Lithia Motors, Inc. Q2 FY2025 earnings call

• Strong earnings growth: 29% increase in EPS year-over-year, record revenue of $9.6 billion, 4% year-over-year same-store revenue increase, diluted EPS of $9.87 and adjusted EPS of $10.24, up 25% and 30% year-over-year respectively. • Adjacencies contribution: Adjacencies now meaningfully contribute to earnings and consumer engagement, with businesses like financing operations and aftersales expanding unit economics. • SG&A efforts: Adjusted SG&A as a percentage of gross profit was 67.7%, down from 67.9% a year ago; pushing levers to reclaim operating margin through productivity, tech stack optimization, vendor contract renegotiations, and automating back-office workflows. • DFC scaling: DFC continues to scale profitably, with financing op income more than doubling year-over-year, originations of $731 million, and U.S. penetration increasing to 15%. • Acquisitions and growth: Strategic acquisitions remain a core pillar, targeting $2 billion to $4 billion in annual acquired revenue, with 95% success rate on acquisitions.

In the second quarter, Lithia & Driveway delivered record revenue of $9.6 billion. Key segments: New vehicle units increased 2% year-over-year with front-end GPUs at $3175. Used vehicle units increased 4% year-over-year, with value auto sales showing 50% same-store sales improvement. Aftersales was a key earnings driver, contributing more than 60% of the company's net income, with same-store aftersales gross profit growing 8.5% year-over-year and gross profit margin widening to 57.8%. Financing operations saw income more than double year-over-year from $7 million to $20 million, supported by a 50 basis point expansion in net interest margin to 4.6%.

• Targets: Long-term target of 55% SG&A as a percentage of gross profit; aim to acquire $2 billion to $4 billion in revenue annually. • Share buybacks: Allocating up to 50% of free cash flow to share buybacks. • DFC growth: Expecting continued growth in DFC with preferential loan selection and penetration rates moving towards 20%. • M&A: Watching the market for opportunities with 95% success rate on acquisitions, currently having over $0.5 billion acquired revenue this year with more under contract.

• Tariff landscape: Evolving tariff landscape could impact pricing and consumer behavior. • Competition: Competition from online pure-play retailers in the used car market. • U.K. market conditions: Challenging conditions in the U.K. market with changing EV mandates and network rationalization. • Credit environment: Broader credit environment choppiness, though DFC's credit performance has been strong but monitoring different vintages and borrower characteristics.

Q: Regarding SG&A to gross profit, how are operational improvements translating to financial implications and guardrails for the second half and 2026?

A: Tina H. Miller stated SG&A is driven by top-line volume and growth, with a focus on leaders driving market share and growth, and ongoing efforts to drive SG&A down to 55% of gross profit through productivity, cost controls, and technology.

Q: How does the U.K. business stand operationally and cost-wise?

A: Bryan B. DeBoer said the U.K. business was up profitability-wise by about 3% year-over-year, with teams focused on cost management and growing businesses.

Q: On DFC's growth trajectory, is $20 million in the quarter a new run rate?

A: Charles Lietz said DFC has gotten out of the start-up phase and expects continued growth rate trend, with Bryan B. DeBoer noting targeting $60-70 million for the year at current revenue base.

Q: When will organic store performance recouple or do better than peers?

A: Bryan B. DeBoer said performance has bridged gaps, with used cars being #1 in revenue growth, and differences due to footprint and mix, expecting recoupling as ecosystem and same-store sales improve.

Q: On used car availability and competition from online retailers, how is Lithia positioned?

A: Bryan B. DeBoer said Lithia purchases over 2/3 of vehicles directly from consumers, yielding a $1,700 price difference, and Driveway purchases over double the amount through AI valuations, giving a competitive edge.

Q: On M&A environment and policy uncertainty, how does it affect targets?

A: Bryan B. DeBoer said they have over $0.5 billion acquired revenue this year with more under contract, acting on opportunities with good ROI sense, and 95% success rate on acquisitions.

Q: On aftersales same-store sales growth and tariff impact, how is it attributed?

A: Bryan B. DeBoer said lapsing of same-store sales was driven by easy comp lapse and outperformance, with minimal impact from tariffs.

Q: On DFC growth and seasonality, what's informing the back half guide?

A: Charles Lietz said growth rates and seasonality impact DFC's near-term profitability, with delinquency rates ticking up in summer months but expected to tick down.

Q: On SG&A cost savings potential, how are the buckets targeted?

A: Bryan B. DeBoer said SG&A costs are driven by top-line growth, with personnel expenses in sales and service departments being key, and AI technology from Pinewood.AI helping drive down costs.

Q: On tariffs and OEM conversations, how will they play out?

A: Bryan B. DeBoer said manufacturers are competing to sell cars, with half of new vehicle sales not impacted by tariffs, and retailers adaptable to changes, with aftersales contributing over 60% of net profit.

Q: On omnichannel initiatives and comparison to competitors, how is Lithia positioned?

A: Bryan B. DeBoer said Lithia sold over 25.5% of vehicles through omnichannel sources with digital support, Driveway channel over 97% new customers, and My Driveway portal growing with users.

Q: On new vehicle volumes guide change, what's the rationale?

A: Bryan B. DeBoer said it's more of an industry thing with difficult comps in July due to CDK event.

Q: On Pinewood rollout and success measurement, what's the timeline?

A: Bryan B. DeBoer said rollout includes a couple of stores by end of year, 15-25 stores next year, full rollout in '27-'28, with U.K. doing phenomenally and Pinewood.AI solutions helping in SG&A improvements.