Lithia Motors Inc. continued to earn a profit in increasingly difficult financial terrain during the third quarter of 2007.

Lithia Motors Inc. continued to earn a profit in increasingly difficult financial terrain during the third quarter of 2007.

The Medford-based auto retailer said earnings for the three months ending Sept. 30 rose 7 percent. Revenue from parts and service and a modest increase in vehicle sales were the chief contributors.

Lithia earned $11.2 million, or 53 cents per share, compared with $10.5 million, or 50 cents per share, for the same quarter in 2006.

Earnings from continuing operations rose to $11.3 million, or 53 cents per share, from $10.7 million, or 51 cents per share, for the year-ago period. Revenue rose 3 percent to $859.7 million from $834.4 million in the 2006 quarter.

During a conference call with analysts and reporters, Lithia Chairman and Chief Executive Officer Sid DeBoer said the ripple effects from the sluggish housing market, high gas prices and consumer debt pressures have made it tougher to deliver bottom-line expectations.

"In response to these challenges, we are successfully reducing employee head count in the stores," DeBoer said. "Our advertising expenses are down by almost 12 percent on a same-store basis. Our vehicle inventory levels are being carefully managed, and we have held our new and used vehicle margins steady."

Lithia's earnings were primarily driven by Texas, Montana and South Dakota markets during the quarter. DeBoer said the Pacific Coast states that fueled car sales during the housing boom have been hurt the most by the real estate slump.

"Texas didn't have a real estate boom, but it has oil money," DeBoer said. "California is a very difficult climate on the legal and administrative side as well and is not an easy place to do business."

Lithia narrowed its profit projection for 2007 and said present retail conditions will persist well into 2008. The company said it now expects to post a 2007 profit of $1.65 to $1.70 per share, down from previously anticipated earnings of $1.60 to $1.80 per share for the year.

Analysts polled by Thomson Financial expect Lithia to post a 2007 profit of $1.68 per share. Lithia said it expects the fourth quarter to produce a profit of 26 cents to 31 cents per share.

"These projections call for a continuation of difficult economic conditions through 2008," said Lithia Chief Financial Officer Jeff DeBoer. "But we expect that our efficiency initiatives and our Assured Selling Program will successfully grow our (earnings)."

He said the guidance assumes a steady pace of acquisitions, dispositions, and 15 to 20 cents of development costs associated with L2, the company's new used car store system which began earlier this year in Loveland, Colo., and will shortly expand into two Texas markets.

The Assured Selling Program, unveiled first in Alaska and more recently in Reno, Nev., and Denver markets, has enabled the company to pare its sales force. Under the system, Lithia anticipates its average of 8 transactions per month per salesperson to climb to 12.

"That's not the limit, but that's the goal for now," Sid DeBoer said. "I think we can get more."

Additional operations previously handled at stores in 15 states are being handled by staff in Medford.

The company, which had total revenue of $3.17 billion in 2006, projected its sales would grow revenues to $12 billion in 2017.

"We've always been a 10-year company," Sid DeBoer said. "Our assured retail program and centralization are allowing us to achieve higher operating margins. We are going to grow, we are a growth company; we're not just going to pay dividend."

Reach reporter Greg Stiles at 776-4463 or e-mail business@mailtribune.com.