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    Lithia Motors Inc (LAD)

    Business Description

    Lithia and Driveway (NYSE: LAD) is a leading global automotive retailer that operates a network of physical locations and e-commerce platforms to serve customers throughout the vehicle ownership lifecycle. The company sells new and used vehicles, provides financing and insurance solutions, and offers repair and maintenance services. With operations spanning the U.S., U.K., and Canada, LAD represents 52 automotive brands and focuses on delivering a seamless, modernized retail experience.

    1. Vehicle Operations - Offers a wide range of new and used vehicles, as well as services like automotive repair, maintenance, and fleet management.

      • New Vehicle Sales - Provides a diverse selection of vehicles from global carmakers.
      • Used Vehicle Sales - Offers pre-owned vehicles to meet varying customer needs.
      • Repair and Maintenance Services - Delivers comprehensive automotive care to support the entire vehicle ownership lifecycle.
      • Fleet Management - Manages vehicle fleets for businesses and organizations.

    2. Financing Operations - Provides financing and insurance products through its captive finance division, Driveway Finance Corporation (DFC), enhancing customer access to loans, leases, and protection plans.

    3. E-commerce Platforms - Operates proprietary digital platforms, including Driveway and GreenCars, to offer a seamless online and physical retail experience for vehicle purchases and related services.

    Q3 2024 Summary

    Initial Price$252.14July 1, 2024
    Final Price$317.27October 1, 2024
    Price Change$65.13
    % Change+25.83%

    What went well

    • Lithia & Driveway has exceeded its cost reduction targets, achieving $200 million in savings, surpassing the initial goal of $150 million. The organization now aims for over $300 million in total cost reductions, with further efficiencies expected in SG&A through productivity increases, marketing, vendor contracts, and interest cost reductions. This aggressive cost management enhances margins and profitability.
    • Significant progress in the e-commerce platforms Driveway and GreenCars, with expenses reduced to optimal levels and burn rate down 40% year-over-year. Customer satisfaction is high, with almost 9 out of every 10 customers giving a 5-star rating. The company sees potential to capture more market share, leveraging the support of physical infrastructure and stores to scale the online sales channel. This indicates strong growth prospects in their digital initiatives.
    • The integration of Pendragon in the UK is progressing positively, with operational efficiencies being realized. The team performed better than expected, and significant synergies are anticipated from network optimization, including the divestment or closure of 40 to 50 assets, streamlining operations. Additionally, there has been an improvement in F&I, with per-unit performance increasing from $824 to $903, demonstrating potential for increased profitability in international operations.

    What went wrong

    • Online monthly units for LAD's Driveway and GreenCars platforms were flat quarter-over-quarter, indicating potential challenges in scaling their online sales channels. Despite a 40% reduction in burn rate, the company is still experiencing burn rates, implying these online businesses are not yet profitable.
    • Increased signs of delinquency and stress in the prime portfolio within their financing operations may impact future profitability. The company acknowledges seeing some signs of increase in delinquency and stress in the prime portfolio.
    • Gross profit per unit (GPU) on new vehicles is declining sequentially, and the company acknowledges that margins are normalizing. There is a reliance on manufacturer incentives to maintain margins, which may not increase as hoped.

    Q&A Summary

    1. Cost-Cutting Exceeding Targets
      Q: Why did cost-cutting exceed targets, and is the additional $100M achievable?
      A: The company surpassed its initial cost-cutting target of $150 million, achieving $200 million due to quick organizational response. Management now sees potential for over $300 million in savings, with an additional $100 million next year. About 25% of the remaining savings will come from further SG&A reductions, and 75% from interest cost savings on flooring.

    2. SG&A Guidance and Margins
      Q: Will SG&A expenses decrease further in Q4, and how will margins be affected?
      A: Most of the initial $200 million savings were realized in Q3, resulting in a 200 basis point sequential drop in SG&A as a percentage of gross profit. However, due to seasonality and snowbelt exposure, SG&A may increase slightly in Q4 and Q1, potentially ranging between 66.5% to 67.5%.

    3. Share Buybacks and Capital Allocation
      Q: Could share buybacks exceed the 30–40% cash flow target?
      A: The company is open to reallocating more towards share buybacks if the share price remains depressed. While they have already repurchased 3.6% of outstanding shares, investing $273 million year-to-date , they see a greater likelihood in the short term to buy back more shares, potentially exceeding the 30–40% target.

    4. Impact of Stellantis Incentives
      Q: How are Stellantis incentives affecting sales and pricing?
      A: Stellantis has been challenging, with sales down mid-single digits in September. Incentives are short-term and tactical, impacting wholesale and retail dynamics. Industry incentives increased from 6.4% to 7.3% of MSRP in Q3. Despite this, ASPs are holding up reasonably, with sequential declines of $700–$800 but still up overall.

    5. Used Car GPU Outlook
      Q: What is the outlook for used car gross profit per unit?
      A: The company's used GPU is about $300 below pre-COVID levels. As supply returns over the next couple of years, they expect a return to normalized GPUs, potentially increasing by a few hundred dollars. They anticipate that their normalized used GPU should be a couple hundred dollars higher than current levels.

    6. Pendragon Acquisition Integration
      Q: Is there opportunity for efficiency gains with Pendragon acquisition?
      A: Yes, similar opportunities exist. They plan to divest, combine, or close 40 to 50 of the 160 acquired assets, with most completed by end of November. F&I improvements were notable, with F&I per unit increasing from $824 to $903 in the quarter.

    7. Inventory Strategy and Used Vehicles
      Q: What is the strategy to manage rising used inventory days' supply?
      A: Sourcing core models remains challenging due to missing 10–12 million vehicles from industry SAAR compared to pre-COVID. They derive 54% of inventory from trade-ins, maintaining a strong position. Value auto segment grew 14.4%, increasing to 16% of mix.

    8. Online Sales and Omnichannel Strategy
      Q: How is the online sales channel evolving amidst flat monthly units?
      A: They have reduced advertising burn rates by 40% while maintaining flat online sales. Focus is on improving effectiveness within the funnel, with potential to scale when appropriate. Positive customer feedback with almost 9 out of 10 customers giving a 5-star rating.

    9. Aftersales Margin and BEV Impact
      Q: What's driving strong aftersales margins, and will they be sustainable?
      A: Aftersales margins are currently at 56%, above the long-term target of 51–54%. As the mix shifts towards parts with lower margins due to sustainable vehicles, margins may drop slightly. However, overall same-store sales and gross profit should grow, with tailwinds expected for at least a decade.

    10. Interest Rate Sensitivity
      Q: How will lower interest rates impact the business?
      A: For every 100 basis points reduction in interest rates, the company expects an EPS impact of approximately $0.70. Lower rates will turn current headwinds into tailwinds, positively affecting various aspects like consumer financing and floorplan costs.

    11. New Vehicle GPU Trends
      Q: What is the outlook for new vehicle gross profit per unit?
      A: New vehicle GPU is expected to continue normalizing, with potential further declines of $600 per unit. Margins have been stabilizing, and the soft landing is positive. The company believes they are currently $400–$500 above normalized levels.

    12. Recall Impact on Aftersales
      Q: How do recalls and stop-sales affect the business?
      A: Recalls are positive, generating significant aftersales profitability. Examples include full engine replacements for certain Korean and Japanese models, which will backlog work for months or years. While vehicle sales are deferred, the aftersales business benefits substantially.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    New Vehicle Retail3,278.94,014.73,885.83,974.815,154.24,014.14,403.74,430.0
    Used Vehicle Retail2,227.52,455.12,620.22,267.49,570.22,800.82,986.02,843.3
    - Used Vehicle Wholesale356.7403.9316.1248.61,325.3337.7289.5390.9
    Finance and Insurance318.3337.9349.4331.41,337.0340.6360.9360.4
    Service, Body, and Parts736.3804.4838.0818.43,197.1912.8950.71,012.8
    Fleet and Other56.195.5267.539.4458.5155.8241.0183.6
    Total Revenue6,973.88,111.58,277.07,6831,042.38,561.89,231.89,221.0
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014 [N/A]Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Domestic--------
    Import--------
    Luxury--------
    Corporate and Other--------
    Total Revenue6,973.8-8,277.0-31,042.38,561.8--
    KPIs - Metric (Unit)FY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Vehicle Units Financed (Units)20,92817,96716,784--17,21919,03017,755
    Total Penetration Rate (%)14.3%12.1%9.7%11.0%-11.7%9.3%11.6%
    Weighted Average Contract Rate (%)9.0%9.5%10.0%9.6%-10.2%9.9%9.8%
    Weighted Average Credit Score731730732732--738-
    Weighted Average FE LTV (%)95.9%95.6%95.1%95.5%-95.2%95.6%95.6%
    Allowance for Loan Losses (% of Receivables)3.1%3.2%3.2%3.2%-3.2%3.2%3.2%
    Net Credit Losses ($ Million)13.413.116.5--19.315.127.0
    Annualized Net Credit Losses (% of Receivables)0.6%2.0%2.3%--2.4%1.8%3.0%
    Past Due Accounts (% of Receivables)3.7%4.1%4.1%4.6%-3.8%4.3%5.1%
    Average Recovery Rate (%)53.9%49.8%43.2%-----
    Average Selling Price ($)48,36448,05847,279--46,84847,60346,649
    Average Gross Profit ($)5,5855,7105,218--4,3464,3514,271

    Executive Team

    NamePositionStart DateShort Bio
    Bryan B. DeBoerPresident and CEO2012Joined LAD in 1989, progressing through roles like Finance Manager, General Manager, and COO before becoming CEO in 2012.
    Christopher S. HolzshuExecutive Vice President2003Joined LAD in 2003 after KPMG LLP. Held roles as CFO and CHRO before becoming COO in 2019.
    Tina H. MillerSenior Vice President and CFOAugust 2019Joined LAD in 2005, promoted to Corporate Controller in 2015, VP in 2018, and CFO in 2019.
    Scott A. HillierSenior Vice President of Operations2008Joined LAD in 1986, promoted to VP of HR in 2003, and SVP of Operations in 2008.
    George N. HinesSenior Vice President and CITOJuly 2019Joined LAD in 2019 after leadership roles at Massage Envy and Viad Corp. Brings global experience and expertise in innovation.
    Adam ChamberlainExecutive Vice President and COOAugust 1, 2024 (expected)Joined LAD in 2022 as CCO and Regional President. Promoted to COO effective August 1, 2024.
    Gary GlandonSenior Vice President and CPOFebruary 2021Joined LAD in 2021 with over 30 years of HR experience. Focuses on talent development and culture.
    David G. StorkSenior Vice President and CAO2021Joined LAD as CLO in 2018, promoted to CAO in 2021. Previously held legal and compliance roles at JELD-WEN and Krause Gentle.
    Dianna du PreezChief Customer Officer2023Joined LAD in 2023 as VP of Driveway Operations. Previously VP of Customer Service at Mercedes-Benz USA with 30+ years of experience.
    Cassandra McKinneyBoard Member (Audit and Compensation Committees)July 1, 2024 (expected)Joined LAD's Board in 2024, overseeing Audit and Compensation Committees. EVP at Comerica Bank with 30+ years in banking.

    Questions to Ask Management

    1. Regarding the decrease in used vehicle units sold by 9.6% year-over-year and the increase in days' supply to 68 days, what specific actions are you taking to address inventory levels and improve used vehicle sales, and how confident are you in your ability to execute on these initiatives? ,

    2. New vehicle gross profit per unit declined sequentially by $241 to $3,188; can you explain the factors behind this decline and whether you expect further pressure on new vehicle margins in the coming quarters? ,

    3. You have exceeded your initial $150 million cost-saving target by reaching $200 million, and anticipate another $100 million in savings; what gives you confidence in achieving additional savings without impacting operational efficiency, and could this aggressive cost-cutting affect your growth plans? ,

    4. Aftersales gross margins reached 56%, above your long-term target of 51%-54%; what is driving these higher margins, and how sustainable are they given the expected mix shift towards parts sales with new propulsion systems? ,

    5. With online monthly units flat quarter-over-quarter and a 40% reduction in burn rate for Driveway and GreenCars, how do you plan to accelerate growth in your e-commerce channels, and are you concerned about increased competition from both offline and online used vehicle retailers? ,

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateJune 4, 2024
    End Date/DurationNo expiration date
    Total additional amount$350 million
    Remaining authorization amount$560.9 million as of September 30, 2024
    DetailsPart of capital allocation strategy to balance growth and returns for shareholders

    Past Guidance

    Here is a summary of the guidance provided by Lithia & Driveway (LAD) in their last four earnings calls, including the issued period, guided period, and exhaustive list of metrics:

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      1. Normalized Combined Vehicle GPU: Expected to normalize to $4,200 to $4,500, including F&I.
      2. SG&A as a Percentage of Gross Profit: Targeting the mid-50% range.
      3. Annual Acquisition Revenues: Estimated at $2 billion to $4 billion per year.
      4. Share Buybacks: 30% to 40% of free cash flows to be allocated to share repurchases.
      5. DFC Profitability: Expected to maintain consistent profitability, with 2024 as a turning point and continued growth in 2025.
      6. Cost Savings: Achieved $200 million in annualized cost savings, with potential for an additional $100 million in 2025.
      7. New Vehicle Inventory Reduction: Targeting a reduction of $540 million.
      8. EPS Growth Target: Aiming for $2 of EPS for every $1 billion in revenue in a normalized environment.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Midterm (2-4 years) and Long-term (5-8 years)
    • Guidance:
      1. EPS Target: $2 in EPS per $1 billion in revenue.
      2. Revenue Growth: Acquired $5.6 billion in annualized revenues in 2024; future acquisitions expected to add $4 billion per year.
      3. Market Share: Aiming for a blended U.S. market share of 5%, up from 1.1%.
      4. Financing Operations: Achieved profitability in Q2 and expected to continue consistent growth.
      5. SG&A as a Percentage of Gross Profit: Targeting the mid-50% range.
      6. Capital Allocation: Adjusted to balance acquisitions and share buybacks; repurchased $202 million (2.9% of shares) in Q2.
      7. EPS Growth: On pace for nearly a 50% sequential increase in EPS.
      8. Cost Savings: A 60-day plan to achieve $150 million in annualized SG&A cost savings, with potential to double by year-end.
      9. Leverage: Targeting leverage below 3x, with net leverage at 2.3x.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: N/A (No specific period mentioned)
    • Guidance:
      1. Acquisitions and Revenue Growth: Future annual acquired revenues expected at $2 billion to $4 billion.
      2. EPS to Revenue Ratio: Targeting $2 in EPS per $1 billion in revenue.
      3. Market Share: Aiming for a 5% blended U.S. market share, up from 1.2%.
      4. Financing Operations: DFC expected to achieve consistent profitability in the latter half of 2024.
      5. SG&A as a Percentage of Gross Profit: Long-term target in the mid-50% range.
      6. Vehicle Gross Profit Normalization: Combined GPUs expected to normalize between $4,300 and $4,500 per unit.
      7. Digital Transactions: Grew to over 40,000 in Q1, up 32% year-over-year.
      8. U.K. Business Impact: U.K. operations represent 18% of revenue mix and 13% of gross profit mix.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: N/A (No specific period mentioned)
    • Guidance:
      1. Revenue Growth and Market Share:
        • Targeting a 5% blended U.S. market share.
        • Revised M&A targets to $2 billion to $4 billion in annual acquired revenues, aiming for mid-$40 billion revenue by 2025.
      2. Profitability Targets:
        • Long-term target of $2 in EPS per $1 billion in revenue.
        • SG&A as a percentage of gross profit to fall below 55% in store operations and below 50% with adjacencies.
      3. Same-Store Sales Growth:
        • Low to mid-single-digit growth overall.
        • Mid- to high single-digit growth for new vehicles; flat year-over-year for used vehicles.
      4. New and Used Vehicle GPU:
        • New vehicle GPUs expected to normalize, declining by $100 per month in Q1 and Q2 2024, reaching normalized levels by year-end.
        • Steady-state normalized GPU of $4,500 per deal.
      5. DFC Profitability: Expected in the latter half of 2024.
      6. Digital Transactions: Grew 27% year-over-year in Q4 2023.
      7. Sustainable Vehicle Sales: Accounted for 16% of new vehicle sales, up from 11% in the prior year.
      8. Capital Allocation:
        • 65% of capital toward acquisitions, 25% toward internal investments, and 10% toward shareholder returns.
        • Repurchased 143,000 shares at an average price of $241 per share.
      9. Pendragon Acquisition: Adds over $4 billion in revenue and expands U.K. presence.
      10. Pinewood DMS Expansion: Planned for North America in 2025.

    This table summarizes the issued and guided periods alongside the exhaustive guidance provided in each earnings call.