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    Lithia Motors Inc (LAD)

    Q3 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$304.54Last close (Oct 22, 2024)
    Post-Earnings Price$299.88Open (Oct 23, 2024)
    Price Change
    $-4.66(-1.53%)

    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.

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