MEDFORD, Ore. -

This past October marked the first anniversary of Lithia Motor’s purchase of DCH Auto Group.

And if the company’s fourth-quarter and full-year 2015 results are any indictor, the combination is working out well for Lithia. In fact, Lithia boosted same-store used sales in Q4, which included the DCH stores, by 12 percent.

The dealer group also made its first two DCH store purchases to kick off 2016. In January, Lithia purchased Riverside Subaru of Riverside, Calif., which it said would be renamed DCH Subaru of Riverside. And earlier this month, the company purchased Ira Toyota/Scion of Milford, Mass., and the store will be renamed DCH Toyota/Scion of Milford.

"With the Subaru and Toyota stores, we are excited to have acquired our first stores within the DCH metropolitan strategy on both the East Coast and the West Coast," said Bryan DeBoer, president and chief executive officer at Lithia.

During the company’s conference call to discuss fourth quarter and full-year 2015 results, DeBoer outlined DCH progress and strategy, and Wall Street investors were very interested in this portion of the dealer group’s business.  

"October 1 marked the first anniversary of our combination with DCH. We are pleased to report that we have fully integrated and realized most cost synergies,” said DeBoer."Their teams are continuing to expand their entrepreneurial approach to operating in metro markets, as they attack market share and improve earnings. All numbers from this point forward will be on a same-store basis, which again will include DCH results for the quarter."

DeBoer said the dealership was happy with its total gross margin rates, even in light of DCH’s slightly different strategy than other Lithia stores.

"Our total gross margin was 14.7 percent (in Q4) compared to 14.6 percent from the same period last year, an increase of 10 basis points, which is an accomplishment considering the DCH volume-based strategy," he said.

As far as the acquisition market goes, DeBoer shared DCH is pursuing a metropolitan strategy as many new store candidates have been identified.

“The acquisition market remains active with a significant number of stores for sale. With Lithia targeting exclusive markets and DCH pursuing a metropolitan strategy, we have identified more than 2,600 stores nationwide as candidates,” he said. “We remain confident that we will find accretive purchases in the near-term to increase our portfolio, and continue to expand our footprint.”

In discussing opportunities for DCH during the call, DeBoer praised DCH president George Liang and his team.

“In terms of other accretion in DCH and other opportunities, I think, George Liang and their teams have developed and grown pretty quickly. They've actually got most of the synergies that they expected,” said DeBoer. “And I think now it's more of a function of the opportunities to now move towards what Lithia's margins are.”

DeBoer said the management teams believes DCH was just over the 2 percent pre-tax margin in the quarter, while Lithia was about at a 3.7 to 3.8 percent margin.

“So, together, we think that that other 1.5 percent or so is what the opportunity remains for DCH to extract,” said DeBoer. “What we noticed pretty early on is the amount of gross profit and volume that are generated in the DCH stores is vastly different than Lithia stores.”

And SG&A expenses at DCH stores have been a little higher than Lithia’s traditionally are, and management is looking to close that gap. For Q4 overall, Lithia SG&A expense as a percentage of gross profit was 68.2 percent. For the full year, adjusted SG&A expenses as a percentage of gross profit sat at 67.9 percent. And management said efficiently operating the dealer group’s stores was one of the company’s primary objectives over the course of 2015.

“So, the ability to play with expenses is pretty large because the grosses are so large (at DCH) and they're such a large quantity, so they're doing a great job of finding new opportunities. We spent the last two weeks down in the West Coast stores in Los Angeles,” said DeBoer. “And their team is motivated, they're hungry, and they're looking for the next opportunity, and I think that's really to extract that extra SG&A out of the stores.”

DeBoer estimated DCH’s SG&A was in the 72 to 73 percentile, “as a percentage of growth.” According to the CEO, Lithia sits around the 66 percentile.

And although expenses are still a bit higher than in traditional Lithia stores, DeBoer is pleased with the progression so far.

 “Sixteen months ago, when we combined, and I think, if you look back at our references, DCH was at mid-80s percentile, and thought that it would be a real struggle even to get to maybe what we would call the more competitive metro-based peer group, which was really in the low to mid-70s percentile,” said DeBoer. “We were there in one year, and we assumed it may take three years to five years.”

Now, Lithia management is trying to drive the DCH stores towards an equivalent SG&A rate as Lithia, "which is another 600 basis points drop in SG&A," DeBoer said.

"I'm starting to believe, and I think our teams are starting to believe that it (DCH) may even be able to challenge things below the Lithia because of that substantial volume and growth that's generated in both service and parts and new- and used-vehicle sales," DeBoer said.

DCH is defined by their “metro strategy,” said DeBoer, which is somewhat different than most similar approaches and may have an impact on lowering SG&A expenses in the future.

"They own 71 percent of their facilities, which allows for static rents than in the past,” said DeBoer. “We did have to remodel a number of stores, which increased rent a little bit, but as a whole, their rent factors are actually about the same as Lithia."

When looking at opportunities for the future of DCH stores, management thinks the road looks bright due in part to the “stability” of the line’s employees.

DeBoer said many of the stores tout “exceptional tenure” for metro markets; in fact DCH GMs had been with their stores at the time of the Lithia purchase for an average of 10 years.

“Now, George and their teams have made some upgrades over the past year. But, ultimately, when people come to DCH or Lithia for that matter, they come and they seem to stay because of the transparency in our models and the simplicity of our performance metrics,” said DeBoer. “And I think that's a uniqueness that allows people to really thrive in our environments.”

All that said, Wall Street investors wanted to know how quickly the dealer group management expected to close the SG&A gap between DCH and the core Lithia stores.

 “I wish I knew. What I do know is that we challenge them on a daily and monthly basis. They seem to be moving quicker than we ever expected on this stuff. And I think as long as we can keep them feeling that there's opportunities and that they haven't reached their limitations, which is what we've had to do in the Lithia division as well,” said DeBoer.

“It's one of our values of continuous improvement. They sure seem like they live that and they remain humble and eyes are wide open. So to me that's the making and the formula for continuing to grow and capture opportunities as quick as humanly possible,” he said.