Lithia Stumbles

Lithia Motors Inc. is losing money for the first time since the dealership group went public in 1996. The losses raise questions about the company's unorthodox business model and sales practices.

Lithia, the nation's seventh-largest auto retailer, faces other problems. The Medford, Ore., company fired a top sales executive last week. And it acknowledges what it calls "potential reporting irregularities" related to sales at three of its 110 dealerships.

Reached last week by Automotive News, Lithia CEO Sid DeBoer declined an interview request.

Industry analysts say they expect Lithia to survive the turmoil. Some believe the company ultimately will thrive as an innovator. But in the short term, they warn, a weak economy, Lithia's heavy reliance on Detroit 3 franchises and its sales policies such as no-haggle pricing likely will mean a bumpy ride.

"There's a lot of change occurring at Lithia," says Rick Nelson, an analyst for Stephens Inc. in Chicago. "Lithia is going the way the industry is heading. They're just moving faster, which causes disruptions."

In the fourth quarter of 2007, Lithia reported a net loss of $5.1 million on revenue of $705.8 million — its first quarterly loss as a public company. In the year-ago quarter, Lithia had net income of $5.5 million on revenue of $709.0 million.

'Franchise impairments'

Lithia took a $1.8 million charge against earnings to reflect "franchise impairments" related to possible misreporting of retail sales. The company did not identify the three dealerships it is investigating, other than to say they sell Ford, Chevrolet and Hyundai vehicles.

DeBoer told analysts Feb. 20 he did not expect the company's review of the sales reporting to result in a substantial added charge.

But the incident "has to be embarrassing for Lithia," says Sheldon Sandler, managing partner of Bel Air Partners LLC, a Skillman, N.J., investment firm that specializes in auto retail.

Lithia is known for its standardized procedures and operating efficiency, Sandler says.

In a Feb. 21 research report on Lithia, Wachovia auto analyst Richard Kwas asked: "What's really going on here? The substantial loss was a big surprise."

Last week, Lithia told the Securities and Exchange Commission it had fired Don Jones Jr., formerly its senior vice president of retail operations. Lithia President Bryan DeBoer, a son of Sid DeBoer, has assumed Jones' duties, the company said.

In response to an Automotive News inquiry, Sid DeBoer refused to say whether Jones' departure was related to the sales reporting problem.

Alex Hart, Lithia's former director of Internet operations, says Jones' exit had been in the works for a long time. Hart says the company's shift to centralized operations, online sales and no-haggle pricing were a culture shock for Jones, who joined Lithia in 1989 as general sales manager of a Dodge dealership.

Jones could not be reached for comment last week.

Lithia is the only public auto retailer that operates largely in small markets. The subprime housing mess and credit crunch have taken a toll on many of the 15 states in which the company does business — notably California, Nevada, Oregon and Colorado.

Different vision

Lithia also has a high concentration of domestic dealerships, while its competitors have shifted their product mix to emphasize import-brand and luxury franchises. Nearly half of Lithia's 193 franchises are Chrysler, Dodge or Jeep.

"We see Lithia to a certain extent reflecting Chrysler's problems," Sandler says.

DeBoer told analysts during last month's conference call that he has faith in Chrysler LLC's turnaround strategy. He conceded that Lithia needs to add higher-volume import brands but said Toyota and Honda dealerships remain expensive.

He said he hopes the slumping economy will drive down acquisition costs.

At the same time, Lithia is rolling out its "Assured Pricing" strategy companywide. The program, based on no-haggle pricing, is requiring Lithia to change how it pays salespeople, from traditional commissions to compensation based on sales volume, DeBoer said.

DeBoer told analysts Lithia continues to centralize operations and streamline its staffing to improve productivity. Those changes have an immediate cost, he said.

"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," DeBoer said. "These changes are critical to our long-term success."