Lithia gears up acquisitions to meet new profit goal
Retailer posts strong Q3 gains, driven by DCH deal in 2014
Lithia Motors Inc. is ramping up its store acquisition strategy after setting aggressive new earnings goals.
“We are looking at approximately 30 deals in the New Jersey and L.A. markets,” Lithia CEO Bryan DeBoer said today in an interview with Automotive News. “We’re pretty close on some of those deals, the ones that underperform and that we can pay a substantial multiple relative to what most people’s mindsets are.”
The auto retailer plans to reach its new goal -- annual earnings per share of $8 -- in the next one to three years. It’s outlook for 2015 is $6.89 to $6.93 per share.
To achieve that goal, Lithia will need to add $1 billion in acquisition revenue, which leaders are confident it will do.
Lithia typically buys stores that are “average performing” and will pay 10 to 15 times that store’s earnings, knowing its upside potential.
DeBoer said some of those 30 deals include multiple stores. The deals range from $70 million in revenue to $750 million in revenue.
Lithia ended the quarter with total potential liquidity of $304 million, CFO Chris Holzshu said during its conference call with analysts. Holzshu said that would allow the company to “easily pick up $2 [billion] to $3 billion in additional revenue from acquisitions.”
Lithia reported that its third-quarter net income increased 26 percent to $43.4 million compared with the year-ago quarter. Revenue rose 61 percent to $2.1 billion on double-digit revenue increases in all areas of operations.
“Our third quarter earnings were the highest in company history,” DeBoer said in a statement. “Same store sales in all four business lines grew by double digits, led by a 13 percent increase in used vehicle sales. A robust new vehicle sales environment, improving supply of late model used vehicles, and the continued growth in our service, body and parts business is allowing our store leaders to unlock new opportunities to improve performance across our company.”
Lithia’s new-vehicle retail sales in the quarter rose 75 percent to 37,401 units, well ahead of the industrywide 6.2 percent gain. Lithia’s used-vehicle retail sales rose 48 percent to 26,206 units.
Much of the Q3 gains were attributable to Lithia’s purchase of DCH Auto Group Inc. in October 2014. DCH has 27 dealerships located mostly on the East and West coasts.
Despite the group’s size and metro-market locations, DCH stores need to improve their costs and sales volumes, DeBoer said.
“They probably have 50 percent of their stores that haven’t recognized all the efficiencies in cost,” DeBoer told Automotive News. “They’re not as profitable as they could be in their current state of sales. But we originally said it’s a three- to five-year transition.”
DCH has two stores on the West Coast and three on the East Coast that are not making money, he said.
“We believe that four out of those five stores are wonderful stores and should be very productive, and they’re not there yet,” DeBoer said. “It’s something we’re working with. Lithia has four or five stores that haven’t made money yet this year either. It’s finding the right people who can turn the store into a winner.”
Lithia is considering selling one DCH store because “it’s limited in its upside, and there is a manufacturer that has a cap on how many of that brand you can have in the country.”
On a same-store basis, Lithia beat the industry, with new-vehicle retail sales of 23,219, up 9.7 percent. Its same-store used retail sales rose 9.6 percent to 19,255.
While sales volume was up, average gross profit per unit for new and used vehicles declined from a year earlier. The average gross profit per used vehicle declined 4 percent to $2,377. The average gross profit per new vehicle fell 7.7 percent to $2,063. On a same-store basis, average gross profit rose 2.3 percent on used vehicles but declined by 2.1 percent on new vehicles. Average gross profit for finance and insurance per unit rose 5.9 percent to $1,274.
The DCH results are not yet included in Lithia’s same-store results. Next quarter, DCH will roll into Lithia’s same-store results.
In the third quarter, Lithia acquired a Ford store in Missoula, Mont., an Acura store in Honolulu and a Subaru-Hyundai-GMC store in Great Falls, Mont. This month, it acquired a Chrysler-Jeep-Dodge-Ram-Fiat store in Concord, Calif. Lithia estimates these stores will contribute about $175 million in annual revenues.
“We have purchased or opened six stores in 2015, which will add cumulative annual revenues of approximately $220 million,” DeBoer said.
Lithia, of Medford, Ore., ranks No. 8 on the Automotive News list of the top 150 U.S. dealership groups, with retail sales of 91,192 new vehicles in 2014. Lithia and DCH combined have 135 dealerships.
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