Lithia wants to hit revenue of $25 billion from acquisitions, up by $5 billion

MEDFORD, Ore. — Dealership acquisitions, already a hallmark of Lithia Motors Inc.'s long-term growth strategy as it became the country's largest seller of new vehicles, will play an even bigger role in an update to its audacious plan to reach $50 billion in annual revenue by the end of 2025.

CEO Bryan DeBoer said Lithia's network development, or acquisition, target is now $25 billion in revenue, up from the previously stated $20 billion.

The change stems from Lithia pulling back on its overall revenue target for Driveway, its online sales platform, by $5 billion, DeBoer said.

"We just hit 75 percent of the way through our initial network development plan," DeBoer said in a wide-ranging interview last week at the auto retail giant's headquarters here. "And we had just reached [the] halfway point of the 2025 plan. So we thought that was an easy give."

Lithia bought 25 U.S. franchised dealerships last year, down from 67 in 2021, according to data tracked by Automotive News.

In its March proxy statement, Lithia said its 2021 acquisitions achieved a return on investment of 30 percent, ahead of its 15 percent target.

"Lithia Motors' core competency is M&A," said DeBoer, who earlier in his career was the retailer's senior vice president of mergers and acquisitions/operations.

DeBoer took that belief to a new level this year when Lithia entered the United Kingdom with the March purchase of Jardine Motors Group. That deal was similar in store count and annual revenue to Lithia's 2021 purchase of Michigan's Suburban Collection, a transaction that was the first in a line of megadeals that year by the publicly traded auto retailers and helped frame the latest wave of dealership consolidation.

Combined with a first-quarter Canadian store purchase, the two 2023 acquisitions will add $2.1 billion to Lithia's annual revenue, DeBoer said.

Since revealing its 2025 plan in July 2020, Lithia has acquired dealerships representing $16 billion in annual revenue, the auto retailer said in its first-quarter earnings report. Lithia also has sold some dealerships in that time frame.

Lithia in 2022 generated $28.23 billion in revenue, up from $12.67 billion in 2019.

"Our run rate today is a little over $30 billion in revenue with the stuff that we bought in the United Kingdom, leaving about $20 billion remaining," DeBoer said.

Lithia has not made a U.S. dealership acquisition so far in 2023. But that is set to soon change with deals under contract, DeBoer said.

"Everything else that we have under contract now is all domestic," DeBoer said. "The rest of the year will round out pretty nicely. We think it should come in around $4 billion" of added revenue.

The company would need to acquire dealerships representing $9 billion more in annual revenue between now and the end of 2025 to meet its updated target.

Lithia's focus areas for U.S. acquisitions, DeBoer said, are in what the company refers to as Regions 4 and 6, the Southeast and South Central, as well as Region 3, its North Central region, or the Upper Midwest.

"Those are the areas that we don't have good saturation of our network," DeBoer said.

All pending acquisitions are located in those three regions, DeBoer said.

In January, DeBoer said Lithia would need to acquire 100 to 150 U.S. stores to achieve its 2025 revenue goal. He reiterated those figures but added it may be as many as 200 stores.

Lithia has 281 U.S. dealerships, including a half-dozen Airstream stores that it bought in October.

The company retailed 271,596 new vehicles last year, up 4.2 percent. That amounts to over 40,000 more vehicles than its rival and the longtime No. 1 seller, AutoNation Inc., retailed in 2022.

While Lithia is a veteran player in the buy-sell arena, Driveway is a relatively new endeavor for the company, launching in 2020.

As part of the updated 2025 plan, Driveway now has a $3 billion revenue target instead of an $8 billion one, DeBoer said. When Lithia unveiled the 2025 plan, Driveway's revenue target was $9 billion.

"That hurt," DeBoer said of the recent strategic shift, pointing to Driveway's broad reach, which he said can touch anywhere in the country since a large part of the business is shipping used vehicles nationwide.

"It was hard to cut that back, but the burn rate on it is pretty high, meaning the cash losses," DeBoer said. "We thought it was more important, at this state, to show that we can get into profitability than it was to grow the business. Even $3 billion — it's quite a sizable, valuable business."

Also this year, Lithia lowered the forecast for its captive finance company, Driveway Finance Corp., for the next three years and expects a $40 million loss for the business in 2023.

Lithia said its goals for 2025 assume a return to a 17 million seasonally adjusted annual rate of sales for the U.S. industry.

DeBoer acknowledged that today's buy-sell environment is tough. He said the market pulled in a lot of sellers amid elevated earnings. Dealers looking for big prices for their stores got them during the last two to three years, he said, but especially the last year and a half.

"Fortunately, the bulk of our purchasing was in 2020 and 2021, so we did pretty good in terms of our returns," DeBoer said. "There's not a ton of transactions, and I think it's because of that pull forward."

Even then, he doesn't think the second half of the five-year plan will be harder to achieve.

"We have great support from our manufacturers," DeBoer said. "We have good support from our sellers. A lot of our deals, we are typically the only person that will get to look at the deal, either because we've put brokers on it or we know the dealers. Or, more importantly than that, the brokers or the investment banking firms will put us front and center because we close deals."