John Murphy: And if I could sneak one follow-up. On SG&A attach rate to GPU, so as GPUs come down, there’s some natural attach rate on SG&A or sales comp without you taking any specific actions to lower SG&A or execute incredibly well. Can you kind of remind us how you think about that SG&A attach rate as GPUs on new slowly fade here?
Chris Holzshu: Our big focus there is really on this whole idea of throughput. And we expect in good times when gross is going up, that we expect 50% throughput to fall to the bottom line. Now the same thing should apply when we are going in to a declining market. I think we lost $100 million in gross year-over-year in the quarter and our overall variable expenses were down about $47 million, so about 50%. The opportunity that you run into is when you put a lot of pressure on GPU, specifically unused, we still pay sales associates to move inventory that’s aged, maybe not as profitable as we like. And so it does provide a short term disconnect sometimes on certain products that we’re moving. And so it’s something that we’re focused on.
I mean, using technology to drive productivity to continue to pay higher — above average pay, above average performance is what we’re focused on. And we have some opportunities there that we’re going to continue to push through in Q4 and into next year.
Operator: Our next question comes from Rajat Gupta with JPMorgan.
Rajat Gupta: I just had a question on Driveway performance in the quarter. You mentioned in the prepared remarks that the SG&A to gross, excluding Driveway, stayed flat sequentially. Previously, we had assumed that the Driveway losses were coming down, maybe like from $15 million monthly to more like $5 million to $10 million. I mean, curious how that progressed through the quarter, was it an incremental headwind? Any color on that to dissect the SG&A performance would be helpful.
Bryan DeBoer: I think most importantly, we continue to make progress in Driveway. The burn rate is similar primarily because the gross profit levels on used cars came down a little bit. We have been able to curb our expenses in Driveway by about a little over 20%, which is a big move. Ultimately, I mean, we intend Driveway to become a portal for consumers, okay, and really be able to create greater touch points, and that’s going to change our equation a ton. We are getting probably more traffic than we can actually handle. We’re achieving over 3 million unique visitors a month through that site, which is — it’s almost unruly the amount of traffic that we’re getting through there. And today, it’s really a financeability source and it needs to become more of an experienced source.
The people are buying cars on Driveway not because we’re able to finance them but because they like the convenience, the simplicity and the empowerment that they achieve for that. So we’ve got some work to do there but it’s neat to see what’s happening on Driveway. One other little side note is this other little incubator called greencars.com is doing some pretty special things. We only spend about $150,000, $200,000 a month in marketing on that, and it’s producing now over 700,000 unique visitors. And those unique visitors are shopping on and learning and educating themselves on GreenCars and they’re buying cars at Lithia at a rate of about 1,200 a month, okay? There’s very little attribution between GreenCars and our stores. If we extrapolate those numbers and you can be extreme and say, Lithia sells 2% of all the new cars and used cars in the country.
So let’s just take 50 times whatever that 1,200, you get to 75,000 units a month that GreenCars could have attributions to sell, okay? So we’re working also on the GreenCars side to be able to monetize to some extent that educational process as more and more consumers begin to move to some level of sustainable transportation.
Rajat Gupta: And then just on DFC, we’ve seen some widening in spreads in the ABS market. Benchmark rates have also gone up. Does that in any way change your thinking around DFC penetration in the near term? Or perhaps some other way to ask is, how much flexibility do you have to manage to your full year guidance or the fourth quarter guidance as well as the 2024 guidance for DFC without hurting financing availability for your customer base?
Chuck Lietz: So first, as we’ve been saying it also in my prepared remarks, our penetration rate did come down to 9.7 this quarter. And for many of the reasons you cited, we’re really focused on increasing our yields, making sure that we maintain our discipline in terms of our credit underwriting standards and then supporting our stores. And we feel like our value proposition to both our customers and to our stores for right now in terms of just letting our portfolio season, making sure that we focus on maintaining our discipline is more important than, say, achieving a specific penetration rate. Relative to your second part of your question, I don’t see any real material impact to maintaining our guidance between now and the end of the year.
Obviously, that’s subject to change if there is other sort of macroeconomic factors that come up in the fourth quarter. But I think we can be fairly comfortable that in the next 65 to 80 days, we should be able to continue the path forward.
Operator: Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group.
Ryan Sigdahl: A specific question if I look at Slide 18 and the mix of CPO versus core versus value. Looking at those ROI expectations from a year ago tied back to this one, as you’d expect, the ROIs are down for CPO and core, it’s actually up for value autos. So I guess my question is, are you seeing improved GPU on value autos despite the more competitive kind of broader narrative around the used market overall?
Bryan DeBoer: I think what you’re seeing mostly on that chart is that the turn rate is going up. So as that supply continues to be pressured and you’re going to see the same thing happen in core on the 10 million units that Chris was talking about. When that bubble moves in or that lack of bubble moves into core, we’re going to see the same thing that our turn rate is going to go up. We’re going to have to be more efficient. And as you know, I mean, we do procure almost three quarters of our vehicles directly from consumers, whether it’s through off-lease, whether it’s through purchasing directly from consumers or whether it’s through trade in.
Ryan Sigdahl: And then my follow-up question. Just as you think about the 2025 targets, you’re reiterating them in the slide deck here, but curious how much of an impact. We know kind of the puts and takes between Driveway and DFC and the core business and M&A, et cetera. But one that is probably a bigger focus now is the rising interest rates. I guess, how much does that impact net income and profitability? And what are the assumptions if rates keep going higher on your ability to achieve that 2025 EPS target?
Bryan DeBoer: I may let Tina follow up with it on the interest costs. I think most importantly, we have now all the foundation that we originally designed into our plan back in 2017. So our ability to achieve the 2025 targets, when we’re producing over $1.2 billion, $1.4 billion in capital, the interest costs do impact things and do change the calculus on whether to buy shares back or whether to buy businesses or whether to expand on the adjacency and the design. But today, we have everything in place that we need ultimately to achieve the $2 in EPS for every $1 billion in revenue. Now that’s a steady-state basis. If you remember in the prepared remarks, we talked a lot about the driving forces behind that. But in terms of where the market looks, the biggest driver of achieving that 25 is really the ability to get the acquisitions and then execute today.
