Sign in

    Lithia Motors Inc (LAD)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$276.33Last close (Jul 31, 2024)
    Post-Earnings Price$302.51Open (Aug 1, 2024)
    Price Change
    $26.18(+9.47%)

    What went well

    • Lithia Motors has successfully implemented cost-saving measures exceeding their initial $150 million target, now realizing over $200 million in annualized SG&A cost savings. This includes reductions in personnel, advertising, and corporate expenses, with expectations to potentially double these savings through inventory reductions by year-end. These initiatives are expected to improve profitability starting in the third quarter.
    • The company's financing operations have achieved profitability earlier than expected, reporting income of $7.2 million in Q2 compared to a loss last year. At maturity, financing operations are projected to contribute an additional $0.22 to $0.25 EPS per $1 billion in revenue, enhancing the company's earnings growth trajectory.
    • Lithia Motors demonstrated confidence in its valuation by repurchasing approximately 2.9% of outstanding shares, totaling $202 million in Q2. The CEO emphasized that the stock is trading at trough earnings and multiples, making share repurchases an attractive use of capital compared to higher-priced acquisitions.

    What went wrong

    • Declining Gross Profit per Unit (GPU): The company acknowledges that current vehicle GPUs are elevated at $4,700, with an expectation that $200 to $500 may come out in the future as market conditions normalize. This potential decline in GPUs could reduce overall profitability.
    • Delayed Realization of Cost Savings: Management indicates that expected cost savings from the 60-day plan, totaling over $200 million, may not be fully realized until 2025, suggesting that SG&A expenses will remain elevated in the near term and benefits may take longer than anticipated to materialize.
    • Challenges in Used Car Segment: The significant decline in used car gross profit per unit is attributed to true market conditions without any one-time events, indicating potential challenges and reduced profitability in the used car market segment.

    Q&A Summary

    1. EPS Growth and CDK Impact
      Q: Explain the nearly 50% sequential EPS increase.
      A: Our EPS was affected by a $1.10 loss due to the CDK event. Adding this back to the reported $7.87 EPS brings us close to a 50% sequential increase from Q1 to Q2.

    2. SG&A Cost Reductions and 60-Day Plan
      Q: How will SG&A trends look in Q3?
      A: We anticipate SG&A to gross will be similar in Q3 as this quarter. We've realized over $200 million in cost savings from our 60-day plan as of July 1, with an additional $100 million expected mainly from inventory reductions by year-end.

    3. Midterm Revenue and EPS Guidance
      Q: What's the timeline for reaching $40-50B sales?
      A: We expect to achieve our midterm sales goal of $40 to $50 billion within 2 to 4 years, potentially sooner. This aligns with our aim for $1.20 to $1.30 EPS in that timeframe, supported by operational improvements and our 60-day plan.

    4. Normalization of Gross Profit Margins
      Q: Will new car GPUs decrease further?
      A: Our total vehicle GPU, including F&I, stands at $4,700, above pre-COVID levels of $3,500 to $3,700. We believe normalized levels are $4,200 to $4,500, so there might be a further $200 to $500 reduction, but we may have reached the bottom.

    5. Wheels Inc. Acquisition Synergies
      Q: How does fleet management tie into your business?
      A: Partnering with Wheels Inc. offers synergies like selling new vehicles to fleets, accessing over 100,000 vehicles annually for resale, and boosting service and parts revenue through vehicle maintenance.

    6. Share Buybacks and Capital Allocation
      Q: Will high-level buybacks continue?
      A: We balance capital allocation between opportunistic share repurchases and M&A. With our stock trading at low valuations, repurchases are attractive, but M&A remains core. We anticipate $2 to $4 billion in acquisitions in the coming years.

    7. Interest Rates Impact
      Q: How do rising rates affect you?
      A: Higher rates impact consumer affordability and our variable debt. As rates potentially decrease, we'll benefit from lower interest expenses and improved consumer purchasing power. We're also targeting a $1 billion reduction in inventory, which could save $100 million in interest costs.

    8. Used Car GPU Trends
      Q: Why did used car GPUs dip overall?
      A: The overall dip in used car GPUs was due to market conditions, not one-time events. We see growth opportunities by increasing sales of value auto cars, which offer higher profits and quicker turnover.

    9. Online Channels and Marketing ROI
      Q: Updates on Driveway and GreenCars performance?
      A: Despite reducing marketing budgets by over 50%, our top-of-funnel metrics remain steady. Customer satisfaction has improved from a 3.7 to 4.7 Google score year-to-date, positioning us to accelerate growth in these channels.

    10. CDK Event Loss Recovery
      Q: Will you recover losses from the CDK event?
      A: We have cyber insurance and are working with carriers, but no recoveries were recorded in Q2. A portion of the $1.10 EPS impact may be recoverable, but likely less than $0.10 to $0.20.

    Related Publications