Lithia reports 38% rise in Q4 net income on better cost controls

DeBoer: "Significant opportunities remain to increase used-car sales."
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Lithia Motors Inc. today reported a 38 percent gain in fourth-quarter net income along with the highest annual revenue in company history, as it credited continued cost controls and robust sales of new and used vehicles.

“We expect to conquest market share of 2 to 4 percent this year, that’s an aggregate amount,” said CEO Bryan DeBoer in an interview with Automotive News. “Our single best way to do that is help our people in the stores recognize what our customers are truly desiring and see what our competitors are really good at.”

The Medford, Ore., dealership group said its fourth-quarter net income rose to $27.4 million from $19.8 million in the year-ago period. Revenue for the quarter rose 17 percent to $1.02 billion from $877.3 million a year earlier.

For the full year, Lithia's net income increased 32 percent to $106.0 million from $80.4 million in the year-ago period. Full-year revenue rose 21 percent to $4.01 billion from $3.32 billion a year ago.

For the third consecutive quarter, Lithia exceeded $1 billion in revenue.

Opportunities ahead

For the year, new vehicle retail sales rose 20 percent to 66,857 units. Used vehicle retail sales rose 19 percent to 57,061 units.

The average gross profit on new cars in 2013 declined by $155 to $2,260. But on used cars it rose by $106 to $2,644.

The average gross profit on finance and insurance rose $39 to $1,122 per vehicle. Lithia’s 2014 F&I target is $1,125.

DeBoer, in an earlier statement, said Lithia maintained cost discipline over the last four years of growth, "resulting in expanding operating margin each year."

He added: "Significant opportunities remain to increase used-car sales and to capture the coming wave of service work from greater vehicle sales volumes over the last few years."

Lithia sold an average of 53 used vehicles per store in the quarter, compared to 48 a year earlier. Lithia has a goal to sell an average of 75 used vehicles per store. DeBoer would not give a timeframe for when the company will hit that goal, but he expects Lithia’s used-vehicle same-store sales to increase by 8 percent in 2014.

In terms of its service business, Lithia will focus on improving the customer experience with faster follow-up to customer contact and efficient service wait times. It also plans to add 100 to 120 service technicians in the next 18 to 24 months, DeBoer said.

Lithia finished the year with an adjusted selling, general and administrative expenses as a percentage of gross profit of 67 percent.

"This is a record result for the company," CFO Chris Holzshu said in a statement.

Low hanging fruit

Lithia’s biggest opportunity to control costs lies in helping under-performing stores improve their top line profits, DeBoer said.

Lithia finished the year with an adjusted selling, general and administrative expenses as a percentage of gross profit of 67 percent. That is a record result for the company, but Lithia wants it to improve closer to the mid-50 percent range.

DeBoer said a third of Lithia’s stores have a "substantial opportunity to improve their volumes."

To help under performing stores sell more new and used cars, and service more vehicles, DeBoer said Lithia’s management will offer more staff training and have the staff "mystery shop" local competitors to learn how to improve.

Calif. acquisitions

In October, Lithia acquired Stockton Nissan-Kia in Stockton, Calif., and Fresno Lincoln-Volvo in Fresno, Calif. In November, it bought Lodi Toyota-Scion in Lodi, Calif.

In December, it acquired Diablo Subaru of Walnut Creek in Walnut Creek, Calif. The combined estimated annual revenue for these acquisitions is $150 million.

This year, Lithia acquired Island Honda in Kahului, Hawaii, and Stockton Volkswagen in Stockton, Calif. The combined estimated annual revenues for these acquisitions is $50 million

"We believe the acquisition market remains active and anticipate 2014 will be a productive year for Lithia to grow our network of stores," DeBoer said.

Lithia ended the fourth quarter with $24 million in cash and $160 million in available credit.

Lithia ranks No. 9 on the Automotive News list of the top 125 dealership groups in the United States with retail sales of 56,960 new vehicles in 2012.

You can reach Jamie LaReau at jlareau@crain.com. -- Follow Jamie on Twitter


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