Lithia Earnings: Lucrative Service Business Results in Good Quarter Despite Used Vehicle Weakness

Lithia Motors’ LAD second quarter looked strong to us with acquisitions driving a 12% year-over-year revenue increase to a second-quarter record. Same-store revenue, however, declined by 2.9% mostly from poor used vehicle affordability for consumers continuing to plague used vehicle retailers. Adjusted diluted EPS fell 10% to $10.91, but last year was a very tough comparable for all dealers, and EPS still beat the $9.26 Refinitiv consensus. We lowered our fair value estimate to $500 per share from $507 due to 2023 share buybacks not occurring to the degree we were modeling. We have lowered our 2023 buyback spending to $250 million from $400 million, which increased our share count by over 7% and reduced our fair value.

New vehicle volumes increased on both the consolidated and same-store levels, while new vehicle gross margin declined by 300 basis points and new vehicle gross profit per unit fell 22.4% to $4,635 despite new vehicle pricing up 1.6% to $48,058. Margins in the sector are falling as the industry recovers from the chip shortage, so we are not concerned, plus it’s important to remember that $4,635 is still far above second-quarter 2019′s new vehicle GPU of $2,078. Dealers also make significant gross profit on service, and Lithia’s service revenue grew 5.8% on a same-store basis and by 17.8% overall. Total service gross profit rose 22.1%, which, along with a 2.3% finance increase—a 100% gross profit segment—enabled a total company gross profit increase of 2.5%. This increase along with expense controls led to a healthy overhead cost to gross profit ratio of only 60.4%. Although that metric still rose by 130 basis points, it’s still low and enabled operating margin of just under 6% from over 7% a year ago.

We see no reason why management cannot achieve its 2025 EPS target range of $55-$60. We expect Lithia to remain highly acquisitive, mostly in the U.S., while also growing its captive finance arm and returning cash to shareholders via buybacks and dividends.