Lithia Motors, Inc. (LAD) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed sentiment. Financial performance shows growth in used vehicle and aftersales revenue, but declining adjusted EBITDA and pressure on used GPUs indicate challenges. The Q&A reveals cautious optimism, with management avoiding specific SG&A targets and acknowledging market pressures. Positive elements include strategic acquisitions and shareholder returns, but uncertainties in market trends and SG&A costs balance the outlook, leading to a neutral prediction.
Key Financial Performance
Quarterly Revenue $9.2 billion, setting a new record for full year revenue of $37.6 billion, up 4% from 2024. The increase was driven by impressive used vehicle sales that greatly outpaced the market.
Adjusted Diluted EPS $6.74 for the quarter with full year adjusted EPS of $33.46, up 16% from 2024. The growth was attributed to operational leaders focusing on growing the top line and leveraging all aspects of the ecosystem.
Same-Store Revenues Essentially flat year-over-year, with gross profit down 1.2%. This reflects strong execution relative to the market.
Total Vehicle GPU $3,946, down $258 year-over-year. This decline aligns with industry-wide compression in both new and used vehicle margins.
New Vehicle Revenue Declined 6.6% on an 8.3% unit decline. This was due to softened industry demand and normalized supply. New vehicle GPU was $2,766, down $300 over last year.
Used Vehicle Revenue Up 6.1%, driven by 4.7% unit growth. Used GPU was $1,575, down $151 year-over-year, as the company increased market share considerably.
F&I Per Unit $1,874, up $10 year-over-year. This growth was achieved despite record DFC penetration, which shifted finance gross profit from F&I to the captive finance platform.
Aftersales Revenue Up 10.9% with gross profit up 9.8%, delivering a 57.3% gross margin. Growth was consistent across all categories, including customer-paid gross profit up 10.9% and warranty gross profit up 10.1%.
Driveway Finance Corporation (DFC) Pretax Income $23 million for Q4, bringing full year 2025 income to $75 million, an increase of $67 million from the prior year. Managed receivables portfolio grew to $4.8 billion, up 23% year-over-year.
Adjusted EBITDA $364.1 million in Q4, an 8.9% decrease year-over-year, primarily driven by lower net income.
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Operating Highlights
Used Vehicle Sales: Achieved record revenues driven by impressive used vehicle sales, with quarterly revenue of $9.2 billion and full-year revenue of $37.6 billion, up 4% from 2024.
Value Auto Platform: Strong momentum with 10.9% unit growth, focusing on affordable price points.
Digital Platforms: Partnership with Pinewood AI to pilot a dealer management system in North America, enhancing customer experience and operational efficiency.
Market Share: Increased market share in used vehicles, focusing on value autos and customer experience.
U.K. Operations: 10% increase in same-store gross profit and 53% increase in adjusted pretax income for the full year, capturing market share in high-margin aftersales business.
Acquisitions: Acquired $2.4 billion in expected annualized revenues, diversifying portfolio and expanding reach, including iconic luxury stores and Canadian footprint.
Operational Efficiency: Implemented dynamic pricing, reduced SG&A, and improved volume to enhance profitability.
Aftersales Growth: 10.9% growth in revenue and 9.8% growth in gross profit, with a 57.3% gross margin.
Technology Investments: Investments in AI-powered chatbots, customer service automation, and Pinewood AI to improve efficiency and customer experience.
Capital Allocation: Focused on share buybacks, retiring 11.4% of shares in 2025, and strategic acquisitions to strengthen network density and brand mix.
Driveway Finance Corporation (DFC): Scaled profitably with record income, expanding market share, and targeting 20% penetration for recurring income.
Long-term Growth Strategy: Targeting $2 billion to $4 billion of acquired revenue annually, focusing on high-return acquisitions and shareholder returns.
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Risk or Challenges
New Vehicle Revenue Decline: New vehicle revenue declined 6.6% on an 8.3% unit decline due to softened industry demand and normalized supply. Luxury brand revenue was down 12.7%, and domestic and import brands also experienced softness, particularly late in the quarter when sales promotions didn't materialize.
Gross Profit Compression: Total vehicle gross profit per unit (GPU) was down $258 year-over-year, reflecting industry-wide compression in both new and used vehicle margins. Used GPU was also down $151 year-over-year.
SG&A Deleverage: Adjusted SG&A as a percentage of gross profit increased to 71.4% from 66.3% a year ago, driven by normalizing GPUs and cost pressures in sales departments.
Regulatory and Labor Cost Increases in the U.K.: The U.K. operations faced challenging market conditions and regulatory labor cost increases, which required navigating to maintain profitability.
Inventory and Interest Costs: While inventory levels remained flat, lower interest costs drove $6.5 million in year-over-year floor plan interest. However, managing inventory and interest costs remains a challenge in a fluctuating market.
Margin Compression in Financing Operations: Driveway Finance Corporation (DFC) experienced margin compression despite strong growth, with a focus on maintaining disciplined credit quality and scaling profitability.
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Guidance & Outlook
Revenue Growth: The company targets $2 billion to $4 billion of acquired revenue annually in 2026 and beyond, aiming to strategically accelerate shareholder return.
Earnings Growth: The company expects compounding earnings growth in 2026 as industry conditions normalize, supported by operational efficiency, free cash flow generation, and disciplined capital deployment.
Digital and Technology Investments: Plans to pilot the Pinewood dealer management system in North American stores to enhance customer experiences and operational efficiency. Investments in AI-powered chatbots and customer service automation are expected to simplify workflows and improve productivity.
Driveway Finance Corporation (DFC) Expansion: DFC aims to scale towards a long-term 20% penetration target, converting more sales into recurring countercyclical income. The managed receivables portfolio is expected to grow beyond $5 billion, with improving margins and penetration growth.
Capital Allocation: The company will maintain a balanced approach, allocating free cash flows to share repurchases and accretive acquisitions, targeting high-quality acquisitions at 15% to 30% of revenue or 3 to 6x normalized EBITDA.
Market Share and Volume Growth: Focus on improving market share and volume to enhance profitability, leveraging the integrated ecosystem to build customer loyalty and increase the value of adjacencies.
Aftersales and Used Vehicle Growth: Plans to grow aftersales profitability and accelerate used vehicle growth, with a focus on high-margin adjacencies and customer retention.
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Shareholder Return Plan
Share Buyback Program: With our shares trading at a deeply discounted valuation, we accelerated repurchases this year, retiring 3.8% of our shares in the quarter and 11.4% of our shares in 2025 at prices that we should drive meaningful accretion with. We also strengthened our balance sheet through opportunistic refinancing while preserving capacity for our growth investments. Going forward, we'll maintain this balanced capital strategy between buybacks, selective M&A, organic investments and balance sheet strength.
Share Buyback Details: This quarter, we continued our commitment to focus on share buybacks while balancing accretive acquisitions. Our shares continue to trade significantly below intrinsic value, and we allocated approximately 40% of capital deployed to share repurchases, buying back 3.8% of outstanding shares at an average price of $314. In 2025, we repurchased 11.4% of our float at an average price of $314. We remain committed to allocating capital to opportunistic share repurchases while our shares trade at a discount to intrinsic value.
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Key Q&A
Q:How much of the growth in retention levels on the aftersales business is tied to extended service contracts?
A:Retention levels are up slightly year-over-year, typically around 8% or 9% better than the state average. 37% penetration on service contracts and just under 20% penetration in Lifetime Oil were noted, though full electrified vehicles are excluded from Lifetime Oil.
Q:Will the company shift its cash generation and shareholder return strategy in the next few years?
A:The strategy may shift if the stock price increases relative to acquisitions. Currently, the company sees value in buying shares as an easy return for shareholders and plans to continue this approach.
Q:What drove the higher SG&A as a percentage of GP in Q4?
A:The quarter weakened with a mediocre close in November and lower-than-expected sales in December. Increased marketing budgets to drive volume did not materialize, leading to an uptick in SG&A. Same-store SG&A as a percentage of gross profit was 71.2%, with differences between the U.K. and North America.
Q:What is the outlook for SG&A as a percentage of GP in the future?
A:Management avoided providing a specific target for 2026 but emphasized that SG&A is influenced by GPUs, volume, and cost adjustments. They are actively working to optimize cost structures.
Q:What are the demand trends in Q1, and how is the company aligning its spending?
A:Trends in Q1 are similar to the latter months of Q4, with some weather impacts in the Northeast. The company hopes for a rebound in March and is adjusting spending to align with these trends.
Q:What is the timeline for achieving the medium-term financing income target of $150 million to $200 million?
A:The company expects to achieve this target within a couple of years, with a 20%+ CAGR in financing income. January penetration rates were a record 17.5%, and the company sees a clear path to 20% penetration.
Q:What is the outlook for used GPUs and the factors causing pressure?
A:Used GPUs are under pressure due to pricing inefficiencies, particularly in older and low-mileage cars. Management is working on improving pricing strategies and expects to see improvements in 2026.
Q:What is driving the growth in aftersales parts and service?
A:Growth is driven by building customer relationships and making processes more collaborative. Management expects mid-single-digit growth in the near term, despite harder comps due to recalls.
Q:What is the outlook for new GPUs in 2026?
A:Management believes new GPUs are stabilizing, with manufacturers controlling inventory more effectively. They are focusing on used cars to balance any potential weakness in new GPUs.
Q:What are the challenges and opportunities with Chinese brands in the U.S. market?
A:The company is cautious about adopting Chinese brands in the U.S. due to the lack of service and parts business initially. They have growing relationships with Chinese manufacturers in the U.K., where dual franchising is allowed.
Q:What is the company's capability in servicing advanced sensor suites and EVs?
A:The company benefits from proprietary technology in advanced sensor suites, which brings customers back to dealerships. They aim to create convenience and transparency for customers.
Q:How has the company adjusted underwriting standards in auto credit?
A:Underwriting standards have been tightened, with improvements in average FICO, payment-to-income percentages, and front-end LTV percentages. Delinquency trends are down 36 basis points year-over-year.
Q:What is the outlook for M&A activity in 2026?
A:The company expects a normal year with $2 billion to $4 billion in acquired revenue, depending on stock price and acquisition opportunities.
Q:Review of Unclear Management Responses
A:Management avoided providing a specific target for SG&A as a percentage of GP in 2026, citing the difficulty in predicting due to volume pressures and market conditions.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI return
Aftersales margin
Auto Easy
CEO Senior
CEO record
Conference Instructions
DFC business
DFC increase
DFC penetration
DFC platform
Director Finance
Driveway Conference
Easy ops
FI end
FI finance
FI product
Finance duty
Finance record
GPU brand
GPU compression
Pinewood
SGA
Senior Director
Tina
aftersales profitability
day inventory
decade
experience technology
footprint
import
luxury
reach
resilience
sale department
share valuation
system
technology investment
throughput
vehicle GPU
LAD Transcript
Lithia Motors, Inc. (LAD) Q4 2025 Earnings Call Transcript
Unknown2-11
The earnings call presents a mixed sentiment. Financial performance shows growth in used vehicle and aftersales revenue, but declining adjusted EBITDA and pressure on used GPUs indicate challenges. The Q&A reveals cautious optimism, with management avoiding specific SG&A targets and acknowledging market pressures. Positive elements include strategic acquisitions and shareholder returns, but uncertainties in market trends and SG&A costs balance the outlook, leading to a neutral prediction.
Lithia Motors, Inc. (LAD) Q3 2025 Earnings Call Transcript
Positive10-22
The earnings call indicates strong financial metrics with $174 million in free cash flow, significant growth in used car sales, and an ambitious M&A strategy. Despite minor challenges, such as the U.K. market impact and EV sales drop, management's optimistic guidance on BEV sales and profitability, coupled with strategic acquisitions and share buybacks, suggests a positive outlook. The Q&A highlights resilience against subprime market turmoil and proactive measures in the U.K., reinforcing a positive sentiment.
Lithia Motors, Inc. (LAD) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call summary and Q&A highlight strong revenue growth, strategic acquisitions, and a focus on shareholder returns through buybacks. Despite some uncertainties in SG&A improvements and organic performance recovery, the company exhibits confidence in its growth trajectory and long-term strategy. The positive aspects, such as record revenue, disciplined M&A, and significant buyback allocation, outweigh the concerns, suggesting a positive sentiment and likely stock price increase in the short term.
Lithia Motors, Inc. (NYSE:LAD) Q1 2025 Earnings Call Transcript
Positive4-24
The earnings call summary reflects strong financial performance with record revenues, EPS growth, and improved gross profit. The Q&A section revealed that management is confident in inventory management and the ability to adapt to market changes, despite some tariff concerns. The commitment to share repurchases and disciplined cost management further boosts sentiment. While there are some uncertainties regarding tariffs and regional performance, the overall outlook remains positive, suggesting a likely stock price increase between 2% to 8% over the next two weeks.
LAD Report
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