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Lithia banks on buy-with-cash strategy

Medford company ranks in top nine auto dealer groups by purchasing stores and improving them

Lithia Motors Inc., has a plan, a strategy that sets it apart from other auto groups - even those larger than the 61-store company.

While many of its national competitors seek the most successful stores to acquire, Lithia seeks underperforming dealerships or those not firing on all cylinders.

As a result, Lithia is now among the top nine auto dealer groups in the country and may be ranked higher in total sales by year's end.

"They bring something to the auto retail sector that is very rare historically, and that's strategic thinking," says Dennis DesRosiers, an independent auto analyst in Toronto. "Most dealerships don't think strategically, they think only in terms of operations. What Lithia has done so well is combining the best of strategic thinking with the best of an operational world."

Lithia has exceeded estimated earnings for 19 straight quarters since going public and the company has indicated more of the same when third-quarter earnings are reported Wednesday.

The expected earnings will be a show of strength in a sector bereft of good news.

"Not very many of the other groups are doing that well right now," DesRosiers says. "Lithia is not totally unique, but it's doing very well."

That's largely because Lithia has stuck by its plan since becoming publicly traded in 1996, paying cash for most of its new properties.

"We said from the beginning that we are going to grow 20 percent per year," says Jeff DeBoer, vice president and chief financial officer. "Actually, it's been faster than that."

Expansion, yes, impulsive buying, no.

The DeBoer family has no interest in following the lead of AutoNation, which charged onto the scene in 1998, grew to more than 400 franchises in two years, and has since struggled to maintain earnings.

AutoNation, even after sliding to 368 franchises, dwarfs Lithia. The industry leader had sales of $20.6 billion in 2000, compared to Lithia's $1.66 billion.

Chairman Wayne Huizenga created AutoNation as a spinoff of Republic Industries Inc. Shares that once crested above $35 three years ago now sell for less than a third that amount.

"They have not integrated their stores," chairman and CEO Sid DeBoer says. "Each guy runs his own deal and there is no common identity."

While many auto groups seek the top 13 percent most profitable dealerships, he says, the 58 percent making — to — percent profit are ideal targets.

AutoNation closed at $10.11 Monday. Lithia has fared far better of late, touching $18 Monday before settling to $17.45 at the market's close.

"They paid a lot and paid mostly in stock and they've had to stop buying stores," Sid DeBoer says. "We've stuck with our plan. If you pay too much, you don't get an adequate return. We've had to wait for pricing to return to reality."

One exception to the cash buys led to a defining moment of growth when Lithia made its largest-to-date acquisition three years ago amid boom times. The company had grown from its original five Southern Oregon dealerships to 28 in March 1999. But with other auto groups aggressively gobbling up properties, Sid DeBoer altered his approach when the firm bought Doug Moreland's seven-dealership group with stores in Colorado and Nevada. Lithia paid a substantial portion of the $57 million purchase in stock.

Dealership groups in close proximity are known as platforms in the industry. (The Thomason Auto Group based in Gladstone with dealerships spread throughout the Portland area is an example.) Platforms, because of their inherent sphere of influence, come at a higher price than isolated dealerships.

The Moreland group was the largest Chrysler dealer in Colorado, accounting for 25 percent of the state's Chrysler sales at six dealerships. Lithia typically replaces only the owner-operator and keeps staff and management, retaining elements such as seniority and vacation time. However, in this case, Doug Moreland joined Lithia's board of directors and the group's other top executives signed long-term contracts with Lithia.

"We can build platforms in some markets, like we have in Southern Oregon," Jeff DeBoer says. "But we don't have a choice in areas where they've already been built and we have to buy from people like Doug Moreland.

"We can't do it all from Medford. It's very much a part of our plan to buy more platforms. The difference between other auto groups and what we do is balance. We buy fewer platforms and more fill-ins and the other companies pretty much buy platforms."

Future platform buys won't necessarily be as momentous as the Moreland buy.

"They won't have the same impact on the company and they're not going to be as big, relative to the whole," Jeff DeBoer says. "Moreland was kind of a big bite for us; $66 million was kind of a jolt at the time."

The deal was an immediate boon to the organization, boosting its annual revenue by more than 40 percent to more than $1.2 billion. But it also produced bones of contention not experienced in the company's other takeovers.

"After three years, we're still not fully integrated," Sid DeBoer says. "That's not unexpected. We're on track, but it's just painful and slow."

Typically, in smaller acquisitions, Lithia breaks down everything from the beginning and installs its own system, top to bottom. The early losses are quickly recovered because the system is proven. But the computer system at one of the Colorado dealerships has only in the past month been tied into Lithia's system.

Just as significant is renaming new acquisitions to the Lithia brand.

"When owner/operators are still there, the old loyalties are still there and change is resisted," DeBoer says.

As a result, when headquarters now sends out orders, they come from support services, not corporate offices, in an effort to soften the "we" and "they" arguments.

The lessons learned from the Moreland acquisition will no doubt guide Lithia as it continues to pick up dealerships in 70 target markets with populations between 250,000 and 600,000 west of the Mississippi River. The more regionally diversified, Sid DeBoer reasons, the better chance to overcome local recessions.

More than half of the company's gross profit comes from non-vehicle sales. Service and parts account for 29 percent of the company's gross profit, new cars 28 percent and used cars 20 percent.

And given the $130 million acquisition credit the company has available from Ford Credit, Lithia has the ability to grow any time the price is right.

"We're in an economy of fear right now and the terrorists didn't help consumer confidence," Sid DeBoer says. "But cars wear out and people need them."

Reach reporter Greg Stiles at 776-4463 or e-mail .