Lithia (LAD)

Automotive retailer Lithia Motors (NYSE:LAD) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 7.2% year on year to $9.18 billion. Its non-GAAP profit of $7.66 per share was 2.1% below analysts’ consensus estimates.

Company Overview

With a strong presence in the Western US, Lithia Motors (NYSE:LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Competitors in the auto retail space include AutoNation (NYSE:AN), Carvana (NYSE:CVNA), and Group 1 Automotive (NYSE:GPI).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $36.85 billion in revenue over the past 12 months, Lithia is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions.

As you can see below, Lithia’s 20.5% annualized revenue growth over the last six years (we compare to 2019 to normalize for COVID-19 impacts) was exceptional as it opened new stores and expanded its reach.

This quarter, Lithia’s revenue grew by 7.2% year on year to $9.18 billion, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.1% over the next 12 months, a deceleration versus the last six years. We still think its growth trajectory is attractive given its scale and indicates the market is forecasting success for its products.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Lithia opened new stores at a rapid clip over the last two years, averaging 19.1% annual growth, much faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Note that Lithia reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Lithia’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% annual declines. This performance is concerning - it shows Lithia artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, Lithia’s same-store sales rose 2.5% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

Lithia has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 15.9% gross margin over the last two years. Said differently, Lithia had to pay a chunky $84.13 to its suppliers for every $100 in revenue.

Lithia produced a 15.4% gross profit margin in Q1, in line with the same quarter last year and exceeding analysts’ estimates by 2.1%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Lithia was profitable over the last two years but held back by its large cost base. Its average operating margin of 4.7% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Lithia’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Lithia generated an operating profit margin of 4.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Lithia broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Lithia’s margin expanded by 1.5 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Lithia’s free cash flow clocked in at $253.4 million in Q1, equivalent to a 2.8% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lithia historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.2%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Lithia reported $430.3 million of cash and $8.26 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.82 billion of EBITDA over the last 12 months, we view Lithia’s 4.3× net-debt-to-EBITDA ratio as safe. We also see its $418.8 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Lithia missed analysts’ revenue and EPS expectations. Overall, this was a softer quarter. The stock remained flat at $296.21 immediately after reporting.

Updated: May 22, 2025 at 10:24 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Lithia, you should also grasp the company’s longer-term business quality and valuation.

Lithia isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last six years, it’s expected to deteriorate over the next 12 months and its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. And while the company’s new store openings have increased its brand equity, the downside is its shrinking same-store sales tell us it will need to change its strategy to succeed.

Lithia’s P/E ratio based on the next 12 months is 8.7x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $384.95 on the company (compared to the current share price of $307.58).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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