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AutoNation (NYSE:AN)

Q1 2011 Earnings Call

April 26, 2011 11:00 am ET

Executives

Michael Maroone - President, Chief Operating Officer and Director

Cheryl Scully -

Michael Jackson - Chairman of the Board and Chief Executive Officer

Mike Short - Chief Financial Officer and Executive Vice President

Analysts

Colin Langan - UBS Investment Bank

Brian Sponheimer - Gabelli & Company, Inc.

Patrick Archambault - Goldman Sachs Group Inc.

Rick Nelson - Stephens Inc.

Matt Nemer - Wells Fargo Securities, LLC

John Murphy - BofA Merrill Lynch

Operator

Thank you for standing by, and welcome to AutoNation's First Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation.

Cheryl Scully

Good morning, and welcome to AutoNation's First Quarter 2011 Conference Call. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer.

Following their remarks, we will open up the call for questions. Kate Keyser and I will also be available by phone following the call to address any additional questions you may have.

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations are provided in our press release, which is available on our website at www.autonation.com.

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

Michael Jackson

Good morning. Thank you for joining us. Today we reported record adjusted EPS from continuing operations of $0.46 for the first quarter, a 35% increase on a per-share basis as compared to $0.34 for the same period in the prior year. Gross profit for all of our major categories improved compared to the first quarter of 2010 and our expense structure remained very disciplined.

First quarter 2011 revenue totaled $3.3 billion compared to $2.8 billion in the year-ago period, an increase of 17% driven primarily by stronger new vehicle revenue. In the first quarter, AutoNation's new vehicle unit sales increased 23%, or 20% on a same-store basis, which were in line with the industry according to CNW Research Data.

In March, we began to see a mix shift, with consumers gradually moving to mid-size and small vehicles as gas prices increase, fuel efficiency has written on the consumer consideration shopping list and is now in the top 10 according to CNW.

We are, of course, supportive of the efforts of our Japanese-based partners as they work tirelessly to rebuild and begin production and bring it back online. To support the recovery efforts, AutoNation has made a donation of $100,000 to the American Red Cross. While the underlying recovery in consumer demand for autos remains on track in the United States due to Japanese supply constraints throughout the remainder of 2011, we are reducing our planning assumption for the 2011 full year U.S. industry sales to mid-12 million new vehicle units.

Based on current information, we see significant reductions in vehicle shipments from the Japanese manufacturers through year end with the resumption of normal shipment level in early 2012.

I'll now turn the call over to Chief Financial Officer, Mike Short.

Mike Short

Thank you, Mike. Good morning, ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $70.3 million, or $0.46 per share, versus $58.8 billion, or $0.34 per share, during the first quarter of 2010, a 35% improvement on a per-share basis. During our fourth quarter conference call, we mentioned that we expected to earn approximately $9 million in performance-based manufacturer incentives over the following 2 quarters, primarily related to Premium Luxury vehicles previously sold.

Our first quarter gross profit and operating income were favorably impacted by $4.6 million due to the recognition of these incentives. We expect to recognize approximately $4.5 million in operating income related to these incentives in the second quarter of 2011.

First quarter revenue increased $474.5 million or 17% compared to the prior year. Gross profit improved by $57.8 million or 11%, while SG&A was up $34.3 million or 9% for the quarter. SG&A as a percentage of gross profit was 72.0% for the quarter. Excluding the benefit from the manufacturer incentives previously mentioned, it would have been 72.6%. This represents an improvement of over 80 basis points compared to the first quarter of 2010, it also represents over 100 basis points sequential improvement, excluding the benefit from the incentives in both quarters.

Although we’ve achieved strong SG&A performance to date, there's still further long-term benefit to be gained as we focus on technology and process improvements in our stores and in our Shared Service Center, as well as centralized procurement initiatives. Our scale and centralization efforts to date uniquely position us to take these next steps in SG&A improvements.

Net new vehicle floorplan was a benefit of $4.7 million for the quarter, an improvement of $1.4 million compared to the $3.3 million benefit in the first quarter of 2010, due to an increase in floorplan assistance as a result of higher new vehicle sales, partially offset by an increase in floorplan interest expense due to higher average floorplan balances during the quarter. Non-vehicle interest expense was $16.3 million for the quarter, up from $9 million we reported in the first quarter of 2010 due to higher debt levels and increased percentage of fixed rate debt and increased spreads related to our refinancing in April of 2010.

During the quarter, we paid down $15 million under our revolving credit facility, resulting in $165 million of outstanding borrowings under the revolving credit facility at the end of the first quarter. Our first quarter non-vehicle debt balance was $1.34 billion, an increase of $226 million compared to the first quarter of 2010, but a decrease of $11.8 million compared to the fourth quarter of 2010.

LIBOR rates were relatively flat compared with the first quarter of 2010. The provision for income tax in the quarter was $44.2 million or 38.6%. During the first quarter, we repurchased approximately 1.8 million shares for $59 million at an average price of $32.84 per share. We ended the first quarter with 148.6 million shares outstanding and a $174 million Board authorization remaining for future share repurchases.

During the quarter, as previously disclosed, we acquired a Toyota store in the Fort Myers market for approximately $64 million. Capital expenditures for the quarter were $25 million, and our CapEx estimate for the year remains at $140 million net of proceeds from related asset sales.

Floorplan debt was approximately $1.65 billion at quarter end, down approximately $214 million from December 31, 2010 in-line with inventory levels. We remain within the limits of our financial covenants with the leverage ratio of 2.27x at the end of the quarter. Our indebtedness number in this calculation is not on a net debt basis, if we had applied the cash of our balance sheet plus cash available from used inventory flooring to a reduce debt, we would have lowered the ratio to 2.0x compared to the limit of 3.25x.

Our quarter end cash balance was $84 million, which combined with our additional borrowing capacity resulted in strong total liquidity of approximately $570 million at the end of March. The strength of our balance sheet and the discipline of our cost structure will enable us to manage through the challenges presented by the Japanese product constraints. We are well-positioned to continue to invest in our business and capitalize on the long-term recovery in the automotive market. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Michael Maroone

Thanks, Mike, and good morning. AutoNation delivered a strong performance in the quarter and I'll start by thanking our associates for their commitment and dedication in making it happen.

Customers were in the market and we were ready as evidenced by strong year-over-year increases in new and used unit volume, making this the fifth consecutive quarter of double-digit growth for total retail volume. Revenue and total gross profit increased in all areas of our business, and we recorded an impressive operating margin of 4.2%.

Turning to detailed results. I'll begin with our segment performance. At $129 million, total segment income for the first quarter grew 22% or $23 million compared to the period a year ago with increases in all 3 segments as follows: Domestic segment income increased 34% to $43 million; Premium Luxury increased 18% to $55 million; and Import segment income increased 15% to $58 million. As I continue my comments, we'll be in a same-store basis unless noted otherwise.

During the first quarter, AutoNation retailed 54,200 new vehicles, an increase of 8,900 units or 20% compared to the period a year ago. First quarter new vehicle same-store revenue increased $286 million, or 20%, to $1.75 billion on increased volume, driven by stronger customer demand.

A $2,266 gross profit per new vehicle retail was relatively flat compared to the period a year ago, and gross profit as a percent of revenue of 7% was off by 10 basis points. This was driven by a decline in margins of the Import segment due to the competitive environment, which was partially offset by the recognition of special performance-based manufacturer incentives which we discussed on our previous call.

Excluding the $4.6 million of special performance-based manufacturer incentives in the quarter, gross profit per new vehicle retailed was $2,181, a reduction of $91 or 4%, and gross profit as a percent of revenue was 6.8%. Sequentially from Q4 to Q1, again excluding the special performance-based manufacturer incentives, we saw an improvement in the gross profit per new vehicle retailed of $18.

At March 31, new vehicle days supply was 50 days or 40,800 units compared to 51 days a year ago and 63 days at December 31.

Next, used vehicles, where we're very pleased with our results. AutoNation retailed 41,300 used vehicles in the quarter, which drove a unit volume increase of 10% compared to the period a year ago and a used-to-new ratio of 0.76:1.

As tight inventories and increasing demand move prices higher, same-store retail used revenue was up 11% to $714 million, and revenue per used vehicle retailed of $17,300 increased $224 compared to the period a year ago. Same-store used vehicle gross profit of $73 million reflected an increase of 15%, while gross profit per used vehicle retailed at $1,757 grew $78, or 5%, compared to the period a year ago. Used vehicle gross profit as a percent of revenue at 10.1% grew 30 basis points.

I'd like to provide a quick update on our Value VehiclesOutlets, an initiative in its early stages to retail value-priced vehicles that we would have traditionally wholesaled. Today, we have 22 locations in operation, with 6 more planned by the end of Q3. We are very pleased with the continued growth of this program, which is an important part of our strategy to address industry supply constraints and meet market demand.

Another important component is winning more trades, which we addressed by viewing every customer visit as a trade opportunity and ensuring our appraisal process that actively involves the customer is consistently executed. I'll also note that in the quarter, we moved nearly 12,000 used vehicles from originating stores to a more optimal location relative to turn and PVR [per vehicle retailed]. In continued experience, good success at retail with this program. At March 31, used vehicle days supply was 42 days in line with our adjusted targeted days supply.

For parts, service and collision compared to the period -- compared to the quarter a year ago, same-store revenue of $557 million increased $19 million or 4%. We are very pleased to deliver another solid performance on the customer pay side, where customer pay revenue grew year-over-year for the third consecutive quarter, and was up 4% year-over-year for the second consecutive quarter.

We attribute the upward trend in customer pay revenue to improving market conditions and better execution in the service drive. Parts, service and collision gross profit of $239 million was up $2 million or 1% compared to a year ago. In the quarter, increases of 2% in customer pay service gross and a 7% increase in internal gross, more than offset a 4% decline in warranty gross.

Gross profit as a percent of revenue was off 120 basis points to 42.9% compared to a year-ago. We attribute this to a shift in mix toward internal as well as a shift within customer pay resulting from our initiatives to grow tires and maintenance to drive customer retention. I'll also note that the warranty comp in a period a year ago included the Toyota recalls.

Turning to F&I. Gross profit per vehicle retailed of $1,137 remain strong but up slightly versus a year ago, with improvements in the rate of product commissions, offset by product chargebacks and lower retrospective commissions on vehicle service contract programs. The credit environment was again favorable compared to a year ago and stable sequentially. In the quarter, we noted key non-prime and sub-prime lenders were buying deeper year-over-year.

At March 31, our store portfolio stood at 209 stores and 243 franchises, representing 31 brands and 15 states. Changes from our Q4 2010 call are the completion of the acquisition of Ft. Myers Toyota and the separation of franchises at 2 locations. One where we separated MINI from BMW in Northern California, and the other where we separated Mitsubishi from Chevrolet in Houston. We remain confident regarding the long-term-outlook for our business and are continuing to invest in our future growth.

Year-to-date, we've completed 8 of 16 major facility projects slated for 2011. We've opened 2 brand new state-of-the-art ad points, Mercedes-Benz of Stanford and Central Florida, and Mercedes-Benz of Coconut Creek in South Florida. Relocations to new ground up facilities include Leesburg Honda, now called Honda of Dulles, Team Hyundai of Mall of Georgia and Mercedes-Benz of Sarasota.

We opened Fiat South Bay in Southern California after renovating an existing vacant facility, and completed the extensive renovation of Mercedes-Benz of Orlando and Mercedes-Benz of Westmont in the Chicago market.

Looking ahead, we continue to seek acquisition opportunities that meet our market, brand and return-on-investment criteria.

Before I close, I'd like to touch on how we're addressing the reduction in Japanese production. We've implemented a substantial number of tactical moves to address potential impacts with the goal of maximizing our inventories and optimizing gross.

Our revised operating plan includes: benchmarking and tactical adjustments of market pricing in new and used vehicles; increased acquisition of used inventory outside of auctions; a significant marketing shift to promote our broad selection of domestic and used inventory, as well as our fixed operation business; and an aggressive management of variable expenses. With the full extent of the industry impact not yet known, we believe that our disciplined approach coupled with an operating model that's diversified by brand, geography and revenue stream, positions us well to successfully navigate the anticipated disruption.

In closing, in the quarter, AutoNation continue to drive top-line growth and margin growth as well as delivered a record EPS in the first quarter and an industry selling rate of 13 million units. We did it with low associate turnover, high customer satisfaction, a disciplined cost structure and a 1-team-1-goal spirit. I'd like to thank our associates and share that we're very optimistic about the future of our company. And with that, I'll turn the call back to Mike Jackson.

Michael Jackson

Thanks, Mike. Our record of first quarter results demonstrate that the consumer is back, and reflect our ability to leverage our operating model and disciplined cost structure. Our diversified business model is resilient and adaptable. We are confident we can manage through the challenges presented by the Japanese product constraints and continue to be optimistic about the long-term recovery of the U.S. auto market. With that, I'd like to open it up the call for questions. First question, please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Patrick Archambault, Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc.

On the Japan impact, 2 questions. #1, can you give us a sense of how you see the timing impacting sales? In earlier call with the group, 1 suggested that inventories might be good to sort of sustain a couple of months of sales without issues, but by the third quarter is when we might see the impact. And then second to that, maybe it's just generally, how you think some of the supply issues that are happening are likely to impact pricing and margins for you guys going forward.

Michael Jackson

Yes, this is Mike Jackson. As of March 1, the Japanese had very good inventories in the U.S. around 600,000 units on the ground, and we had an excellent pipeline coming from Japan and parts going to the U.S. factories to continue production. So that really says you have a good supply. Through April and May, you will begin to see the first sign of disruption. I think then, the Japanese dealers are very skilled at working with lower inventories, they've done it for years so there can be significant inventory reduction before there is a meaningful impact on sales. But I think May, June, you begin to feel the disruption on the production. And certainly July, there will be meaningful shortages of Japanese products. I think on the front-end grosses and margins, we fully expected in the journey back to 16 million units and with increasing demand that we would be able to improve those margins in that journey. And I certainly believe in this period here, where there's going to be a significant differential between demand and supply, you will see improvement in front end margins. Maroone, maybe you can add to that.

Michael Maroone

Mike, I think you captured it. We have good supply today but we will feel pressure, and what we do is we benchmark to market pricing. There's a lot of data out there and we will move our prices up as the market moves up. And we do think there's opportunity.

Patrick Archambault - Goldman Sachs Group Inc.

Okay. Great. And just maybe 1 follow-up to that. How -- I mean, this is kind of a very broad question, but how flexible do you think some of the buyers or most of the buyers are, I should say, for mid-volume for product? Are these folks that you think you can sort of get into some of your other dealerships and competing brands during those periods of time when the product is tight or is the loyalty for that group kind of strong enough that, that might be difficult?

Michael Jackson

I think what we're saying is that the demand is there for a much higher selling rate but the supply will not be there. And I think in Mike and I's 40 years experience in this business, I don't think I've ever said that in the auto industry. So this is an unprecedented supply restraint and to continue the conversation, in all our discussion with the domestic and the German, there is a sense that they're working hard to maintain their original production plans, but they have given us no indication yet that they're able to increase production beyond the original plans, that they are dealing with part supply issues from the Japanese also.

So it's really a supply constrained situation. So I'm not sure the availability is going, at the domestic, it is going to be able to bridge the gap with the shortage of the Japanese in the total year. So it's clearly going to be a margin situation. I will say though in principle, the domestics have a much more attractive offering than they did 5 to 10 years ago, both from design, quality and certainly, from fuel efficiency. So they're well positioned to be attractive to Japanese traffic, and I think you'll have a compelling offer for them. But how much of that can really occur? I can't say. And that's the reason why we reduced our forecast for our industry sales to the mid-12 million. From today's perspective, I just don't see where the production is to support something higher than that.

Patrick Archambault - Goldman Sachs Group Inc.

Okay, terrific. Thanks. That's very helpful.

Operator

The next question is coming from Rick Nelson of Stephens.

Rick Nelson - Stephens Inc.

I think earlier, you had talked about your expectation that we would see a 30% to 50% reduction in production from the Japanese OEMs. Are you still comfortable with that estimate? And has your view have changed at all on the duration of the supply constraints?

Michael Jackson

Rick, my -- last time we spoke, it was on a sales call. It was 30% to 50% in 3 to 4 months. So 30% is out the window. Its 50% somewhere around that, plus or minus somewhat, and it's not 3 to 4 months, its 6 to 7 months. And so, if they're back on stride in the October, November with "normal production" of parts and vehicles, then you have to add 6 weeks to that to get it into the market. So we live in the real world. So on a shipment basis, to begin to rebuild inventory, you're into next year. So that's the reason that we've said that it's going to be a supply-constrained year. Certainly, that means we have to do work on the margin side, which we will. But from today's perspective, I don't see how the production is going to be there to support something above the mid-12 million level.

Rick Nelson - Stephens Inc.

And then you comment -- thank you for that, by the way. Can you comment on the used car business? How you see that impact about the supply constraints, more demand for used cars but higher sourcing cost because you're going to auction to...

Michael Maroone

Rick, it's Mike Maroone. I think there's a tremendous opportunity in used, and we're positioned to take advantage of it. We moved our inventories up. Our goal is to gain supply at the doors, as we call it in our dealerships, to try and win more appraisals. We're aggressively going after every single appraisal. I don't think our business model is just standing at the auction and buying a large numbers of vehicle. So I think there is opportunity. Certainly, the prices are strong. We've changed a number of our policies, aging and wholesale, and are really trying to get our inventories up, which we've done successfully. I think it’s a big opportunity, both on the volume side and the margin side.

Michael Jackson

And 1 more comment, this is Mike Jackson. I will note that both GM and Ford have confirmed, their store outlook of 13 million to 13.4 million, and if you do the math, the only way you can get there, that means GM and Ford are significantly increasing production above plan or else, the math doesn't work. So they may know something I don't know, that could well be. But from what they're telling us as far as what they're going to produce, there's been no increase in their production plan. But I will note they are confirming 13 million to 13.4 million, and they could know something I don't.

Rick Nelson - Stephens Inc.

And then, can I ask you about Toyota allocations? We -- you heard the things have really come to it, grinding halt then at week-to-week basis, any color there would be helpful.

Michael Maroone

Rick, again, its Mike Maroone. I would share your view, is that -- I don't know if they've come to a grinding halt but there's very little allocation of product. As Mike Jackson said, we had very solid inventory, probably above average inventories on March 1 and a very strong pipeline. Of course, the pipeline hasn't been disrupted, its future production that's disrupted. So we're in decent shape today, but I do not see the pipeline refilling too much and we stand by our 50% reduction of normal production.

Rick Nelson - Stephens Inc.

All right. Good. Thanks and good luck.

Operator

Next question is coming from John Murphy, Bank of America Merrill Lynch.

John Murphy - BofA Merrill Lynch

Your comments on the Japan situation have been very helpful, but Mike, I know GM and Ford are saying 1 thing, the Japanese are saying another thing, but I mean if you can comment on what you do know and what you're hearing in your dealerships, I mean, are you hearing any increased cross-shopping, particularly when we've got GM coming out with the Sonic and they had the Cruze last year, and the Ford has the Fiesta and the Focus. I mean, they really do have some good competitive products here at a time when the Japanese are going to be out of product. I'm just wondering if you're hearing that buzz or your sales guys are maybe saying we have another product that might fit your needs. I'm just trying to understand what's going on in the short term and what you're hearing. And then maybe also if that might translate into some potential longer-term market share shifts as they get people into these good vehicles.

Michael Jackson

John, I fully agree that the offering from the domestics is far more compelling than it was 5 to 10 years ago and it's spot-on on issues as far as design, quality, content and most importantly, fuel efficiency. So it really is a different game. And there's no question that the domestics will gain share this year. We're saying the pie is going to be smaller because of production constraints, the big production constraints are with the Japanese. The domestics have confirmed that they'll hit their original production plans with the content and configuration issues but they'll hit the original production plan, so they will take share. So I think the door is open. What we haven't heard from the domestics though is any statement or any indication that they're able to increase production beyond original plan. So that's where the situation sits at the moment. If they are ultimately able to do that as things develop, then I think the door is open for an even larger share step by the domestics. Mr. Maroone, do you want to add anything?

Michael Maroone

I'd just say that our Domestic allocations have been robust. We just had a big allocation yesterday from GM, which we're always looking for more in this kind of situation. I think in terms of cross-shopping, John, I think it’s just a little bit early because there is sufficient import inventory on the ground. I think that cross-shopping will certainly heat up in May, June and July.

Michael Jackson

Yes, so that's an important point. Again in the real retail world, so far nothing's changed. We have excellent supply of Japanese products through month-end and it’s really end of May before you even see the first indication of the disruption at the store level.

John Murphy - BofA Merrill Lynch

Got you. Thank you. And then second question is on SG&A. I mean this is -- the 72% SG&A as a percent of growth is the lowest level it's been in 4 years now in the first quarter. So there's been great performance there. I mean, are we still looking at a period where, I mean, the second or third quarter, we can skip over those, but I think it's in the fourth quarter and beyond and the next year when hopefully the world normalizes eventually, that you could be significantly below the levels that you have been before, meaning that you could break through that 70% level and maybe stay through that in a normalized market -- below that, I should say.

Michael Jackson

Yes, John. We've been below 70% before. In 2005, we operated in the 69% range. And I think as volume comes back, although it's very hard to get back there.

John Murphy - BofA Merrill Lynch

And then just lastly on share buybacks, are there any other limits other than the debt to EBITDA covenant that you mentioned on the call or is that just really the only limiting factor we should look for technically on share buybacks?

Michael Maroone

The only -- just from a technical perspective, it's merely technical, is we have $175 million, or $174 million left there in Board authorization but obviously, that's up to the Board to amend and increase as they see fit.

John Murphy - BofA Merrill Lynch

Okay. Great. Thank you very much.

Operator

The next question is coming from Brian Sponheimer, Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Thanks for taking my calls. Just a couple -- just 1 question back on demand and the Japanese issue. Any sense that you could see customer pull forward into this quarter, where customers are becoming concerned about the availability as they start to see some constraint on supply looking in the summer months?

Michael Jackson

Brian, I really don't think so, because the situation is already going to begin in mid-May and there's not a lot of time for the customer to -- if the customer is going to rush the quarter, you're already going to have supply issues in the quarter. So I don't see that happening in a meaningful way. I mean, you may get some of that anecdotally, but I don't think there's going to be enough supply that you're able to jam the second quarter, if you will, and a land rush to get the Japanese product before they run out, I don't see that. Hey, this is indeed, I have to be clear, an unprecedented situation where, okay, we've had an occasional strike with the domestic manufacturer here and there, but we've never had a whole manufacturing segment shut down like this to this extent. So we'll have to see how it develops but I don't expect that.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. Thank you. And if you're taking about 300,000 units from your 2011 sales estimates, would it be correct to think that those 300,000 units simply push into 2011 or some are lost to the used market?

Michael Jackson

No, I think they are pushed into the following year, 2012.

Brian Sponheimer - Gabelli & Company, Inc.

2012, rather.

Michael Jackson

Yes. And the math is sort of, if we do the production disruption, we come to a loss of 600,000 or 700,000 units for the Japanese. You can take Japanese inventory down 300,000-some units. The Japanese -- that's not pie in the sky. Japanese dealers have clearly shown the ability to work with lean inventories before, and so we're taking the difference of that 300,000 out of our planning with a clear statement that demand is higher but I don't know where the production is going to come to cover it.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And just 1 more, if I may. Just on credit availability and credit score. Do you have any metrics for FICO scores during the quarter? Any change of credit mix or loan availability versus, say, 3 months ago and 12 months ago?

Mike Short

Brian, no real change in FICO scores. I think what we did call out is certainly, a deeper buying at subprime, but the quality of the buyer hasn't deteriorated. It seems to be pretty stable.

Brian Sponheimer - Gabelli & Company, Inc.

Thank you for taking my calls.

Mike Short

Thank you.

Operator

[Technical Difficulty] Our next caller is Matt Nemer of Wells Fargo.

Matt Nemer - Wells Fargo Securities, LLC

Thanks for taking my question. So first, I just wanted to take a step back and ask probably a fairly elementary question. But where a vehicle is short on supplier, out of stock either in the past or currently on something, say, like the Prius. Do customers tend to wait for it to come back in, do they change models or will they switch to nearly new and do you have any stats on that?

Michael Maroone

Matt, it's Mike Maroone. I don't think we've got stats. But I think the precedent we really seen in the business is people buying from an incoming pipeline. We haven't had a situation where the pipeline has been dry so I think it's difficult to say how customers are going to react.

Matt Nemer - Wells Fargo Securities, LLC

Got it. Okay and then just a few questions on the used car business. We've heard some reports that there's been significant intra-quarter appreciation in used vehicle prices, particularly in the month of March and into April. Just wondering if you could pick up some carry on that, based on your current inventory. I realized you have to pay more in the market as well, but could we see a period, short-term, of potentially much higher used vehicle margins?

Michael Maroone

It's Mike Maroone again. I think there is an opportunity for greater margin. You are correct, we did see auction price movement in late February and March as fuel prices went up. We saw some double-digit appreciation in fuel-efficient vehicles, and I think there is opportunity. We do try and generally, keep our inventories lean. We're normally in the 35- to 37-day supply, we're now targeting 42 to 44 to try and take advantage of the opportunity in used. So I think there is some margin opportunity both from your existing inventory and then, again with us, we have a lot of opportunity to win used vehicles at our dealerships, that's our intention. And if we can do that, I think, it really speaks well for a way to mitigate some of the disruption from the new Japanese business.

Matt Nemer - Wells Fargo Securities, LLC

And just to follow up on that, how do you increase appraisal buy rates at the stores? Is there a change in the appraisal process, or maybe you can give us a sense for what you're doing there.

Michael Jackson

Well, we've got a very defined process that we've used that actively involves the customers. We review the vehicle. That's not new, but certainly we're looking for improved execution there. What we do is we measure the number of customer visits, then we look at the appraisals, then look at what the appraisals we've won. We've got the technology to do that. We look at it every single day, and we benchmark our associates, and just trying to raise the awareness of the amount of opportunities from customer visits. So we want to get more vehicles appraised. We want to let the customers know very clearly that whether or not they buy a vehicle from us, although we'd like them to buy a vehicle from us, we would like to buy their trades. So there's a series of both merchandising and process execution that we think we can improve our performance there. And we've been doing that for the last 3 to 4 weeks, and I think we've been successful. We've got a really good used car team out in the field.

Matt Nemer - Wells Fargo Securities, LLC

And then just 1 last 1 on used cars. You mentioned that you moved 12,000 vehicles in the quarter, which is about ¼ of your volume. Is any of that by customer request or is that all on inbound appraisals? And then, can you measure the impact to grosses on those vehicles net of transportation expense?

Michael Jackson

Well, first of all, some of it is customer request because we do have a virtual inventory. So there are times that we'll move it for customer convenience. But what we really do is use some software programs that say, "Here's where you can get highest and best value for that vehicle." We then move it. We used to wait several weeks before we moved it to give the trading store an opportunity to retail it. Now with this disruption, we're moving vehicles day 1 to their highest and best use. We believe when we do that, we can turn the vehicle in 4 to 5 days quicker, and we can turn it for higher gross margin. So it's done very strategically, we use software to do it and I think it's been real successful. It allows us to pay more for the car and it also allows us to retail the vehicle quicker and hopefully with more margin.

Matt Nemer - Wells Fargo Securities, LLC

Great, sounds interesting. Thanks very much.

Operator

The last question is coming from Colin Langan of UBS.

Colin Langan - UBS Investment Bank

Great. Thanks for taking my question. Do you -- any indication how this month is trending? I mean, is there, as you said inventory isn't an issue until next month, so is it staying consistent with what we saw last month? And also regarding margins potentially improving in the near term, has there been a benefit at the end of March or in April so far, is that a trend that's already started to occur?

Michael Jackson

Well, we report our sales every month. We're the 1 of the few companies, automotive retail companies that do that, so I think it's next Wednesday. Next Wednesday, you'll have our results. It's always -- yes, so much happens in the last week of a month that it can really change what would be correct to say today. So I really prefer to keep the discipline of giving you that report when the month is done, and we know, in full, what we're talking about.

Colin Langan - UBS Investment Bank

And on the margin side, if there has been an improvement since...

Michael Jackson

Same statement would apply.

Colin Langan - UBS Investment Bank

And then any comment on the improvement in used margins? It sounds like the improvement in auction values had helped. Does that mean -- is this level sustainable in the Q1 or is it more of a temporary boost because some of the prices of the inventory you are holding rose?

Michael Maroone

It's Mike Maroone. I believe that it is sustainable. We worked hard to improve our processes. Certainly in a strong used car market with high demand and limited supply, I think there is opportunity. So as far out as we can see, we don't see the used vehicle market doing anything but getting better and I think there is margin opportunity there, yes.

Colin Langan - UBS Investment Bank

Okay. And just 1 last 1, I'm not sure if it will be a factor as the near-term disruption, but what would the impact be if we do see a major shift from trucks to cars? I mean, are you equally profitable on both the products at the dealer level or is there a margin benefit from -- higher in trucks?

Michael Jackson

Yes. First, to talk about gas prices. So far, we've seen a migration towards fuel efficiency that can be exemplified by the fact that the split between cars and trucks was 50-50 for us in January, it moved to 52% February, 55% in March. That is not comparable to what happened in the '08 where it spiked over 60% in a very short period of time. We have not seen a significant impact on trading values or residual values of trucks or large cars as we did in '08 where those vehicles took a 15% to 20% hit. And I think the number where people really overact or panic or freak out is indeed higher than $4 a gallon, it's probably $4.50 to $5 a gallon, something like that. So it's a very manageable situation at the moment. Industry is much better prepared. Every manufacturer is there with fuel-efficient vehicles. Inventories are balanced. So it's a very orderly transition towards fuel efficiency and we probably have another $0.50 to a gallon to go to get something -- $1 a gallon to get something that would be comparable to '08.

Colin Langan - UBS Investment Bank

Okay. Thank you very much.

Michael Jackson

Thank you everyone for your time today. Were very appreciative. Thank you.

Operator

This will conclude today's conference. All parties may disconnect at this time.

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