Lithia ramps up store acquisition efforts

Lithia Motors Inc. has agreements to purchase dealerships expected to generate $2 billion in annual revenue, and the acquisitions are slated to close before the end of the year, the retailer said in a regulatory filing last week. If the deals are finalized, they would bring Lithia just shy of a goal key to its ambitious five-year plan to nearly quadruple revenue by 2025.

As part of that plan — to reach $50 billion in annual revenue — Lithia has said it intends to acquire dealerships generating about $4 billion in annual revenue this year and in each of the next four years.

The Medford, Ore., retailer also said last week that it's using debt and equity offerings to generate $1.2 billion — presumably to purchase more stores, said Stephens Inc. analyst Rick Nelson.

"Clearly, they're ramping the acquisition pace. They blew the third-quarter estimates out of the water," he told Automotive News. "With this capital raise, we're expecting substantial acquisition announcements coming in the near term."

In a separate filing last week, Lithia said it anticipates higher-than-expected earnings for the third quarter.

Lithia this year purchased dealerships expected to generate $1.7 billion in annual revenue, including 10 Texas stores from John Eagle Dealerships estimated to contributed $1.1 billion in revenue. The deals disclosed last week would bring Lithia to an expected $3.7 billion in additional revenue through store acquisition for 2020.

Lithia CEO Bryan DeBoer in July set the ambitious goal for the retailer to reach $50 billion in annual revenue by 2025 — nearly quadruple 2019's revenue of $12.67 billion. In addition to acquisitions, the strategy depends on boosting revenue at existing dealerships by 62 percent to $21 billion and counts on $9 billion in revenue from Lithia's newly launched digital retailing platform Driveway.

Lithia officials said in September that the group had 200 stores. The company has since acquired Jim Cogdill Chrysler-Dodge-Jeep-Ram in Knoxville, Tenn.

The recent and pending acquisitions would move Lithia, No. 3 on Automotive News' list of the top 150 dealership groups based in the U.S., closer to No. 1 AutoNation Inc. and No. 2 Penske Automotive Group.

Beyond the acquisition deals expected to contribute $2 billion in revenue and close this year, Lithia said last week in a government filing that it has potential dealership purchases in its pipeline that would contribute an additional $10 billion in annual revenue.

Those deals "may be available at prices within our hurdle range," Lithia said.

Lithia is known for purchasing underperforming dealerships that then show improved results under its leadership. But the batch of dealerships in the pipeline may not need much assistance before yielding returns, Lithia said in the filing.

There's less risk in acquiring well-run dealership groups, Nelson said. And Lithia's stock-price gains and improved profits could enable the purchase of high-performing dealerships. "The pipeline likely includes sizable dealer groups and smaller chains," he said. "I would expect we'll see both well-run stores and fixer-uppers."