AutoNation Inc (AN) Q4 2022 Earnings Call Transcript

AutoNation Inc (NYSE: AN) Q4 2022 earnings call dated Feb. 17, 2023

Corporate Participants:

Derek Fiebig — Vice President of Investor Relations

Michael Manley — Chief Executive Officer and Director

Joe Lower — Executive Vice President and Chief Financial Officer

Analysts:

John Murphy — Bank of America Merrill Lynch — Analyst

Daniel Imbro — Stephens — Analyst

Bret Jordan — Jefferies — Analyst

Colin Langan — Wells Fargo — Analyst

Daniela Haigian — Morgan Stanley — Analyst

Rajat Gupta — J.P. Morgan — Analyst

David Whiston — Morningstar — Analyst

Presentation:

Operator

Good morning. My name is Breeka, and I will be your conference operator for today. At this time, I would like to welcome everyone to the AutoNation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Derek Fiebig, Vice President of Investor Relations. You may begin your conference.

Derek Fiebig — Vice President of Investor Relations

Thanks, Breeka, and good morning, everyone. I’d like to welcome you to AutoNation fourth quarter 2022 conference call and webcast.

Leading our call today will be Mike Manley, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions.

Before beginning, I’d like to remind you that 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 that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussion of factors that could cause our actual results to differ materially are contained in our press release issued today and in our SEC filings.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com

With that, I’ll turn the call over to Mike.

Michael Manley — Chief Executive Officer and Director

Yeah. Thanks, Derek. Good morning, everyone. Thank you for joining us. 2022 was a great year for AutoNation and full consecutive record quarter. Tremendous results driven by the entire AutoNation team, and I know many of you are on the call. So my personal congratulations to all of you.

Joe is going to take us through the results in detail, but I’m going to just touch on some of the headline numbers.

Q4 new vehicle retail industry was up 2% with us posting a same-store 4% increase over prior year. New vehicle industry declined by 6%, which in my view was significantly driven by constrained used vehicle inventory, which also was a key driver of our used vehicle sales being down 11% in the quarter. Total revenue up year-over-year in the quarter to $6.7 billion bringing our full-year revenue and a $27 billion, up 4.4%. So notwithstanding the increased availability of new vehicle inventory in a somewhat choppy used vehicle market, both on the retail and wholesale side, our continued disciplined approach to used unit margin can be seen in the quarter, particularly in our used vehicle margins. This combined with another strong performance on our customer financial services team delivered a total variable per unit margin of more than $6,300, which despite being down from peak level a year ago, was essentially flat sequentially and an acceptable result in my view given the market conditions.

Now coming into the year, we challenged our after-sales teams to consistently grow their business and their performance. And I’m pleased to report that they are making excellent progress as they delivered double-digit sales growth combined with margin expansion. Now with well controlled expenses, which Joe will expand on in more detail, we delivered $1.4 billion of adjusted net income for the year with a margin of 5.2%. So when I look back at 2022, I think you can now consistently see as we’ve discussed before, the business drivers that I consider a structural improvement compared to pre-pandemic levels. These are clearly CFS, which is driven by our focus on product penetration, our intense focus on sales effectiveness, our drive for operational improvements in our after-sales business and finally our SG&A control, all of which have contributed to our record results for the year.

Now with a focus on cash conversion, which remained at nearly 100%, we generated strong free cash flow for the year in excess of $1.3 billion and this gave us significant flexibility to allocate capital in a disciplined way. During the year, we generated $1.7 billion in cash from operations, we invested more than $0.5 billion in our business, which included maintenance projects to ensure continued underlying performance from our core business, organic growth investments, which obviously included the additional AutoNation USA stores and the acquisition of key assets to expand our business. In addition, in the year, we returned $1.7 billion to our shareholders. Now that return to shareholders was in the form of share repurchases and during the year, we bought back 15.6 million shares at an average price of $110 per share, which I think is an excellent investment in ourselves.

And given all our activity and our operational performance, we’re able to deliver an adjusted EPS result of $6.37 for the fourth quarter, over 10% year-over-year. We often on these calls talk about the future, and I think for the foreseeable future, the retail industry will continue to evolve, including how customers approach vehicle ownership and usage. And that’s an exciting time frankly to be in this segment, and we believe the evolving landscape offers many opportunities. AutoNation already has some excellent assets. First and foremost, of course, is our privilege of representing great OEM brands in strong territories, which has enabled us to transact with over 11 million unique customers from nearly 9 million households, another significant undervalued strength of our company. And notwithstanding the fact that we typically add around 300,000 additional customers per year to our database, we know that within our existing customer base, which as I’ve already pointed out is extensive, there’s significant opportunities to grow our business by covering a broader part of the automotive value chain giving us an enhanced opportunity to reactivate inactive customers, improve our retention of new customers, significantly expand the products and services we offer and increase the frequency within which we interact with our customers. So as a result, in addition to acquiring a select number of additional dealerships, we made three key acquisitions that were focused on expanding and extending the reach of the AutoNation brand.

Last fall, we acquired CIG Financial creating AutoNation Finance, and establishing an in-house CFS solution for current and future customers. This business in addition to its legacy relationships is currently focused on servicing used vehicle buyers at our AutoNation USA stores, but will expand to our franchise stores later this year. Obviously as this business grows, we will have an increasing more recurring revenue stream.

Now this January, we acquired RepairSmith, a mobile automotive repair and maintenance solution. The acquisition expands our range of services and creates meaningful after-sales business opportunities, including utilizing another channel to provide service to AutoNation’s existing customer base and introducing additional vehicle owners, who have purchased vehicles outside the AutoNation dealer network. RepairSmith also gives our AN USA brand a unique service proposition and customer experience offering a range of after-sales products and services that our standalone used car sales competitors frankly just do not have. As you know, we’ve consistently gone our after-sales business, which is more recurring revenue stream with a high percentage of customers bring their vehicles into service under warranty. The rate decreases rapidly after the warranty period ends. And RepairSmith now expands our reach and provides a very convenient means for customers to service their off-warranty vehicles.

Finally, we also improved our digital retailing experience with an enhanced digital storefront and our collaboration with TrueCar. All of these activities are targeted and focused to create a stronger, more competitive business that is less exposed to the cyclical nature of the automotive industry and places us in more control of our destiny. And as I said at the beginning, what a [Phonetic] great time to be in this segment.

Now with that, I’ll hand over to Joe, who will take you through the details of our results. Joe?

Joe Lower — Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning, everyone. Today, we reported fourth quarter total revenue of $6.7 billion, an increase of 2% year-over-year. AutoNation’s new unit sales increased by 4% in the quarter, compared to a 2% increase in the retail SAAR. Strong performance in our higher margin premium luxury brands helped support our new unit PBR [Phonetic], which was over $5,600 for the quarter. The overall new market remained very healthy during the quarter as more than half of our vehicles were sold at or above MSRP. This has trended down, but it’s still far higher than historical levels. Total used unit sales were down 9% in the fourth quarter, PBR remains fairly constant from the third quarter and reflected discipline in our pricing strategy. We continue to focus on self-sourcing our used vehicle inventory, which represented 94% of our vehicle acquisitions in the fourth quarter. While good, this needs to increase and we have ramped up our We’ll Buy Your Car efforts to fuel greater used unit sales.

After-sales gross profit grew 12% year-over-year on both higher revenue and increased margins as we continued to drive strong performance in this area of our business. While underappreciated by some, the recurring revenue stream from after-sales alone increased full-year gross profit by more than $225 million to $1.9 billion in 2022 with a strong outlook for the future. CFS performance was also very strong and we continued to lease the sector with PBRs consistently above $2,700.

Moving to costs, SG&A as a percentage of gross profit on an adjusted basis was 59.2% for the quarter, significantly below pre-pandemic levels, reflecting permanent structural changes to our cost basis. Year-over-year, SG&A increased by only 1.5%. As expected in the fourth quarter SG&A as a percentage of gross profit was slightly higher than recent periods, reflecting investments in technology and new business initiatives. Fourth quarter floorplan interest expense of $20 million was impacted primarily by rate and compounded by increased inventory levels. The quarterly expense increased from $11 million in the third quarter and $5 million a year ago.

Reported net income for the quarter was $286 million or $5.72 per share. Adjusted EPS of $6.37 was a record for the fourth quarter and an 11% increase, compared to EPS of $5.76 a year ago. The adjustments to this year’s EPS include acquisition related expenses, including upfront non-cash reserve recorded at the time of the acquisition of the CIG loan portfolio. Our operating performance and cash flow generation remained very strong with record cash from operations totaling $1.7 billion for the year. This provides a significant capacity to deploy capital into our businesses and return capital to our shareholders. As Mike mentioned, for the full year 2022, we invested more than $0.5 billion to expand our business. This included the acquisition of CIG Financial and the Moreland dealerships in Colorado. Expansion of the AN USA used retail footprint and meaningful investments to enhance and expand our digital capabilities. We further expanded our business with the acquisition of RepairSmith, which closed last month.

We also continue to expand our AutoNation USA footprint adding stores in St. Louis in November as well as Austin and Albuquerque last month, bringing the current store count to 15. The AutoNation USA stores play an integral part of both our long-term growth plans and the achievement of scale, scope and density in our markets to better serve and meet the needs of our customers. We have more than 20 additional facilities currently under development with an expectation that we will open 10 new stores over the next 12 months.

We also returned significant capital to our shareholders via share repurchase, as Mike mentioned. During 2022, we invested $1.7 billion reducing our share count by 25% to 47.6 million shares at year end. Full year share repurchases totaled 15.6 million shares, 4.6 million of which were repurchased in the fourth quarter alone. Thus far in 2023, we have purchased an additional 800,000 shares with more than $1 billion of remaining share repurchase authority. We ended the fourth quarter with a total liquidity of approximately $1.8 billion. Our current leverage ratio of debt to EBITDA of 1.6 times remains well below our historical 2 times to 3 times range. And looking ahead, we will continue to focus on operational excellence and disciplined capital allocation supporting growth to drive long-term shareholder value.

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

Michael Manley — Chief Executive Officer and Director

Yeah. Thank you, Joe. Derek, would you open for questions, sir?

Derek Fiebig — Vice President of Investor Relations

Yeah. I think I think that would be good. Yeah.

Operator, can you remind the audience how to queue up for questions please?

Questions and Answers:

Operator

Thank you. [Operator Instructions].

Derek Fiebig — Vice President of Investor Relations

Hello, are you there?

Operator

We have our first question from John Murphy of Bank of America.

John Murphy — Bank of America Merrill Lynch — Analyst

Great. Good morning, guys. Can you hear me?

Michael Manley — Chief Executive Officer and Director

We can. Good morning.

John Murphy — Bank of America Merrill Lynch — Analyst

Good morning. Just maybe a first question on the inventory front. Things are slowly returning to normal, maybe in aggregate, but are still a bit tight. But there’s some pretty big dispersions between the D3 getting closer to normal and the J3 maybe being very tight. I’m just curious if you can kind of comment where that stands, did the inventory levels stand for you and what you think the implications may be for GPUs as we go forward and maybe sort of the dispersion in GPUs in the different brands?

Michael Manley — Chief Executive Officer and Director

Yeah. Good morning, John. I’ll take this and then Joe can jump in as well. I mean, you’re exactly right, if you look at our overall inventory levels and our days of supply, it’s still very, very low. Obviously, what we are doing is we track it by all of the OEMs and across all of our brands that we represent, our inventory levels as a percentage of national are still below our sales as a percentage of national sales. So from a — if you like from a balance perspective, I think even those that have been able to replenish inventory faster than other OEMs, we’re still in a good shape. And Joe and I were talking over the last few days obviously as we prepared for this and really looking in detail at our inventory. I think the key for us is not absolute numbers of inventory, but how that translates into day’s supply as we go through the year. And that obviously brings you on to one of the key questions and that’s what we think is going to happen with new vehicle volume. So as I sit and look at this year, I think there’s strong potential for new vehicle volume under the right circumstances to be above $15 million, and I think we’ll end the year with continued low — relatively low — very relatively low, frankly, when you look back at some of the previous year’s inventory levels on a day’s supply basis. And as a result of that, I think there will be some continued mitigation on new vehicle margin. But frankly, if you look at what happened over the period of 2022, really, I just see a continuation of that, but somewhat compensated by volume increases across the brand. So sorry for a wandering answer, but it — obviously these things are all tied together.

Joe, do you want to add anything?

Joe Lower — Executive Vice President and Chief Financial Officer

Yeah, I just — kind of further elaborate on the same theme. John, if you look, the days I hope of 75 to 90 days of inventory are long in the past. I also think periods of nine days are unsustainable, we’re at 19. And I think with cooperation from our partners, a 30- to 45-day type normal is a pretty healthy place for everyone to operate. And so whether we get to that by the end of this year, I don’t know, but to me that would be a nice level that would serve everyone’s interest, I think exceptionally well and that’s kind of how we’re thinking about the business right now.

John Murphy — Bank of America Merrill Lynch — Analyst

Okay. That’s helpful. And then just a second question, slightly multi-pronged on cap allocation and human capital allocation. The finance business is going to grow. Just kind of want to understand where that goes and exactly what you really are intending to do there? RepairSmith is another sort of leg of the stool, that is new and might augment or should augment the after-sales business. And Mike, your [Indecipherable] something very interesting about reactivating customers, which I’d love to hear what that means and if RepairSmith helps there? And then obviously there’s the share buybacks. So if you think about an AutoNation USA, if you think about sort of the flow of your cap and free cash flow to the finance business, to the after-sales and the extension there, AutoNation USA and then buybacks, I mean, how should we think about this going forward? Because there are new businesses that are kind of adjacent businesses that are popping up that might be drawn on capital or may not even be that big a draw, capital may be incremental on their own. Just how do you think about that?

Michael Manley — Chief Executive Officer and Director

Okay. John, the very first thing that we think about is what is the best use of capital for our shareholders perspective. And clearly, you have seen over the last two years given the market conditions and the overvaluation of assets out there the best return — was to return it to our shareholders and we’re very clear on that and that will continue. Our discipline will continue to be with that in mind. Now I’m going to expand on some of the things that you talked about. There are a lot of really our approach is to firstly maximize the assets that we have in place and inappropriate circumstances to add to that, that will broaden our geographical coverage, but very deliberate. We have an embedded asset in the organization. A very significant customer base over a long period of years has now built significantly. But the reality is that not all of those customers are active and our share of their wallet is relatively narrow, new vehicle sells, used vehicle sales and service. But their total spend on transportation and mobility, whichever buzzwords you want to use is very, very broad. So our approach really is to expand our business, our geographical reach, so that we can continue to add more customers to our base, understand why customers over time become inactive and that’s typically, because the ages of the vehicle that they have is beyond seven or eight years and they therefore believe it’s the right thing to do for them to move out of a franchise environment or they moved outside of a 25-mile radius of our stores and therefore our penetration in the after-sales part drops off. RepairSmith is an ideal solution for that, because not only are they incredibly convenient and overcome that geography limitation, they’re also able to package their services in a way that they’re not underselling their services, but when you value the convenience of them coming to you, it means our customers are likely to think about them as well. And the other consequence of RepairSmith frankly is it provides for our AutoNation USA stores a great USP, because imagine now not only being able to buy a phenomenal used vehicle, backed by AutoNation, you now have access to a team of professional service providers that will give you the most convenient service option in the used car business in our opinion. So when we think about the businesses that we buy, what we’re thinking about really is the needs of our existing customers, not even — if you imagine — even [Phonetic] including these — sometimes of the 300,000 customers that are added to our base each year, so our approach really is to reactivate those customers that are looking for a different type of service that is not traditionally provided by franchise store and we’re adding businesses and we’re adding open term and growing them as well as buying them. That will help us to make sure that we can reactivate those customers and then broaden the services we offer. I think it — well, that hopefully that’s relatively clear in terms of what we are doing. And I think the acquisitions that we’ve made and the businesses that we’re trying to grow internally are really directed at that.

John Murphy — Bank of America Merrill Lynch — Analyst

[Speech Overlap] on that financing?

Joe Lower — Executive Vice President and Chief Financial Officer

Let me — yeah. Let just add, I call it a boring finance answer to some of this. Because strategically, Mike was I think very clear in particular as to what we’re trying to do. When you match that with the financial or capital strategy, we have a first-class problem. We have robust cash flow on a very strong balance sheet. So then the question is how do we utilize that and maximize the benefit of it? And it’s not surprising to most it’s an IRR-driven approach and we look at what the return is on each opportunity. We have obviously, as Mike mentioned, in the recent past, viewed share repurchase as an extremely attractive opportunity. As we look forward, we have found some opportunities that offered very, very compelling returns. And as we think about capital going forward, we will deploy it in a similar fashion in identifying where there really is truly incremental value. And I think you were going to ask about the finance business, and I think we’ve been very clear that one, we’re going to be delivering this growth and we will utilize facilities that we are not funding all of that directly from our balance sheet as it’s typical and in some ways similar to the way you think about floorplan. So we’re not going to be putting dollar for dollar behind the capital business at the expense of other opportunities.

Michael Manley — Chief Executive Officer and Director

And let me just follow up on that. So I think, Joe, in the past, John, last year, when we think about CIG, it was clear that we are going to grow that business. That business has been around 35 years and has been successful during that period. And our intention is to grow that business at a speed that we believe is very manageable on pace with the growth of our AN USA businesses predominantly. We have good relationships in our franchise businesses with our OEM captives and that will continue. So we really wanted to focus on the work of AN USA, so it’s going to grow slowly. And it will grow deliberately, and it will grow in a way that we think is manageable. RepairSmith is a phenomenal startup business. It’s a much younger business and full of dynamic people really trying to forge a new way of trying to provide convenience and great service to their customers. But they are there. They’re a startup business. They’ve grown well. I think they’ve been very deliberate in terms of their growth. But there’s a lot of things that need to continue to happen to make that business grow to scale. So again, don’t expect RepairSmith in the course of the next two, three, four quarters to start to become a dominant force is about a deliberate, progressive approach to growing our business in ways that we think will deliver over time a really good balanced result.

John Murphy — Bank of America Merrill Lynch — Analyst

Mike, just real quick to follow up. It’s fair to say that these are good incremental opportunities that are not going to be very material calls on capital that would crowd out share buybacks that have been a big part of the story and there’s probably room for everything. Is that a fair way to think about this?

Michael Manley — Chief Executive Officer and Director

Actually, I think that’s more eloquent way than I could have put it. So thank you for your answer.

John Murphy — Bank of America Merrill Lynch — Analyst

Okay, then thank you very much, guys.

Michael Manley — Chief Executive Officer and Director

Thank you, John.

Operator

Thank you. Your next question comes from the line of Daniel Imbro with Stephens. Your line is open.

Daniel Imbro — Stephens — Analyst

Yeah. Hey, good morning, guys. Thanks for taking the questions. Joe, I wanted to follow up on one of the answers to the last questions. I think you talked about confidence in OEM partners, maybe just the high 30 to 40 days. I’m just curious what gives you guys the confidence that the OEM partners are going to be disciplined in this cycle? Historically, if I think through it, maybe they’ve been a little less disciplined as supply comes back online. So curious maybe what’s changing in the conversations? What gives you confidence in that? And then to a dovetail onto it, if that is what you expect, kind of where would you expect new GPUs to shake out maybe for the year? Or what’s the exit rate you’re planning on for 2023? Just based on that day supply outlook you provided?

Michael Manley — Chief Executive Officer and Director

I mean, you may think it, but we actually don’t have daily, weekly, monthly conversations with the OEMs about the complexity of inventory levels. We talk to them periodically so we can understand what their hopes and aspirations are both on a volume market share, but also then the production to support that basis. But I tell you what — when I look back, what I think has been really interesting is nobody knew what would happen if all of a sudden there was an industry-wide correction of inventory. Nobody had any clue. Everybody was too scared to do it, because if you do it as an individual OEM, you get crushed. So circumstances create a situation where everybody got affected at the same rate and there was a reset across the industry. Prior to that, in my life anyway and I’m not the best example frankly of this, but prior to that in my life, your whole concept of profitability was keep your plants churn in as hard and fast and as efficient. And as you can churn, churn, churn, churn, churn, [Indecipherable] let your sales guys find a marketplace for share and that was if you like, that was a predominant — and again, I have to speak for myself, I can’t speak for the OEMs, you guys talk to those, but that was a predominant view on the future, so you get this opportunity to reset it, right? And the opportunity comes and people suddenly realize that, yeah, this whole concept of supply and demand, there actually may be something in there. I think it worked for everybody. And I obviously think that people learn, and so I wouldn’t say, is your confidence level 100%, Mike, do you want to go on to [Indecipherable] and take it back? No, I actually don’t want to do that. But I do believe that within the different pressures that are on an OEM, remember, they had very large union relationships, very large investments that they recognize, that is a balance that’s what I believe. I think they’re all intelligent people, they wouldn’t be able to run those complex businesses if they won’t. But I’m hoping that, that prevails.

Daniel Imbro — Stephens — Analyst

Got it. And then Joe, any follow-up question on kind of where you expect GPUs to end this year given that inventory, kind of, expectation?

Joe Lower — Executive Vice President and Chief Financial Officer

So obviously, we’re not going to predict an absolute level. And obviously there was some talk about the expectation of some level of pressure as inventory builds, but consistent with a view that the business can be run at 30 to 45 days, that’s consistent with an expectation that PVRs, while moderating are going to be above pre-pandemic levels. And that should be a sustainable model provided everyone cooperates in much the way that Mike, kind of, alluded to. So, we are cautiously optimistic, but also very pragmatic about the whole thing. [Speech Overlap] we are cautiously optimistic. We’re cautiously optimistic, but we are not going to do it at the final moment.

Daniel Imbro — Stephens — Analyst

Got it. Makes a lot of sense. Maybe just a follow-up on something more in your control on the used side of the business. It does feel like you guys have improved your sourcing, kind of, customer sourcing last few years, maintaining higher GPUs, but unit sales were a bit light there kind of relative to the group. So kind of curious is it becoming more difficult to buy from consumers as vehicle equity normalizes? Or what are your expectations there around your ability to continue self-sourcing enough units to drive outside used growth in the future?

Michael Manley — Chief Executive Officer and Director

I have 100% confidence in our ability to self-source there, because I think in Q4, Joe, we have something like 94% sales [Indecipherable] anyway. I have absolutely confidence in that. But that’s not the real answer to the question, I don’t think. First, I do think you’re going to see an increase in new vehicle industry as we talked about. Obviously, as a large player in the franchise new vehicle, retail business that’s going to help us in terms of our sourcing and that’s a competitive advantage against those standalone used car players, which I think has been pointed out multiple times. But the reality is that roughly 90% of all of the vehicles that are sold, used vehicles that are sold either to franchise dealers or publicly traded used car dealers are under 10-years old, roughly 90%. Of that, 40% of those vehicles are sold between two- and three-year old vehicles. And those vehicles have to be put in the market two and three-years old — two- and three-years ago to be available. So it’s absolutely clear that unless the sales profile has been in the used car market in the United States for years is going to dramatically change. We are entering a period of tight supply on two- and three- and four-year old vehicles, which make up the majority of these car sales. And that’s going to impact wholesale prices and ultimately retail prices, margins I think are going to be fine. They’re going to bounce in and out through the bandwidth that they always bounce in and out, because as wholesale prices move, retail prices move, you all know the dynamic. But the reality is that those vehicles are going to be in short supply for a period of time, which will impact those prices. So for us, what we’re going to do is we’re going to obviously continue on our strength of We’ll Buy Your Car, continue to maximize the trading that we get through our franchise new vehicle sales. And make sure that what we’re doing is appropriately playing in that market to get what we hope is more than our fair share of those vehicles to maintain our sales velocity. We won’t overpay, we will maintain hopefully a 30-day-ish, 35, maybe 40-day-ish supply on used vehicles so that we can be reactive. And what that may mean is that our volume may come down, but in response to that our teams know that if your volume is coming down, your margin better reflect that scant supply. So that’s the dynamic that we’re in. It began, I think, a few months ago, it’s going to continue into this year. The bad news, I don’t think it’s bad news, because if we see the same net price that we’re seeing, net transaction price on new vehicles, a solid used vehicle wholesale and retail price is going to help bridge that balance to pay for our customers. So I think it’s just the reality of the business, and it’s one that we’ll be facing for the next six months. But it is not bad news, it is what it is. You just react to it.

Daniel Imbro — Stephens — Analyst

Really helpful color. Appreciate it and best of luck.

Michael Manley — Chief Executive Officer and Director

Thanks.

Operator

Your next question comes from Rajat Gupta of J.P. Morgan. [Technical Issues]. Our next question comes from Bret Jordan of Jefferies.

Bret Jordan — Jefferies — Analyst

Hey, good morning, guys.

Michael Manley — Chief Executive Officer and Director

Hey, Bret.

Bret Jordan — Jefferies — Analyst

Could you talk a little bit more about RepairSmith, and maybe what the scope of services that you can offer on a remote basis are? And are there any regional restrictions there as far as outdoor work or driveway repair, how you sort of envision that?

Michael Manley — Chief Executive Officer and Director

Yeah, it’s great question, Bret. I mean, obviously, there’s a limited range of services and repairs that can be carried out on someone’s drive or in a car park or those elements and those, but it’s still incredibly broad if you think about servicing, oil changes, filter change, cabin change, all of those things, they can do repairs, a whole host of different repairs, which includes vehicle diagnostics. They can also provide pre — There’s a lot of business, I’ll give you one of the things that to me is always a great area. There’s a lot of business of private, one guy selling a car to another guy or one girl selling the car to another guy, those are private sales. Some of those people actually wouldn’t mind their technician turning up for a relatively competitive fee and doing a quick diagnostic on the car they’re buying, gives them a lot of protection in that used — in that C2C market. So there’s a whole host of things that RepairSmith are exploring and working on. They also have great relationships with fleet companies, because it’s incredibly convenient for these large fleet operators to have their van, their transport vehicle serviced at night when they’re not using them. So I mean, the breadth of services that they can provide is phenomenal. They add back to all of the physical infrastructure that we have. All of the physical infrastructure that we have. So if you turn up at your house, for example, and you’ve asked us to come into do a diagnosis and actually you need new transmission, we’re going to do that on the side of the road, that’s clear. But RepairSmith now has access to tens of thousands of ramps around the country where they can go and do that for you. So you did the benefit is if they’re able to repair at your door, they can repair at your door, they could certainly diagnose it for you so you know what you’re in, and by the way, if necessary, we can get you to a ramp. So I don’t actually see much limitations based upon what you’ve said with the exception of obviously the further north you go in winter, and the less — I would say, the less likely you are to do what I would call prolonged jobs. But again, if you look at the person’s current footprint, our current footprint, how we’re going to grow together, that’s obviously been part of the thought process.

Bret Jordan — Jefferies — Analyst

Okay, great. And then one quick question, you’ve commented that 50% of transactions were at or above MSRP. Could you give us the percent above MSRP and maybe what’s the cadence in that mix?

Joe Lower — Executive Vice President and Chief Financial Officer

It’s above MSRP, has really not changed, really through the entire [Speech Overlap]

Michael Manley — Chief Executive Officer and Director

That we need to clarify this, there’s not 50%. Never ever have there been 50% transactions done above MSRP.

Joe Lower — Executive Vice President and Chief Financial Officer

No, at MSRP.

Michael Manley — Chief Executive Officer and Director

At MSRP.

Bret Jordan — Jefferies — Analyst

No your comment [Speech Overlap] at or above and I was trying to get the above.

Joe Lower — Executive Vice President and Chief Financial Officer

Yeah. So good clarification. My mistake, very clear, above MSRP [Indecipherable] the pandemic has never been much above 3% and today is slightly below 2% and that is really a company policy and approach, which we’ve maintained. So think of 50% of [Indecipherable] at MSRP and less than 2% a buck. So thanks for clarifying that.

Bret Jordan — Jefferies — Analyst

Perfect. Thank you.

Operator

Thank you, Bret. Your next question comes from Colin Langan with Wells Fargo. Your line is open.

Colin Langan — Wells Fargo — Analyst

Great. Thanks for taking my questions. Can you just go into what drove the new GPU decline, I think it was down about $300 quarter-over-quarter. Is that customer mix? What is causing that decline? And how should we think about that as we go forward, is that rate going to continue?

Michael Manley — Chief Executive Officer and Director

I think the reality is that new GPUs are never going to be sustained at the level. And we’ve been talking about it for a long period of time that as new inventory levels begin to restore in the franchise network that you’re going to see a better balance, and I say better because it brings some volume back in and [Phonetic] GPUs drop, but ultimately what you’re trying to do is maintain the overall level of profitability. So it was really driven by the fact that inventory levels across certain manufacturers began to recover. And I would say, well expected moderation of new GPUs. That’s how I would describe it. And I think you will see that in this year as well, and I don’t think it should come as a surprise to anybody.

Colin Langan — Wells Fargo — Analyst

Got it. And how should we think about F&I, there was some article about dealers getting concerned about with rising interest rates, people may scrutinize that line item — that payment. Are you [Indecipherable] much pressure in the quarter? I mean, how should we think about that as the year kind of progresses?

Michael Manley — Chief Executive Officer and Director

So I think what you’ll see when you get rise in interest rates and it gets passed on through F&I rates [Indecipherable] and these penetration levels begin to drop a little bit, because other providers become more attractive and I think that’s what happens. Often it gets mitigated by an extension of the term and/or an increase in terms of deposit. The good news for us is our big focus really has been our focus on additional products within our CFS performance, so that we have a very balanced performance that as you’ve seen in our results consistently, consistently it has been at what I think is great levels. So as interest rates continue to go, you see movement up the FICO range away from being subprime up to mid and into prime, you see obviously the rates passed on. I think — so last time, I looked at the industry, I think about 2% of rate is now embedded in all of the finance that’s written in the United States. And you see a mitigation on penetration levels from captive or pseudo captive finance companies. But that’s how you should think about it. And that just says — reinforces our focus on the additional products that add value to our customers that are not linked to an interest rate.

Joe Lower — Executive Vice President and Chief Financial Officer

Yes, the only thing I would add just to further clarify, more than 70% of our CFS is actually coming from product rather than financing. And as Mike indicated, there is a real focus on increasing penetration, increasing profit per product is clearly our focus and I think underlies the confidence we have in being able to maintain that going forward.

Colin Langan — Wells Fargo — Analyst

But just to be clear, those products in addition to the financing, those are still embedded into what the person pays. So when someone’s shopping, the payment — to keep those products, the payment would still be higher, right?

Joe Lower — Executive Vice President and Chief Financial Officer

In most cases.

Michael Manley — Chief Executive Officer and Director

Yeah, I think they buy on standalone, but most cases, people like to pay on a monthly basis as well.

Colin Langan — Wells Fargo — Analyst

Okay. Thanks for taking my questions.

Michael Manley — Chief Executive Officer and Director

Thank you.

Joe Lower — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Daniela Haigian from Morgan Stanley. Your line is now open, Daniela.

Daniela Haigian — Morgan Stanley — Analyst

Hello. This is Daniela on for Adam Jonas. So we heard you talk about the dynamics that play in the used car market. We’ve heard similar things with our conversations and industry contacts and recent Manheim prints, including the print from this morning. You mentioned tighter supply, is that the sole driver of this kind of 180-degree turn in the used market? Are there other dynamics at play? Are you seeing anything on changes in consumer demand heading into kind of a macro uncertainty this year? Thank you.

Michael Manley — Chief Executive Officer and Director

Hey, Daniela. Firstly, I hope Adam is well [Phonetic] and that he is not on because he’s ill, but when you talk to him, give him my regards, so just — there’s obviously a range of things that impact it, one of which is the availability. And as you’ve seen, we saw used car prices begin to drop at the end of last year and that has now kind of mitigated and stopped. But it’s also being impacted on the demand side, because depending on the age and the profile of the customers buying it, there is no doubt that what we’ve seen in terms of interest rate increases also affects the demand side of it. So it’s a combination of things. I think when I — my opening comments really when we look and obviously do it on a very regular basis when we look at our performance and we — I try and identify the key driver. For us, it was around that very tight supply and not wanting to buy deeper at the expense per se of gross, so hopefully that’s an answer.

Daniela Haigian — Morgan Stanley — Analyst

Thank you.

Operator

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

Rajat Gupta — J.P. Morgan — Analyst

Great. Thanks for taking the question. I had a question on this SG&A going forward. Obviously, that the GPU trajectory is a bit uncertain and how to predict. But how should we think about the SG&A drop through as those gross profit dollars come down over the next 12 to 18 months. And maybe if you’re willing to, can you give us a range of SG&A gross profit that you’re thinking about for 2023? And I have a follow-up. Thanks.

Joe Lower — Executive Vice President and Chief Financial Officer

Sure, Rajat. Good talking to you. So SG&A as you kind of saw in the release, in my comments, maintain strict discipline. As we think about it, you obviously have a fluctuation primarily in comp associated with GPUs. Think of the flow through your SG&A per dollar growth is somewhere between $0.25 and $0.30 per dollar. Beyond that, what we’re trying to do is obviously be very efficient in our advertising and marketing and you can see relatively flat sequentially and then really controlling the store and corporate overhead, which again was essentially flat sequentially. Results of that, as you can see, it’s still below 60%, I think there is some slight pressure on that going forward, but in a strong intent on maintaining our discipline. And then I mentioned the investments, which was maybe 100 basis points as a percentage of growth this quarter. I don’t see that getting much beyond 200 basis points in the course of 2023 as we make what I think are absolutely essential investments to ensure the longevity and well positioning down the road. And I can kind of give you a range, I mean, we clearly intend to stay below 65% this year with a target to be at the lower end of kind of the 60% to 65% range. And that will fluctuate somewhat with the GPUs. But the other measures including overhead and advertising in our elements that we’re going to maintain strict discipline on, so that’s how we think about it and that’s how we manage it every day.

Rajat Gupta — J.P. Morgan — Analyst

Got it. Got it. That’s helpful color. Maybe just to follow-up on the prior question around like the Manheim print and like just used car prices turning, are you able to comment on how first quarter or January and February months to date have been in terms of demand or like just unit comps for you, both new and used?

Michael Manley — Chief Executive Officer and Director

I’d say the interest in buying a used car is very strong. That converting into sales is, as I mentioned, still be and will continue to be impacted by availability of inventory, particularly in those age profiles that historically have been the bulk of used vehicle sales for franchise and publicly traded dealers, so we’re seeing that. Joe mentioned it in his opening remarks, we have — we like, I think, all of our competitors are recognizing this and we’ve redoubled our efforts. That redoubling of efforts means that prices that’s for sure stabilized, you’ll see some upward pressure on prices. I think [Indecipherable] is going to necessarily impact margin, because there is just a relatively short time before that hits retail. But what we saw in Q4 continues in Q1 and it’s an area of great focus and we’ve got our teams focused on that every day, but that’s how it started. Hopefully that helps.

Rajat Gupta — J.P. Morgan — Analyst

No, that’s helpful. Great, thanks for taking the question, and I’ll get it back in queue.

Joe Lower — Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. We have time for one more question. Our final question comes from David Whiston with Morningstar. Please go ahead. Your line is open.

David Whiston — Morningstar — Analyst

Thanks. Good morning. I guess, first looking at the segment income, domestic was down especially hard about 25% and just wondering kind of related to that, you’ve got a large brand mix decline from Ford, but then at the overall segment level for domestic, was there just lack of inventory from Ford or others, or is it more due to unfavorable pricing?

Michael Manley — Chief Executive Officer and Director

Well, there’s no doubt, you had some interesting movements in — from all of the domestic, both up and down. I think there are three things at play. For sure inventory, there’s no doubt about that. Inventory still was for those areas really — that their mainstream brand, I’m not talking about the premium parts of their brands, Lincoln and Buick and Cadillac, the main parts of the brand, you have pockets of inventory that were not available, you have movement in terms of net price position, and it’s incredibly competitive. And I also think all of the OEMs are heading towards the end of the year and what they like to do or look to do is to plan not just the end of the year, how they’re going to start the year and those dynamics resulted in what we saw. So you have already, I think, seen some of the OEMs talk about how they finished off the year. You’re going to — that will all be wrapped up. And then I don’t want to comment for them on how the new year started. But the great thing is that invariably, there is not just one [Indecipherable] they did it, and that’s why this business is beautifully complex.

David Whiston — Morningstar — Analyst

Okay. And on service, that’s — from a growth perspective, that’s a positive outlier I’m just curious, is a lot of people — are there just a lot of people coming back to the market now who have deferred for a long time? And is the growth mostly customer pay or warranty?

Michael Manley — Chief Executive Officer and Director

Yeah, growth is coming mainly through customer payment. It isn’t about significant volumes of additional customers coming into your dealerships, our dealerships at least. I think it really is a reflection of the fact [Indecipherable] more miles driven. And there’s a direct correlation between miles driven and expense to keep the vehicles on the road in a safe fashion. So what you’re actually seeing is you’re seeing the revenue and the gross per repair order actually drift up for a largely stable number of customers that are coming in. It obviously varies dramatically dealership by dealership depending on the penetration of their after-sales part, but broadly across the piece, that’s what you’re seeing. And internal work as well, which obviously has an impact is continuing to improve as well. So broadly, as I said, more miles driven, more repair and maintenance.

David Whiston — Morningstar — Analyst

And Mike, just a higher-level question. Having worked with both OEMs and dealers, I’d love to hear your perspective on contrasting the direct sale model [Indecipherable] doing to the franchise model that you guys do. In your opinion, where is the key value for — in having the dealer franchise model versus a direct-to-sales model — direct-to-consumer model?

Michael Manley — Chief Executive Officer and Director

Well, when you buy me four beers and dinner, I’ll give you an answer to that question because it’s an incredibly complex question. But what I can tell you is that dealers are an invaluable part of the supply chain, not only are they connected to the community. But the reality is that customers given the amount of money that they are spending on vehicles and that price is going up and up, having a relationship that they can trust on a local level where they know that their needs are going to be looked after whether there is an emergency service repair or something else add significant value. And at the end of the day, each of these OEMs are establishing their own individual brand position, and those brand positions are enhanced and developed by their dealer bodies. And therefore, dealer bodies — the dealers and how they work with their OEMs in my opinion, is invaluable and will always be invaluable and will not be replaced with a car turning up on the back of the truck.

David Whiston — Morningstar — Analyst

Well, I appreciate that, and I have a bar in my living room, you’re welcome any time.

Michael Manley — Chief Executive Officer and Director

Thank you. Just email me the address. It’s obviously — and I’d say, and I don’t mean to be flipping, it’s obviously a complex question, but I think — there are lots and lots of OEMs, who have talked about the valuable nature of their dealer body. And working together, our ambition as partners of our OEMs is to just make sure that the customer journey is as seamless as it can possibly be, that it really does represent the brand that the OEMs have spent years and billions of dollars to develop and it’s done in a transparent way. That means the customer feels that they continue to support not just through the purchase, but through the after-sales experience as well. And there’s always moving pieces, but that’s my genuine view on it.

So with that, I think we are done. That was the last question, right?

Joe Lower — Executive Vice President and Chief Financial Officer

Yeah.

Michael Manley — Chief Executive Officer and Director

Again, thank you all for joining us. And our fourth quarter results, as we’ve just discussed, were capping off a record year for us. And we’ve really focused this year, not just on our earnings but also our customer experience. And I’d like to just say to our associates who’re on the call, thank you for the things that you have done. There’s no doubt we continue to perform in this current environment, but we are also taking the steps that I touched on at the beginning so that we can really be a big player and take part in the industry transformation that is coming. So the expansion of our footprint, the additional transportation solutions, how we thought about our cash flow and investments that we’ve made, including return to shareholders, I think, are all examples of that. One of the things that we launched in our organization last year with all of our people was a mantra of Go Be Great. And we like that because what it means is — it means Go Be Great whether that is in your performance in the business and the way that you deal with customers and also in how you get involved in the communities that we’re in. And that’s a big strength for AutoNation. And I’ve said very openly, when I joined this company now nearly maybe a year and a half, maybe a bit longer than that ago, understanding the culture in the organization and how they constantly are looking to give back to communities, whether it’s through their Drive Pink initiatives or whether it’s just through the engagement that they have in each of the individual markets, it’s been for me a fantastic part of the organization.

And frankly, last year, I think [Indecipherable] Drive Pink over $35 million. And these things, I think, are important. These things are important. And notwithstanding the fact that this is a quarterly call, I think it’s important that we call those things out because it isn’t Mike Manley doing that. I had nothing to do with me. It is grassroots from our people getting involved. So thank you all. With that, I’ll give you your days [Phonetic] back. Thank you, everyone. Bye-bye.

Operator

[Operator Closing Remarks]