Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. LITHIA MOTORS INC (1023128) 10-Q published on Apr 26, 2019 at 3:02 pm
Reporting Period: Mar 30, 2019
In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet, as right-of-use assets with corresponding operating lease liabilities. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior periods presented. If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We adopted the new standard as of January 1, 2019 using the transition method that provides for a cumulative-effect adjustment to retained earnings upon adoption. The Consolidated Financial Statements for the three months ended March 31, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with our historical accounting policy. We elected the 'package of practical expedients,' which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease recognition exemption for all leases that qualify. We have both real estate leases and equipment leases that are impacted by the new guidance. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate at the commencement date in determining the present value of lease payments. Adoption of the new standard resulted in the derecognition of a deferred gain from prior completed sale-leaseback transactions. This adjustment, net of tax, was recorded as $0.9 million increase in retained earnings. See Note 10.
We lease certain dealerships, office space, land and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have elected not to bifurcate lease and nonlease components related to leases of real property.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 26 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, arranging of third party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work. The decrease in same store new vehicle revenues for the three-month period ended March 31, 2019, was driven by a decrease in unit volume of 6.8%, partially offset by an increase in average selling prices of 3.7% compared to the same period of 2018. Our stores continue to focus on increasing gross profit per new vehicle sold during 2019, generating an increase of 1.5% for the three months ended March 31, 2019, compared to the same period of 2018. Total company gross profit per new vehicle sold increased 3.3% for the three month-period ended March 31, 2019, compared to the same period of 2018.
Import segment income increased 30.4% in the three-month period ended March 31, 2019, compared to the same period of 2018 primarily due to gross profit growth of 6.8%, partially offset by SG&A expense growth of 2.5%. Total import SG&A as a percent of gross profit decreased from 82.0% to 78.7% for the three-month period ended March 31, 2019, compared to the same period of 2018. This was primarily related to decreases in advertising and facility costs, offset by an increase in personnel expenses. As acquired stores become integrated, we expect operating efficiency in line with our more seasoned stores. Floor plan interest expense for import stores increased 16.4% due to rising interest rates for the three-month period ended March 31, 2019, compared to the same period of 2018.
Our Luxury segment income increased 15.9% for the three-month period ended March 31, 2019, compared to the same period of 2018, primarily due to gross profit growth of 25.3%, offset by an increase in SG&A expense of 23.9%. Luxury segment revenues and gross profit increases for the three-month period ended March 31, 2019, compared to the same period of 2018, were driven by volume related to stores acquired in 2018, strong performance in used vehicles and an increase in finance and insurance per unit. Total Luxury SG&A as a percent of gross profit decreased from 84.3% to 83.4% for the three-month period ended March 31, 2019, compared to the same period of 2018. The decreases occurred in advertising, rent, and facility costs as a percentage of gross