Lithia Motors, Inc. (LAD)

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Lithia Motors (LAD)

Q3 2012 Earnings Call

October 24, 2012 10:00 am ET

Executives

John F. North - Chief Accounting Officer, Vice President of Finance and Corporate Controller

Bryan B. DeBoer - Chief Executive Officer, President and Director

Christopher S. Holzshu - Chief Financial Officer, Senior Vice President and Secretary

Analysts

Simeon Gutman - Crédit Suisse AG, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Scott L. Stember - Sidoti & Company, LLC

John Murphy - BofA Merrill Lynch, Research Division

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Joe Edelstein - Stephens Inc., Research Division

David Whiston - Morningstar Inc., Research Division

Efraim Levy - S&P Equity Research

Presentation

Operator

Greetings, and welcome to the Lithia Motors Q3 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John North. Thank you, Mr. North. You may begin.

John F. North

Thanks, and good morning. Welcome to Lithia Motors Third Quarter 2012 Earnings Conference Call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially due to certain risk factors, which are outlined in our filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements.

During this call, we may discuss certain non-GAAP items, including adjusted selling, general and administrative expense, adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operations and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance.

These presentations are not intended to be provided in accordance with GAAP and should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We also have updated an investor presentation which is posted on our website, lithia.com, highlighting our third quarter results.

Present on the call today are Bryan DeBoer, President and CEO; and Chris Holzshu, Senior Vice President and CFO. At the end of our prepared remarks, we will open the call to questions. I am available in my office after the call for any follow-up you may have. It is now my pleasure to turn the call over to Bryan.

Bryan B. DeBoer

Good morning. Today, we reported record third quarter income from continuing operations of $23.3 million. This is compared to $16.3 million a year ago. We earned $0.90 per share in the third quarter compared to $0.61 per share last year, an increase of 48% or double our revenue growth of 24%.

Total same-store sales were up 23% in the quarter, reflecting increases in all business lines. All comparisons from this point forward will be presented on a same-store basis unless otherwise noted. New vehicle sales increased 30%. This increase was on top of a 28% increase in new vehicle sales in Q3 2011. On a unit basis, we sold approximately 14,500 new vehicles, an increase of 3,400 units or 31%, well above the national average of 14%. Our domestic sales increased 19% compared to 5% nationally. Our import sales were up 51% compared to 25% nationally, and our luxury sales were up 38% compared to 3% nationally.

These results show that each market is unique, and the dominant brands we represent in our markets respond differently than national trends. We have continued to challenge our store leaders to evaluate their business and tailor solutions that improve performance in their local markets. As a result, many of our stores are achieving success in ways we have not seen before.

Earlier this month, we held a meeting with our general managers in Portland, Oregon. I was both humbled and excited by the energy our store leaders brought to the event. Our team believes there is still work to be done and can continue to outperform in their markets with focused efforts, creative thinking and a lot of hard work. As I mentioned, last quarter, many of our Western markets are still experiencing new vehicle registrations significantly lower than historic levels. To put this in perspective, we have compared registration data in our local markets at current levels compared to levels experienced before the recession. We calculated that in our markets, current sales volume equates to a SAAR of under 13 million units compared to the 16.5 million SAAR we experienced during peak historic levels. We are encouraged that as these markets continue to recover, we can capture more than our share of the volume increases. Used retail vehicle sales increased 24% in the quarter. We sold approximately 12,900 retail used vehicles, resulting in a used-to-new ratio to 0.9 to 1. We sold a monthly average of 52 used vehicles per store in the third quarter of 2012, up from 40 used vehicles per store in 2011. Our previous goal is to sell an average of 60 used vehicles per store. As we have improved our performance in this area, we are increasing our goal to sell an average of 75 used vehicles per store. The key to our success in accomplishing this objective is to grow our core vehicle offering. These 3- to 7-year-old cars are most difficult to source, and our stores must effectively mine the 5 channels for procuring this inventory. These channels are customer trade-ins, auctions, wholesalers, private parties and other dealers. As we have more success in selling core vehicles, we will turn to generate more inventory in our value auto category through the trade-ins received on these sales. Success in core vehicle drives our performance in the rest of our used car offerings. As new vehicle sales continue to recover, certified preowned vehicles continue to increase. In the quarter, this category grew 33% due to a larger number of off-lease vehicles compared to the low levels experienced last year. In the quarter, value autos, or vehicles over 80,000 miles, performed well. This segment grew 56% year-over-year with a gross margin of 21%.

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