Lithia Motors, Inc. (LAD)

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Lithia Motors Inc. (LAD)

Q4 2007 Earnings Call

February 20, 2008 5:00 am ET

Executives

Dan Werthaiser-Kent - Manager of IR

Sid DeBoer - Chairman, CEO and Secretary

Jeff DeBoer - SVP and CFO

Bryan DeBoer - President and CEO

Dick Heimann - Vice Chairman

Analysts

Rick Nelson - Stephens

Matthew Fassler - Goldman Sachs

Rex Henderson - Raymond James and Associates

Scott Stember - Sidoti & Company

Matt Nemer - Thomas Weisel Partners

Jonathan Steinmetz - Morgan Stanley

John Murphy - Merrill Lynch

Edward Yruma - JPMorgan

David Lim - Wachovia

Presentation

Operator

At this time, I will like to welcome everyone to the Lithia Motors fourth quarter 2007 conference call. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Dan Werthaiser-Kent. Sir, you may begin your conference.

Dan Werthaiser-Kent

Thank you, Vanessa. Good afternoon, everyone, and welcome to Lithia Motors fourth quarter 2007 Earnings Call.

First, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty, and actual events, results could differ materially due to certain risk factors. These risk factors are included in our fourth quarter and yearend earnings press releases and in the company's filings with the SEC.

Now, I'd like to thank you all for joining us for our fourth quarter 2007 earnings conference call. Presenting the call today are Sid DeBoer, Chairman and CEO of Lithia; and Jeff DeBoer, our Chief Financial Officer. And at the end of their remarks, we'll open up the call to questions. And we also have with us today for Q&A, Bryan DeBoer, our President and Chief Operating Officer; and Dick Heimann, our Vice Chairman.

Now, it's my pleasure to turn over the call over to Lithia's Chairman and CEO, Sid DeBoer. Sid?

Sid DeBoer

Thank you, Dan. Good afternoon to everyone. Thanks for joining us today. I expect that all of you on the call have had the opportunity to review our press release. I will cover a number of those items in more detail and discuss several other points not included in the press release.

Our fourth quarter net loss from continuing operation was $3.6 million and loss per share was $0.18 per share. We are encountering two major issues that, despite their significance, are only temporary. The macroeconomic issues facing our country right now are apparent to everyone. They make it difficult for even the most stable and profitable businesses to shine in times like these.

Recessionary market conditions accelerated in the fourth quarter for us, for Lithia. Since we sell a large ticket to consumer discretionary products that must be financed, we felt the impact. Most of our regional markets were more impacted than the rest of the nation, particularly in Nevada, California, Oregon and Colorado. Customer visit counts at most of our stores were measurably lower than anticipated.

In dealing with the difficulty of the economy, Lithia is taking steps to adjust our cost structure to match lower customer demand. These steps include cost cutting in the areas of personnel, advertising, travel and other inherently variable expenses.

Our change to a new way of serving our customers is a cultural change that is also having an impact on our short-term results. These changes are critical to our long-term success as a national provider of automobiles and related services. They markedly improved our customers’ experiences and will reduce our operating cost as we take out complexity in all the ways that we do with our customers.

Our improved sales processes offer our customers a refreshing sales environment that operates on a single Drive It Now Price posted on every vehicle that is always at or below MSRP. This means there are no longer any additional dealer mark-ups or document fees unless they've been specifically allowed by a state; nor are there any other hidden costs for our customers.

Our extensive consumer research shows overwhelmingly that this is the customers’ preferred way of doing business. The transparent pricing goes hand-in-hand with our 3-day 500-mile return policy. That's both on new and used cars. Customers may bring their new or used vehicle back for a full refund, including the return of their trading vehicle to them, no questions asked. No longer will a customer be burdened with regrets or second thoughts after purchasing a vehicle.

As these processes take hold, not only are we seeing greater satisfaction with our customers, but our sales people also are enjoying their jobs much more. The simpler processes have helped them to become more efficient and customer-focused. In our last call, we projected that all stores would have these new customer guarantees in place by late winter of 2008, and we have succeeded in that first step ahead of schedule.

Lithia Motors is also changing the way we service vehicles. We are trying to go beyond what is currently offered in the marketplace and stand out as having unique processes there as well. When you bring a used vehicle into a Lithia service center, we will take care of you on your schedule. Your car goes in right away for service, so you can be on your way quickly.

You will also never pay for the same job twice. We stand behind every repair we make for a full three years or 50,000 miles. If the repair fails, we'll fix it for free, and that includes parts and labor. Our upfront pricing also assures a complete and detailed quote for the work that needs to be performed on the vehicle before any work begins.

You will also know the exact price for the repair and we guarantee we won't charge any more than that price that is promised. We are excited about the response that we have seen so far from our customers. Now that we have all of the new customer equities in place at all of our stores, the next step is to align our pay plans and the management structure to match these new processes.

With centralization of pricing, inventory control and back office administration, the task remaining in the stores are much more simplified, and therefore, do not require the same skill set, nor do they require as many people. This means that store management will focus almost exclusively on employees and customers.

For example, there is a new position of the Merchandising Manager that will replace our normal Used Car Managers. This new position will be about half the cost of the current positions. This person's duties will be essentially to be the eyes and ears of the Lithia car center and you will hear more of that in the future. It is an appraising and managing of the inventory center.

The car centers is a new department in Lithia, formed within the last three months that we've envisioned for sometime; it is run by a team of industry experts who have the vast experience and the valuation, redistribution, pricing and purchasing of used vehicles. This group was originally organized as part of our incubator L2 auto store concept and has already extended it's purview into the Lithia store operations.

This centralized car center will be operating all used vehicle operations at both Lithia and L2 auto stores in the near future. Our goal for this new store structure should allow us to deliver a vehicle to a customer in about half the cost as it is today.

As we fully transition into the new sales model, our sales staff will receive a base salary, with volume based incentives. We will no longer be paying them on a commission basis, since store personnel will not control the pricing or the trade valuation of the vehicles. Again, aside from the very obvious customer benefit of this program, Lithia will realize better employee retention and a lower cost of delivery of each vehicle.

By offering a simplified new way to buy vehicles, the satisfaction and retention of our customers is rising dramatically. This should in turn, enhance our relationships with our manufacturers who are mostly concerned about the customer satisfaction and sales volumes. This should also result in more opportunities for Lithia to acquire more stores. All of these changes are dramatic improvements, which allow Lithia to be more competitive, more web centered and more agile.

Furthermore, the future of auto retailing demands that these changes occur. But change, as you know, is not easy and does require cultural reevaluation and retraining of all employees. All of these changes are dramatic improvements, which allow Lithia to be more competitive, more web centered and again more agile.

Read the rest of this transcript for free on seekingalpha.com