Q4 2023 Earnings Summary
- Driveway Finance Corporation (DFC) is on track to achieve profitability later this year, which will contribute positively to Lithia & Driveway's earnings.
- The company is focusing on reducing SG&A expenses as a percentage of gross profit to below 55% in their operational businesses, aiming for below 50% through higher-margin adjacencies and operational improvements, which will enhance profitability.
- Lithia & Driveway remains committed to growth through acquisitions, targeting $2 billion to $4 billion in domestic U.S. automotive acquisitions annually, with several deals in the pipeline involving highly attractive franchises to drive future revenue and profitability growth.
- Rising consumer delinquency rates could negatively impact Lithia's financing arm, Driveway Finance Corporation (DFC). Consumers are under some degree of stress, and delinquency rates have either got right to or slightly above pre-pandemic levels for 30-day delinquency. This could lead to higher loan losses and affect DFC's profitability.
- Used car gross profits are significantly below historic levels, putting pressure on overall profitability. Used car gross is right now significantly below historic levels, and the company is facing challenges in procuring core products, creating pressure on gross profit margins. This pressure on margins is causing SG&A growth to outpace gross profit growth, leading to potential profitability concerns.
- Declining gross profit per unit (GPU) in new vehicles is expected to continue, further pressuring margins. The company achieved about a $150 drop per month in new GPU over the last quarter and expects a further $100 drop per month over the next quarter or two, normalizing by year-end. This decline could negatively impact profitability in the near term.
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Capital Allocation Shift
Q: How will your capital allocation strategy change?
A: We are prioritizing share buybacks when acquisition valuations are high, as buying back our shares at 7x earnings is more attractive than acquiring dealerships at 10x to 20x normalized earnings. Consequently, we have revised our M&A targets post-Pendragon to $2–$4 billion annually, allocating 50%–70% of capital to M&A and around 20% to buybacks. We aim to maintain leverage below 3x, providing flexibility for both M&A and buybacks. -
SG&A to Gross Profit Outlook
Q: How will SG&A expenses trend relative to gross profit?
A: We aim to achieve 55% SG&A to gross profit operationally within our core businesses, including Driveway and Lithia stores. Many of our stores already operate at this level in normalized times. The current challenge is the significantly lower used car gross profits, which pressure the SG&A ratio. As used car margins normalize, we expect to improve our SG&A performance. , -
Gross Profit Normalization Timeline
Q: When will new and used gross profits normalize?
A: We expect new vehicle gross profits to normalize by year-end, decreasing by about $100 per month over the next few quarters. Used vehicle margins are at historic lows due to intense inventory competition, but we anticipate a recovery beginning in the next few weeks as we enter the spring selling season. , -
Pinewood's Strategic Benefits
Q: How does Pinewood benefit your business?
A: Implementing the Pinewood DMS allows us to save about 50% on our tech stack costs while adding greater functionality. Pinewood enables us to integrate our multiple adjacencies and develop our ecosystem. This significant cost savings was a key reason why the Pendragon acquisition was strategically important to us. -
Driveway Investment Reduction
Q: What's the outlook on Driveway's investment?
A: Our Driveway burn rate decreased by 30%–35% year-over-year, with another 30%–35% reduction expected by year-end. Driveway is central to our ecosystem, aiming to offer 118 touchpoints throughout the customer lifecycle. We are focused on reducing burn rates while enhancing customer engagement and functionality. -
DFC Profitability Timeline
Q: When will DFC become profitable?
A: Driven Finance Corp (DFC) is on track to achieve profitability later this year. With improved credit quality and strong portfolio performance, DFC is expected to contribute an additional $0.20–$0.25 per share at a normalized steady-state position with a 20% penetration rate.