AutoNation (AN) Q4 2018 Earnings Conference Call Transcript

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AutoNation (NYSE:AN) Q4 2018 Earnings Conference CallFeb. 22, 2019 11:00 a.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Welcome to AutoNation's fourth-quarter 2018 earnings conference call. [Operator instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Robert Quartaro, vice president of investor relations for AutoNation.

Robert Quartaro -- Vice President of Investor Relations

Thank you. Good morning, and welcome to AutoNation's fourth-quarter and full-year 2018 conference call and webcast. Leading our call today will be Mike Jackson, our chairman, chief executive officer and president; Cheryl Miller, our chief financial officer; and I'd like to welcome our incoming Chief Executive Officer and President Carl Liebert. Following their remarks, we will open up the call for questions.

Chris Cade, Taylor Williams and I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. 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, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements.

Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now I'd like to turn the call over to AutoNation's Chairman, Chief Executive Officer and President Mike Jackson.

Mike Jackson -- Chairman, Chief Executive Officer and President

Good morning, and thank you for joining us today. I'm delighted to announce the appointment of AutoNation's new chief executive officer and president effective March 11, Carl Liebert. Carl is an outstanding leader with expertise in customer-centric transformations, omnichannel, digital capabilities and supply chain logistics. Carl's digital consumer retail and business-to-business experience are expected to lead AutoNation in not just auto retail but a leader in all of retail.

I'd like to ask Carl to say a few words. Carl, welcome to AutoNation.

Carl Liebert -- Incoming Chief executive Officer and President

Thanks, Mike. Good morning, everyone. I'm excited to join Mike Jackson, AutoNation founder 2.0, and the entire AutoNation family. I refer to Mike as founder 2.0 because over the last 20 years, he has built a tremendous company.

I love the brand and what it stands for and especially the Drive Pink initiative to cure cancer. AutoNation has a clear strategy that sets it apart in the auto retail sector. Our brand extension strategy gives us an edge in a cyclical business coupled with AutoNation's industry-leading store operating model and digital opportunities for retail and business-to-business customers. Across my career, I've led the deployment of cutting-edge technology to transform the customer experience.

I have implemented successful operational strategies and global sourcing strategies as well as oversaw the future of supply chains. Most recently, I served as the executive vice president and chief operating officer for USAA's business operations in San Antonio, Texas. And I was responsible for delivering an integrated digital experience for our 13 million members. I believe my 30 years of experience at 3 Fortune 100 companies as a global leader focused on customer-centric transformation and creating shareholder value will be an asset to the AutoNation team.

My vision is to lead AutoNation to define and enable the best car-buying and ownership experience in the U.S. We will continue to build branded businesses that delights customers across the car journey. The opportunities that lie ahead for AutoNation are great, and the ability to lead this next chapter is profoundly humbling. I'll now turn the call back over to Mike Jackson.

Mike Jackson -- Chairman, Chief Executive Officer and President

Thanks, Carl. I'm thrilled to hand the baton of leadership of AutoNation to Carl. He's uniquely qualified to lead us forward, and that unique qualification is recognized by unanimous support from our board of directors that he be the next CEO and the full support of our two largest and long-standing shareholders, Cascade and ESL. So turning to our 2018 fourth-quarter results.

We reported 2018 fourth-quarter EPS from continuing operations of $1.02, which was negatively impacted by approximately $0.08 per share or $9 million in restructuring-related charges. Same-store fourth-quarter 2018 revenue totaled $5.3 billion, compared to $5.5 billion in the year-ago period, a decrease of 4%. Same-store fourth-quarter 2018 gross profit of $832 million increased -- decreased by 2%, compared to $846 million in the year-ago period. Same-store customer care gross profit was $383 million, an increase of 5% compared to the same period a year ago, and same-store Customer Financial Services gross profit per vehicle retailed was an all-time record industry-leading $1,851.

AutoNation retail new vehicle unit sales decreased 8% on a same-store basis for the fourth quarter, primarily driven by industry weakness in our largest markets like California, which was down 9% according to J.D. Power, and difficult comparisons due to the hurricane recovery in Texas and Florida that was in last year's numbers. We expect industry new vehicle unit sales, including fleet, to be in the high 16 billion units for the year with an expectation of industry new vehicle retail sales to be down approximately 5%. According to J.D.

Power, industry new vehicle retail sales for January were down 6%. In January, we announced a cost-saving plan restructuring that would reduce costs by approximately $15 million annually. This included a reorganization throughout the company, with us consolidating our regional structure and going from three regions to two. The restructuring allows us to create a more agile, streamlined and efficient core business that is well positioned for the potential challenging year ahead and longer-term success of our company.

I'd now like to turn the call over to our Executive VP and Chief Financial Officer Cheryl Miller.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Thank you, Mike, and good morning, ladies and gentlemen. For the fourth quarter, we reported net income from continuing operations of $93 million or $1.02 per share versus net income of $152 million or $1.64 per share during the fourth quarter of 2017, a 38% decrease on a per-share basis. The fourth-quarter 2018 results included restructuring charges of approximately $9 million pre-tax or $0.08 per share and fourth-quarter 2017 results included a benefit of approximately $41 million or $0.45 per share due to a favorable impact on our deferred tax liability from the Tax Cuts and Jobs Act of 2017. During the fourth quarter, revenue decreased $272 million or 5% compared to the prior year, and gross profit decreased $19 million or 2%.

SG&A as a percentage of gross profit was 74.5% for the quarter, which represents a 280 basis point increase compared to the year-ago period. Excluding restructuring charges of approximately $9 million, SG&A as a percentage of gross profit would have been in line with our guidance from last quarter. In January, we announced a corporate and regional restructuring and savings plan, which we expect will reduce costs by approximately $50 million annually. We have already executed most of the planned actions in order to achieve the $50 million of annual run rate savings.

We expect to incur additional restructuring charges in the first quarter of 2019. However, the amount is expected to be less than the fourth quarter of 2018. For the full-year 2019, we expect SG&A as a percentage of gross profit to improve compared to full-year 2018, with the majority of the improvement occurring later in the year. The provision for income tax in the quarter was $36 million or 27.7%.

Our fourth-quarter tax rate was slightly elevated as compared to the full-year rate due to the impact of certain unfavorable tax rate items, including employee benefit plans impacted by market volatility and limits on deductibility of executive compensation. Due to these items, we are estimating our tax rate to be between 26.5% and 28% for the full-year 2019, and we expect the rate to be near the high end of this range in the first quarter of 2019. Floorplan interest expense increased to $37 million, compared to $26 million in the fourth quarter of 2017, driven primarily by higher average interest rates and higher average floorplan balances. Our floorplan facilities are based on 1-month LIBOR, which has risen approximately 100 basis points over the last 12 months.

Non-vehicle interest expense decreased to $29 million, compared to $32 million in the fourth quarter of 2017, primarily due to lower average debt balances and lower average interest rates as we refinanced higher-cost debt with lower-rate senior notes and commercial paper toward the end of last year. At the end of December, we had $2.6 billion of non-vehicle debt, an increase of $33 million compared to September 30, 2018. Other operating income was $23 million in the fourth quarter of 2018, compared to $25 million in the prior year, a decrease of $2 million. Other operating income was primarily comprised of gains related to store and property divestitures as well as a legal settlement.

As part of our asset optimization strategy, we will continue to actively evaluate and manage our store and real estate portfolio, likely resulting in further divestitures in 2019. However, we expect business divestitures to decrease in 2019 as compared to recent years. During the fourth quarter, we continued to focus on investing in our brand extension strategy as well as our strategic investment in Vroom, and accordingly, we did not repurchase any shares during the period. AutoNation has approximately $264 million of remaining board authorization for share repurchase.

As of December 31, there were approximately 90 million shares outstanding not including the dilutive impact of certain stock awards. Capital expenditures were $97 million for the quarter, compared to $108 million in the prior year. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our leverage ratio was 3.1 times at the end of the fourth quarter, compared to 2.8 times at the end of the third quarter, and our total liquidity was $637 million at the end of December.

Our recently announced restructuring and cost savings plans, combined with continued growth from brand extension initiatives, positions us very well for a challenging retail environment in 2019. I'll now turn the call back over to Mike.

Mike Jackson -- Chairman, Chief Executive Officer and President

Thank you, Cheryl. Finally, I'd like to congratulate the more than 30 AutoNation dealerships who were awarded the J.D. Power 2019 Dealer of Excellence Awards. This award recognizes a very select number of vehicle retailers throughout the United States that exceed not only customer expectations but also provide exceptional customer service and must rank in the very top of the brand sales satisfaction index.

Less than 2% of all dealers in the U.S. receive this award. AutoNation had the most recipients in the entire country. These dealerships exemplify AutoNation's commitment to providing a peerless customer experience from coast to coast.

I would also like to congratulate AutoNation's 26,000 associates for selling 12 million vehicles, a monumental achievement no other automotive retailer has attained. We will now take your questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] And our first question comes from John Murphy with Bank of America Merrill Lynch.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. And Mike, congratulations on a very long successful run. We will definitely miss you in many ways. And Carl, welcome to the team.

We're happy to see you join the team here. Just a first question, and maybe sort of a little bit more of a near-term question, is the GPUs on a dollar basis keep coming down. It's an industrywide problem. It seems like there's growing fatigue in the dealer base, at least in the folks that we've talked to, in supporting deals.

So I'm just curious, as you look at the business in the near term, are there other ways for you to make -- to continue to make up that pressure on new GPU through an F&I PVR or other actions on the used vehicle side? Or are we kind of getting to this point where the other dealers are going to stop supporting deals because it's not just as economic for them and they can't make it up in other ways, and you specifically?

Mike Jackson -- Chairman, Chief Executive Officer and President

Yes, John. I think everybody is very frustrated and feels the fatigue and feels that we sort of have to draw a line on GPU and volume that we finally have reached that point. Now, we have successfully managed it in totality. And if you look at our brand extension in F&I products, it's a remarkable success story.

But it has been frustrating to have it go out the other pocket on the GPU on the new vehicles. So we're intensively working on that. That's a almost daily operating discussion of what the right line is between that. And we certainly hope and have the ambition to make progress on that issue this year.

But it is a challenge. It is an ongoing challenge, but I absolutely see your point.

John Murphy -- Bank of America Merrill Lynch -- Analyst

OK. And a second question, as you look at your store footprint, it sounds like it's shifting to some degree, maybe shrinking, based on what Cheryl said as far as divestitures. Just curious, in the near term, and even in the long term, as far as the store footprint, I mean, do you think you are adequately represented across the nation for the future strategy? Or could there be acquisitions to increase some geographic -- or to increase your geographic exposure in places you're not right now.

Mike Jackson -- Chairman, Chief Executive Officer and President

Here's the way I look at it, John. I think, strategically, we're very well positioned. I'm very satisfied with it. I love being diversified, particularly being on the East Coast with the big state of Florida, anchor state of Florida, the central, anchor state of Texas, West Coast, anchor state of California.

That's absolutely ideal. I love our brand mix: one-third American, one-third Asian and one-third German, basically. I love the fact that we have scale, $20 billion of revenue. Next nearest competitor in the U.S.

is around $10 billion, something like that. So we're double the size of the next nearest competitor within the U.S. That scale then gives us this ability to do brand extension. If I didn't have scale, that's another story.

Then I've got to go get the scale. But we can -- there's not a supplier or a vendor or a financial institution in this industry that won't take a meeting with AutoNation to discuss what we can do together. And then I apply our brand to it and off we go. And I would -- I think it's safe to say an executive of Carl's talent and ambition wouldn't be here if AutoNation didn't have this unique scale, this brand and its sense of purpose.

So you can already see what it could mean to this company over the next five to 10 years. So -- and then what we're working on is not just brand extension, but geographic extension, how you take our digital platform and move into markets with a lighter capital footprint. Now, I can't promise you anything today, but I'm telling you, that's in our mind. So I would view -- when you see us making divestitures, it's more trimming the sales than anything else.

We're very happy with the strategic footprint. We have the scale we need. We have the brand that we need, that we wanted, and that has opened up an opportunity for the future. Now, in the near term, are there headwinds in the new vehicle business? Absolutely.

But that's the reason why we took all these other steps so when this day came, we could look at this difficult period as an opportunity to really make progress for the company and vis-à-vis the competition.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And if I could be so brash as to ask Carl and put Carl in a spot a little bit here. I mean, you're entering a company that's got a very strong core but is also transitioning very quickly. I'm just curious as you see the strategy exists in the core and what's going on for the future, is there anything that you think you would change or are looking at specifically to change going forward? Or are you more looking at sort of accelerating that process here in the early days as you join?

Carl Liebert -- Incoming Chief executive Officer and President

It's a great question. And I think look, in today's world, especially brands like AutoNation, we have to be in a constant state of innovation and transformation. It has to be a daily part of everything that we do. In this case, I couldn't agree more with Mike.

I don't know that I'm here if I'm not staring at stores coast-to-coast, the location strategy, the customer care strategy, the brand extension strategy that's already in play and then the opportunity to really create a technology-based digital platform that can serve the car ownership needs for our customers. The installed base of 12 million autos sold is just the tip of the iceberg with what we can do for customers. And because we have the brand and the scale, that can be delivered. Technology is our friend in this effort.

So I'd say we're going to test. We're going to learn a lot. We're going to try a lot of things. A lot of things aren't going to work, but that's the way we're going to learn.

And we're going to leverage this -- what's been built here at AutoNation. And I couldn't be more excited, because I don't think anybody else has a platform to be able to do that.

Mike Jackson -- Chairman, Chief Executive Officer and President

And John, just to make one last comment, because I think it's on -- to the point, the issues that you raised. When we started the process led by the board to find a successor for me, and we had this criteria in mind of what we wanted in this next executive, there was quite some discussion whether we would openly find it all in one individual. And I'm thrilled and excited that, in fact, we did. So when I look at Carl, OK, a proven, outstanding leader that has demonstrated the ability to move into new industries and master them.

That's quite something. He's one who's done retail, selling things one at a time, fixing things one at a time at scale. You really can't teach that. He's an operator, and we are an operating business.

That's the strength we need, and he has a tremendous respect for operations. Then I look at our brand extension in parts, we need a world-class skill in supply chain logistics. That is not -- that is something that we're currently building. I would say it's not something I grew up doing.

I've never done it in my life, in my career. And so we very much wanted that as a core skill set of the next CEO. So not only does Carl have that skill, but he looked at the opportunity and sees what it can mean for this company. And finally is the digital platform.

And if you look at USAA, I got to tip my hat to them. They're approaching 13 million members that are serviced by a digital platform that's primarily mobile. That's really quite something. So we found it all in one individual, and then, lo and behold, the icing on the cake is that he's a car guy that has owned a dragstrip, and he was the announcer at the dragstrip as a kid growing up.

It doesn't get better than that. And he's got a love and a passion for the cars, and we'll teach him the ins and outs of the automobile business, but there is no question in my mind that he will master it and be a great leader for this company over the next decade.

Operator

Thank you. Our next question comes from Rick Nelson with Stephens.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks. Good morning. And good luck to you, Mike, in your new role, welcome to Carl. I wanted to follow up on the service and parts, the gross profit.

For the year 2018, it was up $65 million. I believe your branding initiatives were supposed to drive incremental gross profit about $100 million in 2018. If you could reconcile that difference.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes, Rick, we talked about, when we launched the brand extension, the achieving $100 million. Keep in mind that some of that incremental growth was originally earned in 2017. So we have earned $100 million of incremental from the parts initiative throughout '18, and you do see that in the 5%. As we talked about earlier in the year, we did have warranty headwinds during the year that offset some of that within the customer care business.

So we're extremely pleased and you see that flowing through in the margin percent of 45%.

Rick Nelson -- Stephens Inc. -- Analyst

OK. Fair enough.

Mike Jackson -- Chairman, Chief Executive Officer and President

You also see that we've outperformed the peers.

Rick Nelson -- Stephens Inc. -- Analyst

Yes.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

And keeping in mind that when you have pressure in unit volumes, you lose some of that reconditioning as well.

Rick Nelson -- Stephens Inc. -- Analyst

Gotcha. So other income also $65 million, $0.53 a share that added in 2018. How should we think about modeling that going forward, the outsized divestiture potential?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes. So we talked about some potential additional divestitures. It'll flow from the prior-year rates. Keep in mind also that we did have some legal settlements within other income for the year as well.

So I would expect reduction in that, certainly comparatively, year over year.

Rick Nelson -- Stephens Inc. -- Analyst

And finally, I'm calculating pro forma SG&A to gross profit with that $50 million in expense savings at 72%. How do you think about that going forward? And I know in the past, you've operated below 70%. Do you think that is still possible? And with these digital initiatives in supply chain, does that actually reduce SG&A? Or does that cause that potentially to rise?

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes. I think as we think about it long term, Rick, definitely, I think below 70% would be attainable over the long term. In the midterm, what we're doing with respect to SG&A certainly is the $50 million of cuts, keeping in mind that a portion of that will be offset this year with some of the expenses. And when you think about where the pressure's been in the business, it's been in new vehicle sales.

So as I look at 2018 and then the potential for retail new unit sales to be down in 2019, that's in the lowest flow-through part of our business. So I do think we have to be mindful of that. As we index more toward customer care, I expect that to help in the ratio, but we're going to continue to invest during the course of the year. So we certainly believe it will be lower in aggregate SG&A in '19 versus '18.

I haven't committed to how low it will get at this point. But I do think as we consider digital and platform plays, a lot of those things over time should reduce expenses. But as you know, omnichannel investments end up costing some in the interim as we're building it out, but it's an important part of our positioning. Particularly, auto remains a cyclical business, and we want to continue to be well positioned building off of this multiyear investment that we've had in brand extension.

Rick Nelson -- Stephens Inc. -- Analyst

Great. Thanks a lot. Good luck, and look forward to working with you both going forward.

Mike Jackson -- Chairman, Chief Executive Officer and President

Thank you, Rick.

Operator

Thank you. And our next question comes from Derek Glynn with Consumer Edge Research.

Derek Glynn -- Consumer Edge Research -- Analyst

Yes. Good morning. Thanks for taking my question. Mike, wish you the best in your transition, and welcome to Carl.

Just wanted to get your read on the health and state of the average U.S. consumer today. And along those lines, if there are higher tariffs on imported vehicles, to what extent would you be able to offset a shortfall in demand or pass through higher prices to consumers? And how should we think about that demand elasticity due to a change in price?

Mike Jackson -- Chairman, Chief Executive Officer and President

So auto tariffs will make the steel and aluminum tariffs look like a picnic. They will be very disruptive to the auto industry and probably knock the global economy off its stride significantly. And it's almost the way to think about them is that they're so disruptive, it's almost unthinkable. I think it's all about leverage and brinkmanship in the trade negotiation.

And at the end of the day, it's mutual destruction to implement tariffs of these levels on autos, let alone the fact that there's no underlying authority that's justifiable to do it, that it's a national security issue when the U.S. auto industry is healthier than it's been in decades is a stretch. But OK, let's not let any facts or clear thinking get in the way. So I think at the end of the day, it's all about a negotiation, but we also know in negotiations, things can spiral out of control, and there can be unintended consequences.

But I think that's a very low percentage, at the end of the day that that will happen. But it will be very entertaining between now and the end of the negotiation, and we will all have to read about it and talk about it every day. Now as far as the state of the consumer, it's a very interesting picture. The consumer, for a big-ticket item, housing, auto, durable goods, is nervous because of the level of uncertainty that exists in America today around anything and everything that you want to think of.

They also are at a higher price point, whether it's a home or a vehicle because of what they want. It's a choice. They want a truck, and trucks have a higher price point than a car. They're getting more vehicle for their money, but that's what they want.

And you combine that with higher interest rates, which are still very low from a historical point of view, but consumers aren't historians. They don't remember who Paul Volcker was. All they know is it's higher than the last time they were in the market. So they're hesitant around big-ticket items.

But that then leaves them free to spend a lot of money on other stuff that's a short-term commitment that will definitely send the signal that the consumer is healthy and the economy is OK. So that's why you get such a bifurcated picture. You put it all together, and I think the markets for the U.S. is high 16s, with a bit -- the fleet is still strong.

So that probably increases with a back off of 5% in new vehicles at retail. There will be a shift toward pre-owned and certified vehicles. We view that as an opportunity that we wish to capture that shift. So the total market is pretty stable all-in.

The customer care business should be absolutely fine.

Derek Glynn -- Consumer Edge Research -- Analyst

Got it. Thanks. Appreciate all the color.

Operator

Thank you. And our next question comes from Chris Bottiglieri with Wolfe Research.

Chris Bottiglieri -- Wolfe Research -- Analyst

Hi. Thanks for taking the question. I wanted to follow-up one of the comments earlier on as you look into -- potentially into a more asset-light geographic expansion, I was curious on where you stand with Vroom? Would you be willing to harvest your own powerful branding initiatives or seek greater collaboration with them?

Mike Jackson -- Chairman, Chief Executive Officer and President

Yes. I don't have an answer for that today. We have some very interesting partnerships that we try to pick someone that we believe we can partner with for the long term on a win-win basis such as Waymo, such as Vroom. We're doing things with Vroom that's already win-win.

We're very good at reconditioning, reconditioning costs. And we're in discussions can we do more together there. They're very good at moving into markets. Now, exactly how that will all work out and what it all means, I don't have an answer for you today.

I can't put a number to it, either to Waymo or to Vroom, what it will ultimately mean to the company. But both Waymo and Vroom are very interesting companies. We're very happy to be partners with them. We're looking for a win-win relationship, and we'll keep you posted how it develops.

It's just one of those where it's an iterative process and you try to find the -- trying the optimum line. But the point is, we are thinking long and hard about how we move into markets without having to do it through acquisitions and how do we extend geographically. I don't have an answer for you today, but we're working on it.

Chris Bottiglieri -- Wolfe Research -- Analyst

That makes a lot of sense. And then I just wanted to follow-up, earlier, you mentioned the retail SAR being down. Just curious in terms of like to what extent you participate in the fleet market. I know the economics are much weaker.

Some of those units theoretically bypass the dealers. But wondering if you could maybe give us some context or some framework to understand to what extent at all, if at all, you participate in the fleet market in terms of the...

Mike Jackson -- Chairman, Chief Executive Officer and President

Our participation in fleet is de minimis. If you're talking about the rental car companies, they are basically purchasing directly from the manufacturers, negotiating directly with the manufacturers, and there's a pro forma system to run the title through a dealer someplace in America. And that's a couple of million units a year of fleet that's in the rental car companies. Then there's some fleetail business that's interesting where you have companies that buy 10, 15, 20 units a year.

That can be interesting. But I think, Cheryl, overall, to us I would say, as far as making money or profit, it's pretty de minimis to us.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes. If you look at that, that's in the other revenue line. So year over year, for instance, that's down $10 million. That line is largely driven by fleet.

And as you can see in total, it's very immaterial for total results. That being said, if we have opportunities where we can provide customer care services to fleets or people that drive in fleets, that's something we continue to like and pursue as a central opportunity for the right customer in the right market structure.

Chris Bottiglieri -- Wolfe Research -- Analyst

Gotcha. Makes a lot of sense. Thank you.

Operator

Thank you. And our next question comes from Rajat Gupta with JP Morgan.

Rajat Gupta -- J.P. Morgan -- Analyst

Hi. Best of luck, Mike, on your new role, and welcome, Carl. I just had a question on AutoNation USA. You mentioned the fact that you evaluate a wait-and-watch kind of strategy there.

Has that changed at all? Or any idea or thoughts there? And also, what's kind of the profitability level right now for those stores?

Mike Jackson -- Chairman, Chief Executive Officer and President

I think we had a $0.02 impact loss from the USA stores in the fourth quarter, with good learnings, all very acceptable, and we're making steady progress. We have no plans to build a store, an additional store in 2019. We have five stores. We'll learn all the lessons we need to find the road to profitability consistently for these stores.

And since we've already said we're heading into a more difficult market overall, we're going to be very strict on both the capital side and on the cost side of operations. So while we're doing these learnings, we don't need more stores. We just need five, and we'll stick with that for 2019 and then see where we're at going into 2020.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That's helpful. On parts and services, a pretty strong margin uptick here in 2018. And GPUs and F&I also look pretty solid.

What's kind of your outlook for 2019 based on what you see in the customer base? And even if you're able to drive mid-single-digit kind of revenue growth, do you think you can expand margin in parts and services? And then on the F&I side, with the higher rate environment and the mix shift to used versus new, do you think you can still see GPU growth there in 2019?

Mike Jackson -- Chairman, Chief Executive Officer and President

Go ahead, Cheryl.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes. So I think from a margin perspective, we expect to see continued strength in parts and service margins. So as we look at the brand extension and the mix of business in that area, we feel very good. And you've seen great consistency of us getting up toward that 45% level.

With respect to F&I, I think you're seeing it accurately. The brand extension -- this was our first area of brand extension in F&I products. And you've certainly seen the industry-leading results at $1,850. That being said, in an environment where new vehicle sales outpaced used -- or sorry, when new is down more than used, the blended dollar could be under pressure, but we still expect very good gross profits in there.

We have very good penetration levels on service and other contracts, which are branded under AutoNation. So we feel good about the trajectory, but we do just note that the dollar blend of used is lower than the dollar blend of a new vehicle unit sale.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. Got it. Just one more, on floorplan interest. You announced the restructuring actions that you're taking.

Are there actions -- is there any opportunity that you see from an inventory perspective to control those costs, given where we are with the rates? I just wanted your thoughts there.

Cheryl Miller -- Executive Vice President and Chief Financial Officer

Yes. If you look at floorplan and what impacts that, certainly, we had 100 basis points of rate hike last year. So that puts over a $35 million headwind year over year. We always knew that was coming, and so that's something we always plan for and expect within our business.

We do focus on managing inventory levels. They are up a little bit year over year. However, they're still below industry average, and we want to make sure we're properly positioned into the March selling season and the important May selling season as well. That being said, we selectively move floorplan lenders where it makes sense.

We constantly push on rates and we're very focused on contracts-in-transit in partnership with the operations and finance teams to maximize that. So I think there's some opportunity we'll consider inventory levels, but we do want to make sure we're positioned for selling. This has always been a known cost. If you go back five, six years ago, we always predicted and expected to absorb it within the business.

But it is a headwind. I think the good news is I don't expect four rate hikes this year in 2019. We may not get any. We may get two.

We will have a full-year impact this year of the four rate hikes last year. So there will be some increase. So our focus is really managing contracts-in-transit and keeping appropriate inventory levels.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. That was really helpful. Thanks a lot.

Mike Jackson -- Chairman, Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from Bret Jordan with Jefferies.

Bret Jordan -- Jefferies -- Analyst

Hey, good morning, guys. On the brand extension strategy around parts, could you maybe give us some idea what inning we're in, maybe how many SKUs we have? And I guess from Carl's perspective, given his supply chain background, I mean, how broadly do you expect to stake this strategy? I mean how many SKUs might you have in the future?

Mike Jackson -- Chairman, Chief Executive Officer and President

I don't know if Carl can tell you how many SKUs we're going to have. I think that's a little premature, but we're in the early innings. It's a tremendous opportunity. And our issue isn't demand.

Our issue is execution. That's how I would describe it, and that's going to be a tremendous concentration of Carl's over the next year. And let's give him a few months to give you a comprehensive answer there. I think the fact that we -- in our criteria for the next CEO that it's crucial that the individual had supply chain logistical expertise of a world-class level.

We wouldn't have done that if we didn't think there was a remarkable opportunity. So there's your answer.

Bret Jordan -- Jefferies -- Analyst

OK. And this next one, sort of a bigger picture on used. I think you were talking about a bigger shift to used and pre-owned as well. I think one of your competitors a couple of days ago when they were discussing their dedicated used strategy, said their front-end margin was effectively zero.

And I guess, with so many folks out there, whether it be online strategies or brick-and-mortar guys focusing on used, do you see anybody acting less rationally around margins in used to get volume with all the new entrants? Or is the market fairly stable?

Mike Jackson -- Chairman, Chief Executive Officer and President

Well, no. I mean you have Carvana out there that is, all-in, has probably the most aggressive or whatever word, irrational front margin policy all-in combined. So we have to deal with all that. But I -- so, listen, the pre-owned business is far more rational all-in than the new vehicle business.

And we have more control of the entire universe in that it's an arbitrage between your ability to acquire, recondition, and present something that's not a commodity to a consumer and then sell it. So I'm much more comfortable in the pre-owned. And competitors with very aggressive pricing, yes, they have a question of how long they can do that, how long can they raise capital to fund losses. And then you have to have loads of profitability.

So everybody has to face that. Now you enter into the new vehicle business, that's really a different world where it's controlled by -- the marketing strategy is controlled by the manufacturer, and there's not much we can do about it. We just do the best we can with a go-to-market approach that's fundamentally misaligned with what the customer wants and what you should do to build a brand. And that remains frustrating, but I've despaired that in my lifetime, it'll get resolved.

Bret Jordan -- Jefferies -- Analyst

OK. Thank you.

Operator

Thank you. And our next question comes from Armintas Sinkevicius with Morgan Stanley.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Thank you for taking the question. Mike, we haven't interacted a whole lot, but I know my predecessors in the firm have a tremendous amount of respect for you. So best of luck on the board.

And Carl, look forward to getting to know you here. Maybe my first one for Carl. I know it's early days, but when you look at the digital initiatives and the strategy there, what are some similarities that you see between your experience at USAA and AutoNation? And what are some differences, just some things you can bring along and some things you may have to do differently, just at a high-level glance that you've had so far?

Carl Liebert -- Incoming Chief executive Officer and President

You bet, right? And I think this is -- first of all, I have a lot to learn and recognize that I want to harness the knowledge not only of Mike but also the 26,000 associates that are here at AutoNation. And so I'm probably -- from an operator's perspective, I believe the answers are in the stores. And the only way to find those answers are to get out and ask your teammates like what's getting in the way of the way customers want to shop and how do we enable that to go make that happen. So to your earlier point, it is a little premature for me because I need to shop more stores.

I need to walk with my -- the leaders that actually have been doing this a long time. And we need to have those conversations on how do we enable that customer shopping experience, both at present and the future. Your translation, though, I think what you're asking is how do you translate a brick-and-mortar to digital. And I've had the privilege to be on both sides of that equation.

At USAA, we don't have agents. We don't have branches. We have to do things through technology in mobile and phone and, increasingly, through voice, so Alexa and Google Home and thinking about those kinds of things. So the beautiful thing about that is I don't have a constraint there, and I have to innovate around that, whether it's taking a picture of your check and so you can deposit it, because I don't have branches for you to deposit your checks.

We had to innovate and own that patent to be able to deliver that. On our side, though, I think the trick, and it's not really a trick, but it's understanding what the data is telling us. And getting that data in the hands of our store managers, our general managers, our customer care associates and allowing them to tailor the shopping experience or the service experience of the customer based on what they want to do, and I think that's the secret to great brands like a Home Depot or a USAA is we're going to serve you the way you want to be served, not the way that we want to serve you. And I think it's a nuanced conversation.

But in this space, AutoNation, because of our J.D. Power awards, our coast-to-coast, I'll call it, breadth and depth, we have the ability. The question really is, how do we leverage the data to know when a customer wants to come and spend three to four hours and get in every vehicle and spend a lot of time and be on the lot and enjoy that experience or how do we deliver that to the example that we talked about already, is I want a complete end-to-end digital experience, and I want the automobile delivered to my front -- to my driveway. Those are the great things that I think omnichannel brings, but you've got to start with the data.

You've got to start with the data, what your customers are asking for. And then you have to use a little design thinking and go a little deeper in understanding the what and the why. And then from there, you count on great people and processes to bring that together. And so I actually love the idea of owning the last five yards finally.

We have the stores. So we own the last five yards, which is the most important in the customer care effort, and we have the locations. So I like our chances.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

OK, that's great color, Carl. Thank you for that. And Mike, one for you. Just as you think about the AutoNation USA lessons learned here and continued evaluation of the initiative here, we're seeing a number of dealers try to pivot to a stand-alone used car business.

Maybe you could talk about some of the puts and takes there, some of the challenges, so to say, as we think about what you're evaluating and what we think others should be evaluating as well?

Mike Jackson -- Chairman, Chief Executive Officer and President

Well, so it can be successfully done. I mean, we're not trying to put a man on Mars here. So I remind everybody that from time-to-time, I know there's some frustration. And so when you benchmark some -- we benchmark the competition and see what they're doing that we're not that leads to a road to profitability.

And we've made -- a number of our assumptions that we had going in have proven to be invalid. Let's see, what would we call that? Mistakes. So we've made our mistakes and faced up to them, adjust and now we're probably on our fourth iteration of mistakes. But on every turn, it gets better.

And I don't think there's any -- maybe on the next call, we can take you through everyone step-by-step. But we're on the way. We're optimistic. We're confident.

We want to give it another year. There's no reason to invest more, though, until we have it figured out. We don't need more than 5 stores to figure out what works and what doesn't work. And once we have that, we'll tell you what the ingredients were on the road to profitability and why we're confident that then we would announce building additional stores.

And I would make one more comment on that. So if I step back and look at the entire portfolio of brand extension that was launched, the other side of this coin is within our company now, it's a competition for capital as to which brand initiatives produced the highest returns the fastest. So far, in that competition, clearly, the USA stores are the caboose. So there's good news and bad news in that, if you follow me.

So not only do we have to find a road to profitability, but they're going to have to get over an investment hurdle that matches or beats other brand extensions. So there's good news and bad news in what I'm telling you.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Yes. That's fair. Thank you.

Operator

Thank you. And our last question comes from Colin Langan with UBS.

Colin Langan -- UBS -- Analyst

Great. Thanks for taking my question. And like everyone else, best, Mike, and welcome, Carl. Just a more basic question.

Why the underperformance in Q4? Is that mostly on unit side, on the new side, new units? Why -- is it geographic or brand mix? What were the major drivers there related to you?

Mike Jackson -- Chairman, Chief Executive Officer and President

Good question. One of our largest states was on fire for just about the entire fourth quarter. And if you look up the J.D. Power retail industry numbers, the entire state of California was down 9% in retail sales in the fourth quarter.

And so there it is. So, California. Then we had difficult comparisons, particularly in the state of Texas, with the snapback in 2018 from the hurricane that occurred in the third quarter of 2017. Then overall, there are headwinds in new vehicle sales, and managing headwinds is always difficult.

But that would be the third issue. There is -- when you have that kind of disruption in your new vehicle business, your trade inflow into your pre-owned is not exactly what you had planned, and it's hard to adjust your stocking to the precipitous flowing of trades coming in. So we have to manage that. So it all started with the disruption in California in the fourth quarter for the entire industry, which also impacted us.

And then you have the comparison with the state of Texas around the hurricanes. That's, in principle, the story. We managed it as best as we could, but it was challenging. I just want to say, we still think that overall, it's going to be a difficult market at retail in 2019.

I'll say that right upfront. And if you look at J.D. Power's numbers that got printed for the United States in the month of January, it was down six. So that was exactly what we -- I predicted five for the year.

The first number out-of-the-box is minus six. So again, you have to be very careful on the headline number. For January for the industry it was down 1. But you got to wait, take a deep breadth, count to 10, and then the fleet number comes out.

And then you adjust and you see what's happening in the real economy and the world that we live in, and that was minus six. And we took the cost measures already were under way in the fourth quarter, apparently going into this year. And that was my gift to Carl. I said let's get this done while it's on my watch.

I know exactly where to get the $50 million and what to do, and let's clear the decks for the new CEO, and that's what we did. So everybody, thank you for joining us today. It's been a great discussion. Thank you for your very interesting questions.

We're happy to have answered them for you. And off we go. And from me to you, Carl, I'm thrilled to hand you the baton.

Carl Liebert -- Incoming Chief executive Officer and President

Thank you.

Mike Jackson -- Chairman, Chief Executive Officer and President

There's no question in my mind we have a great leader for our company for the next decade for us. Thank you, everyone, for joining us today.

Operator

[Operator signoff]

Duration: 53 minutes

Call Participants:

Robert Quartaro -- Vice President of Investor Relations

Mike Jackson -- Chairman, Chief Executive Officer and President

Carl Liebert -- Incoming Chief executive Officer and President

Cheryl Miller -- Executive Vice President and Chief Financial Officer

John Murphy -- Bank of America Merrill Lynch -- Analyst

Rick Nelson -- Stephens Inc. -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

Chris Bottiglieri -- Wolfe Research -- Analyst

Rajat Gupta -- J.P. Morgan -- Analyst

Bret Jordan -- Jefferies -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Colin Langan -- UBS -- Analyst

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