LITHIA MOTORS INC

Lithia Motors, Inc. operates in the global automotive retail industry, providing products and services throughout the vehicle ownership lifecycle. As of December 31, 2025, the company operated 455 locations representing 54 brands in the United States, the United Kingdom, and Canada. The industry is described as massive and unconsolidated, with nearly 17,000 new vehicle franchise dealers in the United States, 4,500 in the United Kingdom, and 3,800 in Canada. The company is ranked #124 on the Fortune 500 in 2025. Key structural forces shaping competition include intense competition among automotive retailers, changes to the retail delivery model, increased e-commerce and omnichannel competition, and evolving manufacturer distribution models such as the agency model in the United Kingdom.

The company competes primarily with other automotive retailers, both publicly- and privately-held, including automotive retailers that are primarily used-vehicle focused, such as CarMax, Carvana, and Cazoo. Lithia states it is larger and has more financial resources than most private automotive retailers with which it currently competes in the majority of its regional markets. The company does not have any cost advantage in purchasing new vehicles from manufacturers. New vehicles from five manufacturers, Honda, Toyota, Ford, BMW, and Stellantis, represent 25% of the company's sales. The company's competitive advantages include its highly diversified and competitively differentiated design, its proprietary performance measurement systems fueled by data science, and its omnichannel ecosystem.

The company generates revenue through a comprehensive network of physical locations, e-commerce platforms, captive finance solutions, fleet management offerings, and other synergistic adjacencies. Revenue streams include new and used vehicle sales, finance and insurance products, and aftersales automotive repair and maintenance services. The company describes its revenue mix as including both transactional income from vehicle sales and recurring income from aftersales services and financing operations. The company's captive auto financing division, Driveway Finance Corporation, provides financing solutions for customers and diversifies the business model with adjacent products. The company's Driveway and GreenCars brands and online customer portal complement in-store experiences in the United States.

The company's Vehicle Operations segment includes new vehicle sales, used vehicle sales, finance and insurance products, and aftersales services. For the year ended December 31, 2025, new vehicle revenues were $18,703.0 million ¹, used vehicle revenues were $13,371.5 million ², finance and insurance revenues were $1,473.6 million ³, and aftersales revenues were $4,086.8 million ⁴. New vehicle gross profit was $1,169.2 million ⁵ with a gross profit margin of 6.3% ⁶. Used vehicle gross profit was $733.2 million ⁷ with a gross profit margin of 5.5% ⁸. Finance and insurance gross profit was $1,473.6 million ⁹ with a 100.0% ¹⁰ margin. Aftersales gross profit was $2,357.0 million ¹¹ with a gross profit margin of 57.7% ¹². The company sold 402,575 ¹³ new vehicles and 425,381 ¹⁴ used retail vehicles. Average gross profit per new vehicle was $2,904 ¹⁵ and per used retail vehicle was $1,756 ¹⁶. Finance and insurance gross profit per unit was $1,844 ¹⁷.

The company's Financing Operations segment provides financing options to customers buying and leasing retail vehicles from the Vehicle Operations segment, as well as leasing vehicles from the fleet management division. Financing operations income was $74.6 million ¹⁸ for the year ended December 31, 2025. Total average managed finance receivables were $4,421.9 million ¹⁹. Net loans originated were $2,804.1 million ²⁰ with 90,977 ²¹ vehicle units financed. The total penetration rate was 14.5% ²². The weighted average contract rate on loans originated was 8.6% ²³ and the weighted average credit score was 747 ²⁴. The allowance for credit losses as a percentage of ending managed receivables was 3.0% ²⁵. Net credit losses on managed receivables were $74.8 million ²⁶, representing 1.8% ²⁷ of total average managed receivables.

During 2025, the company acquired 17 stores and divested 12 stores. The company invested $751.0 million, net of floor plan debt, to acquire these stores and anticipates these acquisitions to add nearly $2.4 billion in annualized revenues. The company utilized $350.9 million for capital expenditures investing in its existing business and paid $55.3 million in dividends. As of December 31, 2025, the company had available liquidity of approximately $1.5 billion, which was comprised of $109.2 million in unrestricted cash, $56.4 million in marketable securities, and $1.4 billion availability on its credit facilities. During 2025, the company repurchased 3,019,951 shares at a weighted average price of $313.73 under its current share repurchase authorization, with $621.6 million remaining for future repurchases. In September 2025, the company issued $600 million in aggregate principal amount of 5.500% senior notes due 2030.

The company experienced revenue growth across all major business lines in 2025 compared to 2024, driven by same store growth and complemented by acquisitions. Total revenues were $37,634.9 million ²⁸ for 2025 compared to $36,188.2 million ²⁹ for 2024. Net income attributable to Lithia Motors, Inc. was $819.6 million ³⁰ for 2025 compared to $796.7 million ³¹ for 2024. Diluted earnings per share attributable to Lithia Motors, Inc. was $32.32 ³² for 2025 compared to $29.45 ³³ for 2024. The decline in net income was driven by margin normalization, higher SG&A as a percentage of gross profit, and a higher effective income tax rate, partially offset by lower interest expense. Operating income was $1,594.7 million ³⁴ for 2025 compared to $1,568.6 million ³⁵ for 2024. Operating margin was 4.2% ³⁶ for 2025 compared to 4.3% ³⁷ for 2024.

A key growth vector is the company's acquisition growth strategy, which focuses on acquiring new vehicle franchises in markets ranging from mid-sized regional markets to metropolitan markets. The company targets an annual after tax return of more than 15% for its acquisitions and has averaged over a 25% return by the third year of ownership. The company evaluates a valuation multiple between 3x to 6x of investment in intangibles to estimated annualized adjusted EBITDA and targets an investment in intangibles as a percentage of annualized revenues in the range of 15% to 30%. During 2025, the company acquired 17 stores and invested $751.0 million, net of floor plan debt, anticipating these acquisitions to add nearly $2.4 billion in annualized revenues.

Another growth vector is the company's captive auto financing division, Driveway Finance Corporation, which allows the company to provide financing solutions for customers and diversify its business model with adjacent products. The company's proprietary credit model performs a return on investment calculation for each application, targeting earnings at least three times the net finance income earned from third party lenders over the life of the finance receivable. The company also invests in transformative adjacencies such as fleet management offerings. The company's Driveway e-commerce platform and GreenCars online education resource for sustainable mobility are also growth vectors, with GreenCars having approximately 9.0 million unique visitors in 2025 at GreenCars.com, of which the company saw a 50% increase in direct and organic traffic.

The company's SG&A as a percentage of gross profit was 68.8% ³⁸ for 2025 compared to 67.5% ³⁹ for 2024. On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit increased to 68.1% from 66.3% in the prior year. Personnel costs as a percentage of gross profit were 43.3% ⁴⁰ for 2025 compared to 43.1% ⁴¹ for 2024. Rent and facility costs as a percentage of gross profit were 7.1% ⁴² for 2025 compared to 6.7% ⁴³ for 2024. The company's operating margin was 4.2% ⁴⁴ for 2025 compared to 4.3% ⁴⁵ for 2024. The company's effective income tax rate was 25.5% ⁴⁶ for 2025 compared to 23.8% ⁴⁷ for 2024.

The company's capital expenditures totaled $350.9 million ⁴⁸ in 2025. The company expects to use a portion of its future capital expenditures to upgrade facilities that it recently acquired. The company expects that certain facility upgrades and remodels will generate additional manufacturer incentive payments. The company believes it would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended upon completion of projects. As of December 31, 2025, the company had outstanding mortgage debt of $1.0 billion and $2.3 billion committed as part of availability on its working capital lines of credit.

The company's current free cash flow deployment strategy includes a target allocation of 25% to 35% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification, and 40% to 50% in shareholder return in the form of dividends and share repurchases due to current valuation trends in acquisitions relative to stock price performance. During 2025, the company paid $55.3 million in dividends. As of December 31, 2025, the company had $621.6 million remaining for future share repurchases under its current authorization. The company's debt to total capital ratio, excluding floor plan notes payable and non-recourse notes payable, was 52.5% at December 31, 2025 compared to 48.4% at December 31, 2024.

Structural headwinds and execution risks management explicitly flagged include the normalization of new and used vehicle gross profit margins toward pre-pandemic levels, which negatively impacted net income. The company also faces headwinds from elevated interest rates and higher vehicle prices that have impacted new and used vehicle sales and vehicle affordability. The company operates internationally, including across the United States, the United Kingdom, and Canada, and changes in and the severity of economic conditions may vary by market. The company also faces risks from changes to manufacturer distribution models, including the transition to an agency model in the United Kingdom by certain manufacturers such as Honda, Volvo, Volkswagen, Mini, Mercedes-Benz and Smart.

Geographic, regulatory, or macro factors management identified as constraints include the highly regulated nature of the automotive retail industry, with numerous laws and regulations governing sales, operations, financing, insurance, advertising, and employment practices. The company's financing activities are subject to federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations. The Consumer Financial Protection Bureau has supervisory authority over large non-bank auto finance companies, including DFC. In the United Kingdom, the Financial Conduct Authority is investigating the historic use of discretionary commission arrangements. The U.K. Court of Appeals ruled that brokers, including car dealerships, could not lawfully receive commissions from finance lenders without obtaining the customer's fully informed consent, which is now on appeal to the Supreme Court of the United Kingdom.

The automotive retail industry is sensitive to changing economic conditions, and a downturn in consumer spending may materially and adversely affect revenues and gross profit margins. Elevated interest rates, along with higher vehicle prices, have impacted new and used vehicle sales and vehicle affordability. The company had $5.1 billion of total non-vehicle long-term debt and $6.1 billion of vehicle inventory financing as of December 31, 2025, and 63% of total debt was variable rate, exposing the company to interest rate risk. A 10% increase in interest rates would increase annual interest expense by approximately $38.8 million, net of tax. The company depends on manufacturers for a supply of vehicles, and new vehicles from five manufacturers, Honda, Toyota, Ford, BMW, and Stellantis, represent 25% of sales. Changes to manufacturer distribution models, including the transition to an agency model in the United Kingdom, could negatively affect revenues and results of operations. The company may experience greater credit losses in DFC's finance receivable portfolio than anticipated; net credit losses on managed receivables were $74.8 million in 2025.

Management's message emphasizes that the company has delivered consistent profitable growth in a massive and unconsolidated industry. The company's long-term strategy to create value includes driving operational excellence, innovation, and diversification; growth through acquisition and network optimization; and thoughtful capital allocation. Management states that the company's highly diversified and competitively differentiated design provides the flexibility and scale to pursue its vision to modernize personal transportation solutions wherever, whenever, and however consumers desire. The company's current free cash flow deployment strategy includes a target allocation of 25% to 35% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification, and 40% to 50% in shareholder return in the form of dividends and share repurchases due to current valuation trends in acquisitions relative to stock price performance.