Lithia Motors Inc. is accelerating the pace of acquisitions of regional auto dealers as it looks to bolster its inventory levels amid a surge in car sales.
The Medford, Ore.-based dealership chain in 2020 set a five-year goal to increase its annual revenue by about $20 billion through acquisitions. Lithia since then has added about $6.5 billion in annual revenue through such deals, putting it one-third of the way toward reaching its target, said Chief Financial Officer Tina Miller, who oversees capital planning for these transactions. Lithia’s deal target is part of a broader plan to generate $50 billion in annual revenue by June 2025, or about four times as much as it booked for last year.
“We’re well ahead of our schedule,” Ms. Miller said, commenting on the pace of deals the company has struck. Lithia views its five-year goal as a base that it can confidently achieve, Ms. Miller said. The company has a more aspirational set of goals internally that involve hitting its targets ahead of schedule, but it won’t share those goals publicly, she said.
The uptick in dealer acquisitions comes as U.S. auto sales are on the rise. During the first quarter, the seasonally adjusted annual rate for new light-vehicle sales was 16.8 million units, up almost 14% from a year earlier, according to the National Automobile Dealers Association.
Dealers are also contending with supply constraints as auto manufacturers are struggling to keep pace with the pandemic-driven surge in demand following factory closures last spring. A global semiconductor shortage has further hampered production by forcing some manufacturers including General Motors Co. and Ford Motor Co. to temporarily close plants.
One of the driving factors behind Lithia’s bricks-and-mortar acquisitions is, conversely, the company’s push to sell more cars online. Lithia in July launched Driveway, an e-commerce platform, and—through the new platform—began selling used cars nationwide in October and new cars in January. Inventory for Driveway comes from the Lithia’s dealer lots.
The dealership acquisitions add to Lithia’s inventory for Driveway and put physical locations in closer proximity to online customers, which makes it more convenient to provide auto repair services, Ms. Miller said. During the quarter ended March 31, the first quarter with new and used vehicle sales, the average shipping distance for cars purchased online was 732 miles, Ms. Miller said. She declined to provide details on online sales so far.
Lithia plans to generate about $10 billion in annual revenue with Driveway by 2025. The company currently has about 40,000 cars listed online nationwide, a figure that it plans to increase to about 300,000 at any given time so that customers in various parts of the country have a diverse selection of vehicles to choose from.
“If you go to the local dealership in your area, they’re going to show you the inventory that’s on their lawn,” she said. “What Driveway really allows us to do is take the inventory from all of our stores and post it online.”
Lithia currently operates 249 dealer locations in 22 states. The company in 2020 added $3.1 billion in annualized revenue through acquisitions, compared with adding $825 million a year earlier, according to the company. During the quarter ended March 31, Lithia sold 112,891 new and used cars, up 44% from a year earlier. Lithia had net income of $156 million, compared with $46 million a year earlier.
Deals so far in 2021 have included locations in the Midwest and Southeast of the U.S., for example a 34-location dealer based in Troy, Mich., which is expected to add $2.4 billion in annualized revenue, and a five-location dealership in Tampa, Fla., which is forecast to bring $430 million in additional revenue a year.
The company in October raised $805 million by selling stock to fund acquisitions, and would consider tapping equity markets again if Lithia continues to grow at its current pace, Ms. Miller said. The company also targets 65% of its free cash flow for acquisitions and accesses the debt and equity markets as needed.
Lithia has historically acquired underperforming dealerships for a low price and then invested in fixing them up, according to Bret Jordan, an analyst at Jefferies Financial Group Inc. But the push to add inventory and get its Driveway business off the ground has spurred the company to expand its list of targets to include dealerships with stronger sales, he said.
Lithia typically pays between 15% and 25% of a dealer’s annual revenue for its acquisitions, according to the company.
The inventory dynamic is enabling some dealers to charge higher prices for vehicles. And it has likely encouraged smaller regional chains to sell themselves to Lithia, Mr. Jordan said. “If you’re a dealer right now, you’re about as profitable as you’ve been in your life,” he said.