Bryan DeBoer: There was a step-up in losses two quarters ago. So in Q3 we started to see increases in wholesale losses. We had ramped a few other things and our gross profits had been hit pretty hard and that continued into Q4, okay? We believe that the market has stabilized and I think we even mentioned this on Driveway that we typically are going through seasonality in Q4 and it continues typically until about this time, and fortunately, over the last few months or few weeks, we have seen stabilization of valuations on used cars, which helps us in terms of our pricing and in terms of our wholesale valuations.
Chris Bottiglieri: Got you. That leads to my next question. Sorry, this is kind of a one would be. What do you — like, one of the industry consultants spoke to kind of used volumes being up in January. It seems like a pretty big inflection from Q4. I am wondering what you have seeing, like, what was the cadence of your used business throughout Q4 on a three-year CAGR or one year, everyone to frame it and what have you seen kind of carry into January and February? Are you seeing signs that like we somehow turned a corner unused or is this just temporary as dealers were depleting in clear inventory given pricing declines?
Bryan DeBoer: Yeah. I think, Chris, it’s important to remember that on same stores, you got to go back to the previous year to look at it and we have — we had pretty good comps in Q4, but the comps start to subside a little bit in Q3. We have looking at an annual same-store sales increase of high-single digits on used cars. So, yes, we have looking at increasing our market share and we believe the market will recover to some extent on used, and as far as what’s happening in January, we will give you an update in April.
Operator: Next question, Bret Jordan with Jefferies. Please go ahead.
Bret Jordan: Hey. Good morning, guys.
Bryan DeBoer: Good morning, Bret.
Bret Jordan: As you look longer term, I guess, on the third quarter call, you talked about GPUs on the new side maybe getting back to a pre-COVID level or at least briefly maybe going below that. Do you think, as you look out past 2023, that we are sustainably above historic GPUs and new or our incentives and inventory recoveries going to take us back to the prior levels?
Chris Holzshu: Yeah. Good morning, Bret. This is Chris. Yeah. I think that’s why Tina laid out kind of our forecast for kind of GPUs on new for the rest of the year kind of dropping at about $200 a month, which the impact for that on an average basis will be about $1,200 this year year-over-year. I will tell you though that specifically, as Bryan pointed out, with two of our domestic OEMs, specifically Ford and Stellantis. We saw a pretty big drop in our overall sales volumes in the quarter, which I think when 27% of our sales are domestic, I think, it had an outsized kind of impact, as Bryan alluded to, on our overall gross profit. I will tell you, though, that starting in February, we have seen a pretty massive pivot in those OEMs as far as what they have doing specifically to move out 2022 model year inventory, which is about 50% of the overall inventory we have.
And so our expectation now is that with kind of this supply and demand equation moderating in 2023, based on product line, based on OEM, we have going to see additional support that we haven’t seen in the last couple of years in overall kind of incentives, rebates, et cetera, that will help us kind of moderate the impact that we feel in 2023.
Operator: Next question comes from Colin Langan with Wells Fargo. Please go ahead.
Colin Langan: Oh! Great. Thanks for taking the questions.
Bryan DeBoer: Hi, Colin.
Colin Langan: Just a follow-up, I kind of confused on the GPU per unit is down, it’s because of Ford and Stellantis having lower volume. I would thought that would affect sales. If you had lower volume, would you be able to sell those at a higher GPU? Yeah, maybe if you could kind of connect the two?
Bryan DeBoer: Yeah. Sure, Colin. I think, it’s — this is Bryan talking. The — on Chrysler, our GPUs, our overall gross was down 40% on Stellantis, okay, and it was down 30% on Ford. Inventories are building, and as such, you have trying to move product to help reduce your interest costs and so on, and as such, your GPUs drop, okay? And in terms of the SG&A impact, it’s just that the overall SG&A. You have not adjusting your cost structures as quickly to compensate and to be able to leverage the cost structure that you have.
Colin Langan: Got it. Okay. Thanks. Yeah. So a lower GPU for those sites. And then just also
Bryan DeBoer: Yeah.
Colin Langan: up another question. You had talked about 50% SG&A for every sort of dollar of growth. Is that accurate, because that seems quite high to me because you have talking new GPUs are up since COVID $3,500, that would almost be like a $2,000 added sales commission. What are those variable costs that come out from SG&A that we should be thinking about?
Chris Holzshu: Yeah. Good morning. This is Chris again. I’d say that, ultimately, the line of sight that we had on the recovery in both supply and GPU has been pretty difficult over the last couple of years. And given that 75% of our SG&A is personnel that is commission based, in most cases, high GPUs translate to high commissions, okay. That’s high commissions not just for salespeople, but for our management team, for our store operators, our general managers, our F&I managers, all of those things have been inflated due to kind of this unusual supply and demand equation. And so, if you look back historically, though, our expectation because we didn’t change pay going into that cycle, coming out of that cycle, if you kind of do the quick math on what that represents from a commission basis on a drop in growth when you think about the number of people paid on the GPU on a single car deal, for example, Obviously, it’s going to go the other direction, as well as GPUs drop.
And so, yeah, our expectation is that 50% throughput. We have done it historically, we manage it operationally and while we didn’t see it at the level that we thought we should have in Q4, that’s why we launched our whole operational team to focus on those stores that didn’t get that. And as you can see on slide nine, it’s not all of them. We have several stores, especially in our larger store footprint that we have running 46% SG&A to gross through last year. And I think that what we also see is the other side of that, which is stores that are between 70% and 85%, 90% SG&A to gross and those are the stores that we have focused on fixing that will translate to getting us quickly back to that 50% throughput number.
Operator: Next question comes from Adam Jonas with Morgan Stanley. Please go ahead.
Unidentified Analyst: Hi. This is Danielle Hagen on for Adam Jonas. So we heard a question about used volumes I wanted to ask about used prices. Recent Manheim prints and conversations with some show that the used market has been firming up. So what do you see is driving this recent used car strength and how do you think — how long this trend can last?
Chris Holzshu: Yeah. Good morning. This is Chris again. I think the biggest driver that we see right now is the seasonality. I mean, it was nice to see the moderation in the Manheim Index and good news for us is as we carry only a 50-day, 60-day supply of used car inventory, the fluctuations in both directions get cleared pretty quickly through the pipeline. And so I think ASPs in the quarter were still up like Tina can tell you, but I think it was about 2% or something. Our bigger fundamental is, as you start to see a recovery in new car inventory. How does that impact CPO? How does that impact trade? How does that impact our ability to continue to drive used car volumes, which is really our biggest driver in profitability, because it’s all about gross profit, which might actually be advantageous for us because consumers that have held their vehicles longer are going to fall more into those core and value auto product lines, which generate a much higher return for us.
So we have very optimistic about the recovery in volume, we feel like that’s not just going to be great for new, but it’s going to be great for used and F&I.
Operator: Next question, David Whiston with Morningstar. Please go ahead.
Bryan DeBoer: Good morning, David.
David Whiston: Hey, everyone. I guess, just a question I wanted to ask you guys, because I am getting this from clients is that, they have hearing some critics out there saying, well, Lithia can’t get to their $50 billion goal, because of factory approval, too much brand concentration in one geographic market. I am sure you disagree with that, but I’d love to just hear your take on that?
Bryan DeBoer: Sure, David. And haven’t they been saying that since we were at $13 billion three years ago, I think so, anyway it’s fun. So we have actually run all the modeling and have the actual data. We should be able to achieve domestic revenue of between $70 billion and $90 billion, okay, based off framework agreements that we currently have in place, okay? And we believe that some of those framework agreements you can grow beyond that through market share. So we can easily get to those numbers. It does require a little bit of optimization that you have seen over the last few years to really be able to maximize that performance, but the $50 billion we believe, is still quite achievable, okay, by 2025.
David Whiston: So as you have been doing this given the framework you have citing, you have getting absolutely no resistance from the factories on, right?
Bryan DeBoer: No. I mean we have back to the same excuses at the other peer group usually make as to why they can’t buy deals. It’s because they have not structurally involved with every seller that is what we would call attractive in the country and because Lithia typically buys about half of all public deals over the last 10 years. I mean, look at the slide, what slide are we on 13, I think it was, slide 13 illustrates that, but again, it’s the same messaging that we heard for the decade before 2021 when some other publics bought some deals that do have problems with manufacturers. We do not have problems with any manufacturer, okay, and we will continue to grow towards the $70 billion to $90 billion domestically.
David Whiston: Okay. I appreciate the clarity. Can I just ask one question on used real quick, which is on value autos. The ASP there’s about 18,000 now according to the slide deck and that’s just about pre-pandemic ASPs for the overall national use average a little less. So I am just curious, how much of that particular customer demographic struggling right now relative to the other used vehicle customers?
