Lithia Finishes 2022 With a Rare Soft Quarter

Lithia Motors LAD rarely fails to beat Refinitiv consensus, but fourth-quarter adjusted EPS declining 20.5% year over year to $9.05 missed the $10.10 consensus and sent the stock down 8% during Feb. 15 trading. We are leaving our fair value estimate in place, but we will revisit all modeling assumptions after the 10-K is filed. We see no reason to change our thesis that Lithia is on track to meet its 2025 revenue goal of $50 billion (up from $28.2 billion in 2022) and EPS of $55-$60 ($44.42 in 2022). The quarter had strong headwinds from overhead costs and a large decline in vehicle sale volume from Ford and Stellantis stores, which combined were about 20% of volume. Management did say these two firms have increased incentives in 2023, and February saw a large pivot to move out 2022 model-year inventory, so we think the volume problem should be short-lived.

The administrative cost headwinds will take more time to resolve, but rising vehicle volumes as the chip shortage improves should also help mitigate declining per unit gross profit dollar declines. New and used vehicle gross profit dollars per unit fell by 13.1% and 33.7%, respectively, while new volumes rose 5.2% and used grew 8.5%. Same-store revenue rose by 0.8% but service grew 8.5%, which is a good sign especially since industry new-vehicle sales should grow to around the mid-14 million units, in our view, over 2022. Overhead costs as a percent of gross profit deleveraged by 590 basis points to 62.8%, which likely drove the earnings miss. Lithia is investing for the future, so there will be quarters where overhead spending will continue even when volumes are soft, as in the fourth quarter. Spending is for building the Driveway omnichannel brand as well as future new verticals such as insurance and fleet management, which needs to be done if the company wants to realize its goal of $1.10-$1.20 of EPS for every $1 billion of revenue in 2025 and long term as much as $2 of EPS for every $1 billion of sales.