencies, which would made possible, position eliminations and reduction in advertising cost.

Additionally in 2018, AutoNation implemented a restructuring plan that reduced cost annually, consolidated its regional structure from three to two. This year, we made further reductions to headcount, advertising and discretionary spending. These efforts allowed us to deliver adjusted SG&A as a percentage of gross profit of 68.2% in the second quarter of 2020, which represents a 520 point basis point improvement compared to the second quarter of 2018. We intend to operate below 69% SG&A as a percentage of gross profit on a long-term basis.

Today, we announced plans to build at least 20 additional AutoNation USA stores, will provide details of the roll-out schedule next quarter. We see an opportunity to take a larger share of the used vehicle market, which is substantially larger than the new vehicle market and benefit from the increased interest in vehicle ownership from consumers, first-class digital capabilities, our One Price strategy combined with lower acquisition cost, stable used vehicle retail price -- USA stores and attractive investment opportunity.

I'd now like to turn it over to Joe.

Joe Lower -- Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning, everyone.

Today, we reported adjusted net income from continuing operations of $124 million or $1.41 per share versus $108 or $1.20 per share during the second quarter of 2019, increased on a per share basis. Second quarter 2020 adjusted results exclude an unrealized gain of $161 million after-tax or $1.82 per share associated with our equity investment in Vroom and executive [Technical Issues] or $0.05 per share.

Going forward, our investment in Vroom will be marked to market at the end of each quarter with fluctuations in value included in our GAAP results. During the second quarter, same-store revenue decreased $726 million or 14% compared to the prior year as the global pandemic and shelter-in-place orders significantly disrupted our business, particularly in April. We did see a significant recovery sequentially from month to month through the quarter as Mike highlighted earlier as shelter-in-place orders were lifted in the economy reopened. Despite the economic volatility, our team executed at a high level during the quarter with same-store gross profit declining only 9% year-over-year driven by strong PVRs and resiliency of our used vehicle business. Our same-store variable PVRs were up $585 or up 16%, while same-store used units declined only 3% while compared to the prior year periods. Limited supply and recovering demand benefited vehicle margins in the second quarter. Looking ahead, we expect margins to normalize as inventory recovers through the second half of the year.

Moving to costs. Adjusted SG&A as a percentage of gross profit was 68.2% for the second quarter, which represents a 330 basis point decrease compared to a year-ago period. We drove significant SGA [Phonetic] leverage through extensive cost reduction efforts, including leveraging our digital capabilities to reduce expenses across labor, advertising and discretionary spend. As Mike stated, we will continue to maintain a discipline in our cost structure going forward targeting to continue to operate SG&A as a percentage of gross profit below 69%. Due to the strong execution in our stores, recovering demand and our proactive cost reduction efforts, adjusted operating income was only down 3% compared to the prior year, further benefiting result, floorplan interest expense decreased to $16 million as compared with $37 million in the second quarter of 2019 due to both lower interest rates and lower [Technical Issues] in the second quarter of 2019, due to both lower interest rates and lower average floorplan balances.

Non-vehicle interest expense decreased to $23 million as compared to $28 million in the second quarter of 2019, as we refinanced our 5.5% notes in February, with lower-cost debt. Importantly, during the second quarter, we strengthened our balance sheet and improved our liquidity position through rigorous expense management, disciplined capital allocation, strong free cash flow generation and the issuance of new 10-year notes. At the end of June, we had $2.1 billion of non-vehicle debt, a decrease of $432 million compared to the end of the first quarter. Our cash balance at quarter end was $257 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $1.6 billion at the end of June. This is an increase from $1.2 billion at the end of Q1. Our covenant leverage ratio of debt-to-EBITDA [Technical Issues] at the end of the second quarter compared to 2.8 times at the end of the first quarter.

Including cash, our net leverage was down to 2.0 at quarter end. During the quarter, we did not repurchased any shares as a result of the uncertainties presented by the global pandemic, but under the current Board authorization, the company has approximately $139 million available for additional share repurchase. Capital expenditures were $25 million compared to $67 million in the prior year, reflecting the actions we have implemented since March.

Looking forward, we will maintain cost and capital discipline, while we continue to invest in our business, opportunistically allocating capital to maximize shareholder returns. Our AutoNation USA expansion provides an attractive opportunity to increase our used vehicle market share and drive long-term shareholder value.

With that, I will now turn the call back over to Mike.

Mike Jackson -- Chairman and Chief Executive Officer

Thank you, Joe. I'm really excited about the great opportunities in front of us as a company. We have an industry-leading brand with scale, proprietary digital capabilities. We're well positioned for the future. We're now happy to take any of your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of John Murphy of Bank of America. Your line is open.

John Murphy -- Bank of America Merrill Lynch

Good morning, guys, and congrats on a great quarter. Mike, I just had a first question on AutoNation USA. I'm just curious, if you can update us on how the five stores are progressing, that are already launched? And what's kind of triggered the decision to really accelerate the growth over the next three years to 20 additional stores?

Mike Jackson -- Chairman and Chief Executive Officer

So we built five pilot stores, John, and the key was, after billing the pilot stores was to pause and come to conclusions what we have done right and what we have done wrong and how do we have a clear understandable path to profitability and what stores meet or exceed our return threshold. And on that, we did a lot right, but we also did a lot wrong and I'm glad we took the pause and we now have a very good understanding of what's right with the stores and the stores are solidly profitable and Joe can give you some numbers in a moment. So the amount of investment per store will be 20% to 25% lower than what we originally did. This is primarily because we narrowed the cape -- the focus of the store to being a transactional delivery center for vehicles and a reconditioning center. The number of service -- the amount of service capacity we put in the stores simply didn't pan out and we don't want to repeat that in future stores. So that gets our investment per store down to around $10 million or $11 million a store. Then we perfected the processes that were within the stores and really learned that the AutoNation One Price and all the procedures that we use in our existing stores are actually first rate and first-class and no reason to try to reinvent everything and now we have a very clear path to profitability on the stores. We expect we will rate -- reach breakeven within 12 months and within 18 months to two years, we'll be running already at our return threshold we need to green light an investment. So if you ignore March and April, which were so severely disrupted by the pandemic and really just look at January, February, we were already on track to green light this. So actually, I think the pause period was actually longer than we thought it was going to be. So it's not all of a sudden, we've been building to this, but we wanted to have a high degree of confidence and certitude that we know exactly what we're doing and that we'd hit the return targets. And so we're there and off we go. Joe, you want to talk about any other numbers?

Joe Lower -- Executive Vice President and Chief Financial Officer

Yeah, the only thing, I guess I would add Mike is, if you look at the stores today and again great performance, but we're generating about little over $2 million a quarter on a run rate and I think that's a kind of a good estimate of what our existing footprint has done recognizing there are obviously varied performance on that and for the model kind of going forward, as Mike said, to give you some confidence that it is a profitable model that we have now demonstrated successfully.

John Murphy -- Bank of America Merrill Lynch

Okay, that's helpful. And then just a second question on M&A and the online efforts and Mike you have, I mean, obviously been doing this for a long time and have a lot of perspective. It seems that there is a looser -- loosening of framework agreements and constraints by the automakers allowing certain networks to potentially grow above and beyond where they used to be limited, whether it'd be in the physical or virtual world. I'm just curious, in your interactions with the automakers, are they at a point where they're accepting more and more that these larger wealth yields partners in distribution like yourself can get larger without creating issues that they kind of anticipated in the past?

Mike Jackson -- Chairman and Chief Executive Officer

Yeah, well, I would say as the largest, there is still issues there that are by no means completely behind us and the gating to get the green light has implications for every store you already own with that particularly -- particular franchise. So the bar gets higher and higher. So when we look at future capital allocation, of course, we love our existing business and you see how it's performing. We made a surge investment in digital that we have a much more capable, robust platform with proprietary tools that fully prepared us for when there was this surge in consumer moving in this direction. And on the cost side, it had a double benefit in that the surge investment is behind this. We're on the other side of the mountain now and now that investment is allowing us to operate at a lower SG&A as a percent of growth and you heard the new target. And John, you and I have talked about when we will be under 70 again. Well, we're there, so that was a solid investment. So we love the returns on the USA stores and that I don't have -- we don't have to pay goodwill. We don't have to deal with all the manufacturer restrictions and we also look at the pricing that we see on the deals for new vehicle franchises and hitting our return threshold. It's not always clear that's the best place to put our capital. So I'm not saying we won't do deals, but still probably would be more in the line of tuck-ins rather than something big. That would be my expectation. So we will invest our capital in making sure our existing business is first class. We'll always look at the share repurchase opportunistically in the second quarter. Even though the price was attractive, there was just too much uncertainty that what was going to happen next. We had to be disciplined and refrain from share repurchase but we'll certainly be very keen to watch for opportunities in the future and then we'll do tuck-ins on new vehicle franchise.

John Murphy -- Bank of America Merrill Lynch

Got it. The couple...

Mike Jackson -- Chairman and Chief Executive Officer

The basic footprint we have -- with basic footprint we have, we like. As you know, we took a look at everything in our footprint from top to bottom. I would say, basically the divestitures of new vehicle franchise, it is for AutoNation is complete.

John Murphy -- Bank of America Merrill Lynch

Okay, that's very helpful, and then just lastly, real quick on SG&A. I mean, I know you guys are saying opportunity to remain below 69%. I'm just curious, if there is a greater opportunity to go lower as more sales and more of the process goes online and then also as AutoNation USA stores ramp up, do they have a lower SG&A to grow, so maybe we could blend down over time? So what is online mean and then what is AutoNation USA mean to that number?

Mike Jackson -- Chairman and Chief Executive Officer

Yes, John. I -- directionally, I would agree with your statement. Our efforts have certainly not -- will not cease, but I can't commit today that it's going to be -- I have to stand on what we said today. We are going to be below 69%, but our work has not stopped. Certainly, there was a big step taken in the second quarter. Certainly, you can see this is two years of effort that's been under way with this focus on digital, improving both effectiveness and efficiency. There is no reason to stop.

John Murphy -- Bank of America Merrill Lynch

Okay, great. Thank you very much...

Mike Jackson -- Chairman and Chief Executive Officer

Far as the...

John Murphy -- Bank of America Merrill Lynch

Have a good day.

Mike Jackson -- Chairman and Chief Executive Officer

With the USA stores, I don't know the answer to that.

John Murphy -- Bank of America Merrill Lynch

Yeah, yeah.

Mike Jackson -- Chairman and Chief Executive Officer

I will have to get back to you.

John Murphy -- Bank of America Merrill Lynch

Sure. Okay, all right. Thank you very much. I greatly appreciate it.

Operator

Your next question comes from the line of Rick Nelson of Stephens. Your line is open.

N. Richard Nelson -- Stephens, Inc.

All right. Thanks. Good morning. So the other car dealers are pointing to a big step change in profitability in June. I am curious, if you could comment there and whether that's continuing here in 2Q? Maybe you could talk about the SG&A juice [Phonetic] on June to give us some perspective.

Mike Jackson -- Chairman and Chief Executive Officer

Well, June was a remarkable month. I think our SG&A in June was at a level, you have the number there, Joe? I would assume it's 60s or something...

Joe Lower -- Executive Vice President and Chief Financial Officer

It was the low market...

Mike Jackson -- Chairman and Chief Executive Officer

Or below 50?

Joe Lower -- Executive Vice President and Chief Financial Officer

It was clearly the low mark of the quarter. How about if I put that way? So it's below 68%.

Mike Jackson -- Chairman and Chief Executive Officer

Yeah. It was a very good number but not the run rate we're declaring. We're declaring 69%, we will be below with opportunity and work to go and we'll see what the future brings there.

N. Richard Nelson -- Stephens, Inc.

Got you. So we did see improvement in the several -- some parts operations. You mentioned minus 40 in April, minus 10 in June.

Mike Jackson -- Chairman and Chief Executive Officer

Yeah. Its...

N. Richard Nelson -- Stephens, Inc.

If Mike, yeah, what you are thinking there as we push lower?

Mike Jackson -- Chairman and Chief Executive Officer

Rick, let me tell you exactly where we are. Usually, we don't give updates on the current month, but this is extraordinary circumstances. So new unit sales so far in July are running minus 15%. It's definitely a supply issue. The manufacturers are ramping up and they have challenges and I think our shipments of new vehicles to us will be 25% lower than a year ago. So I think it's really into the fall before new vehicle inventories normalize. Our used pre-owned sales are running plus 7%, plus 8%, something like that. Good demand and if we had more, we could sell more. So we're -- we had a really strong close, end of June. So inventories were tight going into July. We're working to get -- and on customer care, it can -- the pace continues to improve, I think on a daily basis at minus 7% compared to a year ago and if the trend continues at some point during this quarter, I expect customer care will be running equal to prior year. And there's going to be a lot of pent up demand ultimately for maintenance. No maintenance was done during this pandemic period. We only did repairs that had to be done. So it's gradually -- it's only down 7% in July and still getting a little better each day.

N. Richard Nelson -- Stephens, Inc.

Great. Thanks for that color. Also like to ask you about markets, where we've seen some COVID outbreaks like Texas, Florida, California, can you have commentary about what you're seeing there? That will be helpful.

Mike Jackson -- Chairman and Chief Executive Officer

Yeah. So we're -- first for AutoNation, I think we are the first, if not today, the only auto retailer that -- of any size and scale that mandated mask for all employees. We had them -- we started buying them, acquiring them in late March. By early April, we had a good supply and the policy went in place on April 17th, as well as social distancing within the stores and that put our employees in a safe environment and we could really see that a customers appreciated it. I will tell you the overriding team, we're hearing from customers, is their demand for personal mobility rather than shared mobility in every aspect and this is trumping any concern they may have about leaving their house or not leaving their house. They want to come out and get their personal mobility situation to a new place and so with these markets were -- become so called hot-spots, we have seen no change in customer behavior. Business is fine. No real change with additional outbreaks. Now that's not to say there won't be government action in some of these places, between now and the year-end, there could still be some twists and turns, but if I put it all together and try to step back from that, I mean ultimately, there will be a vaccine. So let's look at '21. I think this demand for personal mobility will very much remain so for retail automotive, new and pre-owned. I think the outlook is quite positive, quite confident. You combine that with the fact that I believe we are going to have low interest rates for both ourself and our customers for years, gives me a very positive outlook about auto retail sales. The key word there is retail, the fleet, it's another whole story, not our expertise, not our issue, I'm talking automotive retail.

N. Richard Nelson -- Stephens, Inc.

Great. Thanks. Thanks a lot and good luck.

Mike Jackson -- Chairman and Chief Executive Officer

Thank you.

Joe Lower -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Armintas Sinkevicius. Your line is open -- of Morgan Stanley. Your line is open.

Mike Jackson -- Chairman and Chief Executive Officer

You may be on mute. We don't hear anything.

Joe Lower -- Executive Vice President and Chief Financial Officer

Okay. We have the next caller then.

Mike Jackson -- Chairman and Chief Executive Officer

Next caller please.

Operator

One moment. Your line is open.

Armintas Sinkevicius -- Morgan Stanley

Hello?

Mike Jackson -- Chairman and Chief Executive Officer

Hello.

Armintas Sinkevicius -- Morgan Stanley

Hello. Hi. That was weird, I did not have my mute button on but glad we're connected now. There seems to be a greater focus on digital, particularly in the press release, your prepared remarks. Maybe you could talk about your plan here for digital going forward, some milestones you hope to head or some initiatives that you're targeting on rolling out?

Mike Jackson -- Chairman and Chief Executive Officer

Well, we had a surge investment in digital over the last few years, that was quite remarkable. And we felt the customer was on a migration to digital and certainly this pandemic is an inflection point for which are fully prepared. So we have a very robust platform today that performs across the enterprise flawlessly, that is really quite remarkable. And we have proprietary tools that we will systematically add to, but we're now, as I said earlier on the other side of the mountain. So we were rolling the stone uphill, where we had to make these significant investments with the hope and the belief that it would give us capabilities and get us to a different cost basis. But one of the reasons we're so confident on the cost basis is that the surge investment period is passed and the tools are working and we can see the effect -- effectiveness and efficiency that they bring. And we'll just continue to build on the platform that we have and we have very smart, talented people, but climbing the mountain and crushing the mountain was the hard part and I'm happy to say we're on the other side.

Armintas Sinkevicius -- Morgan Stanley

Okay. And how many of your sales during the quarter and since then have been involving delivery and/or curbside pickup. Have you seen that continue to increase since just over the last 12 months or?

Mike Jackson -- Chairman and Chief Executive Officer

TYeah, It's -- so we have that capability and we do it for our customers, both on the sales and service side. But our experience remains that the customer wants to do a substantial amount of the transaction digitally and you better have that capability to interact with the customer or else you're going to lose them to someone else. But ultimately, the customer wants to come in to take final delivery and that's what they want. We're good at it. It's efficient, it's effective. It's a safe environment. But the point is, we have a capability to move wherever the customer wants to go and I think, we certainly demonstrated that during this Corona period. If they want to surge to digital, we're ready for it. If they want to surge to home delivery, we're ready for it. We have the capability to do both, but on home delivery and pickup, I would say, it's less than 10% of the business.

Armintas Sinkevicius -- Morgan Stanley

Okay. And just last one here. Any lessons learned from Vroom, I know it was a financial investment but anything that you were able to takeaway from that experience in working with them?

Mike Jackson -- Chairman and Chief Executive Officer

I think, Vroom has been a terrific investment and it's a company that we admire. And I think the -- having been at the table as a Board Member and all the bilateral discussions was constructive for both companies, but it did not lead to any operating partnerships. And I would say, we are now an investor in Vroom.

Armintas Sinkevicius -- Morgan Stanley

Okay. Great. Thank you for taking the questions.

Mike Jackson -- Chairman and Chief Executive Officer

Absolutely.

Operator

Your next question comes from the line of David Whiston of Morningstar. Your line is open.

David Whiston -- Morningstar

Thanks, good morning. Can you just -- in the press release, you're really differentiating between Customer 360 and the Equity Mining Tool in terms of 360 being a more personalized experience. And I'm just curious, could you go in a little more detail on what makes it more personalized than the insights you're already getting from the mining tool?

Mike Jackson -- Chairman and Chief Executive Officer

So what's amazing about 360 and what we mean by 360 degrees. First, it's a customer-centric approach rather than a vehicle-centric approach. So if you're Mr. Smith and you go in LA and buy your daughter who's going away to college a preowned car and you fly to Miami, your home and walk into our Mercedes-Benz store, we know instantly when you entered in the Miami store, what you just did in LA. So it's not in silos, it's a pan-enterprise customers that's quite remarkable. So we know your whole history, both sales and service with every AutoNation store in our system in real time. Then Equity Mining Tools and analytical tool, it's applied to that, which then identifies when customers on certain vehicles they own are in the maximum opportunity window to do something. So if we know your X, Y, Z number of months into a Toyota and we see that it's -- what the equity is you have in the vehicle while breaking and then there is a special deal on what we think with the predictive model, what you will want next that you can move into this other vehicle at the same price or less price and you're coming in for service tomorrow at our store and we'll walk up to you and say, hey, by the way, this opportunity is there. We just wanted to make you aware of it. You think about it, but here it is. So we've proactively turned a service visit into specific, compelling offer that is in the customers' interest. It's not where you just make a cold approach, it's like we know all this. You should think about this. This is in your interest and the closing rate is remarkable. And the customers are delighted that we are thinking toward them. We could not, cannot do database that goes across the entire concern without the analytics.

David Whiston -- Morningstar

That's very helpful. I appreciate the detail.

Mike Jackson -- Chairman and Chief Executive Officer

Absolutely.

David Whiston -- Morningstar

Moving onto to new vehicles. [Technical Issues] Unit volume was down 23%, but the profitability was up over $400 and then your total new vehicle gross profit dollars, I think went only down about just under 5%. So is there no price war really going on among the few new vehicle customers that are there, because it's all the supply constraint?

Mike Jackson -- Chairman and Chief Executive Officer

Yeah. It's very, very reminiscent of 2011, when the Japanese factories closed duty. We just took -- the factories were closed for how long. We just looked at our inventory and said, there is no reason to rush it out the door unless there is something, some reason to do. And we just adjusted our prices and felt we would get a higher yield on it and that's exactly how it played out, exactly how it developed. Now -- but we're not saying, it's sustainable, open-ended. I mean, when inventories normalize and the plants are all humming again then I think, the prices will also normalize.

Armintas Sinkevicius -- Morgan Stanley

And one...

Mike Jackson -- Chairman and Chief Executive Officer

But it is again a demonstration of how resilient the auto retail model is that in very challenging circumstances, there is a lot of ways to manage the business. And I'm happy to tell you in my 20 years here, we've never had an operating loss that store level in month the April, month of April. This April was the toughest, had a shelter-in-place [Technical Issues] lot of different ways. [Technical Issues]

David Whiston -- Morningstar

Yeah. I agree and your F&I has been awesome too. Staying on that shutdown topic though, are you worried about California, Texas and Florida [Technical Issues].

Mike Jackson -- Chairman and Chief Executive Officer

Well, look, anybody who said they know the end to COVID-19, I don't believe. I think it's been turns left. I can tell you just what we hear [Technical Issues] they do not want to shelter-in-place again the -- by and large, people are being responsible. Now we've all seen photographs of those who are not but the idea of shelter-in-place again is not what we're hearing from customers. Now, what the authorities, government finally decide, I can't predict but I think, American people are one step in front of another, thank goodness better treatments are here [Technical Issues] and can't wait for a vaccine. So still a ways to go.

David Whiston -- Morningstar

I agree, I agree. And I just want to clarify finally. One thing you said on USA stores at the beginning. Did you say going forward, they would have basically no service or just very limited service?

Mike Jackson -- Chairman and Chief Executive Officer

Primarily [Technical Issues] so we have two choices, do a centralized reconditioning center, which means we acquire a vehicle, ship it to a central reconditioning center, recondition it, ship it back to the point of sale, deliver it toward customer. So we've analyzed that whole model and have concluded that we have the ability to do very cost effective reconditioning at the technical expertise, at the point of sale that we're not shipping the car multiple times to get it in front-line condition. So speed to market, speed to front-line sale with point of sale, reconditioning is a very strong advantage, because our intention is very serious in a sense that we want to grow our pre-owned business profitably. So we want the shortest time from opening of store to breakeven. We now feel it's about one year and then, the quickest time till we hit our return targets and that's now 18 months to two years. So that's a very -- and in our return, those losses have to all be factored in. So when your focus is really on profitability, grow the pre-owned business profitably, these are the conclusions you -- we came to. And so it is a reconditioning center near the point of sale, speed the front-end -- front-line presentation to the customer. There will be some service capability in those stores, but not nearly as much as was in the original plan.

David Whiston -- Morningstar

Great. Thanks for all the detail.

Mike Jackson -- Chairman and Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Rajat Gupta of J.P. Morgan. Your line is open.

Rajat Gupta -- J.P. Morgan

Hi, good morning and thanks for taking my questions...

Mike Jackson -- Chairman and Chief Executive Officer

Good morning.

Joe Lower -- Executive Vice President and Chief Financial Officer

Good morning.

Rajat Gupta -- J.P. Morgan

And congrats on the quarter, very well executed. I just had a follow-up on the SG&A question. Could you give us a sense of where your staffing levels are right now? Are you back to the level of staffing that you think you're good at right now or you think you need to continue to ramp that up? Just trying to get a sense of like how much personnel, headcount reduction is [Technical Issues] and related to that also, how should we think about [Technical Issues] might move forward here [Technical Issues] AutoNation USA, how do those all blend in to? [Technical Issues]

Mike Jackson -- Chairman and Chief Executive Officer

Yes, so on staffing [Technical Issues] I will just pick up where we entered. We had already taken actions in 2019, but let's just do 2020. We had 25,000 associates when we entered 2020. We have 21,000 associates today. There is no plan on a ramp. Now within that, I would say, we're very certain that 3,000 are permanent reductions. There is discussion around another 1,000 and maybe the truth is somewhere in between 21,000 and 22,000, but there is no plan to ramp [Technical Issues] what somebody asked me earlier, are you still working on SG&A, do you still see possibilities in it, SG&A it's [Technical Issues] working on right now. So I can't commit [Technical Issues] to say for the same level of business that we were tracking at in the first quarter. We can now do that with 22,000 employees rather than 25,000 and maybe even less than 22,000, but we'll have to see on that. And Joe, you want to take the other cost questions please?

Joe Lower -- Executive Vice President and Chief Financial Officer

Sure. Maybe just to kind of breakdown the SG&A pool discussion, so if you think about SG&A, we've talked a lot about the digital enablement. So I think of SG&A in three big buckets. I think of it is in compensation. I think of it is advertising. I think of it is overhead. So you take those three buckets, largest in our compensation quarter-over-quarter was down about 14% [Technical Issues] and clearly, we are seeing majority of that is in the store and clearly, the more efficient sales process in particular is enabling those reductions, the 100 basis points as a percentage of SG&A year-over-year improvement. And so clearly, we see opportunity there and as Mike said, an area we think has further leverage going forward. The next bucket. I think of is advertising. It's the smallest in dollars, but clearly the one that have the biggest impact from a year-over-year perspective. We were down about 40% in advertising year-over-year, really driven by the environment in our digital capabilities and being far more efficient in using our advertising dollars and that was 180 basis points year-over-year improvement. And in the third bucket. I think of it is overhead in the store and in corporate and that was down again, primarily headcount and discretionary spend 13% or 50 basis points. So each of those buckets have been impacted by the headcount reductions and been enabled by our digital capabilities that cumulatively was about 15% down year-over-year or 330 basis points. And as you look at the model going forward, we do see continued leverage, particularly as some of the higher margin -- our customer care type business recovers. Hope that helps.

Rajat Gupta -- J.P. Morgan

Ya, that's helpful. So the advertising dollars per unit, if you just like divided by like the new unit sales. I mean, does that mean lower year going forward on a normalized basis?

Joe Lower -- Executive Vice President and Chief Financial Officer

Yes.

Rajat Gupta -- J.P. Morgan

Is that fair to assume? Okay, that's super helpful. And on the F&I GPU, really very solid numbers in the quarter. Was any of that temporary in nature you think? I know, there was higher penetration on any of the buckets that helped that or is that a pretty good sustainable number that we can expect to see in the near term?

Mike Jackson -- Chairman and Chief Executive Officer

Rajat, this is Mike, I'll go first. Our remarkable success in F&I is due to the AutoNation products that we've developed that customers are choosing. The amount of finance income over the last few years is relatively stable. I don't know [Technical Issues] we're selling customers more expensive products, that's not the growth. Greater percentage of customers are choosing AutoNation service contracts, maintenance contracts, which by the way is building the future and that adoption by customers just continues and we refine the products and we refine our processes every quarter. It's a continuous improvement loop and so that goes on. It's not some quirk [Technical Issues] is a windfall. It's -- at the core level, it's really a branded product that customers just want and are adopting at a higher level. So anything you want to add to that, Joe?

Joe Lower -- Executive Vice President and Chief Financial Officer

Only thing i would add Mike, to reiterate the point is [Technical Issues] and now with much this of this being completely digital makes it even a more efficient process. So I agree with Mike. I do not -- I would not expect any sort of material [Technical Issues] we will continued to see improvement.

Rajat Gupta -- J.P. Morgan

Got it. That's helpful. Just one last one from me, if I may ask on the management change. I know you've said that you would sometime in early 2022, could you give us a sense of just the kind of candidate you would be looking for as successor. I mean, do you think that process could be accelerated at any point? Just curious as your thoughts there and...

Mike Jackson -- Chairman and Chief Executive Officer

Certainly, certainly. Second quarter of 2020 will live in my memory forever in the midst of this pandemic earnings per share in the history of the company that was a tremendous performance on behalf of all our employees. Decisions we as executive team had to make and we also had the shock of unexpectedly losing Cheryl as a part the leadership team here and she was doing a terrific job and I have to tell you I miss her. I worked side by side with her for 10 years and I miss her. Now, having said that, you all know I'm passionate about auto and auto retail and passionate about AutoNation. I love the business, I love the people in the company, i love the Board. I love every day here and the Board said, you know, Mike, you are not exactly chopped liver and we're in the middle of a pandemic, we think there should be a singular focus by the Board, by Executive Team and by management that not only how do we get through this pandemic but -- well, on the other side of this pandemic, we're stronger than ever. That was the singular mandate [Technical Issues] so nobody knows exactly how this pandemic is going to play out, but we all sort of felt well, 2022, we can do succession in an orderly fashion in this pandemic with a singular focus and there has been not a single meeting or a single discussion about succession process. There is that nothing, singular focus, lead the business, run the business and achieve something very remarkable through this difficult challenging period with the pandemic. And I think our results show that decision to go for a singular focus was the right one, as the road we're on and I don't expect much change in the timeline, one way or the other.

Rajat Gupta -- J.P. Morgan

Got it, got it. That's helpful. So there is no discussion as now, it's like the successor would be internal or external or?

Mike Jackson -- Chairman and Chief Executive Officer

Zero.

Rajat Gupta -- J.P. Morgan

With the kind of profile. Okay, got it.

Mike Jackson -- Chairman and Chief Executive Officer

Zero. Singular focus. Run the business.

Rajat Gupta -- J.P. Morgan

That's great. Yes, thank you. Thanks for the color and congrats again.

Mike Jackson -- Chairman and Chief Executive Officer

Okay.

Rajat Gupta -- J.P. Morgan

Yeah.

Operator

Your next question comes from the line of Stephanie Benjamin of SunTrust. Your line is open.

Stephanie Benjamin -- SunTrust Robinson Humphrey

Good morning.

Mike Jackson -- Chairman and Chief Executive Officer

Good morning.

Joe Lower -- Executive Vice President and Chief Financial Officer

Good morning.

Stephanie Benjamin -- SunTrust Robinson Humphrey

I wanted to touch on -- can I go back to the [Technical Issues] before and I apologize, if I missed this, but did you quantify the percentages, units or sales in the quarter that did come from a digital platform or anything like that?

Mike Jackson -- Chairman and Chief Executive Officer

Well, we were -- for the way, we measure it, for our metrics, we were somewhere -- entering the year in the low 30s and if I went back five years ago, we were in the low 20s, something like that. And each year [Technical Issues] increase and so that's the road we are on. With the arrival of Corona, 10 days, that number moved into the low 40s and it hasn't moved back and I don't think it will. I think, there was an inflection point that lifted the whole digital issue, accelerated, if you will. Now, I think we go back to increasing 100 to 200 basis points a year, but you're going to have this inflection point, where all of a sudden it went from the low 30s to low 40s and doesn't go back. So the only thing I can say is that I'm happy we made the investments that we were fully prepared for that moment. We didn't expect that [Technical Issues] moment but there was and we were able then to perform for the expectations of our customers and take that moment to move to a different cost basis.

Stephanie Benjamin -- SunTrust Robinson Humphrey

Got it. Thank you. And in the same vein, wanted to hear your thoughts on just your ability to continue to penetrate your F&I products, particularly the warranty and extended service with a fully digital platform. So maybe kind of discuss how you're able to sell those digitally and kind of engage the consumer without being in person? I mean and then just the adoption rate, you've seen with those digital sales. Yeah. Thank you.

Mike Jackson -- Chairman and Chief Executive Officer

Joe has discussed earlier, the -- over 90% of our customers, I don't know what the exact number is, Joe might have it, of our customers prefer to take delivery of their vehicle at the store. And I think, our selection rate from customers for AutoNation branded products is somewhere around 42%, 43%, something like that. So we have excellent penetration and it's steadily growing. Quite frankly, though as far as achieving that level of penetration digitally, we have not been able to do that successfully yet. We've made various attempts but we do not -- I don't know the exact number. We do not have the same adoption rate of those products digitally online that we do with an in-store process. Now with the in-store process, the customers are delighted, they are happy that they -- of course, they have the right to walk away. So it's not for sale, it's something they really choose and are happy to have, but we have it, I would say, perfected in the stores. There is still work to do in the digital world on those products.

Stephanie Benjamin -- SunTrust Robinson Humphrey

Got it. And that's all I had. So thank you for your time.

Mike Jackson -- Chairman and Chief Executive Officer

Great. Thank you.

Operator

Your last question comes from the line of Bret Jordan of Jefferies. Your line is open.

Bret Jordan -- Jefferies

Hey, good morning guys.

Mike Jackson -- Chairman and Chief Executive Officer

Good morning.

Joe Lower -- Executive Vice President and Chief Financial Officer

Morning.

Bret Jordan -- Jefferies

As you guys de-emphasized the customer pay service of AutoNation USA a bit, does that change your strategy around the AutoNation branded parts at all?

Mike Jackson -- Chairman and Chief Executive Officer

Now, the AutoNation branded parts have been a big success as far as all the maintenance parts and mechanical parts. It certainly has put us on a very good basis for recondition and it will be AutoNation branded parts that we use in the USA stores for reconditioning, that's a complete success and has made meaningful contribution to profitability of the company.Now AutoNation Collision Parts is another story. The whole collision business was very challenged during the second quarter with the dramatic reductions in the amount of miles driven and that business wasn't profitable even before the marketplace got much more difficult, that's a relatively small part of the AutoNation parts world, but I would say that's the only area of concern. Everything else is moving in very good direction.

Bret Jordan -- Jefferies

Okay. And then one big picture question. I guess as it seems most everyone, including all the online start-ups are really focusing on building out used volumes and growing units quickly, do you see the structural change in the inventory sourcing, I guess as the world is just going to be more competitive to buy the incremental used car or is the share just going to shift from independent used car dealers to the larger players like yourself and the total...

Mike Jackson -- Chairman and Chief Executive Officer

Yeah...

Bret Jordan -- Jefferies

Number of buyers out there won't necessarily...

Mike Jackson -- Chairman and Chief Executive Officer

It's absolutely the second one. First, it's a huge market, $35 million a year. You have private transactions, independent transactions and you have franchise dealers and then you have the big players. I think, there is a yearning for a branded [Technical Issues] and scale also brings in the consumers' mind an idea of trust and if you really have a good experience and you stand behind the product, I think that's where the business is going to consolidate around and whether that's Carvana, CarMax, AutoNation, Vroom, I think the big players that are branded are clearly going to take share. It's a share consolidation in a very big ocean, that's how I see it developing. Now, when it comes to making money then in that consolidation, I like our position and I think I believe, we've built the brand, we have the brand, the brand is respected, our reputational score is through the roof. We figured out how to do reconditioning competitively and I like our acquisition plans, because I have a new vehicle business, which is huge, on which I'm taking trades very cost-effectively, then I have a big pre-owned business that I'm taking trades very cost-effectively. We're building our We'll Buy Your Car business. We're going to buy directly from consumers another 3,500 in July and then you have the auction component as the icing on the cake. So I think we're very competitive in how we acquire. We have a brand that's trusted and we One Price, on the retail side, we had a very good idea that retail pricing was not moving in the second quarter, downward precipitously, that gave us the confidence to go out and buy a lot of inventory, even though there was a lot of those who said the sky was falling and we really performed well through there. So a core skill set of AutoNation is acquiring pre-owned vehicles at very good prices and we know how to One Price them centrally across the company. We know have to recondition them cost effectively. We have a brand. We have a process. We have digital capability. I'm optimistic about our future in pre-owned and I view the big players as the winners. I think that's what the yearning is out there for.

Bret Jordan -- Jefferies

Great. Thank you. Appreciate it.

Mike Jackson -- Chairman and Chief Executive Officer

Great. Thank you everyone for joining us today. Thank you for all your questions.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Robert Quartaro -- Vice President, Investor Relations

Mike Jackson -- Chairman and Chief Executive Officer

Joe Lower -- Executive Vice President and Chief Financial Officer

Joe Lower -- Executive Vice President and Chief Financial Officer

John Murphy -- Bank of America Merrill Lynch

N. Richard Nelson -- Stephens, Inc.

Armintas Sinkevicius -- Morgan Stanley

David Whiston -- Morningstar

Rajat Gupta -- J.P. Morgan

Stephanie Benjamin -- SunTrust Robinson Humphrey

Bret Jordan -- Jefferies

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