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Lithia: Right People, Pay Plans and Product Deliver Record F&I Performance in Q3

October 27, 2016

MEDFORD, Ore. — Record-setting F&I, a strong used-car segment, and healthy gains in parts and service paved the way for a year-over-year improvement in third quarter gross profit for Lithia Motors.

Strong performances in those segments helped to offset waning new-vehicle unit sales and declines in new- and used-vehicle profits on a per-unit basis.

“In the third quarter, the blended overall gross profit per unit was $3,449 compared to $3,405 last year, an increase of $44 per unit,” said President and CEO Bryan Deboer during the group's Oct. 21 earnings call. “This was complemented by a 3% increase in combined unit volume.

"Our store personnel have increased total gross profit while focusing on taking market share in a declining new-vehicle sales environment," he added. "To achieve this increase, we’ve experienced slightly higher selling costs.”

Total gross profit for the quarter was $323.7 million, a 4.4% gain over the year prior. As noted, the quarter’s $3,449 per-unit gross profit was, in fact, a 1.3% improvement over the year before; however, the bulk of those gains came from F&I.  

F&I produced a record $1,302 in gross profit on a per-unit basis, an 8.1% improvement over the year prior. Each new vehicle sold produced $1,972 in gross profit, a 4.3% year-over-year decline. Additionally, each retail used car produced $2,344 in gross profit, a 1.5% drop compared to last year. Sales of wholesale used vehicles produced $83 in gross profit, a 43.1% improvement over the year before.

“I think the focus that we have on our F&I business has really taken hold. We’re focused on three core areas. I mean, No. 1, we’re focused on getting the right people in our F&I offices and motivating with the right pay plans that really generate additional sales for the company,” said Chris Holzshu, senior vice president and CFO. “And so, in often cases, that means providing less transactions to each F&I manager, but encouraging them to make sure they offer all the opportunities that we have for customers to protect their vehicles. … The second thing is making sure that we have the right product … and lastly on that we are adjusting our pricing.”

He added that although F&I performance was strong this quarter, they’re still work to be done. He noted that the group’s F&I gains were driven by stores with exceptional performance, but noted that the group has many stores that are struggling to get surpass $1,000 per-copy.

Although per-unit performance for the dealer group’s used segment has declined, its overall performance improved. In the third quarter, Lithia Motors posted sales of 28,322 used units on a same-store basis, an 8.5% increase over the year prior. That gain and a 1.9% increase in the average retail price for a used vehicle — $19,677 — helped offset the segment’s weaker per-unit gross profit.

Total used-vehicle retail gross profit was $66.3 million, a 6.9% year-over-year increase.  

On the new-vehicle front, unit sales declined 1.7% from a year ago to 36,681. This, coupled with the segment’s per-unit gross profit results, caused total new-vehicle gross profit to fall 6% to $72.3 on a same-store basis. Additionally, the 3% increase in the average selling price of new vehicles, which was $33,792 in the third quarter, was not enough to offset the rest of the segment’s problems.

Ringing a similar bell as Group 1, which reported its third quarter performance the day prior, Lithia Motors experienced downturns in its energy-dependent markets. Sales in Alaska were down 4% and profits were down 1%. Revenue in North Dakota was also down, falling 2.7%. However, profit in the state was up 46%.

Unfortunately for the dealer group, the largest energy-dependent state in which it operates posted the biggest  declines. “Texas, unfortunately still remains under pressure. Revenues were down about 5%, but earnings were down 22% in the quarter," Deboer said. "That’s not what we want to see, obviously. Our stores in Texas seem to be spending more money to maintain their current market share, and ... we hope to offset it with revenue and gross profit."

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