Good morning. My name is Shannon, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Rob Quartaro, Vice President of Investor Relations. You may begin your conference.

Robert Quartaro - Vice President Investor Relations

Thank you. Good morning and welcome to AutoNation's second quarter 2021 conference call and webcast. Please ensure that your lines are muted until the operator announces your turn to ask a question. Leading our call today will be Mike Jackson, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks we will open up the call for questions. 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 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'll turn the call over to AutoNation's Chief Executive Officer, Mike Jackson.

Mike Jackson - Chief Executive Officer and Director

Good morning, and thank you for joining us.

Today, we reported all-time record quarterly results with adjusted earnings per share from continuing operations of $4.83; an increase of 243% compared to last year. This marks AutoNation's fifth consecutive all-time record quarter with stellar performances across all our business sectors. Our second quarter same-store revenue was an industry-leading record $7 billion, which is up 54% compared to same period a year ago and up 33% compared to 2019.

The COVID-19 pandemic caused a dramatic shift in consumer spending priorities, they want bigger homes and the safety and convenience of personal transportation combined with low interest rates, the strong vehicle demand has led to faster inventory turnover and consumers are buying vehicles before they even arrive at our stores. We expect the current environment of demand exceeding supply to continue into 2022. New vehicle shipments for the quarter were up 100% compared to last year and only down 6% compared to 2019.

With demand outpacing supply, manufacturers are unable to increase their available inventory and with a limited supply of new vehicles, many consumers are opting for pre-owned vehicles. With consumer demand high for personal transportation, we're aggressively moving [Phonetic] to increase our availability of pre-owned vehicles. Almost 90% of our pre-owned vehicles retailed in the second quarter were self-sourced. Self-sourcing is the core capability and a competitive advantage for AutoNation.

A proven acquisition strategy, successful We'll Buy Your Car program, digital tools and operational execution allow us to source attractive inventory, drive used vehicle sales and deliver a peerless customer experience. AutoNation's same-store pre-owned units were up 37% year-over-year and up 32% compared to 2019. Continued strength of our pre-owned business was also evident in the success and profitability of our sixth AutoNation USA stores. We opened AutoNation USA San Antonio in May. The store exceeded expectations, and the store was profitable in its first full month of operation. We are on track to open four additional stores in second half of this year.

Turning to capital allocation, from January 1st to July 15th we repurchased 15% of our shares outstanding. We remain committed to opportunistic capital allocation and delivering value to our shareholders.

I'll now turn the call over to Joe Lower, our Chief Executive - Chief Financial Officer.

Joe Lower - Executive Vice President and Chief Financial Officer

Thank you, Mike and good morning everyone. Today we reported adjusted net income from continuing operations of $385 million or $4.83 per share versus $124 million or $1.41 per share during the second quarter of 2020. This represents an all-time high quarterly EPS and a 243% increase year-over-year.

While year-over-year comparisons benefit from lapping the early stages of the COVID-19 pandemic last year, we've also demonstrated impressive growth compared to a more normal operating environment in the second quarter of 2019. As Mike stated, second quarter revenue for 2021 was $7 billion. On a same-store basis, revenue increased $2.5 billion or 54% and increased $1.7 billion or 33% compared to the second quarter of 2019 driven by growth in both the variable and fixed operations.

The current environment of demand exceeding supply continues to support strong vehicle sales and margins. For the quarter, same-store variable gross profit increased 85% year-over-year driven by the increase in total combined units of 39% and an increase in total variable PVR of $1,354 or 32%. Further highlighting our impressive performance, our same store total combined units increased 21% compared to the second quarter of 2019 with growth in new units of 12% and growth in used units of 32%.

Our customer care business continues to improve with same-store customer care gross profit increasing 41% on a year-over-year basis, and 8% compared to the second quarter of 2019. Taken together, our same store gross profit increased 68% compared to the prior year and 52% compared to the second quarter of 2019.

Moving to costs, second quarter SG&A as a percentage of gross profit was 56.5%, a 1,170 basis point improvement compared to the year ago period on an adjusted basis. Our strong performance continues to be driven by strict cost discipline, leverage of our digital capabilities, and robust vehicle margins. As measured against gross profit, on an adjusted basis, overhead decreased 760 basis points, compensation decreased 380 basis points and advertising decreased 30 basis points on a year-over-year basis.

Floorplan interest expense decreased to $7 million in the second quarter of 2021 due primarily to lower average floorplan balances. This, combined with lower non-vehicle interest expense, a lower effective tax rate, and fewer shares outstanding, generated record adjusted EPS. Turning to the balance sheet and liquidity, our cash balance at quarter end was $60 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $1.6 billion.

We continue to deploy capital to grow our business and drive long-term shareholder returns. During the second quarter, we opened our sixth AutoNation USA store in San Antonio, Texas. As Mike mentioned, our new store reached profitability in its first full month of operations. We remain on track to open four additional stores in the second half of 2021 and 12 more in 2022. Longer term, we continue to target over 130 stores by the end of 2026.

Year-to-date through July 15th, we repurchased 12.9 million shares for an aggregate purchase price of $1.2 billion, completing our prior authorization. Today, we announced that our Board has authorized an additional $1 billion for share repurchase. As of July 15th, there were approximately 72 million shares outstanding. Despite the significant investments in our business and volume of share repurchase, our covenant leverage ratio of debt to EBITDA declined 1.2 times at the end of the second quarter, down from 1.3 times at the end of the first quarter, based upon strong operating performance and cash flow generation.

Including cash and used floorplan availability, our net leverage ratio was 1.1 times at the end of June. Looking ahead, we will continue to leverage our strong balance sheet and robust cash flows to invest in AutoNation USA expansion as well as opportunistic acquisitions and share repurchases.

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

Mike Jackson - Chief Executive Officer and Director

Thank you, Joe. We continued to demonstrate strong performance in the second quarter. Looking ahead, we remain committed to driving value from solid execution with industry leading digital capabilities and continuing to deliver an exceptional experience for our customers.

AutoNation remains an industry leader in customer satisfaction with over 500,000 five-star reviews according to Reputation. AutoNation is the only automotive retailer to achieve this, and is outstanding by all our 21,000 AutoNation associates.

With that, we'll now take your question.

Question & Answers

Questions and Answers:

[

Operator

[Operator Instructions]. Your first question comes from the line of Rick Nelson from Stephens.

Richard Nelson - Stephens Inc. - Analyst

Thanks for [Indecipherable] and congratulations. Mike, I'd like to ask you about inventory. You're sitting at 14 days supply, you're more profitable than you've ever been, I guess, where do you see days supply going from here? What do you think is the optimal level of days supply to maximize profits? When do you think things normalize?

Mike Jackson - Chief Executive Officer and Director

Yeah, Rick - yeah, this is Mike. So I assume you're referring to new vehicles, [Indecipherable]. We'll do pre-owned first. As you know, a year ago we moved very aggressively, we're very bullish on pre-owned, and all that culminating in our ability to increase pre-owned revenue during the second quarter like 65%, just a remarkable achievement.

On the new vehicle side, first I have to tip my hat to the manufacturers, they've done an incredible job to restart the global supply chain. Shipments for us in the second quarter were up 100% compared to a year ago, and we're only 6% down from 2019. Obviously, the chip shortage continues. The manufacturers have been very enlightened about how to meet the challenges of this. I really admire the way that they're producing what - they're using the chips that they do have to produce vehicles, that consumers want to buy. And in some cases will produce vehicles and leave out certain features to keep the supply coming. And in other cases, they have produced the vehicles and are awaiting arrival of chips just to plug them in and then they can ship them.

But the headline is that the demand is far higher than supply, and I think that continues well into next year. And I - and I really don't know if we'll ever see a crossover point back to the old push system. There is a very healthy discussion going on within the industry of the shortcomings of the push system, and that while the current situation is extreme, no doubt about it, maybe the best path is somewhere in between. You're not even going to get to the fork in that road until sometime into next year.

Richard Nelson - Stephens Inc. - Analyst

I guess [Phonetic], was my follow-up, do you think there is a potential paradigm shift here with the OEMs, where they learn to live with less inventory, everybody seems to be more profitable in that environment till we go back to the old bad habits.

Mike Jackson - Chief Executive Officer and Director

As I told, there is a very healthy discussion. Listen, this pandemic has been absolutely godawful, it's just been unimaginable. Shelter in place in America is unimaginable. However, there is a very healthy, constructive debate going on within the industry that there is a better way than the old push system.

And you know, this whole idea that you couldn't sell - this obsession with immediacy on delivery and immediate self gratification that drove the industry with the push system, I think that's really being rethought. We are selling a huge percentage of our pipeline, which we make visible on AutoNation.com, and you can see what's incoming. And you can - we can match up vehicle with consumers in the pipeline when they come in and go out and take delivery, is a valuable lesson for the industry that this idea of having 4 million vehicles sitting on lots across America as the way to run an industry, I think is genuinely being rethought.

And, I'm optimistic - I'm optimistic. Now the truth is somewhere in between, it's not 14 days supply. That's not optimal for anyone, but maybe it's 30 days, 36 days, sort of 30 to 40 somewhere like we run pre-owned, that's probably where the truth is. But the headline is, demand is strong, the strong demand will continue, and this shift disruption is not coming to an end quickly, but let us not lose sight of the fact that shipments doubled from a year ago and are only 6%, 7% behind where they were in 2019.

Richard Nelson - Stephens Inc. - Analyst

Okay. Great, great color. Thanks, Mike. Good luck as we push forward.

Mike Jackson - Chief Executive Officer and Director

Thank you. Thank you.

Operator

And you next question comes from the line of Stephanie Moore [Phonetic] from Truist.

Stephanie Moore - Truist - Analyst

Hi, good morning. Thank you for the question. I kind of - I wanted to continue on the last set of questions there. And I think Mike you brought up an interesting point about just maybe the days supply isn't what it was kind of the pre-COVID levels, but certainly higher than it is today, what does this mean from anything from maybe a footprint on a real estate standpoint? Does it make sense to have this large a footprint for holding less inventory or on the same level, what does it mean from your digital capabilities?

And with that, I'd love to get an update on what you're seeing or you saw during the quarter, just the adoption and usage of your digital efforts, that would be helpful. Thank you.

Mike Jackson - Chief Executive Officer and Director

Alright. You're absolutely spot on that the pandemic is also being an inflection point towards digitalization. We were ready because of the investments that we told you that we made to surge investment in 13, 14 and 15, that really gave us a capability, resulting in a 65% improvement in pre-owned sales, increase in pre-owned sales here in the second quarter on a revenue basis. And I don't - I don't think that's going backwards.

But the USA strategy, the AutoNation USA strategy exactly describes our thinking that delivery centers remain essential point of purchase for the acquisition of pre-owned inventory, remained essential speed to market and reconditioning centers remain essential, and that's basically what a USA store is. And we expect to build an additional 125 over the next several years. We opened our sixth AN market where the AutoNation footprint did not exist in San Antonio, Texas, and we are profitable in the first month. Congratulations to the entire team.

We'll open up four additional stores in the remainder of the year and accelerate the build out in future years. But speed to market, reconditioning costs, acquisition point and delivery center are essential, and we have the capability to build out a footprint in ultimately in the entire United States of America with AutoNation USA stores profitably.

Stephanie Moore - Truist - Analyst

Got it. No, thank you so much. And then switching gears a little bit. I'd love to hear, just what you're seeing from a customer care standpoint is very strong growth for the quarter. Do you view this as pent-up demand, just for us - we kind of moved through the pandemic and then the country continues to open up or, what can you say in terms of driving such a nice cliff here in the second quarter?

Joe Lower - Executive Vice President and Chief Financial Officer

Yeah. So I think it's a combination of things. I don't think it's solely attributable to pent-up demand. If you kind of go through the categories, customer pay, a portion of it has rebounded most quickly as well as obviously the internal reconditioning is obviously tracking with the impact of the new volume and used volume. We're finally seeing collision kind of get back to its '19 level, which has been a little laggard and then warranty probably of the four categories is the slowest to recover.

But as we track it on a monthly basis, we continue to see continued recovery and anticipate that will continue through the rest of the year.

Stephanie Moore - Truist - Analyst

Great. Well, thank you so much for the color.

Joe Lower - Executive Vice President and Chief Financial Officer

Sure.

Operator

Thanks. Your next question comes from the line of John Murphy from Bank of America. Your line is open.

John Murphy - Bank of America Merrill Lynch - Analyst

Good morning, everybody. Mike, I just wanted to challenge you on something - we don't usually challenge you on, because you usually are the challenger of the inventories, bloated inventory. How do you define optimal inventory? Because with these very low inventories, you're generating record profits. So I mean, I would define optimal inventory as the level that generates the highest profits, and that's what's occurring right now. And I think it's a little interesting to hear you say and another [Indecipherable] usually are the more disciplined folks, say hey we need a little more inventory. I mean, if you're putting up record profits, this tightness is really healthy for profitability. What does optimal inventories to you mean?

Mike Jackson - Chief Executive Officer and Director

Well, maybe I was expressing more a hope of where the industry would be as a new goal, and not be going back to 70, 75, 80 and 90 days worth of inventory.

There are issues today with the extremity of some of the shortages, and I don't see it remaining at this extreme level of this situation that we have right now. But I don't see it going back to the old way either. And I guess that's a big headline John, with a few - just a year ago, no one would be saying that. I mean, I said it ten years ago, but I now think it's very realistic goal. Would I like it the way it is right now forever, happily ever after, Camelot, absolutely, absolutely. This situation we can match.

I'm not sure that [Indecipherable] be a year from now, but I don't think it's going back. The headline is, I don't think it's going back to the old ways of a massive over production push system.

John Murphy - Bank of America Merrill Lynch - Analyst

That's encouraging. I mean, the other question that we get often is the GPU seem like they may be somewhat inflated in the moment because of this dislocation of supply and demand, which is a good thing. And focusing here so you guys are just over earning, but if I kind of normalize grosses as best as I can, I'm coming up into an SG&A gross, somewhere in the low to fairly mid-60s, right?

So meaning that you are - half of this beat at least is coming from pure execution on your side, which means that the costs you've taken out are a lot more sticky or structural than maybe even you talked about before. I mean that 68% that you're talking about SG&A gross before is kind of a level, it seems like it's ticked down by 300 basis points to 500 basis points. How do you think about that going forward? Is that 68% still relevant or is your execution which apparently is based on the calcs [Phonetic] I'm doing it is much better than people have been thinking and you were thinking before? I mean, can you may be reset the bar on that 68%, or how are you thinking about that right now?

Mike Jackson - Chief Executive Officer and Director

So John, directionally you are correct. And particularly, I'm going to talk about AutoNation. We had a surge investment in digital 13, 14, 15 which took up our cost. We were very transparent about them then, called it out, and are delighted with the digital platform and the digital capability and tools that we created today that are unique and proprietary to AutoNation.

So, if you look at AutoNation's SG&A, while the surge period is over, and as we said at the time these digital capabilities would bring us to a lower cost, which it has, and then when the pandemic hit, we said, well, okay, we're going to do everything we plan to do over the next several years. Now, so that accelerated additional cost savings. So it's really three steps, which has taken us to a permanently lower basis on SG&A. Absolutely, no question about it.

Now, am I going to give you a number today, probably not. But I would say, Joe, can you give us a number for the rest of this year, where would we end the year?

Joe Lower - Executive Vice President and Chief Financial Officer

I think for this year we'll be in around the 60% range. As you just alluded Mike, there clearly are some permanent changes. If you look at the increase in SG&A, over 90% of that is coming through variable comp. We are doing a very good job of keeping the fixed cost fixed, with strict discipline and leveraging the digital tools we have.

So, we clearly are on a different trajectory than we thought even a year ago.

John Murphy - Bank of America Merrill Lynch - Analyst

That's very helpful. And then just lastly, the share repos have been massive year-to-date. I'm just curious, I think - as you think about cap allocation, I mean, you turned the tap on if it makes sense doing M&A and obviously you're reinvesting cash in AutoNation USA. But as you look at this, I mean, the investment opportunities on the acquisition side, I guess you're viewing those as really not that attractive at current levels and your stock is much more attractive, and that's why you're making that decision. Is that a correct interpretation of how capital is being reallocated at the moment?

Mike Jackson - Chief Executive Officer and Director

That's a very fair statement. So we invest in our existing stores. No question, we keep our existing stores top notch. Strategically, we're investing in USA, a very ambitious rollout plan culminating and having 130 of these built out in the next several years. And then we will see where it goes from there.

But also John, and you know me, when I feel that AutoNation is an attractive price, we have not hesitated to buy aggressively. And we keep a strong balance sheet, we are investment grade, but clearly, we're optimistic about the future, see things as that - as you describe them, and therefore we view purchasing our own Company relative to the pricing we see as other choices as the best use of that capital after having taken care of investing in our existing stores and building up USA.

Joe, what would you like to add to that?

Joe Lower - Executive Vice President and Chief Financial Officer

I think you nailed it Mike, I mean, the M&A pipeline is robust which is demonstrating real discipline. And as you said, right now, if we look at our return basis, following AN USA, in our existing stores, our share repurchase has been the most attractive return. So we're going to continue a balanced and disciplined approach. All the while we're at very low leverage level. So we have tremendous capacity to be opportunistic.

John Murphy - Bank of America Merrill Lynch - Analyst

Seems very, very, very sensible given where the stock is right now. Thank you very much guys.

Operator

Your next question comes from the line of Mike Ward from Benchmark. Your line is open.

Michael Ward - The Benchmark Company - Analyst

Thank you. Thank you very much for taking the question. Maybe to follow-on with John's question there about the digital side of it. A couple of things. Does the digital side of it improve the F&I side? I think you mentioned that two-thirds of F&I is coming from vehicle protection. Does the digital streaming that you have and people looking online for different purchasing options, does that enhance the F&I revenue stream?

Mike Jackson - Chief Executive Officer and Director

So when we think about digital, it is - the customers want to engage in a digital process where they are empowered, and it's a high value. However, they still want to come to a store for final delivery and final decision. And you might say, well, how can that be, what is the answer there. Well, they actually feel more empowered coming into the store than they do having the car show up in their driveway. That's in over 90% of the situations, I'm not saying there aren't exceptions to that.

Now, our inflow process is all integrated and seamless with our digital process, and this includes the presentation and offering of AutoNation product. So, if I look at the numbers right now, 55% of our customers, of our business engage with us digitally first. They go to different levels of engagement depending on their preference, and we can go as far and deep into it as they want, and they engage with a specific store, and our store process is very much in the express lane.

We love the adoption rate of our AutoNation customer care products, because it's a benefit not only to us today, but we are building a repeat referral customer care business for the future that has tremendous power and tremendous momentum. So I think we found just the right line. And I've already said in the past, I think who wins in the marketplace of the future are companies that have a brand, a customer-friendly experience, a digital platform to interact with their customers and the operating ability to be very profitable.

That's the combination that wins in the marketplace.

Michael Ward - The Benchmark Company - Analyst

And is there any reason not to expect the elevated levels of F&I to continue?

Mike Jackson - Chief Executive Officer and Director

I see no reason. You know, it's - but here is why. It's not that we're raising prices on F&I, it's that the adoption rate of our products is going up and up per transaction, and every year it goes up, because we improve the products, we improve the price value for our customers and we improve our skills at presenting them to customers. So I think that continues.

Michael Ward - The Benchmark Company - Analyst

And just, is there a huge difference on the F&I side between new and used or are they pretty comparable?

Mike Jackson - Chief Executive Officer and Director

I think there is just slight difference. Joe, please?

Joe Lower - Executive Vice President and Chief Financial Officer

Slight difference. Generally the CFS is slightly higher on new vehicles than used. But we've seen - we've seen increases really across all categories, both new and used and really all segments, domestic, import and luxury.

Michael Ward - The Benchmark Company - Analyst

In all stores both new and used, including AutoNation USA have full digital capabilities, correct?

Mike Jackson - Chief Executive Officer and Director

That is correct.

Joe Lower - Executive Vice President and Chief Financial Officer

Correct.

Michael Ward - The Benchmark Company - Analyst

Thank you. Thank you very much.

Mike Jackson - Chief Executive Officer and Director

Yeah, the Company-wide platform at the entire offering that the Company has presented new, pre-owned, certified pre-owned and most importantly, the entire pipeline of AutoNation. So if you're looking for pink [Phonetic] suburban and for whatever reason, and we have one going to the West Coast, and you live on the East Coast and you can see it six week out, and you want, we will redirect it to you. And that's a tremendous competitive advantage.

Michael Ward - The Benchmark Company - Analyst

Yeah, that's huge. Thank you.

Joe Lower - Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Rajat Gupta - J.P. Morgan - Analyst

Hi, good morning. Thanks for taking my questions and congrats on the strong quarter. I just had a couple of follow-ups from previous question. On parts and services, revenue was up roughly 10% versus 2Q'19 levels. Could you give us a sense of how much of that 10% is higher transaction volumes, more transaction versus pricing, like any way to parse that out on a like-for-like basis? And I have just a couple of follow ups. Thanks.

Mike Jackson - Chief Executive Officer and Director

Yeah. I can't give you specifics. I would say the price has improved, and so it's not solely volume, it's the total return, if you will. It's a combination of both. So we have seen recovery in absolute volume, but there also has been pricing improvement that's complimenting that.

Rajat Gupta - J.P. Morgan - Analyst

Got it. Would you say like the one was higher or greater contributing than the other or is it pretty similar?

Mike Jackson - Chief Executive Officer and Director

I would say it's generally pretty similar.

Rajat Gupta - J.P. Morgan - Analyst

Got it, got it. And on the SG&A side, you mentioned earlier to John's question that 90% of the uptick was more variable, can you give us a sense of where your headcount stands today? You know, in the past you talked about the 3,000 to 3,500 permanent employee reduction on like-for-like basis, if you were back to pre-pandemic volumes. But your overall unit growth is now tracking roughly 20%-plus versus 2Q19 levels.

So, are you now - where does your headcount stand versus that kind of volume growth level? Are we hiring back more people or all this were just coming through higher productivity? So just to get a sense of how this can continue going forward. Thanks.

Joe Lower - Executive Vice President and Chief Financial Officer

Yeah. So I'll answer the question directly and then elaborate. So headcounts around 21,600 were down about 14%. So, to the point about the increase in units despite reduction in headcount. This totally touches on I think the power of digital tools and how our folks are much more effective. And we talk about digital, digital is simply not what the customer sees. It's also the tools we provide to our sales and service representatives. And we clearly are seeing more effective close rates, almost double the close rates with our digital tools and clearly higher PVRs, with the tools being used.

So when you look at our ability to manage the volumes on lower headcount, it clearly is in part by the tool that we have put in our sales and service associates. It's also enhanced by the tools that we put into our Shared Service Center, all of which provide us greater leverage if you will, given the volumes of vehicles that we're selling.

Rajat Gupta - J.P. Morgan - Analyst

Got it, got it. Yeah, that's clearly extremely impressive. Just one last question on the used vehicle side of the business. The 32% growth versus 2Q19 levels, any sense of how much of that is coming from franchise versus the USA stores? You know, just so we can get a sense of the contribution within double [Phonetic] buckets, and I guess from the GPU there as well. Any way to parse out if the 2,200 level in 2Q, how much of that is more structural versus just temporal given like the change in the newspaper pricing? Thanks.

Mike Jackson - Chief Executive Officer and Director

So, we - so first and foremost, we run [Phonetic] an integrated approach on the pre-owned. We really view every location we have as a pre-owned delivery center and pre-owned opportunity, and we do acquisition and pricing centrally. So, it is all behind the AutoNation brand. And the USA stores are solidly profitable. Joe, you want to talk about the numbers and…?

Joe Lower - Executive Vice President and Chief Financial Officer

Yeah. So two parts of that - two parts of a response. So first on the used volume, to be clear that's across the entire [Phonetic] enterprise. And we only have today six USA stores which sold 3,000 units in the quarter. So it's not as if it's solely incremental in USA. That said, it's doing extremely well. I mean the profit in the quarter is about $5 million which clearly demonstrates the leverage that we're seeing there. And as we mentioned earlier, San Antonio has already achieved profitability in its first four months. So - but it's across the entire enterprise that we're seeing the success of our sourcing.

Our inventory produce actually increased from the end of Q1 to Q2 in large part by the success of our We'll Buy Your Car and other procurement methods which we do think is a competitive advantage.

Rajat Gupta - J.P. Morgan - Analyst

Got it. And on the GPU side? [Speech Overlap]

Joe Lower - Executive Vice President and Chief Financial Officer

It's not materially different between our various stores from a used perspective.

Rajat Gupta - J.P. Morgan - Analyst

Yeah. But just a 2,200 level versus what you've historically done. Any sense of like how much of that is just temporal versus just structural given like the changes in the sourcing mix that you have had.

Joe Lower - Executive Vice President and Chief Financial Officer

It's - I mean, I am uncomfortable saying right now, how much - what the timing is going to be. Clearly, we have seen the benefits from our sourcing decisions and being well positioned, but ultimately there may be some pressure in that area, but we don't see it in current environment.

Rajat Gupta - J.P. Morgan - Analyst

Got it. Great, thanks. Thanks for all the color and good luck.

Operator

Thank you. Next question comes from Bret Jordan from Jefferies. Your line is open.

Bret Jordan - Jefferies - Analyst

Hey, good morning guys.

Mike Jackson - Chief Executive Officer and Director

Good morning.

Bret Jordan - Jefferies - Analyst

On the service business, could you talk about the cadence of service as the quarter progressed, maybe against '19 sort of take the volatility of '20 out. Is this correlated to reopening, and sort of return to work? Or is this sort of just pent-up demand given the time that's passed since we've really seen the COVID shutdown.

Mike Jackson - Chief Executive Officer and Director

We have commented throughout that we saw on a month-to-month basis continued improvement. What I would tell you from my perspective is we're starting to see a bit of stabilization, I wouldn't say it's just been [Phonetic] each month better and better, I think we're starting to see a level of stability across the business with really the warranty where in one part of the business it continues to lag, but otherwise, I'd say we are cautiously optimistic that we'll continue to see this level of demand through the rest of the year.

Bret Jordan - Jefferies - Analyst

Okay, great. And you commented that the M&A pipeline was robust. What are you seeing in like seller price expectations? And obviously a wildly profitable environment, are they expecting to sell off these - these very high profit levels or are they sort of expecting, I guess it's pricing rational is the short question.

Mike Jackson - Chief Executive Officer and Director

So - it is Mike Jackson. If I will - I think we've already expressed what we think on that question in the second quarter. We repurchased 9% of AutoNation. So I bought 9% of AutoNation rather than doing a lot of acquisitions that I thought were overpriced.

Bret Jordan - Jefferies - Analyst

Okay, great. Thank you. And I guess one quick final question. In the self-source mix, the 90% of your use, how does that shake out between We'll Buy Your Car versus trades, versus lease returns? Could you sort of carve that for us?

Joe Lower - Executive Vice President and Chief Financial Officer

So certainly the largest piece is trade-in. I would say from a sourcing standpoint that's - that can be 60%, We'll Buy Your Car from a sourcing is probably 20%. So between trade and We'll Buy Your Car, you're talking about 80% and then you have lease return and service loaner [Phonetic] that gets you to 90% of our sourcing in the quarter right there.

Bret Jordan - Jefferies - Analyst

Okay, great. Thank you.

Joe Lower - Executive Vice President and Chief Financial Officer

Yeah.

Operator

Your next question comes from Adam Jonas from Morgan Stanley, your line is open.

Adam Jonas - Morgan Stanley - Analyst

Hey, thanks everybody. Mike, I always love your opinions and wisdom around industry moves especially from OEMs, where we're seeing some auto companies looking to go direct to consumer for things like vehicle maintenance or service through OTA, and then a bit more visibly insurance and related financial services.

So Mike in your opinion, could an OEM using the car, connected car, as a way to kind of engage directly with the consumer on say insurance like bond start [Phonetic] insurance or that kind of thing. Could that constitute a violation of dealer franchise laws? I mean your dealers, you guys generate significant revenue from F&I and including the I [Phonetic], and I'm just wondering if the connected car gives the OEMs a chance to kind of circumnavigate that.

Do you have a right to get access to that data? Are they allowed to do it? I'm just curious if you see that being an emerging problem, if you take it to its logical conclusion.

Joe Lower - Executive Vice President and Chief Financial Officer

Here is what I see as the strategic trend. The complexity of the automobile is going up exponentially. And that when - there are issues and there always are issues, the number of entities that actually can care for it and fix it are fuel and fuel. And eventually looking on the electric vehicles, the investments we're having to make in specialty equipment, technical training, expertise is unbelievable. On the connected car, whoever you're doing and with whatever manufacturer, there are issues. And we have the expertise to resolve it. So I see complexity going up exponentially as far as the eye can see, as far as a Company like AutoNation is concerned, we love complexity because it's what we do. And the barriers to entry on complexity are very high.

Adam Jonas - Morgan Stanley - Analyst

Okay, Mike. Appreciate that. Just one follow-up. I think last quarter I asked you about Volvo looking to do some things, selling electric vehicles on line through separate channel at one price. More recently, I think in auto news there was GM BrightDrop, ahead of their vehicle distribution said they were looking to have just a distribution footprint that might include sites outside of GM's current dealer network. Just curious again if you had - one of the shared thoughts on whether that is something that gets close to the state franchise law issue or whether it's kind of more nuance than that?

Mike Jackson - Chief Executive Officer and Director

So you know, I'm well aware of the state franchise laws. I don't obsess over them. I really look at the equation of what works for consumers, what works for manufacturers. And so far from what I see on the attempts by OEMs, with the reservation system, they really haven't had much added value for consumers. At the end of the day, everything gets transferred over to us and you can't even specify your vehicle in this reservation.

Just [Technical Issues] really has a direct model, of any sort [Technical Issues] viable at the moment is Tesla. Now Tesla skipped this test and didn't feel [Phonetic] customer care network to take care of that. So we hear it every day from customer - Tesla customers who are fed up with the amount of time it takes for their cars to be cared for.

So that's one thing you do get with a franchise system, that's extremely worthwhile to manufacturer is that in front-load the customer care platform for your vehicle. So I have been listening to the challenges of the - or the questions of viability of the auto franchise system in America for over a decade, and I think we're resilient, adaptable and viable as far as the eye can see.

Adam Jonas - Morgan Stanley - Analyst

Thanks, Mike.

Mike Jackson - Chief Executive Officer and Director

Thank you.

Operator

Your next question comes from the line of David Whiston from Morningstar.

David Whiston - Morningstar - Analyst

Thanks, good morning. First on vehicles coming off [Technical Issues] Honda and GM are saying that they want lease buyout to be done by their own dealers for their respective franchise dealers and does that hurt on your ability to do deals from complex customers and why don't the factories [Indecipherable] they could be good for everyone?

Mike Jackson - Chief Executive Officer and Director

I think we do that already. I think we have - we have always embraced the partnership with the OEMs on all issues like this that are win-win situations, and we've always been a high participant in the acquisition of off lease vehicles and the manufacturers know that, and we expect that about us we'll buy almost everything they have.

David Whiston - Morningstar - Analyst

Okay. And going back to the conversation at the beginning with the [Technical Issues] gratification of consumers, and I mean, it sounds like you're saying that some consumers maybe want to have a [Technical Issues] for them and whereas others would be willing [Technical Issues] to build a older model and long time ago, the US was entirely build of orders. [Technical Issues] Where do you think are consumers that some will wait and some won't wait. [Technical Issues]

Mike Jackson - Chief Executive Officer and Director

So I've never been a strong proponent or advocate of the build to order model. I really didn't - I mean, there is a certain small percentage of marketplace especially on specialty vehicles, that's what they want. But here is an epiphany that the industry is really embraced is that when they are building their production schedules, they prioritize what people want to buy, and you can figure them very close to what people want to buy, and with a little bit of give and take, people are getting 95%, 98% of what they want in a relatively short period of time of 30 days to 45 days.

And that is really working, and going always back to our earlier conversations, I think it unleashed a very healthy discussion in the industry. If you make this [Indecipherable] of build to order, I think you sort of lose your way, it's a bridge too far. You don't really need to go that far, but there is in between, build what people would like to buy and configure on very close to what they want to buy, giving visibility into the pipeline and they will buy it, and they'll wait a little bit and then take delivery. That's working very well.

David Whiston - Morningstar - Analyst

Okay. And inflation, there's a lot of inflation chatter now, some say it's temporary, some say it's long-term, my math suggests a 100 bps increase in rates is generally roughly maybe $15 a month increase in monthly payment. How concerned are you about inflation, and do you see any [Technical Issues] from this year?

Mike Jackson - Chief Executive Officer and Director

I'm pretty much in agreement with the Federal Reserve that the inflation discussion, station issue is transitory and there are two big factors in it.

One is, you have the exceptional unemployment benefits which were appropriate considering the circumstances of the pandemic and shelter in place. But we are - and there has been inflationary issues around that, but that - those issues are going to be resolved before year-end. And of course the other big headline is pre-owned, which of course and by going the second quarter of 2019, pre-owned - of 2020, pre-owned there was the liquidation of the fleets, there was pressure on pre-owned value, so you're comping against the downslope to now a recovery with an unique situation of production disruption on the new vehicle side.

So I agree with the federal reserve. I think inflation is in principle, we have a transitory situation here and things will look different by the end of the year.

David Whiston - Morningstar - Analyst

Okay. And finally, probably for Joe, should the Biden Administration increase the federal tax rate, can you give any rough estimate of what your own tax rate sensitivity could be, could it be 100 bps increase on the federal rate, is it a one for one or is that a little bit less?

John Murphy - Bank of America Merrill Lynch - Analyst

So in general, if you look, I think the proposal out there have been about a 400 basis point increase. So effectively if those were approved, we'll see about that through our tax rate. We try to find ways to mitigate it, but as you know today, we're pretty effective, if you look at our rate and state taxes, it's got a whole lot more room there so.

David Whiston - Morningstar - Analyst

Okay, thank you.

Mike Jackson - Chief Executive Officer and Director

Alright. Thank you everyone for joining us today. Thank you for your questions, very grateful. All the best.

Operator

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AUTONATION INC

Q2 2021

Earnings Transcript

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