Asbury Automotive Group Inc (ABG) 2014 Q1 法說會逐字稿

Good day and welcome to the Asbury Automotive Group first-quarter 2014 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead sir.

Thanks Leah. Good morning to everyone. Welcome to Asbury Automotive Group's first-quarter 2014 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's first-quarter results was issued earlier this morning and is posted on our website at AsburyAuto.com.

Participating with us today are Craig Monaghan, our President and CEO, Michael Kearney, our Executive Vice President and COO, and Keith Style, our Senior Vice President and CFO. At the conclusion of our remarks, we will open up the call for questions and I will be available later for any follow-up questions that you might have.

Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by these statements. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2013, any subsequently filed quarterly reports on Form 10-Q and our earnings release that we issued earlier this morning. We expressly disclaim any responsibility to update forward-looking statements.

It is now my pleasure to hand the call over to our CFO, Keith Style.

Good morning everyone, and thanks for joining us today. Earlier this morning, we reported first-quarter EPS from continuing operations of $1.03, a 34% increase from last year's first quarter and an all-time record for Asbury. We are thrilled with the way our stores performed this quarter especially in light of the challenging weather conditions we faced in many of our geographies.

Once again our performance was driven through growth in all areas of the business and continued expense discipline. Total gross profit for the quarter was up $24 million, or 12%, with 80% of the incremental gross profit coming from used cars, finance and insurance, and parts and service.

We remain focused on balancing growth and expenses. We were able to leverage the significant gross profit we generated during the quarter with our improved cost structure, resulting in SG&A as a percentage of gross profit of 69.4%, 220 basis points lower than the first quarter of 2013. Our flow through for the quarter was 49% and we continue to target a flow-through of around 40% over the remainder of the year.

Turning to capital deployment, during the first quarter, we spent $13.3 million on CapEx to upgrade our stores, expand service capacity, and invest in our technologies. As we discussed in our prior call, we are budgeting CapEx of $60 million for 2014. This includes $45 million associated with our core annual capital plan.

In addition, there are a few projects that are unique to 2014 which are included in our CapEx budget for the year. They include construction of a $5 million facility related to a recent acquisition, and $10 million in construction costs to prepare owned properties for franchises that currently operate in leased facilities with the intention of relocating these franchises near the end of the lease term.

During the first quarter, we repurchased $9.4 million of our common stock, or 182,000 shares. In 2014, we plan to continue our base annual share repurchase program of approximately $30 million with additional repurchases on an opportunistic basis. We had $61 million remaining under our board authorization for share repurchase at the end of the quarter.

Finally, from a liquidity perspective, we ended the quarter with $6 million in cash, $63 million available in floorplan offset accounts, $84 million available on our used vehicle line, and $160 million available on our revolving line of credit. In short, we have plenty of liquidity to support our capital allocation plans in 2014, and the financial flexibility to invest in our strategic growth plans in the coming years.

Now I'll hand the call over to Michael to discuss our operational performance. Michael?

Thank you Keith. We are extremely proud of our company's performance in this quarter. Our gross profit increased 12% through growth in all of our business segments. This growth helped produce a record operating margin of 4.7% compared to 4.3% in the prior-year period.

For the balance of my remarks, I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance during the first quarter.

New vehicle revenues increased 7% and gross profit increased 9% compared to the prior year. Our new vehicle unit sales were up almost 5%, outpacing the industry growth of 2%. New vehicle margins for the quarter were up 20 basis points compared to last year at 6.3%. On a sequential basis, our new vehicle margin improved slightly by 10 basis points.

Our gross profit per unit retail benefited from strong luxury sales in the quarter as well as improved margins at a number of our midline important stores. I believe we can maintain new vehicle gross profit per unit retailed in a range of around $2000 to $2100 a unit. Based on the pace of sales we saw throughout March and continuing into April, our 2014 business plan for a SAR of around $16.2 million remains unchanged.

We ended the first quarter with $592 million of new vehicle inventory, or a 63-day supply on a trailing 30-day basis. We are comfortable with our existing overall new vehicle inventory levels in light of the current pace of business we are seeing in our stores. We monitor a number of our individual brands very closely as we continue into the remainder of 2014.

Used vehicle unit sales increased 10% over the first quarter of last year. As we progress through the balance of the year, we will be facing increasingly stronger prior-year sales comps, so we expect our growth numbers to stabilize in the mid-single-digit area for the year.

Although our margins decreased 50 basis points to 9.1% compared to the prior-year period, the substantial increase in volume more than offset the margin decline. This resulted in a 7% increase in used vehicle gross profit.

On a sequential basis, our used vehicle margin increased 50 basis points and the profit per vehicle retail increased $78. Please bear in mind that the first quarter is historically the highest quarter of the year for used car sales due to the timing of tax returns. The strong growth we produced in used vehicle unit sales resulted in a used-to-new sales ratio of 86% for the quarter and provided an additional source of attractive trade-in vehicles. Our used vehicle sales continue to grow faster than that of new vehicles and will be an important source of future gross profit.

As we move into the second and third quarter, we expect our used-to-new sales ratio to stabilize around the 80% area as we enter into the stronger new vehicle sales season. Our first-quarter total front-end gross profit yield, that is new and used vehicle gross profit per vehicle sold plus our F&I profit per vehicle sold increased $34 over the prior-year period to a record of $3283.

We continue to execute our purchasing and preowned acquisition program to ensure that we maintain an adequate supply of preowned vehicles. We believe this plan has provided a variety of product our customers are seeking. Additionally, this plan has provided us with the inventory levels that fuel our continued growth in this segment.

We ended the first quarter with $139 million of used vehicle inventory, or 36 days supply, on a trailing 30-day basis. We have invested $29 million, an increase of over 25%, in used car inventory over the last 12 months to match our sales pace while maintaining days supply close to our targeted range of 30 to 35 days.

Our strategy and practice within the F&I segment of our business remains unchanged. Disciplined execution of F&I sales processes and training creates solid, reliable growth and results. First-quarter F&I revenues grew 9% compared to the prior period. F&I PVR for the quarter was $1308, up 1% year-over-year. The lending environment remains favorable.

In the first quarter, our parts and service revenues grew 6% and gross profit grew 9% compared to the first quarter of 2013. Parts and service gross margin for the quarter was 60.9%, up 180 basis points compared to the prior year. The year-over-year gross profit improvement continues to be augmented by an 18% increase in reconditioning work, a 12% increase in warranty work, and a 6% increase in customer pay.

For 2014, we believe we can continue to grow our parts and service business at a mid-single-digit range while maintaining our current margins through our ongoing customer retention programs. We are installing and evaluating a new generation of how we provide quick service at a number of our dealerships in order to further improve customer retention.

Finally, we would like to express our appreciation to all of our associates in the field as well as those in our support center. Our company continues to improve in all aspects of our business and our employees are producing best-in-class results in many areas. This is a direct result of your collective dedication and effort and again we thank you.

On a personal note, today I have announced that I will retire from Asbury Automotive Group in the first quarter of 2015. I want to thank Craig and the board for allowing me to be part of this great team and to all of our associates for their help and support throughout the last 24 years. I look forward to being involved in our transition process.

I will now turn it over to Craig.

Thank you Michael. We have been working very hard over the last five years to make Asbury one of the best-in-class automotive retailers. Our first-quarter operating margin of 4.7% speaks to our progress and demonstrates the strength of our team, the quality of our brand portfolio, and the benefits of our operating footprint. Our team continues to prove their ability to quickly identify, adapt, and execute effective systems and processes in a dynamic marketplace.

I would like to highlight one of the important pieces of this transformation, our used vehicle operations. Over the last three years, we have grown used vehicle unit sales in excess of 55%, and grown used vehicle gross profit by close to 35%. We remained excited about the opportunities we see in the used vehicle market and believe there is now an opportunity for us to take our demonstrated used vehicle retailing talent, technology and processes and expand into a standalone used vehicle retailing model.

This year, we plan on opening two freestanding used vehicle stores which we are branding as Q auto. Here are a couple of details about our plan. We expect our first store to open in Tampa, Florida this June with a second store opening this fall in Jacksonville, Florida. We believe it will take a store approximately 18 months to achieve run rate revenues and profitability. We estimate the launch of this initiative may reduce EPS by $0.08 to $0.12 per share in 2014. We estimate incremental 2014 capital commitments related to this initiative may be up to $25 million. This would be in addition to the $60 million of CapEx Keith mentioned earlier.

With respect to our previously stated capital allocation plan, we view our Q auto investment as an incremental capital allocation decision that we believe will generate an attractive ROI. Our three-year balance capital allocation plan remains on track. We are targeting core CapEx of $30 million to $35 million per year, excluding future acquisitions, lease buyouts of approximately $10 million per year as we work towards owning 75% of our real estate, the acquisition of an additional $500 million of annualized revenues over the next three years, and the return of capital to our shareholders by repurchasing a baseline of $30 million of our common stock per year in an ongoing share repurchase program with additional shares on an opportunistic basis. We are very excited about our accomplishments and look forward to the opportunities we see ahead of us.

Finally, I'd like to express my sincere appreciation to Michael for all he has done for our company. He has been a huge contributor to our success. The good news is that he won't be retiring until early next year, so we have ample time to work through a transition. We will now be happy to take your question. Operator?

Thank you. (Operator Instructions). Rick Nelson.

Thanks very much. Congrats, Michael, on your pending retirement. I'd like to start with the used car counts. I have a few questions here, how it differs from CarMax. If you could talk about the targeted economics and the return on capital that you're expecting from this business.

It's Craig. I'll hop in. Michael may jump in behind me. This is about Asbury. We look at the success we've had in used cars. We like the technologies we have in place. We think we've got a great team, and we feel like we have a pretty good handle on the markets that we do business in.

So these two stores that we're talking about are in our backyard. We've got a great team committed to this. We've been doing a fair amount of homework. We think we can generate ROI's here that could potentially be quite attractive. And essentially we are giving it a shot. And I would say we'd feel remiss if we didn't give it a shot. It's going to take a little bit of time to see how this plays out.

What we are doing here today is just calling to your attention that we've committed some capital. It is going to cost us a little bit of money to get these things launched. We're going to see how they go and when we've got some information, some concrete information, then we're going to come back and tell you about it.

This is Michael. Just to add onto that from Craig, as you know, a number of years ago, we introduced what we call preferred selling, which is a technique that we have in a number of our stores. So, we developed that process working differently with the consumer. And a number of years ago, we introduced a vehicle acquisition internal process that helps us evaluate inventories, move inventories, capitalize on trade-in values. So as Craig said, this is a normal expansion of what we think we've done a good job with over the last number of years, and it's a pure Asbury play.

And do you plan, given the capital requirements of this format to flow out the acquisition pace as you build out the used cars?

At this point, it's just two stores. Like I said earlier, we are sticking with our core capital allocation philosophy. We are still targeting $0.5 billion in acquisitions. I think we need to give this thing a chance and see how it goes before we -- really before we can say a lot more about it.

Okay, fair enough. Also I'd like to ask about the weather impact in the quarter. It didn't seem to hurt your results very much, very strong performance. If you could speak to that and how sales have recovered post the storms. It seems like March and April were very strong months.

This is Michael. We did have some weather. We've all had to deal with it. We just think we have a great team out there and we press them to do whatever they have to do to make up for difficult weather conditions, and they performed accordingly.

March was -- I would say the last part of March is as strong as I've ever seen sales in a 5- to 10-day period, just a remarkable amount of sales, a lot of activity at all levels, Internet activity, floor traffic activity, parts and service activity. So, we were very encouraged with that, and as I mentioned in the script, we are happy with the pace that we see going into April.

Very good. Thanks a lot and good luck.

Thanks Rick.

John Murphy, Bank of America.

This is Liz Suzuki on for John. On the standalone used vehicle concept, is there a target volume per store or store size that you are aiming for? Will these be smaller than your existing stores or larger?

It's Craig. At this point, I wouldn't say there is a target. We've looked at different size potentially different size stores for different markets. But I think we are really at a point in time now where we just need to go out, launch these two stores and see how they perform. We will see what the market brings, I guess is the answer.

Got it. And how low do you think your SG&A as a percent of gross profit can realistically get if we continue to see the SAR climb higher, excluding the investments in the used car standalone?

This is Keith. Obviously, we've done a good job this quarter on controlling our expenses. You member last year and as part of our capital allocation plan this year as well we continue to buy back leases. That has been beneficial. Last year there was some heavy lifting too in the compensation area that we are recognizing this quarter and that will roll into next quarter as well. I'll take it this way and say we are still targeting the 40% flow-through and then the rest will just be math and weather issue I guess too.

Okay. And the 40% flow-through is including the investments in the used standalone?

That is not. That is in the core business.

Got it, okay. Thank you. And just one last one. On your parts and service business, how much of the mid-single-digit growth you expect is organic growth that would be driven by the industry fleet dynamics, and how much incremental growth do you think Asbury can generate from company specific initiatives?

This is Mike. That's a great question. I think that we all benefit from the rising tide. There's a lot of car part that's out there that's getting to be older, so we will benefit from that. I think our initiatives, our tire initiatives, our quick service initiatives, our follow-ups that go along with that, our dream service initiative, our expanded hours is additive to that. I don't think I could give you a number right now. It's something we would have to get back to you on. But I think in combination that they will continue to provide us with the single-digit growth, and I think our teams are taking full advantage of the customer base that's out there.

Great. Thank you.

Scott Stember, Sidoti.

Good morning. With the weather seasonally not impacting you guys as bad as expected, could you maybe point to some other items where you were able to outperform the industry the way that you did? Maybe talk about brand specific performance, some of your top brands, how you perform versus the industry?

This is Michael. I'll take a shot at it and maybe Craig can jump in if he wants to. I didn't want to diminish the impact of the weather. It did have an impact, and I just want to make sure that people understand our teams I think did a remarkable job in dealing with it. So we did have weather issues.

But luxury was very strong for us in the first quarter, very good in the growth side as well as the volumes. We had a number of our midline import brands that contributed substantially to the gross profit margin.

In terms of preowned, we have internal targets. We have a very strong dedicated culture towards preowned business, and we just continue to push it. So, I think that is a result of -- the preowned is a result of continuing to talk about it, the culture that we've created on how to maintain trades, how to take more trades at the desk, managing our inventory very carefully, and the way we price them on the Internet. So I think it's all of those and above that contributed the results we saw in the first quarter.

And just circling back to that point on the profits and the midline imports, is that something you are seeing at the industry level with the OEMs becoming a little bit more rational with pricing, or is it a combination of that plus what you guys are doing internally to manage the business?

I think that there were a couple of incentives that were out there that we took advantage of this year in the first quarter. I think there's some processes we put in place in some of our midline stores that has taken a while to take hold, but it has. I think that's part of it. And I think there is some rationalization. I think the production of inventory, at least in the recent months, has seemed to rationalize to the pace of sales.

Okay. And just the last question circling back to the used car standalone concept. Out of that $0.10 to $0.12 that you would expect to come out of 2014, can you talk about how much actually hit in the first quarter?

It's Craig. There's virtually -- there's I would say virtually no expense in the first quarter. The 8% to 12% we talk about will flow through the remainder of the year. This is something we have to work through. I think, for planning purposes, I would assume that you will see that spread relatively evenly once we get to June. So from June on is when we will see the bulk of that expense come.

Okay. And just a follow-on, how would you expect that to flow into 2015, or are we not looking that far out yet?

We are not looking that far out. For planning purposes, I wouldn't plan on anything.

Got you. Great. Thank you so much.

Bill Armstrong, CL King and Associates.

Good morning gentlemen. On the Q auto, I was curious why you chose Tampa and Jacksonville. What was it about those markets? I know you guys already have a big presence there. CarMax has a couple of stores in each of those markets. So I was just kind of interested in the thought process on how you came to choose those two markets as your test markets.

It's a fair question, Bill. I would start with these are markets we know well; they are markets where we have a presence; they are markets where we do a very good job selling used cars. And let me say I'd even go beyond market, maybe get to we know the streets. We know the intersections. We know where cars sell well. And we were able to identify facilities that we could get at what we feel were attractive price points. So we can get in here and give this thing a shot with a reasonable amount of investment. And it's not a whole lot more complicated than that.

Where these existing buildings, or did you have to break ground?

One of these buildings is a lease-to-buy, so we have leased the facility. We have an option to buy it. And the second facility is a building that we own that we are vacating as we are nearing the completion of Jacksonville. Just to be specific, in Jacksonville, we own the facility. It's a Toyota store today, does quite well. The store is being relocated a few miles down the road. That store will be converted to Q auto store; that's a store that will open in the fall. The store that will open here in June is in Orlando, and that's -- I'm sorry, that's in Tampa, Brandon. And that's the lease-to-buy.

Okay, great. And then I think maybe this one for Keith. I was wondering if you could maybe detail what buckets may have contributed the most to the SG&A leverage in terms of the different buckets within SG&A?

Yes, let me start by going back to the flow-through ratio that we achieved this quarter. That was at 49%. That's higher than our target. If we exclude rent for example, that would bring us down to the mid-40s%, 44%. So that's a chunk of that, and that's generally where we expect to be, 40% to 45% flow-through and targeted 40% for the rest of the year. So some work on comp plans last year, how that benefited the quarter, but it was mostly rent and comp plans that pushed us over our target.

Got it, okay. Thank you.

Brett Hoselton, KeyBanc.

Good morning gentlemen. I'm going to start off with the Q auto. And my first question just basically taking a long step back, Craig, I think, as you well know, a number of people have tried an initiative along these lines and have not been as successful as CarMax. And I guess what I'm wondering is, as you've looked at those, and then obviously looked at CarMax and some of these others, do you have a sense of why is it that you think or what are you doing differently that is going to allow you to potentially be successful versus some of these other folks that maybe have tried in the past and not been successful?

That's a very fair question. I would tell you that we have not entered into this lightly. We've done a lot of homework. I've got some experience personally with the old megastore concept. So, we are well aware of the fact that there have been a number of failures. But I come back to what we said earlier. This is not about what everybody else has tried or the way they go about it. This is essentially just an extension of what we already do today.

Michael mentioned that we have a number of stores that we already operate on a preferred selling model, so we have quite a bit of experience with that. That's the model that we will be using in these stores.

We've spent a tremendous amount of time and energy building out our technology infrastructure here. The technologies that exist today are significantly different from the technologies that were in existence even five years ago, certainly 10 years ago when none of these other initiatives struggled. So we feel very good about those platforms.

As you've seen in our numbers, our used vehicle teams have done a phenomenal job. We feel like we've got a tremendous amount of knowledge about how that market works. And then we get down to a more granular level, specifically where these stores are physically located, we know those locations. We know what the stores in those areas are able to do selling used cars, and we just put that altogether and we feel quite confident that this thing has got a real shot and is worth giving a try.

This is Michael. I would just add one thing to that that I think on a number of calls over the years that been asked question, But the preowned market is huge compared to the new vehicle market. And there's a huge opportunity out there and as we have seen our teams grow, I think this is the logical extension and the next step.

I would add one more point if I could, just to add to that. We're sending about 30,000 cars a year to the auction. Many those cars just end up on a competitor's lot. And so one of the fundamental questions we ask ourselves, is there an opportunity to keep more those cars in our system and generate an incremental sale? And we sincerely believe there is, and we actually feel we would be remiss if we didn't take a shot at this.

And then as you kind of work through some of the pro forma numbers for Q auto, how would you compare the return on invested capital associated with that investment versus potentially spending $25 million to purchase a dealership or something along those lines, a new car dealership?

I don't think we are at a point yet to talk about specific numbers with respect to ROI. Obviously, we feel that we've got a pretty attractive investment here.

The one thing I would say, though, that's just fundamental is that we don't have to pay BlueSky. And as you are well aware, BlueSky is a very significant piece of any capital that we put into an acquisition. In some instances BlueSky can be half the purchase price. There is no BlueSky here, and so I think that's one of the things that leads us to believe that this could be quite an attractive opportunity. But it's very early in the game. We've got a lot of learning to do, and so we just want to give it a shot, see where it goes, but we are very optimistic.

Do you think it has the potential to do better than a new car dealership from an ROIC standpoint? Again, I know you're just guessing here. Well, you obviously have some pro forma numbers as well and I know that you're very thorough. But does it have that kind of potential? Is it in the ballpark? Is it slightly less?

Here's what I would rather do. Let's let these stores run for a little while, and let's see how they are doing and then we'll talk about that. But I come back and say that we've got a balanced capital allocation plan, and we like that plan a lot. We think this is another leg that we can add to that plan. And we believe it has the potential to be quite attractive.

Okay. Right on.

The jury is still out. We need to see how it goes.

Okay. And then just on the throughput, obviously very strong in the first quarter, had some nice tailwind it appears. I guess I'm kind of looking at your last year. You had very good throughput in the first quarter, so it's not as though it's an easy comp. What's going to cause the deterioration as we kind of move through the second, third, and fourth quarter again?

This is Keith. We had about $36 million of capital deployed to buy out leases last year. That was largely in the second and third quarter. You'll see when we release our Q in a couple of days' time here that rent is actually down over $1 million quarter-over-quarter. When we move through the second quarter and third quarter, that comes a little bit higher hurdle unless we are able to deploy more capital in that area. Today, we are always doing that opportunistically, but it is on an opportunistic basis. That's point one.

The second point, I keep on pushing on this, is we did do some work in the competition area last year in the second into third quarter as well. And we see that as a little higher gate to get over in the second and third quarters as well that we don't have in our quiver this year.

And then finally, just kind of switching gears, thinking about acquisitions, you've got that target of $500 million over the next three years in revenue. I was hoping you could just maybe briefly talk about the current environment, whether it be deal flow relative to where you were 6 to 12 months ago, valuations relative to where you were 6 to 12 months ago. Where's the environment at this point in time?

It's Craig. I'll take the first shot and Michael may want to -- or someone else may want to jump in as well. I would say deal flow is tough. There's always a conversation, so there's always people who want to talk, but actually getting things done is a challenge. If we just step back over the last 18 months, we have acquired about $200 million worth of revenue, so we do find opportunities and we just rolled in this Land Rover store. There's a couple of conversations that we've got going on right now, but I would I think the word "tough" is realistic.

Let's just face facts. Car sales are good. There's a lot of great product out there. Interest rates are low. Many of us in this industry are realizing record profits, and I think a lot of potential sellers ask themselves whether or not now is the time that they want to sell a store. We are always looking. We are happy to be a buyer, but it's got to be at a price that makes economic sense for us and our shareholders.

Excellent. Thank you very much, gentlemen. Great quarter.

Rod Lache, Deutsche Bank.

Good morning everybody. Congratulations. The clarification also on the Q stores, first of all, the $25 million, is that basically just capital investment, or is that including some of the operational investment?

And then operationally, do you envision the sourcing of vehicles to be different from your existing business? And is the business model different than the typical new vehicle franchise with respect to the F&I or the fixed operations and that sort of thing?

It's Craig. I'll take a shot and then maybe Michael will follow up. You asked a number of questions there. Let me maybe speak picture first.

I'll go back to I mentioned we send 30,000 cars a year to auction. We are working on the mechanisms to move at least a portion of those cars to Q. Other than that, Q is very much a standalone operation and we've made efforts internally with the way we're structuring and organizing it in that it is really a standalone format that we want to be separate from our traditional retailing model. That said, we do want to take advantage of a lot of the skill sets we have here. So I would tell you that our real estate team is part of this initiative. Our IT team is part of this initiative. Our marketing people are involved with this initiative. So, we want to take advantage of the skills that reside within Asbury, but we want this to have a very different look and feel than a traditional car store. Michael?

Rod, as Craig talked about, the sourcing of vehicles, we are developing the business rules for how we will sell cars to this entity of course. There's a number of vehicles that reside in what we call our used car bank at any point in time during the month, and we will now make those cars available to be purchased. But essentially they will go to the auctions. They will be on the Internet asking for people to come in and sell their car to us. They will be soliciting other dealers and smaller local auctions for our vehicle, so that's the source of cars. They will have access, like anybody else does, to take off lease vehicles, take those vehicles in.

As far as you mentioned something about how is it different than a franchise dealer in our parts and service. We will of course offer service after the sale to our buyers. We will do that from the very beginning. Our preferred selling process is very much -- I don't like to use the word "one price", but it is what we call the preferred price. This isn't the exact model, has been extended through the financed assurance process. We will have a different approach to the consumer in the showroom that has been developed with our partners, some of our strategic partners helping us develop that. So it will look different and it will feel a little different, but it is a preowned retailing store that will provide preferred selling, one-stop shopping for the consumer, very heavy on the Web as well as a driving presence.

And the $25 million, is that a capital investment or including some operational investment?

No, we're trying to help you out with this information that we've given. The $25 million is pure capital. The $0.08 to $0.12 is primarily the operating losses that we expect to incur this year.

Right. And Craig, you alluded to your prior experience with megastores. Is the primary difference for you guys now looking at this that the IT tools have become more sophisticated in being able to manage this kind of an operation? Is that the primary learning that you would point to as increasing the chances of success?

I think there's two learnings, and that is certainly one of them. Technology is very different. We operate in a very different world. We've got different skill sets. We understand the importance of the Web and the importance of the Web to the used car buyer. We recognize, at the end of the day, even a used car now is a commodity.

Number two is the capital commitment. My used car experience was around the concept of a megastore, which is a huge facility, 20 acres or more in many instances, that required tremendous amounts of capital just to get it up and running. The stores that we are working on are stores that will have a much smaller footprint, and we've got a tremendous focus on return on investment. So, we are very much looking at how much cash is this investment going to tie up? How big does this lot have to be? How many service bays do we have to be? How big does the showroom have to be? And what kind of throughput do we think we can get, and ultimately what's the return on investment.

Okay. And lastly, just on your existing used vehicle business, you alluded to the fact that the comps become a little bit tougher now. Are there adjustments that have been made to that business, since that inflection occurred last year in the June quarter, that would allow you to continue to drive some pretty strong momentum even against these comps? And how should we be thinking about how you manage the grosses in that business? I think there's been a little modest downtick in profits starting in the back half of last year. Where do you see that going?

This is Michael. So, I'll answer them in reverse. So, yes, we did see a little pressure on it, a lot of that quite honestly self-induced as we grew the volume. So sequentially our margins have improved a little bit, so I am happy about that. That is philosophical in culture to get that back in line. I think we can maintain where we are. I don't want to start getting out on a ledge too far, but I think we can maintain where we are now and continue to grow the volume in the single-digit number that we talked about in the script.

So, to address what changed, where was the inflection shift on that, a number of years ago, we started processes. We talked about rolling it out. We rolled out how we do things a little differently. It took a while to get in all the stores. We developed a team that helped us work and train, but fundamentally we now have all of our stores bought into it, and so the culture begins at the store where we have the general managers our stores have bought into the process, see the results of the process, manage the process.

We do the vast amount of our acquisitions at the store level. We do the gross profit management at the store level. So that is the cultural shift as it takes a while for everybody to buy in. I would say that's where started with that. And we are very, very deep into the way we do business today. And I don't expect that change.

Thank you.

Great. That wraps up our questions. We appreciate your time today and look forward to seeing you again next quarter.

Thank you for joining us. That concludes today's conference. We appreciate your participation. Have a great day.