RDNW - NASDAQ

Greetings, and welcome to RumbleON Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Will Newell, Head of IR. Thank you. You may begin.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us on this conference call to discuss RumbleON's third quarter 2022 financial results. Joining me on the call today are Marshall Chesrown, RumbleON's Chairman and Chief Executive Officer; and Narinder Sahai, RumbleON's Chief Financial Officer. Our Q3 results are detailed in the press release we issued this morning and supplemental information will be available in our third quarter Form 10-Q that will be filed later today. Before we start, I'd like to remind you that the following discussion contains forward-looking statements, including, but not limited to, RumbleON's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in RumbleON's periodic and other SEC filings. The forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and RumbleON assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Also, the following discussion contains non-GAAP financial measures. For a reconciliation of non-GAAP financial measures, please see our earnings release issued earlier this morning. Now I will turn the call over to Marshall. Marshall?

Thank you, Will. Good morning, everyone, and thank you for joining us today. As of August 31, we reached our one year anniversary of our landmark acquisition of RideNow, and we are proud of the achievements we've made in the last 12 plus months. We've positioned ourselves as a leader in the new and used powersports market, expanded to 55 retail locations with a management structure to drive success. We established ourselves as the go-to partner for the major manufacturers and are continuing to develop tools, technology and processes to meaningfully improve the customer experience, all while positioning ourselves for long-term growth and profitability. I look forward to more significant improvements to come as we continue to build the future of powersports. In the third quarter, we made solid progress and continue to demonstrate our market leadership. While we saw anticipated and previously discussed seasonal impacts across our business, we sold well over 18,000 powersports units in Q3 and generated over $385 million in revenue from the Powersports segment alone. Powersports segment results exceeded our prior expectations. Our overall results were impacted by our strategic decision to purchase fewer automotive units during the quarter due to high wholesale costs, unstable valuations, increasing freight costs and a shift in how used wholesale auto distribution takes place. Due to what we see as permanent structural changes in the post-COVID wholesale auto business, we are exploring strategic alternatives for this segment and expect to execute our plans in the coming months. This does not impact our profitable vehicle logistics segment, Wholesale Express. Our Automotive segment has become an increasingly smaller portion of our overall business. We are fortunate to have the luxury to affect the transition and emphasize our focus on our core business assets. I'd like to focus today's call on the following three important topics. First, we remain focused on our number one objective, improving the customer experience and our results demonstrate that we continue to take market share due to the early improvements we've already made. Second, we are building a generational company and we'll continue to invest thoughtfully in technology, facilities, people and process. Finally, we continue to see resilience across our customer base and we're taking steps to act nimbly and responsibly to ensure we are meeting customer demand while managing potential risk. I'll take a few minutes to discuss these themes and then I'll pass the call over to Narinder to walk through the details of our third quarter financial results and our revised guidance for the full year 2022 before opening the call for questions. First, improving customer experience. Our early success in transforming the customer experience is clear and encouraging. In addition to continued execution, we took home multiple Dealer of the Year awards in the quarter and throughout the year. We believe these awards validate our enhanced consumer offering and provide tangible proof that our efforts to improve the typical powersports transaction are paying off. I'd like to recognize the incredible work of our team members for always putting the customer first, focusing on the lifetime value of our customers and embodying our mission. We sold 17,481 retail powersports units in the third quarter amid macro uncertainty. We've clearly continued to take market share and are pleased with our results in the early days of scaling this incredible opportunity. As the first mover and driven by the best people, technology and processes, we believe we will be the market's dominant participant for years to come. An important component of a superior consumer offering is unifying the customer experience across online and in-store locations. We have fully integrated RideNow and Freedom into RumbleON and look forward to debuting RideNow now as our unified brand across all of our consumer-facing properties by year end. The name RideNow is a commanding call to action that we believe has become synonymous with powersports. Paramount to our mission of improving customer experience will be the execution of a complete end-to-end digital transaction via our website. Our vision is to allow customers who live beyond our store's geographic reach to access, research and purchase from our unparalleled selection of inventory, including the opportunity to consult with our team of powersports experts. If the consumer so chooses, culminating in home delivery. This will not only be the first e-commerce offering in powersports, but the majority of those anticipated transactions will also be incremental, further increasing our market share. Investing in our vision. We are investing in technology, facilities, people and processes while remaining agile to react to any potential escalation of economic headwinds. Developing the technology stack to support 55 physical locations and a seamless online experience is a key initiative for us and we've made great strides this year. We expect full digital inventory integration via an all-new corporate website and a whole new experience on ridenow.com to be completed very soon, enabling consumers to easily shop nationwide. This is the next step towards our ultimate goal of launching our digital 100% paperless end-to-end buying experience in 2023. RumbleON's evolving omnichannel experience will bring together the largest inventory in a no-hassle format without boundaries for the consumer and will be the next leg up of organic growth for the company. We are growing our team of experienced tech experts, including our new CTO, who brings 20-plus years of technology implementation and platform experience. We've also made hires across product management, software architecture, information security and network operations. Beyond our technology team, we made dozens of strategic hires across our organization, including finance, facilities, project management and brand marketing. We are attracting and retaining top talent and look forward to benefiting from productivity gains as we advance our strategic initiatives. We're continuing to build our fulfillment network for faster and more efficient processing of new and used powersports as well as parts and merchandise inventory. Increasing this capacity will free up the service departments in our stores to focus on faster and more pleasant customer experience. Fulfillment also allows for consistent inspection, reconditioning, photo and video, which will enhance the customer interface, key to our digital end-to-end sales initiative. As we discussed on our last call, we've launched operations in two fulfillment facilities this year, Concord, North Carolina and Orlando, Florida and are encouraged by the initial results. We are testing public access to our Orlando warehouse, offering the largest selection of inventory of all makes and models with a warehouse look and feel. Based on our initial customer response in Orlando, we believe there is a significant opportunity to employ this model in additional facilities and become part of our ongoing strategy. We have recently secured a new fulfillment location in Pennsylvania that will open next year. This will be our first physical location in the Northeast providing access to a massive population in a region where we have always acquired a significant portion of our used inventory. Ultimately, we will manage every product we sell through fulfillment, like almost all major retailers do today. Industry-wide showrooms and service departments are limited by their available space with constraints primarily due to the size of the products in the fastest-growing categories such as side-by-sides and personal watercraft. Our fulfillment plan is substantially more efficient and cost effective and reduces the need for significant CapEx investments in our 50-plus physical locations. Our vision includes fixed pricing and no fees where our customers interact with a customer service representative and transact on an iPad, instead of a traditional sales process with the antiquated and hated hassle of long negotiations with multiple departments and staff. Everything we sell is a want, not a need. Our customers enjoy our products for their next adventure and fun is at the core of the experience. We believe the entire buying experience online or in-store should be the same, fun. We are creating a true destination for powersports enthusiasts and continue to make good progress towards our goal of launching our first ever customer experience center in Dallas in 2023. We added multiple franchise brands from several manufacturers to our current locations and will continue to do so. Our best performing stores continue to be those that represent a broad array of products and manufacturers. This vector of organic growth, direct award of a franchise from a manufacturer has significant return potential as we don't pay for the franchise if it is awarded from the OEM. Our current focus is on organic growth of our existing locations and fulfillment center network. While we plan to make prudent high return investments in inorganic growth in the future, we are extremely selective and we'll continue to exercise discipline in that regard as the current uncertainties and economic conditions stabilize, which could cause cost of future acquisitions to improve. Lastly, I would be remiss not to address how we are seeing the current macro environment impact consumer demand. Our robust selection of inventory is a clear advantage for RumbleON. While demand for our offering is proving resilient, certain trends are beginning to surface for the most part in regards to vehicle type and price point. We saw continued strong demand in some segments such as new utility vehicles and used motorcycles. We are closely monitoring the economic headwinds, and we are not currently seeing softening in demand at levels others have discussed. We believe our diverse product mix, combined with our parts, accessories, merchandise, service and finance programs leave us well positioned to continue to capture profitable market share amidst various demand environments. For new vehicle supply, manufacturing and supply chain issues appear to be rapidly improving for the first time since the onset of COVID. In the third quarter, OEMs shipped more vehicles albeit at higher prices in order to replenish supply. Showroom inventory levels, which were not expected to normalize until late in 2023 at the earliest, as quoted by many of our manufacturer partners are now fast approaching those levels. While we were surprised by the pace of inventory replenishment in the last 60 days or so, we are glad to have better selection for our customers and are managing days of supply by manufacturer very closely. We will work with OEMs to achieve normalized inventory targets of the right units for the right markets and in the right quantities. We do anticipate seeing maximum inventory levels of some products, makes and models in the very near future. Turning to used. Access to high quality used inventory is key to our model. Like in new, disciplined days of supply is being monitored very closely as potential shifts in the macro environment play out. In October, we announced a $75 million used powersports vehicle inventory financing credit facility from JPMorgan Chase, giving us the flexibility to fund our inventory purchases while executing on our mission and growth plans. Our business model affords us flexibility to move rapidly in reaction to market changes, and we are continually monitoring the macro environment and the consumer settlement. We are being deliberate and prudently managing operations to maintain optionality and mitigate potential risk. We cannot control the macro environment, but we are confident in our model as we execute on strategic priorities. Our differentiated positioning, emphasis on better customer experience, superior offerings and current market share, combined with our talented team's operational rigor will enable us to deliver long term profitable growth for our shareholders. We are improving the customer experience, and I'm proud of the progress thus far. I'll now turn the call over to Narinder, who will take you through the details of our financial performance.

Thank you, Marshall, and good morning, everyone. Please refer to our earnings press release and third quarter Form 10-Q to be filed later today for full details of the quarter. As a reminder, we closed our acquisition of RideNow Powersports on August 31, 2021 and therefore, we will lap the acquisition impact in the fourth quarter. Unless otherwise specified, all of the third quarter comparisons cited in my remarks today are sequential comparisons. Now moving on to some key highlights. We are pleased to report solid results for the third quarter, with seasonally impacted revenue and gross profit from the Powersport segment. Despite a tough macroeconomic backdrop, we saw healthy consumer demand in this segment in the third quarter. While we are not immune to macro headwinds, we remain prepared to respond quickly and prudently to evolving conditions. In the third quarter, we sold 19,908 total units down 14.7% sequentially due to our decision to purchase less automotive inventory combined with the typical seasonal impact experienced in powersports. We sold 18,393 total powersports units. Sequential declines of 11.2% in total powersports and 12.9% in used retail powersports were ahead of our prior expectations. We delivered total revenue of $470.3 million, down 13.9% sequentially, driven primarily by a nearly 40% decline in revenue in the Automotive segment. Powersports segment revenue of $385.4 million declined 7.1% sequentially, attributable to expected seasonality. Revenue from finance and insurance net was down 14.3%, while revenue from parts, service and accessories sales declined 4.7% from the second quarter. Total gross profit for the third quarter was $116.3 million, down 15.7% from the second quarter. Total gross profit margin was 24.7%, down from 25.3% in the prior quarter. As we had anticipated, the sequential decline in gross profit margin was driven by ongoing normalization of the supply demand imbalances that have inflated GPU in recent history and was further exacerbated by a 60%-plus decline in Automotive segment gross profit. As Marshall mentioned, we made a strategic decision to purchase fewer automotive units during the quarter due to high wholesale costs in the auto market, resulting in lower gross profit per automotive vehicle. While moderating our activity in the Automotive segment, negatively impacted our total revenue and gross profit dollars in the third quarter. Strength in the Powersports segment partially offset this impact. Further, excluding the Automotive segment, gross profit margin would have been 28.6% in the third quarter, demonstrating the earnings potential of our core business. We have conviction in our decision to begin exploring strategic alternatives for the Automotive segment, so we can focus on our core Powersports and Vehicle Logistics segments. As we have previously discussed, we anticipate modest margin contraction as we focus on sales volume and growing market share. We are not currently seeing any measurable reduction in demand indicators for our Powersports segment. So we continue to fulfill this demand, while optimizing our inventory mix. Total SG&A expenses were $96.2 million or 20.5% of revenue compared to $100.2 million or 18.3% of revenue in the second quarter. Declines in SG&A are primarily attributable to seasonal volume declines as well as reduction in the variable compensation expense and advertising and marketing expense lines. SG&A as a percentage of revenue increased quarter-over-quarter, due to the decline in revenue, combined with headcount additions and facilities investments Marshall previously discussed. While we have levers to pull to reduce certain expenditures, the investments we are making will provide the foundation for long-term sustainable growth as we continue to scale RumbleON. As we have previously discussed, we do not expect leverage from SG&A expenses this year. Within SG&A, total stock-based compensation was approximately $2.6 million, down from $2.8 million in the second quarter. Adjusted net income was $4.4 million and adjusted diluted earnings per share was $0.27. For the nine months ended September 30, 2022, adjusted net income and adjusted diluted earnings per share were $34.1 million and $2.14, respectively. Adjusted EBITDA was $25.7 million in the third quarter, down 42.1% over the second quarter, driven by modest gross profit margin compression in the Powersports segment and lower gross profit contribution from the Automotive segment. Adjusted EBITDA was $101.4 million year-to-date, or 6.9% of revenue. Year-to-date, we have generated $4.7 million in cash flow from operations. This was negatively impacted by cash used primarily for used inventory purchases which were not financed by trade floor plan credit facilities. As of September 30, cash and cash equivalents, including restricted cash, was $49.2 million. Our total liquidity, defined as cash and cash equivalents, including restricted cash, plus availability under our short-term revolving credit facilities totaled approximately $193.8 million. With the closing of our $75 million used vehicle floor plan financing facility, we have built the option to provide additional liquidity. Our top capital allocation priority remains to invest in our business and we will balance our investments with a continuing focus on profitability and cash generation. Now turning to outlook. We anticipate both sequential and year-over-year growth in our Powersports and Vehicle Logistics segments. Our activity around automotive will be muted for the remainder of the year due to our decision to explore strategic alternatives for this segment, and we therefore expect sequential declines in unit volume, revenue and gross profit in this segment. Further, our outlook is based on the consumer demand trends we are seeing today and reflects our assumptions for continued resiliency throughout the remainder of the year. We will make responsible investments that factor in macro conditions as we continue to stay focused on building a scalable organization. As outlined previously, we do not expect leverage in SG&A for the remainder of the year. As such, we are revising our full year 2022 outlook to account for the strength in our Powersports segment, which will be partially offset by anticipated decline in the Automotive segment. Total company revenue within the range of $1.85 billion to $1.9 billion with Powersports segment revenue of at least $1.5 billion. Note that prior total company revenue outlook implied a revenue outlook of $1.45 billion for the Powersports segment at the midpoint. Performance expectations in the Powersports segment assume both in the used retail powersports units to be in excess of 50% year-over-year with low-single digit decline in new powersports units year-over-year normalized for the Freedom acquisition. We now expect non-powersports segments, which includes automotive and vehicle logistics revenue within the range of $350 million to $400 million, driven by anticipated volume declines in the Automotive segment. The prior full year revenue outlook range for non-powersports segments was approximately $500 million. As we have indicated previously, we expect modest gross margin compression due to the combination of input cost inflation and availability of new inventory, which helps to address the supply and demand imbalance. As a result of these dynamics, we now expect adjusted EBITDA of at least $125 million for the full year. Our revised adjusted EBITDA outlook is due to expected lower realized gross margin in the Automotive segment, anticipated modest gross margin compression in the Powersports segment and continued expectation of ongoing organic investments and integration costs resulting in no SG&A leverage for the remainder of this year. We will provide 2023 guidance on our next earnings call. However, we would like to take this opportunity to share our confidence that the initiatives we are currently undertaking will drive continued growth in our core powersports business. 2022 has been about building a solid foundation. As we look ahead to 2023, we expect to continue to deliver profitable growth while making organic and inorganic investments in areas that we believe will drive the most long-term value for all of our stakeholders. I will now pass the call back to Marshall for closing remarks before we open the call for questions.

Thank you, Narinder. Before we open the call to questions, we announced this morning that we've reached a global settlement of all current and any other potential or future claims with Mark Tkach and Bill Coulter, the former owners of RideNow. While neither expressed a present intention to sell any RumbleON stock, the settlement does provide a mechanism for the orderly disposition of RumbleON shares. It is important to RumbleON and its stockholders to have these matters resolved and we are pleased to have Bill and Mark continue as stockholders of the company. I'll conclude my remarks by reiterating that our results demonstrate the resiliency of our diversified business model despite the uncertainty in the macro environment. We are building the future of powersports and we will remain focused on achieving our long-term goals while delivering an unparalleled customer experience through our unique omnichannel offering. So thanks again to the entire RumbleON team for all of the hard work and dedication to our mission. Operator, we're ready for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Eric Wold with B. Riley. Please proceed with your question.

Thank you. Good morning, Marshall and Narinder. A few questions, if I may. I guess, first off, Narinder, one for you just on the guidance you provided. I know you reduced the EBITDA guidance from $145 million to $125 million and commented on the reasons for that. But the press release didn't mention the $20 million investment that you normally expect to spend -- or pre expected spend this year. Is that inclusive of $20 million? Or is that $20 million on?

Yeah. So thanks, Eric for the question. So a good question to clarify. The $125 million is inclusive of the investments we are making. So we are not backing that out from our guidance. So to give you a little -- yes. So to give you a little bit more color on that. So year-to-date, the investment that is flowing through the operating expense line is about $13 million. And in addition to that, if you look at the balance sheet, we have about $10.5 million capitalized for the investments in facilities and technology. So we will continue to expect this to continue in the fourth quarter. There's no reason to pull back on these investments as these are for the longer-term foundation building and scaling of the company. I also want to make a note that what you also see in the SG&A expense, and we don't back this out, so I want to remind everyone, there are some purchase accounting adjustments that run through the operating expenses because of the acquisition accounting, purchase accounting that we have to do and that you would recall that we had made some changes on the leases which essentially results in incremental expense kind of flowing through the facilities line, which obviously we're not backing out. So that is there as well.

Perfect. That's good to hear. Thank you. So I guess Marshall, a couple of questions just on kind of the overall environment. I know you talked about you're not seeing kind of the broad-based weakness in demand for powersports. So maybe talk about where you are possibly seeing some weakness? Is it reasonably at all? Or are you seeing it trade down in price -- kind of lower price point product? Are you seeing any difficulty in consumers getting financing? Maybe just anything that kind of shows where things may be changing or if you're not seeing that, then you're not.

Yeah. No, we're definitely seeing some. I mean what -- the guidance we're giving today is really based on what we have seen through third quarter, but as well as October. The demand, the showroom traffic, the online traffic, et cetera., we're not seeing diminish at any measurable levels. I think, obviously, the consumer is under pressure, right. The consumer is under pressure on financing rates, prices are increasing, both on the goods we sell as well as everything else the consumer is dealing with. So we have a -- what I would call a recession playbook, Eric. And we have deployed pieces of it already, just in what we're seeing it's pretty clear. But we will deploy whatever necessary as we move forward. But right now, outside of my comments with regards to inventory, we don't see any need for any knee-jerk reaction at this point.

Got it. And then just final question for me. Are you talking about some of the guidance includes some kind of marginal pressure on gross margins in the powersports vehicle. Kind of what lever do you have to kind of maintain gross margin to hold the line? I know that you kind of adjust what you're purchasing out there and what you pay for a product and bring it to the showrooms and recondition, but what about maybe inventory that's already on the floor in hand? Kind of what can you do to try to maintain its gross margins if you are seeing some pressure from consumers?

Yeah. Good question. We've said all along that at some point as showroom inventories normalize, that there would be a normalization of GPU as well. The new site is purely, I think, in inventory versus demand question. And as I pointed out in my comments, I think everybody, including ourselves, had an unknown answer to supply chain challenges. And I think everybody extrapolated that out to where this was not going to correct itself for anytime in the near future, at least through 2023, and it certainly has at this point. So we think we'll continue to see an opportunity for increased volume on the new vehicle side but could have some normalization on the GPU, and we are expecting that. But as you can see in our third quarter numbers, I mean, it wasn't dramatic by any means from Q2, which is always the best quarter, and we didn't have as many economic headwinds. The used -- I think the management of our used margin, we are still not in control of. Once we have the technology which we're very close on, to be able to centralize this inventory and control fixed pricing, we think there's some long-term opportunity actually on GPU on the used. But right now, because it's still done the old-fashioned way where kind of each store is setting their prices. And we just think that it could experience some pressure. There has to be a relief valve, right? When the price is higher, the interest rate is higher to the consumer, it has to show up somewhere and along with higher prices, right? So that's really what we see. We do expect some normalization.

Got it. Thank you, both.

Our next question is from Seth Basham with Wedbush Securities. Please proceed with your question.

Thanks a lot and good morning. My first question is a follow-up on the last response. When you're thinking about normalized used and new powersports GPU, what are you aiming for in 2023 and 2024? Do you expect those to be normal years?

Well, we haven't given guidance in that regard, Seth, but we don't see any need for adjustments with regards to used. It's kind of a different animal. On the new vehicle side, we would expect that to normalize. I wouldn't utilize pre-COVID GPU at this point because the mix of the products that we sell is dramatically different today. And when you look at the fastest-growing segments being side-by-sides in that off-road category, those are some of the better margins that we have.

Got it. So somewhere north of pre-COVID GPUs on the new side and on the used side, in the near term, you expect additional pressure likely into 2023. Longer term, you see opportunity for improvement.

Correct. And you saw some -- a lot of times, we don't put a lot of emphasis on our other categories, be it parts, accessories, merchandise and service but when you look at the total gross profit makeup of the company, it's very well balanced between those categories. And we are not seeing pressure on those categories, which kind of is, I think, normal, at least it was my experience in the automobile business that if people are in a position to where they aren't -- they can't or they don't want to trade today, it does typically drive some offset in your service department.

Got it. Thank you. And then, a follow-up question is just on the auto segment. You're considering strategic alternatives there. What are the structural changes that you see in the wholesale auto industry right now, leading you to that decision?

I appreciate the question. So I was hoping it would be asked that. I think Seth, you're aware that we have a lot of automotive knowledge within our management team. We think that the way -- keep in mind, we were only in the wholesale business. And the way the redistribution of wholesale has changed primarily due to technology. I believe it had started prior to COVID, but what happened in my estimation is that COVID accelerated it. I think the opportunity to -- in a very skinny margin business to operate basically a wholesale arbitrage play in the supply chain. We just don't anticipate it's coming back, just to be totally clear. We think that this was not just a COVID effect that everything will go back to normal. If you look at -- I mean, you see it, you follow a lot of the auto companies, if you think back of the makeup of an auction inventory pre-COVID, it was made up of rental cars, off-lease, fleets, those types of things. Because of technology and the fact that a lot of them were shut down during COVID, everybody is now redistributing those products upstream with the use of technology. And so I think just the whole structural, wholesale and supply chain for preowned automobiles is changing, and we're not going to -- we have the luxury to do something different. And we're going to take that advantage. When we were making good money in the wholesale business, there was no reason to consider it because we didn't dedicate a lot of time or effort to it. But as you know, businesses become more challenging. They do require more effort on the management's team. And we just feel that being focused on powersports is definitely in our best interest.

That's helpful perspective. And then lastly, as it relates to the integration of RideNow, including all the technology integration to help with centralized inventory and pricing, where are you relative to your expectations when you closed the transaction? Are you on track and when do you expect to complete that?

We will be -- we will have a lot of it completed in 2023. I would tell you from my personal perspective, we're probably a little behind where I was hopeful of being. And the reason for that is because of some other priorities that are very, very important. We've talked to you before about this was our first year of SOX compliance, as an example. And all these different things that have taken up a fairly small technology team's efforts to be able to do this. But we're very, very pleased with what is available. The nice part about it is when this website and websites are launched. Now everyone will be able to see what the next consumer experience of an online powersports sale is going to look like. And it will be rolled out in phases but you will see it very, very soon, and you'll see the results of a lot of hard work of a lot of people, both internal and external.

Got it. Thank you and good luck.

Thanks. Appreciate it.

Our next question is from Michael Baker with D.A. Davidson. Please proceed with your question.

Thanks. Okay. So it's still not entirely clear to me, maybe I'm a little dense, but in the prepared comments, Marshall, you talked about seeing some signs of concern -- yet you keep seeing that demand and all that is strong. So again, one more time, what are those signs of concerns? Is that what you refer -- is that the gross margin issue that you're referring to? That pricing is maybe come down a little bit relative to import costs or is it a mix thing, trade downs to different kinds of vehicles? I'm still not entirely sure what you mean by that comment that you're starting to see some signs of macro content.

Okay. Good question. I'll try to be a little clearer. I think that we are seeing some issues with regards to mix, right. Our higher-end units, which you can kind of see from our ASP, our higher-end units continue to be in high demand. We are seeing some softening in the lower-priced segment. And I think that runs along with a lot of those end up being cash transactions because of the price point. And I think people are in a different cash position today than they might have been. So we're also basically seeing that the price increases from the manufacturers, which are due to the same headwinds in their regard are continuing to cause some issues for our customers. I mean, when you increase the cost and you increase the interest rate in a short window of time, it does take some people out of the mix. What we said by not -- we don't see a decrease in demand. What we see is as these prices rise and interest rates rise, et cetera, there is situations where people can't afford the product. And that will normalize over time, but we're certainly seeing that.

When you say no decline in demand, but you're seeing some softness that mean the conversion is down a little bit? When you're talking about demand?

Correct.

Okay. I got you.

Yeah. I would say that -- yes, I'd say it's conversion because, as we said before, we track showroom traffic and online traffic. And we are not seeing an -- it's some regional shift in there but we aren't seeing any type of meaningful numbers.

Understood. Thanks. And then can you just remind us how much of your sales typically or even industry-wide sales in your view, are done with financing? And so how much of this high interest rate environment do you think will impact you?

If you look at it overall, it's north of 60%.

Okay. So that could -- all right, that's a pretty big number. Last question for me. I think I read this right, but it sounds like, I just want to clarify, your guidance for new sales is a little bit better, right? It's down low-single digits. It was down, as I recall, in the second quarter. The previous outlook was down mid-single digits. Is that a function of inventory being better?

Yeah. This is Narinder here. Yes, that's correct. So we have a better expectation on volume on the new side. So we are expecting low single digits. So you're exactly right.

Yeah. I would point out and what we tried to point out in the previous notes is the downturn in retail sales as reported by the manufacturers that have already announced is we're not at that level. So you have to extract that, that we are gaining market share because we're not -- we don't have a downturn to what is being reported.

Understood. All right. Appreciate the color.

Thank you. Bye.

Our next question is from Fred Wightman with Wolfe Research. Please proceed with your question.

Hey, guys. Good morning. I was hoping you could just dig into and unpack some of the inventory numbers. I mean, that's a pretty big move sequentially. And I know that there is some seasonality at play but sounds like that came back a bit faster than what you were expecting. So can you talk about where that growth is coming from and sort of what the outlook is as we think about moving into 4Q and early next year?

Yeah. The first thing I would say -- I appreciate the question, Fred. The first thing I would say is we have extremely manageable day supply, both on the new side and on the used side. I think what you saw in the growth of the inventory was surprising, but not concerning from the standpoint that our showrooms were really, really short in inventory. I think the change that we saw loud and clear, Fred really revolves around the expectations that were set by the manufacturers we represent, throughout COVID that the demand was so high and the supply was so low and nobody had any clarity on their supply challenges, right. And so we had literally thousands of units that were in our stores that we couldn't even sell because they were missing a particular part or something. And whatever was the holdup in those supply chains that was expected to take much longer apparently is not taking that long because most of that has been taken care of fairly dramatically. But overall, we order inventory. Some of it is earned on allocation, but we will manage the day supply very effectively as we move forward. And the current day supply on both new and used is really more than manageable.

Okay. That's fair. And then just coming back to your marked spending targets that you guys have for the year. I think that, that number was $20 million for the full year '22. And then Narinder, I thought sounds like just based on the OpEx and CapEx number that you're already at $23 million year-to-date. So what is sort of the right number for spending in '22 now? And then how should we sort of think about that continuing or potentially rolling off into '23?

Yeah. Thanks for the question. So let me clarify. So what's flowing through the income statement, the expectation for those operating expenses is about $13 million for the full year 2022. So that's -- if I pull out my crystal ball, that's what I can see. What you see on the balance sheet is about $10.5 million year-to-date, so we still have a quarter to go, so you can expect some more additions there. We are not through with the 2023 planning cycle. So it's hard for me to give you a specific steer on what the investment will be. But suffice to say, this isn't a invest in technology and facilities and our processes and then stop, we would expect that to continue. I think Marshall outlined our strategic priorities in terms of technology and facilities. Obviously, we have some more work to do on the organization side of things. So I would expect some of those investments to continue. Now as we finish the budget cycle and we take into account all of the macro environment and do our scenario planning, we'll figure out where and how much capital we want to deploy for the next year. But sitting here today, I wouldn't give you that steer. I think it's too early to say.

Fred, I would also reiterate that we spend a lot of our time right now looking at day in and day out economic changes and challenges, right? We do have a detailed recession playbook, and this spend is obviously a big part of that playbook. So with -- these aren't commitments where we're out with millions of dollars of commitment throughout 2023. These are things that we can slow down. Many of them we can put off and that is all built into our playbook, but we also do not want to, as I said earlier, have a knee-jerk reaction and overreact like everybody, including us, did at the onset of COVID and then deal with the ramifications of being behind on our initiatives.

Okay. So sorry, just to reiterate the numbers, Narinder, the $13 million in OpEx that's your expectation for the full year or is that a year-to-date number?

Yes. That's expectation for the full year.

And the $10.5 million on CapEx is a year-to-date number that will probably go higher based on 4Q?

That's correct.

Perfect. Thank you.

Thank you. Appreciate it.

[Operator Instructions] Our next question comes from Craig Kennison with Baird. Please proceed with your question.

Hey. Good morning. Thank you for taking my questions as well. First, Narinder with respect to 2023 guidance, should we expect that to exclude the automotive business when you provide it?

Yeah. That's a great question. That would be the baseline planning scenario, Craig. So yes, we would exclude that in our '23 guidance. We obviously have a plan in place for the automotive business, we are proceeding with that. And we fully intend to execute that over the next 90 days or so. So I would not include automotive in our '23 guidance.

Thank you. And I'm curious, Marshall, on the sourcing side, if you're seeing any of these consumer trends that we've been talking about, are consumers coming in to trade and trade up or are they coming in to trade to say, hey, I don't have the cash today and I need to raise some.

Yes. Not necessarily on the trade. I think there's been -- I've had some questions with regards to our people trading down, that really isn't a phenomenon that I've ever really seen in my career. But are people needing to sell? Absolutely. I think that our cash offer tool is becoming very, very important for our customers. And we have a lot of activity. But suffice to say, we're buying things today significantly less than we were six months ago. So we are managing capture rates and all those types of things due to that. So they are looking to sell. We are still buying a lot. But our trades are actually up. And I think the reason trades are up is because of this mix situation that as we got more side-by-sides and those -- in, those are units that have a higher likelihood of having to trade in. So our trade percentages of our total inventory are significantly higher today than they were, say, six months ago.

So is there any trend that you can interpret from that decision to sell to you? I mean, is it economic stress? Is it consumers who bought during the pandemic and decided it wasn't for them. Just curious why you might be seeing some of that selling activity.

Yeah. We obviously really track those types of motivations as we do our business. I would say, again, depending on the price point, would drive whether people have negative equity, whether they have large loan balances. You do see in times like this where people are trying to get off of a payment -- that doesn't mean they're leaving the space. It just means they need to take a breather because maybe one of them lost their job or whatever the case may be. And we have seen an acceleration in that regard. Which again skews to a higher dollar unit than does the $3,000 dirt bike that the guy bought and is sitting in his garage.

And as they come in -- sorry to press on this, are they coming in with equity in general, given the high price of -- the higher values of this equipment or is there any negative equity coming through the door as well?

Yeah. They were coming in with equity, but prices have come down fairly dramatically, and that's purely because of the effect of new inventory now in stock. I think where you saw that -- where we're seeing the biggest effect on cost is in that current year model and one year old preowned vehicle. And that's usually the first that gets hit. That $6,000 unit, it might be worth $5,500 today where it was worth $6,000, six months from now. But those ones that we were able to put in -- be able to retail at close to new prices because we didn't have any new. Those are the ones that get impacted. As far as loan balances and negative equity, we do see -- and we have always seen a significant amount of that. And I would tell you that naming specific manufacturers, I think you can probably draw that conclusion of who has the highest priced product those consumers do tend to have the most negative equity.

Got it. And then just shifting gears, Marshall, I wondered if you would expand on the warehouse strategy, seems to be gaining steam in Orlando and how that might unfold in the Pennsylvania market, where you have less of a, I guess, retail presence?

Yeah. It's really evolving and we're learning obviously every day, and we're testing different concepts within these facilities. We are very, very encouraged by what we see. But let's take one -- in two different pieces. We'll talk about Pennsylvania, but let me discuss Orlando. We have a very, very interesting location in Orlando. It's in a very highly populated area. And when we walked in that facility and saw hundreds and hundreds of all makes and models, the thought came to mind why on earth wouldn't we open this up to consumers. Yes, we're processing them to push to our stores at some point. But how many people would love to walk in and not have the typical sales process and everything else and be able to buy at fixed prices and select from that kind of inventory. And the initial reaction has been extremely positive. So we are looking at that. We're looking at size of facilities. There's -- I would say Orlando is probably one of the smaller and from our initial belief it's probably too small. And then we have a very large one underway as you know in Dallas, Texas, and then you have Pennsylvania, which is kind of in the middle. The purpose of Pennsylvania is twofold. Number one, the majority -- a high percentage of all of the used vehicles that we buy come out of the Northeast. And I would tell you that the quality of the vehicles that come out of the Northeast from our data is significantly better. And obvious, it's not sitting outside. They can only ride a portion of the year. They have lower miles and so on and so forth. The fact that we have closer and less cost -- closer facility to where we're acquiring the vehicle, we believe is going to make a dramatic change on our inbound freight costs initially. Secondly, this market has access to 90 million people. And we think on the retail side, our wholesale -- I mean, our warehouse concept could also be very, very interesting. So that's the portion there. And then the last piece with regards to those is I think Pennsylvania is interesting because, as you said, we don't have any new vehicle franchises there. How dramatic can we affect the market and grab market share in that market, focusing on preowned. And I think that we're pretty excited about that because that's 100% organic growth and could produce millions of dollars of revenue and gross profit.

Great. Thank you.

You bet. Thank you, Craig. Thanks for everything.

We have reached the end of the question-and-answer session. I'd like to turn the call back over to Marshall Chesrown for closing comments.

Well, I want to thank everybody for joining us today. We've got lots to look forward to and lots of moving pieces as a company. We're staying absolutely focused on the key priorities. We have a laundry list of opportunity. I think for Narinder and myself and the rest of our management team, it's really a job of focusing on the biggest opportunities first and then doing them in a very disciplined, methodical way and making sure that we have an effective playbook. So if, in fact, we don't anticipate it. But if, in fact, the market gets even more crazy from an economic perspective, we're going to be in a position to react very quickly. So with all of that, we really appreciate all of your time. Everybody, have a great day, and we'll talk to you in a few months. Thank you so much.