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Lithia sees solid first quarter despite flat sales in some markets

Two elements are cutting into Lithia Motors' bottom line: economic decline in the energy states and waiting for manufacturers to produce parts for recall repairs.

Nonetheless, the Medford auto retailer's first-quarter revenue of $1.98 billion topped analysts' $1.95 billion estimate, with net earnings of $40.3 million, or $1.55 per share, versus $40.7 million, or $1.53 per share, a year earlier.

Lithia Motors CEO and President Bryan DeBoer described the quarter's performance as solid during a Thursday morning conference call, with 12 percent increases in adjusted per-share earnings and double-digit increases in used retail vehicle sales and service department and finance performance. But pushing cars off the sales floor means reduced margins at times.

DeBoer told analysts that each market responds differently to changing conditions.

"I’d say a third of our markets, primarily the energy states, are feeling the pressures of either flat or slightly declining sales," DeBoer said. "They’re continuing to keep volume, but they're not responding to their (operating costs). So they're having to push a little harder to be able to maintain that volume."

Volume drives operations and service parts elements, he said, adding that individual stores need time to adjust, and that can take a quarter or two.

Energy-state markets have softened for the past couple of years, but Lithia's unit sales have grown, even in those regions.

"We could have been taking market share there with aggressive pricing," DeBoer said later. "But then it affects bottom line because we're sacrificing margins. Our sales were really good, but our ability to sell cost-effectively is not as good as in the past. It's always a balancing act with short-term volume. I'd rather have more volume with less money than fewer cars with more money in order to retain the customer base longer."

Manufacturers issuing recalls have asked dealers to stop sales of some new and used vehicle models, adding to the inventory on Lithia's car lots.

"The manufacturers are paying for the interest and depreciation," he said. "It's not all going to get done at once, you're talking three to five years of sales for certain models. When you have to build those parts, it creates a backlog."

He expects most of the work will be done in the second and third quarters.

Lithia continues to eye domestic and import franchises in medium markets, where between 25,000 and 50,000 vehicles are registered, with its DCH unit seeking inroads in markets where there are more than 100,000 registered vehicles.

"The acquisition market continues to build momentum, there is no question about it," DeBoer said. "The prices are, however, pretty steep and we are pretty disciplined."

As a result, he said, franchises would have to be significantly under-performing to the point Lithia thought it could double or triple profitability to bite.

"I wouldn’t say that it’s going to slow, but I do think that we’re pretty picky," DeBoer said. "When we look at acquisitions, we look at approximately 10 to 15 acquisitions for every one that we’re able to buy. I think as the market begins to plateau, local markets begin to change, and people can see that maybe earnings for the next two or three years are reaching their potentials. Then they are going to look to sell, and I think we’ll be sitting there ready with open arms."

Investors seemed to react negatively to Lithia's adjusted projections for new vehicle sales growth in 2016, dropping its shares by $13.36 to $79.14 during Thursday trading. Lithia projected new vehicle sales would increase 4.5 percent in 2016, down from a 5.5 percent projection in February.

Reach reporter Greg Stiles at 541-776-4463 or business@mailtribune.com. Follow him on Twitter at www.twitter.com/GregMTBusiness, on Facebook at www.facebook.com/greg.stiles.31