Lithia Motors, Inc. 2026 Q3 Earnings Call

Good morning. Thank you for joining us for our third quarter earnings call. With me today are Bryan DeBoer, Chairman and CEO, Tina Miller, Senior Vice President and CFO, Chuck Lietz, Senior Vice President, and Scott Cooke, Driveway Finance Corporation and Southeast Region Operations President. Today's discussion may include statements about future events, financial projections, and expectations about the company's products, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release.

Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our third quarter results. With that, I'll turn the call over to Brian.

Thank you, Jardan. Good morning and welcome to our quarterly earnings call. Our third quarter again demonstrated what makes Lithia and Driveway different. We delivered revenues just shy of $10 billion and adjusted diluted EPS of $10.34, up 9% from last year, growing earnings in a mixed retail environment. Our leaders continued to capture the profitability of our diversified and durable model, delivering quality results in any environment. During the quarter, same-store revenues declined 1.4%, a resilient result as we lapped revenue growth of nearly 8% in the third quarter of 2025. Our gross profit comparison was the best of 2026, and we exited the quarter with good momentum. Total vehicle GPU of $3,958 was down only $63 year over year, reflecting strong pricing discipline. Our teams responded dynamically to the market, and our progress puts us in position to accelerate our growth, diversification, and results going forward.

As a reminder, all vehicle operations results from this point forward are on a same-store basis. Used vehicle profitability was strong, with GPU up 13%, or $234 year-over-year. In North America, same-store SG&A as a percentage of gross profit improved 50 basis points sequentially, reflecting our ongoing focus on cost controls. Driveway Finance Corporation continues to grow, delivering finance operations income of $32 million, an increase of nearly 70% over last year, as average managed receivables grew 22% and provision expenses also improved. Our model is designed so each business line reinforces the others, and this quarter demonstrated that dynamic. Our growth starts with our people who are pricing smarter and running leaner stores across our ecosystem.

Every customer relationship creates recurring value after the first sale, and a vehicle we sell today brings that customer back to our service drive tomorrow and eventually returns as a trade-in, all accelerating our DFC and Driveway platforms. I want to personally thank our store and support team members for the results they delivered this quarter and the care that they show our customers each and every day. Our diversified mix continued to drive stable earnings, with used vehicle gross profit up 9.3% and after-sales gross profit up 2.4%, offsetting a modest quarter of new vehicles. New vehicle revenues declined 2.6% on 2.7% fewer units against a demanding comparison to last year's third quarter, when new vehicle revenue grew 5.5%. By category, import units grew 0.8%, domestic declined 8.8%, and luxury declined 2.9%.

We view these conditions as cyclical, and as comparisons ease in the fourth quarter, our team carry a strong trajectory into year-end and the following year. In used vehicles, our pricing strategy continues to deliver, and it's a great example of our ecosystem, technology, and people all working together as one. Total used gross profit grew 9.3% year-over-year, and used GPU was 1993, led by our core three to eight-year-old vehicle category, where GPUs rose 44%. Our work on dynamic AI pricing supports improved profitability, and used vehicles remain one of our highest return businesses, providing an entry point to our ecosystem for customers at every affordability level. F&I per unit was 1736, a 4.7% decline year-over-year.

As a reminder, DFC's growth shifts a portion of our F&I into captive platform, where each loan earns recurring counter-cyclical income that is three times more profitable over its lifetime. Our growing remote F&I program is demonstrating the opportunity to improve F&I attachment and customer experiences at a greatly reduced cost. Aftersales continues to anchor our resiliency with gross profit growing in each of the last eight quarters and margins expanding 100 basis points this quarter to 59.5%. Aftersales earns on every vehicle and operations, not only the ones we sell, and it is where the relationship we build at each sale keeps paying off. Lifetime oil contracts are an example of how we are building customer retention through higher attachment. With nearly one in every four North American customers now choosing to subscribe, up more than 200 basis points over last year.

We're building on that improved retention in our service lanes, reaching customers before their next service is due and getting the most value out of each of them on each visit. Adjusted SG&A as a percentage of gross profit was 68.5%, in line with the second quarter. In North America, same-store SG&A was 65.7%, likely sector-leading performance that demonstrates how our scale, diversification, and store leadership is transforming our operations. In our sales departments, we've combined roles, removed layers, and given our strongest leaders responsibilities across multiple stores and departments. Behind the scenes, automation, more efficient vendor relationship, and AI tools are also contributing. Every quarter of progress gets us closer to our global SG&A target of below 60% of gross profit, and as volumes recover, a larger share of each gross profit dollar will drop to earnings. The U.K. delivered another standout quarter with gross profit up 7%.

Aftersales led the way, growing profit 13.6%. New vehicle units grew 10.6% and new vehicle gross profit rose 8.5%, helped by our expanding partnership with some Chinese OEMs. In used vehicles, retail units grew 4.6% and GPUs grew 4.9%. These results reflect strong execution by our U.K. teams and the potential of our international platform. Before we jump into finance operations, I'd like to welcome Scott Cooke, who joined us in August as our Operations President after more than 25 years at Toyota Financial Services, most recently as their President and CEO. He brings deep global leadership, industry experience running one of the largest captive finance companies in the world, and is a wonderful cultural fit to Lithia and Driveway. Welcome, Scott. Driveway Finance Corporation continues to scale profitably.

With managed receivables now at $5 billion and penetration climbing towards our target of 20% or more, DFC is doing exactly what we built it to do, turning each vehicle sale into durable, stable income, a deeper, longer relationship with our customers, and a clear differentiated advantage. We keep making it easier for customers to shop, finance, and service their vehicles with us, whether in stores or online. Our stores, DFC, Driveway, and GreenCars let us serve customers however, whenever, and wherever they choose, and Pinewood.AI gives us a customer-first platform to truly deliver that experience. Ridgeview Partners' acquisition of Pinewood.AI, completed earlier this month, delivers a meaningful valuation gain on the investment this quarter while leaving our strategic alignment unchanged and providing an even brighter future for our growth.

Moving team members onto one AI-native system will take cost and complexity out of the business while freeing up our teams to do what they do best, bond, build trust, and create memorable experiences with each and every customer. Now, turning to capital allocation, our approach remains the same. We put capital where it earns the best returns for our shareholders. After a very active first half, we took a more balanced approach in the third quarter, repurchasing $85 million worth of stock while funding acquisitions and maintaining balance sheet strength. Our share count is 11% lower than a year ago, and that benefit to earnings per share carries forward every quarter. Our regenerative cash flows also gives us room to strategically grow our network.

A few days ago, we acquired four Gossett Hyundai and Kia stores in Memphis, Tennessee, adding $250 million in expected annualized revenues and strengthening our presence in the Southeast region. So far this year, we've acquired $1.2 billion in annualized revenue of high-quality stores while divesting a quarter billion dollars of underperforming revenue, freeing up capital to be more efficiently used. These actions make our network more diversified across brands and regions, increases efficiency, provides growth for our people, and better utilizes our capital. This growth is always underwritten with discipline and consistent execution. We target purchase prices of 15%-30% of revenue or three to six times normalized EBITDA. For more than a decade, this framework has delivered returns above 25%, which is well ahead of our 15% after-tax hurdle rate.

These returns create a compelling growth opportunity in an unconsolidated industry and the scale necessary to continue to differentiate and leverage our considerable size and scale advantages. That same discipline guides how we deploy cash across the business, whether through share repurchases, acquisitions, or investments in our own operations, always building on our strong balance sheet. We head into the final quarter of the year with confidence in a higher-quality, diversified outcome. Our results came together nicely with North America SG&A improving sequentially, record third quarter DFC income, double-digit growth in used vehicle GPU, and continued after-sales growth, all adding up to high-quality earnings. These gains build on each other as we continue allocating capital prudently and we remain on track to achieving our long-term target of $2 of EPS for every $1 billion of revenue.