UPDATED: 7/23/14 4:17 pm ET - adds details, correction
Lithia Motors Inc. today reported the highest adjusted quarterly net income in the company’s history -- a 29 percent surge to $35 million -- on higher revenues and cost controls.
Revenues rose 21 percent from the year-earlier period to $1.2 billion.
Revenues rose 20 percent or more for finance and insurance, both new- and used-vehicle retail sales, and service, body and parts. Meanwhile, selling, general and administrative expenses rose just 15 percent.
The retailer said it will continue its aggressive acquisition strategy this year and its push to sell more high-margin used vehicles.
Lithia’s second-quarter net income jumped 50 percent to $38 million from the year-earlier period, aided by a gain from selling a store. Income from continuing operations rose 40 percent. Lower interest and tax expenses plus cost controls also helped push profits higher.
“For the first time in our history, same store sales experienced double-digit increases in all four business lines,” CEO Bryan DeBoer said in a statement. “Notably, we saw a record quarterly increase in service, body and parts sales, at 10 percent, driven by a 10 percent improvement in customer pay work and a 15 percent increase in warranty activity.”
New-vehicle sales rose 20 percent to 20,446 units -- and 9 percent on a same-store basis -- amid a U.S. industrywide sales gain of 7 percent. New-vehicle retail revenues rose 22 percent to $694 million, while average gross profit per new vehicle retailed declined 1 percent to $2,250.
Used-vehicle retail sales in the second quarter increased 14 percent to 16,086 units.
For used vehicles, retail revenues rose 20 percent to $310 million. The average gross profit per used vehicle retailed declined 1 percent to $2,739.
DeBoer continues to push for an average 75 used-car sales per store each month. The company hit 55 in the second quarter, vs. 51 a year earlier. To reach its goal, he said, each store has to get better at procuring what Lithia dubs “core” vehicles -- those that are 3 to 8 years old.
“They are difficult cars to find,” DeBoer said in a conference call. But because of rising new-vehicle sales over the last several years, he said, “it’s getting easier to find those cars.”
Recalls and price hikes
Revenues from service, body and parts rose 21 percent to $114 million.
Recent recalls by a wide range of automakers, but especially General Motors, have helped drive the increase in service revenues, DeBoer said.
DeBoer said revenues from warranty work grew 15 percent overall, but Lithia’s warranty revenues related to GM vehicles grew 34 percent.
In a conference call, CFO Chris Holzshu also said that Lithia raised prices by an undisclosed amount on some of its F&I products. It also improved the penetration rates on F&I products such as extended service contracts, Guaranteed Asset Protection insurance and Lithia’s Lifetime Oil Change. That helped spur a 28 percent rise in revenue from F&I operations to $44 million. Average gross profit on F&I rose 9 percent to $1,206 per unit retailed. Lithia’s goal is to get to $1,300 per unit, Holzshu said, though he didn’t give a target date.
Lithia is targeting a new goal of $1.7 billion in revenue from acquisitions after having met its previous target of $1 billion. Lithia set the goal of $1.7 million in 2012 with the intent of achieving it in two to six years. But first, DeBoer said, Lithia must integrate its upcoming acquisition of the DCH Auto Group Ltd.
“We have been in discussions with other dealership groups, and we don’t know if it’s the right timing for their succession planning or for their pocketbook,” DeBoer said. “We do know there is interest out there for more buy-sell in general.”
Lithia predicts revenue for the fourth quarter to be $1.2 billion to $1.3 billion. It ended the second quarter with $28 million in cash and $84 million in available credit. Additionally, it has about $216 million in operating real estate that is currently unfinanced, which could provide an estimated additional $162 million in available liquidity, for total potential liquidity of $274 million.
Lithia’s leaders said they are willing to tap the equity markets to generate cash if another big acquisition similar to its DCH deal comes along.
Last month, Lithia agreed to buy DCH Auto Group in a combination that would create the fifth-largest U.S. auto retailer by store count. The deal will help Lithia pursue its goal of expanding to the eastern United States. The DCH stores are estimated to generate about $2.3 billion in annualized revenue.
Lithia will pay about $340 million in cash and another $22.5 million in Lithia stock to make the acquisition, which is expected to close in the fourth quarter. The transaction is expected to be funded through the expansion of Lithia’s existing credit facility by $600 million, mortgage financing of $200 million, and available cash flows from operations.
DeBoer said the “potential remains for more acquisitions in 2014.”
Lithia ranks No. 8 on the Automotive News list of the top 125 dealership groups in the United States, with retail sales of 67,177 new vehicles in 2013.
Editor's note: Lithia's quarterly revenues from service, body and parts were misstated in an earlier version of this story. They rose 21 percent to $114 million.