How Lithia is diversifying and thinking globally

As Lithia Motors marches toward completing its ambitious five-year plan toward $50 billion in annual revenue by 2025, further diversification appears top of mind for the fast-growing auto retailer.

When Lithia unveiled its plan in July 2020, dealership acquisitions, digital retail and its own captive finance unit were seen as key cogs to achieve it.

That's still the case a little after two years. And Lithia, in a third-quarter investor presentation, noted its annualized revenue run-rate is approaching $30 billion, up from $12.67 billion in 2019.

But Lithia CEO Bryan DeBoer, speaking during the company's third-quarter earnings call last week, hinted at what also could be in store, namely taking a look at customer relationship management systems or dealership management systems and continued interest in additional international markets.

Lithia also revealed it had entered the RV retail business with the purchase of six Airstream stores in the Pacific Northwest.

"We obviously are focused on the network growth both domestically and internationally, but I think as we begin to think about the different verticals and horizontals that are built into our design thesis, the idea of sharing data across the different adjacencies is quite important to us," DeBoer said.

"When we begin to think about our growth and our ability — whether we buy or whether we build — I think there's a good argument to be made that we could look at CRM systems or possibly DMS systems, or those type of things, to glue things together a lot cleaner and to be able to share data on both customer platforms and other stuff to really maximize the experiences throughout the life cycle of the consumer."

DeBoer pointed out Lithia has about 140 engineers on staff and that the company does "know how to build things already."

Lithia was the second-largest U.S. dealership group in 2021 but was the nation's top retailer of new vehicles through this year's first half. Lithia's third-quarter net income increased 6.9 percent to $330.3 million as revenue rose 18 percent to $7.3 billion.

A Sky News report from August named Lithia as the unidentified bidder in a failed deal to buy Pendragon, one of the largest auto retailers in the U.K. Lithia at the time told Automotive News it doesn't comment on "any potential acquisition activity until the transaction is complete."

But when asked by an analyst about Lithia entering Europe and specifically the U.K., DeBoer voiced his interest, noting Western European businesses typically trade at lower multiples than what dealerships trade for in the U.S.

"If we can find the right team because of the strong value of the dollar, it seems like it's a good time to be able to do that," DeBoer said. "And I know there were some alleged rumors of us working on a project over there. I think we were pretty clear on if that was us that was talking about it. It wasn't just about the raw dealership assets. It was about the raw dealerships' assets as well as some fleet and leasing type of exposure that helps open up a new horizontal and, probably most importantly, the ability that they may have a DMS system that's pretty savvy and may help us with our $110 million annual cost of our DMS stack today."

Pendragon has its own DMS, Pinewood, which it acquired in the late 1990s.

"That's a big amount," DeBoer said of what Lithia spends on its DMS. "If we can save half of that, that's $50 million, or a couple dollars a share."

David Whiston, an analyst with Morningstar in Chicago, noted the strong dollar can help Lithia on purchasing power if it decided to enter Europe.

"I would be surprised if 12 months from now if they [Lithia] haven't made a deal in the U.K., or at least somewhere in Western Europe, because they've already been doing some work on it, most likely," Whiston said.

But the most concrete example of Lithia's diversification is its Airstream store acquisition.

Lithia, which is based in Medford, Ore., bought Airstream Adventures of Clackamas, Ore., near Portland on Oct. 2, according to Performance Brokerage Services. The Irvine, Calif., buy-sell firm represented sellers Ted Davis, Parker Johnstone and John Dimmer in the sale.

"It takes little effort because it's based out of Portland," DeBoer said. "It's with the best RV manufacturer with the greatest level of exclusivity. It's a really low-cost investment."

Airstream Adventures has six locations that sell and service the iconic luxury recreational vehicles across Oregon, Washington, Idaho and California. DeBoer said the group sells almost one-fifth of all Airstreams in the country.

"[It's a] very small focus for the company relative to what we're doing and no real initiative to grow that business other than to really get a feel for what some of these other mobility verticals could look like," DeBoer said.

The RV acquisition follows Lithia's late 2021 purchase of a Harley-Davidson store in Toronto.

Whiston said the RV business is worth pursuing for Lithia.

"If it works out, I think they would be interested in doing a lot more of it," Whiston said. "Because once they get the playbook down, they've got the size that they can come up with the capital to make the investments. It's not so much can they afford to do it, it's can they operate it well? Can they either acquire managers that know the space well or can they learn that space?"