Lithia Motors, Inc. (LAD) — Q2 2023 Form 10-Q
Business context and reporting period. Unaudited results for the three and six months ended June 30, 2023, compared with the same 2022 periods. Lithia operated 345 locations representing 46 brands in the U.S., Canada and, following its March acquisition of Jardine Motors Group, the U.K. The company combines vehicle retail, service, customer financing and digital sales.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $8,111.5 million | $7,240.1 million | $15,091.0 million | $13,945.4 million |
| Gross profit | $1,385.1 million | $1,350.7 million | $2,596.3 million | $2,628.9 million |
| Operating income | $475.8 million | $519.1 million | $854.6 million | $1,025.5 million |
| Net income attributable to Lithia | $297.2 million | $331.3 million | $525.9 million | $673.5 million |
| Diluted EPS | $10.78 | $11.60 | $19.08 | $23.15 |
- Revenue rose 12.0% in Q2 and 8.2% year to date, primarily from acquisitions, with organic growth in new vehicles and service. Gross profit increased 2.5% in Q2 but declined 1.2% year to date.
- Q2 gross margin was 17.1% versus 18.7%; operating margin was 5.9% versus 7.2%. Year-to-date gross margin was 17.2% versus 18.9%, and operating margin was 5.7% versus 7.4%.
- Vehicle gross profit per retail unit weakened: Q2 new-vehicle gross profit per unit fell 22.4% and used-vehicle gross profit per unit fell 10.3%. Service, body and parts gross profit rose 22.1% in Q2, supported by acquisitions and customer-pay work.
- Financing Operations posted a Q2 loss of $18.7 million, versus $3.3 million income a year earlier; the six-month loss was $39.5 million versus $8.3 million income. Higher funding costs compressed interest margin while portfolio growth increased provision expense.
- Cash flow from operations was negative $298.7 million for the first six months, compared with negative $263.1 million. Investing cash outflow was $1,000.2 million, including $978.5 million net cash paid for acquisitions; financing provided $1,248.5 million. Management’s adjusted operating cash flow measure was positive $499.7 million, but is non-GAAP.
- At June 30, total debt, net of issuance costs, was $9,504.8 million; cash was $88.7 million and available credit was $933.3 million. Management reported approximately $1.0 billion of current available liquidity and estimated approximately $0.5 billion of additional liquidity from unfinanced real estate. The company was in compliance with financial covenants.
- Cash dividends paid were $0.50 per share in Q2 and $0.92 per share year to date. The company repurchased no shares under its public authorization during the first six months; 70,560 shares were repurchased for RSU tax withholding.
Changes, outlook and risks
- Growth was acquisition-led: Lithia acquired 51 locations in the first six months, including Jardine Motors Group, Priority Auto Group and Wade Ford. Acquisitions contributed $791.8 million of revenue and $28.8 million of operating income after their respective acquisition dates. Net cash paid for acquisitions was $978.5 million.
- Same-store trends were weaker than consolidated revenue: Q2 same-store revenue fell 2.9% and gross profit fell 9.6%. Same-store used-vehicle revenue declined 15.8%; new-vehicle gross profit per unit continued to normalize. Service and parts remained a relative strength.
- Inventory increased to $4,278.9 million from $3,409.4 million at year-end; floor-plan debt increased to $2,816.7 million from $2,116.6 million. Management attributed higher interest expense to rising rates, increased inventory and acquisition-related borrowing.
- Finance receivables, net, increased to $2,882.4 million from $2,187.6 million. The allowance rose to $97.1 million from $69.3 million, and six-month provision expense increased to $52.0 million from $24.4 million. Management said over 99% of the portfolio was less than 60 days past due and less than 1% was on non-accrual status.
- Management stated it expects sufficient funding for business needs over the next 12 months and longer term, but cautioned that alternative financing sources may not be available on acceptable terms. No specific full-year earnings or revenue guidance is provided in the supplied filing text. Stated operating targets include 15% financing penetration by 2025 and 100 used retail units per store per month; trailing-twelve-month performance was 86 units.
- Management’s capital allocation targets are 65% of free cash flow for acquisitions, 25% for internal investment and 10% for shareholder returns. These are targets, not assured outcomes.
- Material risk considerations include margin normalization, interest-rate and consumer-demand exposure, auto-loan credit losses, acquisition integration and leverage. Newly emphasized U.K. risks include regulatory differences, proposed restrictions on gasoline and hybrid vehicle sales, manufacturer adoption of agency sales models, and fewer dealership franchise-law protections than in the U.S. Management also disclosed routine-course litigation; outcomes cannot be predicted with certainty.
- Unusual items included Q2 storm insurance reserve charges of $2.4 million and acquisition expenses of $4.5 million; first-half vendor contract buyouts of $10.1 million, storm reserves of $2.5 million, acquisition expenses of $5.7 million and store-disposal gains of $8.2 million. Other income benefited from foreign-currency gains and a small unrealized investment gain, compared with a substantial investment loss in 2022.
Important facts for investors to verify
- Whether vehicle retail margins and same-store used-vehicle sales stabilize, and whether service growth can offset pressure in vehicle retail.
- Acquisition returns and integration, including the U.K. business, against management’s return targets; purchase-price allocations remained preliminary for some acquisitions.
- Financing Operations’ funding spreads, provision expense, delinquency and recovery trends as the loan portfolio grows.
- Liquidity, debt and covenant headroom, including the availability and cost of revolving credit and real-estate financing.
- How reported GAAP results compare with management’s non-GAAP adjusted measures and the specified unusual items.