More than just the recent decline in the Manheim Used Vehicle Index has Lithia Motors upbeat about supply availability, especially coming on the heels of double-digit gross profit rises within what dealer group executives classify as their core used-vehicle sales segment as well as their certified pre-owned division.

“We’re finally getting the cars that we need, and more importantly able to be more discerning in our choices of those cars to find the demand cars, which is where is where we build our gross profit,” Lithia president and chief executive officer Bryan DeBoer said last week when the company hosted its quarterly conference call and shared its first-quarter financial statement.

Perhaps what dragged Lithia’s overall used-vehicle gross down year-over-year was a softening of the performance within its value auto segment. These units are usually higher-mileage, older vehicles Lithia often turns with contracts associated with subprime buyers.

When touching on the supply of units that might fit within its value auto segment, DeBoer acknowledged, “It’s still tight. They’re still difficult to get.”

While the Manheim Index has dipped three months in a row, investment analysts wondered if that’s an automatic trigger for improved used-vehicle department performance.

“I think the softening of Manheim index is a positive thing that usually indicates that supply is loosening. I believe our stores are feeling that as well,” DeBoer said.

Lithia also remains steadfast in its goal toward achieving an average of 75 used-vehicle retail sales at each of its stores. The dealer group took another step toward that goal in Q1, climbing from 56 to 64, as Lithia turned a total of 26,531 used vehicles.

“I think we’ve seen some nice increases in a dozen stores or so,” DeBoer said. “We see more than ever that it’s people, inventory and the ability to attract the customers that are looking for those vehicles, and I think that will continue.”

Update on M&A activity

Wall Street observers again wanted to know if Lithia would continue to expand its store footprint, which stood at 138 dealerships when the first quarter closed.

Senior vice president and chief financial officer Chris Holzshu pointed out that Lithia has acquired eight stores during the past 12 months. “That’s the pace that I’m pretty confident that we can maintain,” Holzshu said.

Lithia remains hesitant when discussing if another acquisition to the scale of DCH Auto could be on its horizon. DeBoer didn’t mention the groups by name but perhaps referenced the deal that recently brought together Holman Automotive and Kuni Automotive.

“The acquisition market continues to build momentum; there is no question about it,” DeBoer said. “The prices are, however, pretty steep, and we are pretty disciplined on what our hurdle rates are on acquisitions.

“I think that we’ll see in the coming quarters and years opportunities still,” he continued. “I wouldn’t say that it’s going to slow, but I do think that we’re pretty picky. I mean again when we look at acquisitions, we look at approximately 10 to 15 acquisitions for every one that we’re able to buy.

“In terms of large groups, there is a lot of activity on those currently,” DeBoer went on to say. “I think many of you saw a large Northwest group that announced a couple of weeks ago. That was obviously … it appeared pretty pricey. It’s a wonderful group but it just doesn’t fit our (return on equity) thresholds when they are performing at a high level.”

Record F&I performance

Lithia established a new F&I department performance record during Q1 as gross profit per unit generated in the finance office came in at $1,290, representing a 9.5-percent rise year-over-year.

“As you know we've lagged our peer group for the last several quarters in F&I performance,” Holzshu said. “What we really focused on was three primary things. People and make sure we have the right people with the right pay plans. We have the right products and we have the right process. So we've been focusing on all three of those areas.

“We knew that we had the incremental opportunity there and we feel like right now we’re finally starting to see that execution happen and we feel confident that we can continue to do that for the remainder of the year,” he went on to say.