Lithia Management Properly Addresses Concerns On Conference Call

| About: Lithia Motors, (LAD)

I think Alec Yagy of Morgan Stanley hit the nail on the head when he asked about when investors should finally start to see returns from all of the investments Lithia (NYSE:LAD) has been making.

And he brought up a really appropriate illustration, saying that even on the call management pointed out SG&A (selling general, and administrative expenses) are right at the company's five year historical average. But Lithia is 70% (at least in terms of annual revenues) bigger than they were 5-year ago. "Shouldn't there be some leverage? When do we see the benefits from the initiatives?" He appropriately pressed.

I share Mr. Yagy's concerns. And maybe a few years from now we will look back and say I was a sucker, but I really bought management's response to the question. . .

Sid DeBoer - CEO

In reality, we could take out the acquisition group and all the initiatives and fall right in line on SG&A based on the current volume of business. And that would be a silly sell out for the future of this company.

So we're not managing to the SG&A managing, we're managing to the costs it takes to grow this company into what we want it to be. And we're going to get these spurts in gross profit, which will bring them in line. But we're not going to cut back on SG&a in order to achieve an SG&A number right now that looks great. Because that is not the objective. The objective is to build the company that can be the best retailer of automobiles in America. And grow consistently.

We'd love to see a day when we're growing same store sales at 10% because of customer friendly environment we've got. And because of what we're able to do. And we can have lowest cost in the industry because of what we've centralized. But it's like building something bigger than you need right now to get by with than in order to produce some numbers in the short term, I'm sorry but this company is not going there.

Jeff DeBoer - CFO

And on the last call, if you remember Alec, we laid these initiatives out as a major cultural change for the company. That no other company in the industry is attempting to do. And when we get there we will be incredibly powerful as a retailer. And no one else will have even attempted these things. So you can not underestimate the depth of the changes and the evolutionary processes that we're attempting. It's very dramatic. I think people can underestimate that real easy.

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