Oct 23, 2012
Operator
Good day, and welcome to the Asbury Automotive Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to the Treasurer, Mr. Ryan Marsh.
Please go ahead.
Ryan Marsh
Thank you, Katie, and good morning to everybody. Welcome to Asbury Automotive Group's third quarter 2012 earnings call.
Today's call is being recorded and will be available for replay later today.
Ryan Marsh
The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our website as asburyauto.com. Participating with us today are Craig Monaghan, our President and CEO; Michael Kearney, our Executive Vice President and COO; and Scott Krenz, our Senior Vice President and CFO.
Ryan Marsh
At the conclusion of our remarks, we'll open the call up for your questions and I'll be available later today for any follow-up questions you might have.
Ryan Marsh
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.
Ryan Marsh
All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by these statements.
Ryan Marsh
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 2011, any subsequently filed quarterly reports on Form 10-Q and our earnings release that was issued earlier today.
Ryan Marsh
We expressly disclaim any responsibility to update any forward-looking statements. With that said, it is now my pleasure to hand the call over to our CEO, Craig Monaghan.
Craig Monaghan
Good morning, everyone, and thank you for joining us. We are pleased to report all time record results for the quarter with EPS from continuing operations increasing 71%.
Operational excellence combined with disciplined spending produced these record results.
Craig Monaghan
Following our usual format, Scott will provide more detail on our financials and Michael will provide an overview of our operating results. But I would like to provide a few highlights from the quarter.
Craig Monaghan
Revenues improved 14% and gross profit was up 9%. We continue to improve our cost structure, reducing SG&A as a percent of gross profit by 480 basis points, our operating leverage, resulting in the flow [ph] through of 80% of our incremental gross profit and with our adjusted leverage of 2.3x, we believe we have one of the strongest balance sheets among the publicly traded automotive retailers.
Craig Monaghan
Before I turn it over to Scott, I'd like to acknowledge and congratulate our Michael Kearney on his recent employment to Asbury's board of directors. Michael brings a tremendous amount of operational experience and perspective to the board that we lost with the untimely passing of Jeff Wooley.
Craig Monaghan
Michael has been instrumental in navigating Asbury through the recent financial crisis and producing the operational results you see today. We look forward to his expanded leadership as a member of our board.
Now, I'll turn it over to Scott.
Scott Krenz
Thank you, Craig. Our record third quarter results of $0.72 reflect the improved operating leverage we have built into the company.
This quarter's results include no adjustments for non-core items.
Scott Krenz
The one item I would call to your attention is the increase in our discontinued operations line. The increase is primarily the result of a real estate impairment of a property we are planning to sell.
Scott Krenz
Our cost structure continues to improve. Our SG&A to gross profit ration was 72.3% for the quarter, a 480 basis point improvement compared to the prior period.
With the rent adjusted SG&A to gross profit ratio of 67.6%, Asbury's operating leverage is now apparent and among the best in class.
Scott Krenz
We continue to focus on future productivity enhancements. Additionally, we will continue to target opportunities to purchase real estate we are currently leasing.
We could close on additional lease buyouts by year-end.
Scott Krenz
During the third quarter, we spent approximately $6 million repurchasing 232,000 shares under our continuing share repurchase program. Year-to-date we have spent approximately $17 million repurchasing 637,000 shares.
At the end of the quarter, we had $32 million remaining under our board authorization.
Scott Krenz
As capital expenditures, in the third quarter we spent $15 million, bringing our year-to-date total to $34 million. For 2012, we are targeting CapEx spend of $55 million to $60 million and anticipate 2013 capital expenditures declining to approximately $45 million.
Our CapEx numbers exclude lease buyouts and real estate investments.
Scott Krenz
During the third quarter, we spent approximately $15 million to retire our remaining convertible debt. During the quarter, we completed $34 million in new mortgages with one of our captive finance partners resulting in a total debt to adjusted EBITDA ratio of 2.3x at the end of the quarter.
Scott Krenz
We anticipate closing on another $50 million of mortgages in the next month or 2. These additional mortgages will also be with our captive finance partners.
Taking this all into account, we expect to end the year with leverage ratio of approximately 2.5x adjusted EBITDA. As we have previously stated, this is a level with which we are comfortable.
Scott Krenz
We ended the quarter with total liquidity of $265 million. This includes $210 million available under our undrawn committed revolving credit lines, $6 million in cash and $49 million available in floor plan offset accounts.
Scott Krenz
I'm excited by this financial strength Asbury has achieved as well as the technology and improved cost structure we now have in place. Both support Asbury's move from defense to offense.
Scott Krenz
Craig will preview our plans in his closing remarks. I'll now hand the call over to Michael to discuss our operational highlights.
Michael Kearney
I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance.
Michael Kearney
Our new vehicle revenues increased 22% and our unit volume increased 24% compared to the same period in the prior year. Our new vehicle margins for this quarter were 6.1%, down 90 basis points compared to the same period in the prior year, a period of constrained supply for many of our import brands.
Michael Kearney
As sales of the Japanese brands have recovered and availability of other brands has increased, we have seen continued pressure on new vehicle margins. Some of this margin drop has been offset by the increase in our F&I per vehicle retailed.
Michael Kearney
We ended the quarter with 64 days supply of inventory on a trialing 30 day basis. We anticipate having more than adequate luxury in the inventory to match the anticipated marketing push by those manufacturers in the fourth quarter.
Michael Kearney
We have expanded our preferred selling program which we launched in January of 2011 to a second market and now have the program in 4 luxury stores. The program has been extremely well received by both our customers and our employees.
Michael Kearney
We are very encouraged by the results we've seen so far and will continue to evaluate future markets and brand participation. In these dealerships, we have experienced a reduction in marketing expense, a substantial increase in dealer rater [ph] scores and participation, and an overall drop in our sales staff turnover.
Michael Kearney
We continue to grow our used car business, increasing used unit sales 4% over the third quarter last year. Margins have stabilized compared to the prior year period at 9.5% and are up 30 basis points sequentially from the 9.2% in the second quarter.
Michael Kearney
Our used to new-used sales ratio was 72% for the third quarter and we ended the quarter with approximately $91 million of used vehicle inventory, or a 34 day supply on a trailing 30 day basis.
Michael Kearney
Our F&I business continues to remain strong for us as our stores broke all-time company records for both F&I revenues and profit per vehicle sold. Third quarter F&I revenues grew 22% compared to the same period in the prior year.
Michael Kearney
F&I profit per vehicle sold for the quarter was $1242, up 6% year-over-year. Our F&I processes continue to enhance production and field execution continues to validate our continuous improvement training program.
Michael Kearney
As part of this process, we are operating a more effective customer facing experience by increasing productivity. We continue to be the beneficiaries of the much improved lending environment, tire advance [ph] rates, consistent application of lender requirements and aggressive lease terms.
Michael Kearney
Our parts and service operations also continue to grow. Gross profit grew 4% compared to the third quarter of 2011.
Parts and service gross margin for the quarter was 58%, up 170 basis points compared to the same period in the prior year.
Michael Kearney
The year-over-year gross profit improvement driven primarily by the 17% increase and reconditioning work and 3% increase in customer pay more than offset the decrease in the gross profit from warranty work, down 7% over the prior period.
Michael Kearney
Several large recalls have been announced recently, but it is too early to speak to the potential benefit to our warranty business for the fourth quarter.
Michael Kearney
Our national tire initiative continues to provide us with additional parts and service revenue and greater opportunity to retain both current and previous customers. Our tire sales are on pace to grow approximately 70% by the end of the year.
Michael Kearney
We recently introduced our clear view advantage program as another service to our customers and touch point to help with customer retention. Under the program, we offer free windshield wiper blades every six months to customers that visit our service lanes.
Michael Kearney
Finally, I want to extend my appreciation and thanks to all of our associates in the field. Your collective efforts are reflected in these record breaking results.
With that, I'll turn the call back to Craig to conclude our prepared remarks. Craig?
Craig Monaghan
We have worked hard over the past 3 years to manage through the recession while building out our infrastructure, systems and processes. Our record performance demonstrates the success of these efforts and our company is now on the offensive.
Craig Monaghan
We have the financial strength and operational systems to selectively add dealerships as opportunities arise. This flexibility as well as our building liquidity position also allows us to reaffirm our commitment to repatriate capital to our shareholders.
Craig Monaghan
Let me share our thoughts for the next 3 years. We are planning our business around a modestly improving economy, favorable interest rates and a SAR approaching approximately 16 million units by 2015.
Under this scenario we anticipate the following
CapEx of $35 million to $45 million per year, a significant reduction from our 2012 CapEx spend; lease buyouts of $10 million to $20 million per year as we approach our goal of owning 75% of our real estate; share repurchases of $25 million to $30 million per year in our ongoing share repurchase program with additional amounts on an opportunistic basis; and finally, the acquisition of $400 million to $600 million of additional revenues.
Under this scenario we anticipate the following
I’m very optimistic about Asbury's future and encouraged by the recent positive momentum from 2 consecutive quarters of record profits in what is still a very uncertain economy.
Under this scenario we anticipate the following
I'd now like to turn the call back to the operator and we'd be happy to take your questions. Operator?
Operator
[Operator Instructions] Your first question comes from the line of Rick Nelson with Stephens.
Rick Nelson
I'd like to ask you about sales. The industry statistics certainly indicate that the business accelerated into September.
I’m curious what you're seeing in October.
Michael Kearney
Yes, September, of course, I think all of us saw a nice finish to September. October is October.
I think we're seeing descent floor [ph] traffic, very good internet traffic. As you know, there is a lot of new product that's really starting to hit a lot of our show rooms, particularly with our brand.
Michael Kearney
So as I was alluding to in the script, we have adequate inventory for all those brands and we anticipate that what we're seeing is pretty much in line with what Craig alluded to, a modestly growing SAR environment [ph].
Rick Nelson
And a question about the growth per unit on new cars, I realize the inventories are normalized and we're seeing some pressures there particularly with Japan. But can you talk about some of the other brands, maybe the premium luxury segment, as to what you're seeing with growth per unit or are they the same sort of pressures there, your expectation as we look forward.
Rick Nelson
I think that new car growth was just under 2000 a unit. Would you expect to have that improve as the mix shifts towards luxury here in the fourth quarter?
Michael Kearney
Again, with inventories normalizing, we did see a little pressure in the midlines. We've seen stabilization in the luxury segment.
We anticipate with the new product that's coming out there that we would be able to hold those margins.
Michael Kearney
Domestic margins have come down a little bit but it doesn't impact us because we don't have that kind of exposure with the domestics. I'll also point out to you, as you alluded to, we had a little brand shift throughout the first three quarters that we expect movement more towards what we normally would see with our mix, which is a little more luxury business in the fourth quarter.
Michael Kearney
The other thing, Rick, I'd like to point out to you is that although the margins, we have seen pressure particularly in the midline imports, when we look at our total yield, which is the new volume -- the new gross, the F&I gross and our internal gross. We're actually up sequentially and essentially flat quarter-over-quarter.
Michael Kearney
So I think that bodes well for the way that the industry handles pressure in one area. We get it in another.
So we're comfortable with our total yield margins, particularly as we head into the fourth quarter.
Rick Nelson
Just to follow up on the three-year plan, Craig, but to enumerate it down [ph] 2015 16 million units, do you have interim targets that are in terms of SAR expectation?
Craig Monaghan
We've just come off our 3-year plan process. We've reviewed that with the board and that's what we're sharing with you today.
But it's -- we don't have a crystal ball. We'll be the first to admit it.
Craig Monaghan
But for plan purposes, what we've got here is just a very gradually improving SAR over that timeframe.
Rick Nelson
On the acquisition front of $400 million to $600 million revenue how the pipeline might look at this point and pricing on acquisitions.
Craig Monaghan
Rick, acquisitions are expensive, but there are sellers out there who are talking. I had a call yesterday about a store, for example.
So I think things might be softening in a sense that buyers' expectations may be softening just a little. But I feel like there's more conversation within the last 30 days than there has been in the last 3 months.
Craig Monaghan
We see a couple things out in the pipeline that we think could be interesting, but we think over time there will be more to come.
Operator
Your next question comes from the line of John Murphy with Bank of America Merrill Lynch.
Elizabeth Lane
This is Elizabeth Lane on for John. The operating leverage this quarter is really impressive at 72.3% SG&A to gross.
Do you think that number could get below 70% in the next 2 or 3 years simply through improved operational efficiency or do you think the rent expense could eventually come out as you're buying up leases and drive down that SG&A?
Scott Krenz
Well, certainly if we buy up leases we'll drive that down. We tend to look at it X rent, which we think is a fairer way of looking at the true operational efficiency in the company and there were -- just had over 67% and we think that's an awfully good result.
Scott Krenz
We set a target back at the end of 2011 and at that time it was to take about 200 basis points out of our SG&A as a percentage of gross at that level of SAR. To be honest, we probably surprised ourselves a little bit with the success we've had in creating a much more leveragable environment.
Scott Krenz
Obviously the results have been extremely good. We continue to look at other improvements.
I think this is a continuous process. But at the time, I think we're comfortable saying that we think the level we're at given the volumes is a sustainable level and that we truly have created a much more leveragable infrastructure within this company.
Elizabeth Lane
And you said that your goal is to own 75% of the real estate. Can you just tell us what percentage you currently own?
Craig Monaghan
We own about 60% and if we continue, we can continue to buy out $10 million to $20 million like I was saying, that'll get us right around that 75% that we're targeting.
Elizabeth Lane
At what point next year do you think the comps become more normalized for Toyota and Honda since we still have some negative impact early in 2012 from the low supply?
Michael Kearney
I think first quarter of next year we'll be looking at where we started to see a rationalization, normalization of inventory, so probably the first quarter of next year.
Operator
Your next question comes from the line of Scott Stember with Sidoti & Company.
Scott Stember
Can you guys talk about the used side? If you go back to the second quarter, I think you guys pointed to a little bit of a mix issue going up against some of the brand new models of Toyota and Honda which were being heavily incentivized.
Was there any of that same pressure in the third quarter that maybe crimped sales somewhat?
Michael Kearney
Traditionally, third quarter is a very big push in the new side. I think what we saw this particular third quarter was the fact that we absolutely had inventory and particularly in Honda, Toyota and Nissan that we just didn't have last year.
Michael Kearney
So I think it's fair to say that the third quarter was a little bit out of our normal sequence of the programs we're putting in place to accelerate used car growth. We did -- we saw substantial push with a number of the manufacturers for model year change over as well as anticipation of the inventory's building.
Michael Kearney
So I think we'll see inventories stabilize a little bit more and I think you'll see the continuation of our used car program efforts.
Scott Stember
On the parts and service side, referring to the warranty, excluding any potential Toyota recall work that comes in, in the next quarter or 2, when would you expect warranty comparisons to become more favorable?
Michael Kearney
A couple answers to that question. I think the rate of warranty drop has stabilized.
I think we're all in the industry looking at cars that are built much better. They're lasting longer, so I think we're all looking at leveling of that rate.
Michael Kearney
We can never predict recalls, so there's always going to be a bump one side or the other. And we can't anticipate whether warranty business would grow or not grow, but I do think that, again, with the quality of the cars across all manufacturers, the way that they're assembled and put together, I think that we've seen the greatest drop in the warranty and we just have to monitor that business form quarter to quarter as we go along.
Scott Stember
And last question just referring to your acquisition plan over the next few years, is there any brand or type of vehicle that you would be willing to look at more than the other?
Craig Monaghan
We want to maintain a balanced portfolio. We like the geography that we're in, but we would be willing to expand that somewhat.
We like stores that are in relatively close proximity to one another. We've learned that that's much easier to manage.
Craig Monaghan
And obviously we want to make acquisitions that make economic sense, so if we can find stores that fit those criteria, we're after them.
Scott Stember
So domestic brands could be included in there as well.
Craig Monaghan
Absolutely, absolutely.
Scott Stember
Could you just maybe just talk about the preferred selling program one more time and just some of the nuts and bolts behind it?
Michael Kearney
It is a program we initiated in early '11 in one of our markets, Richmond, Virginia. We call it preferred selling because it is a non-negotiated selling system.
However, prices are changed weekly to reflect market conditions, availability and supply.
Michael Kearney
Our sales consultants are paid a salary and then they are given bonuses based upon CSI and owner loyalty and retention. They are not paid on commissions.
Michael Kearney
All of our used car appraisals are done online in conjunction with the customer right there on the spot. We offer, of course, to buy their trade in even if they choose not to buy a new car from us and it's essentially carried -- that practice is carried in throughout the dealership, so that is why it's called preferred selling.
Michael Kearney
We, as I noted in the script, we expanded it into the Atlanta market with another franchise and we'll continue to evaluate the progress that we've seen and evaluate more markets and other brands.
Operator
We'll take our next question from Rod Lache with Deutsche Bank.
Dan Galves
It's Dan Galves in for Rod. I had a question on subprime credit availability.
I’m wondering if you could give us any data on how much of your new and used units are financed by subprime customers now versus some time in the past, maybe a year ago or pre-crisis.
Michael Kearney
So I think we have to go to pre-crisis because the market was different as was a little bit of our portfolio mix and a little bit of philosophy.
Michael Kearney
At one time, we were approaching, particularly on the used car side, 25% of our business being subprime, something less than that, of course, on the new car side.
Michael Kearney
Today, it is a very much -- a very much more difficult number to get a hold of because our prime lenders, particularly in number of our captives, do what we would call, traditionally have called subprime financing.
Michael Kearney
So it's very difficult to say this is a subprime customer or subprime deal. Having said that, it is substantially less than it was in the peak of '06.
There is availability not only through lenders, the captive lenders, but also through the other traditional lenders, Capital One, Regence Bank, et cetera, so we can give the detailed information, but it is much more difficult to get the exact detail, again, because of the way that the captives now lend in that subprime business.
Dan Galves
How does that play into F&I per unit earnings on a, let's say a lower credit customer versus a higher credit customer? I think that at one point third parties were charging dealers to take subprime loans, but I think that's changed.
Craig Monaghan
Yes, Dan, that's essentially correct. And there are still lenders out there today that charge a fee for that.
But with the advent of our manufacture partners, there is no fee associated with that.
Craig Monaghan
We, of course, in an environment with the rates they are today, we can sell product to all of our customers and we do push product sales more so than rate by a large margin. So I think it's not a negative trust for the subprime business.
Craig Monaghan
We don't pursue it like we used to. A lot of that has to do with the brands that we have and the markets that we're in today.
But there is no negative on our PBR whether we do a subprime business or not.
Dan Galves
So it sounds like maybe any kind of year-over-year increase in subprime availability hasn't really been a material positive to your business. Would you agree with that?
Craig Monaghan
I think that's a fair statement.
Dan Galves
Then, if I could ask another question on the recon and prep business in parts and service, just wanted to get more color on kind of what's driving the growth there. If I look at a $2.5 million increase in gross profit on only 500 incremental used units in the quarter, that's $5000 a piece, so obviously there must be something else going on in there, if you could just give us more color on what's causing the growth there and whether further growth going forward is sustainable.
Michael Kearney
So we go back to 2 years ago when we introduced the Asbury 121 program, which was our effort to get our used-new ratio to 100% of the new car sales. Part of that philosophy and program is a broadening of the type of cars that we inventory for used side and a broadening of the price bands.
Michael Kearney
Going along with that in a number of cases can be an increase in amount of the reconditioning work that we do on those cars to bring them up to our standards.
Michael Kearney
Part of our tire initiative, one of our internal parts of the tire initiative is to expand the availability of tires internally. There's been a very big push on that.
Michael Kearney
So as you see, it expands and it grows not only with the volume but philosophically in the stores. Any one store can grow that business year-over-year with only a nominal amount of unit growth as we create the philosophy internally.
Michael Kearney
So I think we've seen substantial increases. I'm not sure we can maintain the level of growth with the level of used car growth, but as we continue to push more used car growth in the ensuing quarters, I think you can expect that the reconditioning and internal business will remain very strong for us.
Dan Galves
Do you have available -- just a follow up, what is the -- what do you spend on reconditioning per unit this year versus last year? You've reconditioning per used unit.
Is there any sense of that?
Craig Monaghan
Dan, we don't disclose that. I don't have that to tell you either way but we don't disclose those numbers.
Operator
We'll take our next question from James Albertine with Stifel, Nicolaus.
James Albertine
First, on the incentive side, I just want to get a sense what you're seeing on the new vehicle front, the balance between sort of direct to consumer incentives versus the more traditional dealer incentives.
What are you seeing from the manufacturers and how does that vary across the 3 sort of buckets that you report on
luxury midline, import midline and domestic [ph]?
Michael Kearney
So as you know, there was a very long, what we would call, a model change over incentive put out by Honda that started in March that ran through the end of August, so that was a dealer cash incentive type of program.
Michael Kearney
We continually see in a number of our import brands the -- more of the cash incentive to the dealer as opposed to direct to the consumer. I think a number of the manufacturers have found out that they can get, I guess for lack of a better word, most bang for the buck by doing that.
Michael Kearney
We are also starting to see more subvented [ph] leases. That comes from both the luxury and the midline imports.
With the cost of money where it is today and with a, let's call it a very aggressive residual value, the manufacturers are able to put monthly payments back in line to what consumers were seeing three or four years ago on vehicles that not only have a higher MSRP but a substantial improvement in fuel economy, technology and content.
Michael Kearney
So I think we're seeing that across, again, the midlines and the luxuries. I would anticipate that in the fourth quarter there will be a number of programs to the dealers from the luxury manufacturers.
Michael Kearney
There's a substantial push in tier 1 marketing efforts right after the election, so I expect we will see a variety of incentives. I can't opine to those.
I'd be guessing, but, suffice it to say, I think we will see a lot of dealer type of incentives in the fourth quarter from those brands.
James Albertine
Then lastly, I apologize if I missed it. I dialed in a few minutes late.
But wanted to dig a little bit deeper into the SG&A maybe by line item if you're willing to provide it, where the biggest surprises, as you mentioned on the leverage front, originated from and then where do you see -- is there a shift in where you're budgeting leverage opportunities going forward?
Craig Monaghan
I don't think there's -- the surprise probably is only in the sense of we got there a little more quickly. We had originally targeted 2 years and we seem to have made progress a little more quickly than we had expected.
Craig Monaghan
We're finding what we expected to find. Most of it is obviously coming out of leverage around personnel and creating by giving tools and training and all the various things we do.
We're creating a more leveragable environment because personnel costs are the vast, vast majority of the SG&A expenses.
Craig Monaghan
But we continue to look at in other areas where we can leverage technology. I think there are still a lot of opportunities both within the back office and the support we can give to the stores in terms of leveraging technology and that will bring, again, continuing efficiencies.
Craig Monaghan
It really is about creating an environment, which is leveragable now, whereas volumes go up, costs do not have to go up in lock step with them, that we can create more efficiency as the business expands here.
Craig Monaghan
And creating an infrastructure which can support the other activities that the company's undertaking here and we're comfortable with something we can replicate in other stores.
Operator
We'll take our next question from Brett Hoselton with Keybanc.
Brett Hoselton
I wanted to start off with new vehicle gross profit per unit. I would typically expect to see a seasonal bump due to some luxury sales and so forth into the fourth quarter of maybe about $100 or something along those lines.
Brett Hoselton
And it sounds like you guys are saying, yes, you should expect gross profit to improve into the fourth quarter, so first I want to make sure that my understanding is clear on that. Is that essentially correct?
Michael Kearney
Yes, I think that's essentially correct. I don't know if I can be as precise down to the hard dollar fees [ph], but I think directionally fourth quarter we will have more available luxury inventory, as well as new product in the luxury market.
Michael Kearney
So I think with our mix and what I know from a marketing spend is going to start occurring in November. I think there will be a big push for luxury business and we would expect an increase in margin.
Brett Hoselton
As I look through the year, 2012, and out through the remainder of this year, it seems like you guys are going to be in around that $2100 range for this year and is there any reason to believe that that might materially change in 2013 and forward or is that given your current brand mix and so forth probably a reasonable range to work with?
Michael Kearney
Again, to allude to what Craig said earlier, the crystal ball is a little tough to see through, but based upon history, what our brand mix is currently today, what we see in terms of production from the manufacturer because a lot of this is incentive driven, so as long as production stays in step with demand, I would say that's a reasonable assumption.
Michael Kearney
All bets are off if production gets carried away by one or more of the manufacturers and inventories build up then incentives build up and then we get into a different situation. But assuming the environment we're in today, I would say that's a reasonable assumption.
Brett Hoselton
Scott, on the SG&A leverage, when you introduced the program a while ago, you had talked about some improvements in 2012 and then some incremental improvements as you move into 2013.
Brett Hoselton
So for the past couple of quarters we've been in the low 72% range, SG&A as a percentage of sales. It sounds like you feel comfortable at those levels.
Brett Hoselton
I guess my question is have you seen all of the improvements that you anticipated or is there still an incremental benefit you're expecting as you move into 2013?
Scott Krenz
Yes, we're constantly -- this is a business about continuous improvement, so we're constantly looking for alternatives -- for things to improve the operations here. What we've seen today I guess are the things I would say that are relatively easy to get at.
And I say that cautiously because none of this has been easy or relatively easy.
Scott Krenz
A lot of the things we're looking at now are more complex. They're process related.
They're systems related and just take longer to implement there. And, again, the focus is on efficiency.
The focus is on creating an environment where we can actually do more work with what we've got and that's what our focus is on going forward.
Scott Krenz
We'll see how they play out, but I think this is a never ending game of constantly looking for how to become more efficient.
Brett Hoselton
So I guess if I were to interpret that I would say that in a flat SAR environment you might anticipate some improvement in your SG&A as a percentage of gross profit but it may not necessarily be the step function significant change that you've seen over the past year. Is that a fair characterization?
Scott Krenz
I think that's fair. Yes, we're not looking for step function.
We're looking for a continuous improvement here in a flat SAR environment.
Brett Hoselton
And then, Craig, you were very specific on your uses of free cash, very specific. I guess my question is as you think about that list that you provided us with and the dollar amount that you provided us with, do you see -- is that a fairly flexible list?
Brett Hoselton
In other words, if your share price were to decline significantly, would you move in the direction of repurchasing more shares or if acquisition prices came down significantly, would you move in the direction of acquisitions or are those ranges that you provided kind of like this is where we're going to stick for a while here?
Craig Monaghan
No, I guess I'd say there are parts of it that are pretty specific and parts of it that are very flexible. The fact of the matter is this business generates a lot of cash.
We have driven our leverage to what we think are very reasonable levels.
Craig Monaghan
Scott mentioned and we've got some mortgages coming along, so there's some refinancing that's coming at us as well, so we are accumulating cash and we felt it's only fair to you and to our shareholders to understand, broadly speaking, what our plans are to utilize that cash.
Craig Monaghan
So if I look back to this CapEx, the $35 million to $45 million a year, that's pretty specific over the next 2 to 3 years. We intend to be in that range.
That will leave -- it will get us to the point where 90% of our stores will have been either rebuilt or gone through some form of major renovations, so our portfolio about stores will be in great shape.
Craig Monaghan
Lease buyouts, we feel that's a good return. Typically when we buy back a lease, we're effectively paying down debt that's got somewhere around an 8% to 10% interest rate on it.
We think that makes sense and we want to control that operating asset.
Craig Monaghan
So that $10 million to $20 million a year, that's pretty specific. We think that's essentially what's going to mature and that we can go after it.
Craig Monaghan
Share repurchase I think there's a little more flexibility around that. The $25 million to $30 million that I called out, we consider that to be an ongoing program.
You've seen us buying back around $6 million to $7 million a quarter and that's in line with what we're seeing there.
Craig Monaghan
I think to a certain extent you can view that as an implied dividend. We like the share repurchase approach as opposed to the dividend approach because it's more flexible and we think, given the uncertainty in the tax environment, it's more shareholder friendly.
Craig Monaghan
If the stock were to come under pressure, we would consider a more aggressive share repurchase program. So that's where there would be some flexibility, absolutely and we've got the capacity to do that within our restricted covenants basket.
Craig Monaghan
And then finally, acquisitions, we set out a target. I think the key thing on that acquisition target is with the systems and processes in place, liquidity that we have today, we believe we've got the capability to go out and do some meaningful acquisitions and we're looking and that's just a broad-based target of that $400 million to $600 million of what we think we could potentially get over the next 3 years.
Operator
We'll take our next question from Bill Armstrong with CL King & Associates.
William Armstrong
I had a question about market share. Any sense for what your market share shifts were during the quarter within your local market?
Do you think you gained share?
Michael Kearney
Yes, in the quarter we gained -- we measured against our local competitors from a standpoint of national numbers -- don't really apply to us. But we gained market share in our midline imports.
We gained market share in most of our luxury brands and we held our market share in all, but one of our domestics in the third quarter.
William Armstrong
Were there any franchises closed or sold during the third quarter?
Scott Krenz
Yes, we had some activity. We're constantly looking at fine-tuning the portfolio here.
But there's nothing of significance. It was just the little changes around the edges, but nothing which is going to materially impact our numbers at all.
Scott Krenz
In fact, some of the moves we made were to free up real estate which we actually think will be a net benefit to the company because it allows us to showcase some of our hot brands a little better.
Operator
We'll take our next question from Ravi Shanker with Morgan Stanley.
Ravi Shanker
I apologize if I missed this but did you also give SG&A to gross targets for that period?
Scott Krenz
We did not specifically give that number and what we did say or what I did say was that the level we've achieved now is a level we're comfortable at being able to maintain at this volume level in this SAR environment.
Ravi Shanker
The acquisition target, the $400 million to $600 million, you always said that you think that investing in your own stock is a better deal than acquisitions and I believe you -- I suspect you still feel that way. But has something changed with your outlook towards acquisitions?
Ravi Shanker
I mean, have you decided to get more aggressive and go out there and make more acquisitions than you maybe thought even a few quarters ago? And if you can just help us with what's changed there, that'd be great.
Craig Monaghan
We still believe that investing in our own stock is a very attractive alternative for us. I mentioned just a moment ago and we retain flexibility around that.
I come back to we. One of the foundations of this plan is we will spend $25 million to $35 million a year investing in our own stock, if you would, essentially buying back our own stores.
Craig Monaghan
But we do think that with the platforms that we now have in place that there will be opportunities to acquire stores and roll them into the portfolio as well. I mentioned we're not just going to buy stores for the sake of buying stores.
We want stores that make economic sense.
Craig Monaghan
But we have seen that there are advantages that we bring to play. We look at our acquisition in Greenville where we essentially doubled up in IPBRs versus when we bought that store.
Craig Monaghan
We've seen significant growth in the parts and service business there. We've seen a pickup on market share.
So we think there are times when a company like ourselves can bring advantages to bear versus what someone can do -- especially someone who's got only 1 or 2 stores. They just don’t have the resources to bring to bear that we do.
Craig Monaghan
So there are opportunities there and we're looking for those opportunities. But we like the flexibility that we can move back and forth between share repurchase and acquisitions and whatever makes the most sense.
Craig Monaghan
And we can also be patient and I think you see that today. We've got tremendous amount of liquidity.
It's - we're not letting it burn a hole in our pocket but if the right opportunity comes along we are certainly in position to move.
Operator
There are no additional questions in the queue.
Craig Monaghan
Very good. Well, we certainly appreciate you taking this time with us this morning.
As you can see, we're very happy with our quarter but we look forward to many good things to come. Thank you very much.
Operator
That concludes today's conference. We appreciate your participation.