Lithia Motors downplays $50B 2025 revenue target, stresses earnings per share growth

Lithia Motors Inc. CEO Bryan DeBoer is downplaying his company's goal to reach $50 billion in revenue by the end of 2025 amid high dealership acquisition prices. He said the auto retail giant is focused more on an earnings per share benchmark.

"The idea of trying to achieve $50 billion in revenue isn't really the target," DeBoer said on Lithia's Feb. 14 fourth-quarter earnings call. The goal is to produce "an ecosystem that is unreplicable," he said. The company has diversified into multiple other transportation segments besides traditional consumer auto retail, such as fleet management.

Lithia joins some other public dealership groups in adjusting targets as the industry adapts to lower margins and higher volumes in the wake of the microchip shortage.

"The target has now moved" to that ecosystem's ability to produce customer experiences and multiple opportunities to reach each customer, and in doing so, generate $2 of earnings per share for every billion dollars of revenue generated, DeBoer said.

That would require a significant increase in profit margin. In 2023, Lithia earned $36.86 per diluted share on about $31 billion in earnings — or about $1.19 per share per billion in revenue.

Lithia has for at least two years described to investors its potential to someday reach that $2 in earnings per share and $75 billion in revenue, later refined to $1.75 to $2 per billion per share and $75 billion to $100 billion in revenue. DeBoer repeatedly stressed this $2 earnings per share figure on Lithia's fourth-quarter call.

In what he called "an important new slide," Lithia's fourth-quarter investor presentation offered new specifics on ways the company would grow to $1.75 to $2 in earnings per share per billion in revenue.

Optimizing stores will provide 20 to 30 cents of earnings per share per billion. According to DeBoer, this includes "being in better markets, being in less regulated markets, like the Southeast and the South Central, and improving the performance in the stores."

• Lithia captive finance company Driveway Finance is "well on its way to profitability," DeBoer said on the call. Lithia predicts financing activity at the subsidiary will yield another 20 to 30 cents.
• DeBoer said Lithia's new fleet management company, acquired in the January purchase of United Kingdom auto retailer Pendragon, would yield 10 to 15 cents, and other Lithia adjacent business segments are predicted to add 5 to 10 cents.
• Lithia expects 10 to 15 cents to come from economies of scale and cheaper credit. DeBoer said a boost would result from switching to the Pinewood dealership management system his company partially acquired in the Pendragon purchase, and he said obtaining an investment grade rating would cut Lithia's interest cost.

Lithia's "50-50 strategic plan" announced in 2020 called for the company to reach $50 billion in revenue and $50 in earnings per share by the end of 2025. Lithia later raised the 2025 earnings goal from $50 per share to $55 to $60, with a projection of $1.10 to $1.20 in earnings per billion applied to that $50 billion.

DeBoer said on the fourth-quarter call that he thinks Lithia will reach a "mid-$40 billion in revenue range in 2025." He told Automotive News on Feb. 15 that he thinks Lithia could reach $50 billion in revenue "somewhere in the next few years."

Lithia reported $31.04 billion in revenue for 2023, up 10 percent from a year earlier. With its Pendragon acquisition, it expects to add $4.5 billion in annual revenue, pushing it to at least $35.5 billion on a go-forward basis.

The company generated $36.86 in adjusted diluted earnings per share in 2023, down 17 percent.

Lithia had predicted reaching much of the $50 billion in revenue figure through acquisitions. Just last year, it announced that its network development or acquisition target was $25 billion in revenue, up from the previously stated $20 billion.

The company said it has completed acquisitions worth nearly $22 billion in revenue since 2020.

But right now, acquisitions are demanding "massive multiples," requiring prices of even 10 to 20 times earnings, DeBoer said on the call. "That's just not something that we're going to chase," he said.

The auto retailer also has revised its acquisition targets per year to $2 billion to $4 billion, down from $3 billion to $5 billion. It is slated to buy the nine-store Carousel Motor Group from the Pohlad Cos. conglomerate, with dealerships in Minnesota and Wisconsin.

If it costs 10 times earnings to buy another auto retail business but seven times earnings to buy Lithia's stock back, "we're going to buy our shares back," DeBoer said.

Bret Jordan, an analyst with Jefferies, said buybacks make sense for a business when valuations for acquisition targets exceed the cost of the company's own shares.

"You're essentially buying a dealership by buying your stock, only for less money," he told Automotive News.

Lithia bought back more than 142,700 shares at a weighted average price of $240.81 in the fourth quarter. The company has authorization to spend up to $467 million more to buy shares.

"No one would have known that by 2025 ... that some acquisitions were going to trade for eight to 12 times earnings," DeBoer said. "We couldn't predict that."

Lithia dispensing with its 2025 revenue and earnings targets isn't likely to rile investors, Jordan said. People realize "that was probably a stretch goal anyway," a year or a year and a half into the five-year cycle, he said.

Lithia rivals Asbury Automotive Group Inc. and AutoNation Inc. also have had to adjust expectations, Jordan said.

"Asbury had to pull their guide; AutoNation seems to have largely pulled their big targets on AutoNation USA stores," he said. "So I'd say it's been a sort of a thematic thing in the auto dealers, that some of the very large goals that were put on the table in the last few years have been either extended or were shelved."

Asbury in reporting fourth-quarter earnings Feb. 8 adjusted its goal of producing $32 billion in revenue by the end of 2025 to achieving $30 billion sometime from 2025 to 2030.

AutoNation said in 2021 it sought to have more than 130 AutoNation USA stores by the end of 2026, but by its third-quarter 2022 earnings, it called the time frame for those 130 stores for the used-only brand "long-term." AutoNation has 22 AutoNation USA stores, according to its website.

Lithia shares aren't trading at prices far above the value suggested by the company's performance, which also makes missing a target less of an issue, according to Jordan.

"If they were trading at a premium, that would probably have a bigger impact than trading at relatively low valuations and reducing a target that most people thought was unrealistic in the first place," he said. "I think people were already pricing in that that wasn't going to happen."

Lithia shares would be trading much higher than $300 if the market thought the auto retailer would produce $50 per share in earnings in 2025, Jordan said. Lithia stock closed at $303.54 on Feb. 14, the day it released earnings.

"So the fact that they said it's not going to happen is not a big deal," Jordan said.

Lithia, of Medford, Ore., ranks No. 1 on Automotive News' list of the top 150 dealership groups based in the U.S., retailing 271,596 new vehicles in 2022.