Lithia Motors, Inc. (LAD) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Lithia operated 345 locations representing 47 brands in the U.S., Canada and the U.K.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $8.277 billion | $7.296 billion | $23.368 billion | $21.241 billion |
| Gross profit | $1.371 billion | $1.314 billion | $3.968 billion | $3.943 billion |
| Operating income | $465.3 million | $514.9 million | $1.320 billion | $1.541 billion |
| Net income attributable to Lithia | $261.5 million | $329.6 million | $787.3 million | $1.003 billion |
| Diluted EPS | $9.46 | $11.92 | $28.54 | $35.10 |
- Q3 total gross margin was 16.6%, down from 18.0%; operating margin was 5.6%, down from 7.1%.
- Q3 new-vehicle retail gross profit per unit fell 24.7% to $4,367; used-vehicle retail gross profit per unit fell 14.0% to $2,132. Service, body and parts gross profit rose 20.5%.
- Nine-month net cash used in operating activities was $177.2 million, versus $517.5 million used in 2022. The company’s adjusted operating cash flow, a non-GAAP measure, was $1.046 billion, versus $786.4 million.
- At September 30, cash was $146.9 million, total immediately available funds were $1.402 billion, and additional liquidity from unfinanced real estate was estimated at approximately $0.4 billion.
- Total debt, net, was $9.785 billion, including $3.125 billion of floor plan debt and $1.470 billion of non-recourse notes. Inventory was $4.405 billion. The company reported compliance with all financial covenants.
Changes and drivers
- Revenue growth reflected acquisitions as well as organic growth in new-vehicle sales and service. Q3 revenue increased 13.5%, but gross profit rose only 4.3% and operating income declined.
- Same-store Q3 revenue decreased 1.1% and same-store gross profit decreased 8.2%. New- and used-vehicle retail margins continued to normalize from prior-year levels.
- Acquisitions completed in the first nine months contributed $1.721 billion of revenue and $54.5 million of operating income after their acquisition dates. Lithia paid $1.205 billion, net of cash acquired, for acquisitions and acquired 56 locations during the period.
- Higher interest costs and credit-loss provisions pressured Financing Operations: its nine-month loss was $43.8 million, compared with income of $3.7 million in 2022. The nine-month provision expense increased to $75.0 million from $25.5 million.
- SG&A increased 12.8% in Q3; SG&A as a percentage of gross profit rose to 62.0% from 57.4%. Floor plan interest expense rose to $40.2 million from $10.7 million, primarily due to higher rates and inventory levels.
Outlook, risks and unusual items
- The filing provides no specific near-term earnings or revenue guidance. Management states it believes funding is sufficient for business requirements over the next 12 months and longer term. Its stated free-cash-flow allocation targets are 65% acquisitions, 25% internal investment and 10% shareholder returns.
- Management’s strategy includes acquisition growth, operational efficiency, digital retail and expansion of its captive finance business; it targets 15% penetration of retail units financed by DFC by 2025. These are strategic targets, not reported guarantees.
- Risks include continued vehicle-margin normalization, higher borrowing costs, consumer demand and credit performance, acquisition integration, and uncertainty in the auto and used-vehicle markets. The expanded U.K. business adds regulatory, economic and operating risks. The filing also notes potential effects of U.K. agency sales models and changes to dealership protections or vehicle regulations.
- Unusual Q3 items included $4.6 million of storm insurance reserve charges, $4.2 million of one-time contract buyouts, $4.8 million of acquisition-related expenses and a $23.1 million net gain on store disposals. These items affect comparisons and the company’s adjusted non-GAAP measures.
- Finance-receivable allowance increased to $103.0 million from $69.3 million at year-end; nine-month charge-offs were $79.1 million versus $36.3 million. The filing states more than 99% of the portfolio was less than 60 days past due and less than 1% was on non-accrual status.
Investor verification points
- Check whether vehicle retail margins and same-store sales stabilize, and whether service growth continues to offset weaker vehicle profitability.
- Assess acquisition returns and integration, including preliminary purchase-price allocations and the contribution of acquired stores to reported growth.
- Monitor borrowing costs, floor plan balances, liquidity and covenant headroom as inventory and debt levels change.
- Track finance-receivable delinquencies, charge-offs, recoveries, allowance adequacy and the impact of funding costs on Financing Operations.
- Review the assumptions behind management’s non-GAAP adjusted results and cash-flow measures alongside their GAAP counterparts.