Lithia bullish on U.S. sales but expects lower new-car profit margins
Sid DeBoer: "The U.S. market is chugging along and improving."
DETROIT -- On the heels of a profitable second quarter, Lithia Motors Inc.’s top executives remain bullish on new-vehicle sales this year despite economic uncertainty. But Lithia expects its new-vehicle profit margins to thin in the third quarter as it pushes to increase sales volume and market share.
“The U.S. market is chugging along and improving,” said Sid DeBoer, Lithia’s founder and executive chairman, during a second-quarter earnings conference call today. “Many of the markets that we’re in are improving. That’s why we haven’t blinked on our guidance.”
Lithia expects a 14 million to 14.5 million seasonally adjusted annual selling rate. In May, the rate was 13.8 million, the first time it was below 14 million this year, but it recovered to 14.1 million in June.
In the second quarter, Lithia posted a 38 percent rise in quarterly net income to $20.5 million and raised its full-year earnings forecast as higher demand for new cars spurred sales (click here for full report).
Lithia CFO Chris Holzshu said the credit market’s recovery also has helped lift sales. He said the number of subprime contracts last quarter rose 31 percent from a year ago.
“We continue to monitor and watch in each market what’s happening with prime and subprime customers,” Holzshu said.
Profits per vehicle
In terms of profits per vehicle, Lithia said the average gross profit per unit on new vehicles was $2,404 compared with $2,611 a year earlier. Lithia expects its gross profit margins on new vehicles to further narrow next quarter, said Lithia CEO Bryan DeBoer, the son of Sid DeBoer.
“There’s a conscious effort by teams in our stores that they are going to get market share,” the younger DeBoer said during the conference call.
He said Lithia is willing “to sacrifice a little bit of margin” to capture that market share. DeBoer said more customers mean improved revenue from long-term business with service and parts. Also, the sales of finance and insurance products can offset dips in new-vehicle profit margins, he said.
But DeBoer said there is no macro-economic issue impacting the industry’s overall profit margins on new vehicles.
Lithia’s average gross profit per unit in F&I products rose to $1,059 in the second quarter from $1,004 a year earlier.
Domestic business strong
Unlike most large U.S. dealership groups, light vehicles made by domestic manufacturers account for most of Lithia's new-vehicle sales.
Lower gasoline prices in the second quarter have fueled new-vehicle sales -- an early sign of consumer spending -- in the United States, which are on track to score their best year since 2007.
Late-model used vehicles continue to be difficult to acquire, DeBoer said. Lithia sold an average of 45 used vehicles per store per month in the second quarter, up from 39 a year earlier, he said. Lithia’s goal is to sell an average of 60 used vehicles a month at each store.
As of June 1, Lithia’s inventory of new vehicles was at a 74-day supply, up 6 days from last year. Supply of used vehicles was at 52 days, down 4 days from last year.
“We believe inventories look pretty good,” DeBoer said. “There’s some shortages coming in a few manufacturers’ truck production -- GM might have a bit of a shortage. We’ll have to work though.”
DeBoer said Lithia expects to earn between $2.69 and $2.75 per share for the full year 2012, from an earlier forecast of $2.45 to $2.53 per share.
Net income from continuing operations rose to $20.5 million, or 78 cents per share, for the second quarter, from $14.7 million, or 55 cents per share, a year earlier.
Excluding items, Lithia earned 76 cents per share.
Total revenue rose 26 percent to $847.1 million. Revenue from its new-vehicle retail segment -- which accounts for more than half of total revenue -- rose 35 percent to $470.4 million.
The company's shares, which have gained more than 80 percent in value since touching a year-low in October, closed at $24.79 on the New York Stock Exchange on Tuesday.
Lithia, of Medford, Ore., ranks No. 9 on the Automotive News list of the top 125 dealership groups in the United States with retail sales of 44,537 new vehicles in 2011.
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