Business Overview and History
Lithia Motors, Inc. was founded in 1946 by Walt DeBoer in Medford, Oregon, starting as a single Ford and Mercury dealership. Over the following decades, the company embarked on an expansion strategy, acquiring additional dealerships and franchises across the western United States. This growth trajectory continued through the 1980s and 1990s, with Lithia diversifying its brand portfolio to mitigate risks associated with economic fluctuations and shifting consumer preferences.
By the early 2000s, Lithia had established itself as one of the largest automotive retailers in the country. However, the company faced significant challenges during the Great Recession of the late 2000s. In response, Lithia implemented stringent cost-cutting measures and rationalized its dealership portfolio, which ultimately allowed the company to emerge from the economic downturn in a stronger competitive position.
In the past decade, Lithia has pursued an aggressive growth strategy, expanding both organically and through strategic acquisitions. The company has extended its geographical reach into new markets, including the United Kingdom, and diversified into adjacent businesses such as automotive finance and fleet management. These initiatives have transformed Lithia into one of the most diversified and well-capitalized automotive retailers in the industry.
Today, Lithia & Driveway operates a network of 467 locations, representing 52 brands, serving customers in the U.S., U.K., and Canada. The company's business model is centered around providing a comprehensive suite of products and services throughout the entire vehicle ownership lifecycle. This includes new and used vehicle sales, financing and insurance solutions, automotive repair and maintenance, and a growing suite of complementary offerings, such as fleet management and captive insurance.
The company's financial performance has been consistently strong, with revenue reaching $36.24 billion in the most recent fiscal year. However, the COVID-19 pandemic presented a significant challenge, leading to a decline in revenue and profitability in 2020. Lithia's management team quickly adapted, implementing cost-saving measures and leveraging its diversified business model to navigate the crisis.
Financials
Lithia's financial ratios paint a picture of a well-capitalized and efficiently managed company. The current ratio stands at 1.19, indicating a healthy ability to meet short-term obligations. The quick ratio of 0.28 suggests a moderate level of liquidity, with a significant portion of current assets tied up in inventory.
The company's debt ratio of 0.09 and debt-to-equity ratio of 0.31 demonstrate a conservative approach to leverage, providing financial flexibility and reducing risk. Lithia's interest coverage ratio of 2.31 suggests a solid ability to service its debt obligations.
Lithia operates in two main reportable segments: Vehicle Operations and Financing Operations. The Vehicle Operations segment encompasses all aspects of LAD's auto merchandising and aftersales operations, excluding the financing provided by the Financing Operations segment.
In the third quarter of 2024, new vehicle retail revenue increased 14.0% compared to the same period in 2023, driven by acquisition activity. On a same-store basis, new vehicle retail revenue increased 1.3% primarily due to a 2.0% increase in unit volume, partially offset by a 0.7% decrease in average selling prices. However, same-store new vehicle gross profit per unit decreased 27.2% due to a 250 basis point decline in new vehicle gross profit margins.
Used vehicle retail revenue increased 8.5% in Q3 2024 compared to Q3 2023, also driven by acquisitions. On a same-store basis, used vehicle retail revenue decreased 14.6% due to a 9.6% decline in unit volume and a 5.6% decrease in average selling prices. Total same-store used vehicle gross profit per unit, including finance and insurance revenue, decreased $68 to $3,890.
The finance and insurance business generated $360.4 million in revenue in Q3 2024, up 3.1% year-over-year. However, on a same-store basis, finance and insurance revenue decreased 6.7% due to lower service contract penetration rates.
Aftersales revenue, which includes automotive repair and maintenance services, increased 20.9% in Q3 2024 compared to the prior year period, driven by acquisitions as well as increases in customer pay and warranty revenues. On a same-store basis, aftersales gross profit increased 6.3%, with overall same-store aftersales gross margins up 70 basis points.
The Financing Operations segment provides financing to customers buying and leasing retail vehicles from LAD's Vehicle Operations, as well as leasing vehicles from its fleet management services. In Q3 2024, the Financing Operations segment recorded income of $0.9 million compared to income of $4.4 million in the prior year period. The increase was primarily due to higher interest income resulting from portfolio growth and an increase in the weighted average contract rate, which offset higher provision expense.
Loan originations in Q3 2024 increased slightly compared to Q3 2023, but the penetration rate decreased due to acquisition growth as LAD maintained its underwriting standards. The weighted average contract rate on loans originated in Q3 2024 decreased to 9.8% from 10.0% in the prior year period.
Liquidity
In the most recent quarter, Lithia reported revenue of $9.22 billion, a 20% increase compared to the same period in the previous year. This strong performance was driven by growth across multiple business segments, including new vehicle retail, used vehicle retail, and aftersales.
However, the company's quarterly net income of $216.2 million, or $8.12 per share, represented a slight decline from the $220.6 million, or $8.24 per share, reported in the same quarter of the prior year. This was primarily due to a normalization of gross profit margins and higher interest expenses.
For the full fiscal year, Lithia reported revenue of $36.24 billion and net income of $802 million, or $29.65 per share. The company's annual operating cash flow was not available, while free cash flow amounted to was also not provided.
In terms of liquidity, LAD had $209.8 million in cash and $863.2 million available on its credit facilities as of the most recent quarter. The company's debt-to-equity ratio stands at 0.31, indicating a conservative approach to leverage. The current ratio of 1.19 and quick ratio of 0.28 suggest a moderate level of liquidity, with a significant portion of current assets tied up in inventory.
Guidance and Outlook
Lithia & Driveway has provided guidance for the upcoming fiscal year, targeting revenue growth and continued profitability. The company expects to leverage its diversified business model, cost-saving initiatives, and strategic investments in its digital platforms to drive performance.
For 2025, LAD is targeting SG&A as a percentage of gross profit in the mid-50% range, down from 66.3% in Q4 2024. The company expects its Financing Operations profitability to continue growing, with a fully seasoned portfolio. LAD is reiterating its expectation for estimated future annual acquired revenues of $2 billion to $4 billion per year.
In terms of vehicle performance, LAD is targeting a new vehicle GPU range of $2,500 to $2,700 for 2025, with a normalized level of $2,300 to $2,500. For used vehicles, the company is targeting a GPU range of $1,800 to $2,100 for 2025. Overall, LAD is targeting a front-end gross profit per unit of $4,100 to $4,300 for 2025.
It's worth noting that in Q4 2024, LAD generated adjusted diluted EPS of $7.79 and fully realized their $200 million in annual cost savings target, with two consecutive quarters of absolute sequential decreases in SG&A. Additionally, LAD's Financing Operations achieved full year profitability of $15 million in 2024, up from a loss of $2 million in Q4 2023.
Risks and Challenges
While Lithia & Driveway has demonstrated resilience and adaptability, the company faces several risks and challenges that merit consideration. The automotive industry is highly competitive, and the company must navigate evolving consumer preferences, technological advancements, and regulatory changes.
Additionally, the company's reliance on acquisitions as a growth strategy exposes it to integration risks and the potential for overpaying for targets. Lithia must also manage the cyclical nature of the automotive industry, which can impact its financial performance during economic downturns.
The automotive retail industry has seen moderate growth in recent years, with a CAGR of around 5-7% over the past 5 years. However, the industry has faced some headwinds related to supply chain disruptions and shifting consumer preferences towards electric vehicles. This shift presents both opportunities and challenges for traditional auto retailers like LAD.
Conclusion
Lithia & Driveway's comprehensive ecosystem of products and services, coupled with its disciplined approach to capital allocation and cost management, position the company as a leader in the automotive retail industry. As the company continues to leverage its digital capabilities, expand its geographic footprint, and capitalize on emerging trends, it is well-positioned to deliver consistent growth and value for its shareholders.
The company's diversified business model across vehicle sales, aftersales, and financing operations has enabled it to generate consistent profitable growth, although margin normalization and increased interest expense have pressured profitability in 2024 compared to the prior year. Despite these challenges, LAD's strong liquidity position, conservative leverage, and clear strategic focus on operational efficiency and targeted growth suggest a positive outlook for the company's future performance.