Executive Summary / Key Takeaways

• Ecosystem-Driven Performance: Lithia & Driveway (LAD) is demonstrating an inflection in performance, with Q3 2025 revenue up 4.9% year-over-year and adjusted diluted EPS up 17%, driven by its diversified omnichannel ecosystem and strong execution across all business lines.
• High-Margin Adjacencies & Cost Discipline: The company's Financing Operations (DFC) achieved $19 million in income in Q3 2025, hitting its full-year low-end target a quarter early, with managed receivables exceeding $4.5 billion and a 14.5% penetration rate. Aftersales gross profit rose 9.1% with margins expanding to 58.4%, contributing over 60% of net income. This is complemented by rigorous SG&A control, with North America's adjusted SG&A flat sequentially at 64.8%.
• Strategic Capital Allocation: LAD is aggressively repurchasing shares, allocating approximately 60% of Q3 2025 capital deployment to buybacks (5.1% of outstanding shares), due to its stock trading at a significant discount to intrinsic value. The company reiterates a $2 billion acquisition revenue estimate for 2025, focusing on high-return U.S. assets.
• Technological Edge & Operational Excellence: Investments in Pinewood.AI and the MyDriveway portal are streamlining operations, enhancing customer experience, and driving productivity gains, contributing to long-term SG&A leverage and market share expansion. The company's focus on "Performance Through People" aims to unlock further potential in existing stores.
• Resilient Outlook Amidst Market Shifts: Despite normalizing new vehicle Gross Profit Per Unit (GPUs) and evolving tariff landscapes, LAD's diversified model, strong used vehicle performance (up 11.8% in retail revenue, 22.3% in value autos in Q3 2025), and robust aftersales provide resilience and a clear path to its long-term target of $2 EPS per $1 billion in revenue.

A Modern Mobility Ecosystem in Motion

Lithia & Driveway (LAD), founded in 1946, has evolved into the largest global automotive retailer, operating 447 locations across 52 brands in the United States, the United Kingdom, and Canada as of September 30, 2025. The company's foundational strategy centers on providing a comprehensive array of products and services throughout the entire vehicle ownership lifecycle, from new and used vehicle sales to financing, insurance, and aftersales services. This diversified, omnichannel approach aims to build a resilient business model, reducing dependence on any single manufacturer or consumer preference.

LAD's historical journey, marked by significant expansion, saw its revenue grow from $12.7 billion in 2019 to approaching $40 billion today, largely through strategic acquisitions. This growth propelled LAD onto the Fortune 500 list in 2015 at #482, advancing to #124 by 2025. The company's acquisition strategy has consistently targeted high-quality assets that diversify its brand and geographic mix, with a particular focus on the high-growth Southeast and South Central U.S. regions. This disciplined approach has historically yielded high rates of return, boasting a 95% success rate on acquisitions.

The automotive retail industry is characterized by fragmentation and evolving dynamics, including shifts towards electric vehicles (EVs) and digital sales. LAD's competitive landscape includes major publicly traded dealership groups such as AutoNation , Group 1 Automotive , CarMax , and Penske Automotive . LAD differentiates itself through its integrated online and in-store experiences, extensive physical network, and a strategic emphasis on customer service and brand variety. While competitors like AutoNation and Group 1 leverage their scale for broad market reach, and CarMax specializes in streamlined used-car transactions, LAD's ecosystem aims to offer a more adaptable and comprehensive approach.

Technological Foundation: The Digital Engine of Growth

LAD's core differentiated technology, particularly its digital platforms and strategic partnerships, forms a critical competitive moat. The company is actively unifying the customer experience across driveway.com, green cars, and its MyDriveway owner portal to simplify and accelerate shopping, financing, and service.

Pinewood.AI, a U.K.-based automotive dealership management system provider in which LAD increased its voting interest to 31.95% in July 2025, is central to this technological push. The sale of LAD's North American joint venture back to Pinewood.AI streamlines the path for a full North America rollout, creating a single industry platform for stores and customers. This initiative is expected to reduce duplication, increase speed of delivery, and empower associates and customers, ultimately driving down personnel costs. Management anticipates that AI improvements and staffing adjustments from this technology will contribute to approximately 700 basis points of SG&A reduction, with the Pinewood software system alone expected to yield $30-40 million in savings. The rollout schedule includes a couple of stores by the end of 2025, with 15 to 25 more stores in 2026, and full rollout in 2027 and 2028.

The MyDriveway customer portal, launched in December 2024, had 137,000 users by Q2 2025. This portal offers over 250 functions, providing customers with greater control, visibility, and simplicity in managing their vehicle ownership. It reduces service costs and drives higher retention by enabling customer self-service for tasks like scheduling appointments, making payments, and obtaining vehicle valuations. The Driveway and GreenCars e-commerce platforms serve as key entry points, attracting new customers—over 97% of whom are new to the LAD ecosystem—and extending the company's reach to 50 times more potential customers than its core physical businesses. LAD is targeting a significant lift of approximately 50% in Driveway and GreenCars this year. These technological advancements are not merely incremental; they are foundational to LAD's strategy, enhancing its competitive moat, improving financial performance through lower costs and better margins, and strengthening its market positioning for long-term growth.

Operational Excellence and Financial Performance

LAD's operational focus, powered by its people and ecosystem, is translating into strong financial results. For the three months ended September 30, 2025, total revenues reached $9.68 billion, a 4.9% increase year-over-year, with adjusted diluted EPS growing 17% to $9.50. This quarter marked an inflection point, with strong top-line growth across all business lines and a high-quality earnings mix increasingly derived from recurring streams. Year-to-date September 30, 2025, total revenues were $28.44 billion, up 5.3% from the prior year, and net income attributable to Lithia Motors, Inc. was $682.7 million.

The company has demonstrated disciplined cost control, with North America's adjusted Selling, General, and Administrative (SG&A) expenses remaining flat sequentially at 64.8% in Q3 2025, even as Gross Profit Per Unit (GPUs) normalized. This reflects management's commitment to "bending the cost curve" through productivity gains and performance management. LAD has already realized over $320 million in cost reductions from Q4 2024 to H1 2025, including $50-70 million in interest cost savings and $50 million in personnel and tech costs. The company targets further SG&A reductions of approximately 1.5% over the next five years, aiming for a mid-50% range.

LAD maintains a strong balance sheet and ample liquidity. As of September 30, 2025, available liquidity stood at approximately $1.90 billion, comprising unrestricted cash, marketable securities, and credit facility availability. The company's net leverage was 2.5 times at the end of Q1 2025, well within its long-term target of two to three times and significantly below its bank covenant requirement of 5.75 times. Free cash flow generation remains robust, with $174 million generated in Q3 2025.

Segment Deep Dive: Pillars of Profitability

LAD's Vehicle Operations segment, encompassing new and used vehicle sales, and Finance & Insurance (F&I), showed mixed but strategically aligned performance. New vehicle retail revenue grew 4.5% to $4.63 billion in Q3 2025, with units up 2.5% on a same-store basis. New GPU was $2,867, down sequentially, reflecting continued margin normalization. Domestic brands saw improvement, while luxury brands were weakest.

Used vehicle retail performance "considerably outperformed the industry," with revenue increasing 11.8% year-over-year in Q3 2025, driven by a 6.3% unit increase and higher average selling prices on a same-store basis. The "value auto" segment (vehicles over 80,000 miles) was a standout, delivering 22.3% unit growth year-over-year in Q3 2025. Management highlights that value autos, despite lower average selling prices, generate an impressive 130% cash-on-cash annual return, significantly higher than certified and core products. Approximately 74% of used car sourcing in Q3 2025 came directly from consumers, providing a cost advantage over traditional auction sourcing. Used front-end GPU was $1,767 in Q3 2025.

F&I revenue increased 5.0% to $378.6 million in Q3 2025, with F&I per retail unit reaching $1,847, up $20 year-over-year. This growth includes the impact of increasing EV lease penetration and strengthening DFC penetration. Inventory management has also shown improvement, with new vehicle day supply at 52 days (down 11 days sequentially) and used vehicle Days Sales Outstanding (DSO) at 46 days in Q3 2025. This efficiency, coupled with slightly lower interest rates, led to a $19 million decline in floorplan interest expense year-over-year in Q3 2025.

Financing Operations (Driveway Finance Corporation - DFC)

LAD's Financing Operations segment, primarily DFC, is a rapidly maturing and increasingly profitable adjacency. In Q3 2025, financing operations income reached $19.1 million, a substantial increase from $1.4 million in Q3 2024. Year-to-date, DFC achieved $51.7 million in income, hitting the low end of its full-year expectations a quarter early. The net interest margin expanded to 4.6% in Q3 2025, up 70 basis points year-over-year.

DFC's managed receivables now exceed $4.5 billion, with loan originations increasing 33% over the prior year. The North America penetration rate reached 14.5% in Q3 2025, surpassing the mid-term goal and moving towards a long-term target of 20%. This growth is underpinned by disciplined underwriting, with the weighted average FICO score on new originations at 746 in Q3 2025, significantly higher than the original forecast of 710. This focus on credit quality has resulted in strong provision experience and a decrease in annualized net charge-offs, with no meaningful changes in consumer credit trends within the portfolio. Management emphasizes that DFC's position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, reinforcing its earnings trajectory. Each loan originated by DFC contributes up to three times more profitability than traditional indirect lending.

Aftersales

Aftersales services remain the largest contributor to LAD's overall profitability and customer retention, accounting for over 60% of the company's net income. In Q3 2025, aftersales revenue increased 2.4% to $1.04 billion, while gross profit rose a robust 8.0% to $604.5 million, with margins expanding to 58.3%, up 280 basis points year-over-year. This strong performance was driven by increases in both customer pay gross profit (up 9.2%) and warranty gross profit (up 10.8%). The margin expansion is attributed to a higher labor portion of the business and increased labor rates on warranty work due to inflation. Management believes aftersales can achieve high single-digit to low double-digit growth in the coming quarters, leveraging existing capacity and technician availability.

Competitive Positioning: Differentiating in a Fragmented Market

LAD's competitive standing is bolstered by its extensive network, digital integration, and diversified offerings. Compared to AutoNation , LAD's integrated online and in-store experiences, coupled with its diverse brand portfolio, offer a versatile approach to customer engagement. While AutoNation (AN) may leverage sheer scale, LAD's strategic focus on customer service and brand variety provides a unique value proposition. Against Group 1 Automotive (GPI), LAD's online accessibility and balanced segment mix (domestic, import, luxury) offer a strong competitive edge, though Group 1's aggressive expansion could challenge LAD in certain regions.

CarMax , a specialized used-vehicle retailer, contrasts with LAD's full-spectrum retail model. LAD's broader offerings and extensive physical and digital presence provide greater accessibility, while CarMax (KMX) is known for its streamlined transaction efficiency. LAD's ability to source 74% of its used cars directly from consumers provides a cost advantage over used-only retailers. Penske Automotive (PAG), with its focus on premium and luxury brands, operates in a segment where LAD is expanding. LAD's integrated omnichannel approach offers a more adaptable model compared to Penske's premium-focused strategy, giving LAD a unique value proposition in accessibility and affordability.

LAD's technological differentiators, such as Pinewood.AI and the MyDriveway portal, provide a structural edge. Pinewood.AI's ability to streamline operations and reduce costs contrasts with competitors potentially reliant on multiple legacy systems. The MyDriveway portal enhances customer retention and reduces service costs, offering a more integrated customer experience than many rivals. These technological advantages contribute to LAD's competitive moat, supporting its financial performance through lower operating costs and improved customer loyalty.

Indirect competitors include online-only platforms like Carvana (CVNA) and EV manufacturers like Tesla . LAD counters these by offering a blended online and physical experience, a wide range of vehicle affordability (including "value autos"), and a comprehensive service lifecycle that online-only models often lack. The company is actively "conquesting second and third-generation Tesla (TSLA) customers," leveraging its service and aftersales experience.

Strategic Outlook and Guidance

LAD's management is confident in its strategic direction, asserting that the company is at an "inflection point" with its integrated ecosystem delivering tangible results. The long-term target remains $2 of EPS per $1 billion in revenue, a goal management believes is "fully within their control."

The outlook is underpinned by several key assumptions and guidance figures:

• Market Environment: The company expects the SAAR to exit 2024 at 17 million units and potentially reach 18 million in the future, with a full-year 2025 SAAR projected in the 16-17 million range. While acknowledging potential "lumpiness" in the fall if tariffs persist, LAD believes the impact will be manageable due to its diversified inventory (over 45% unaffected by tariffs) and manufacturers' efforts to stabilize pricing and offer incentives.
• Acquisition Strategy: LAD reiterates a $2 billion acquisition revenue estimate for 2025, with a long-term target of $2-4 billion annually. Acquisitions will remain disciplined and U.S.-focused, prioritizing high-quality assets in the Southeast and South Central regions that meet a strict 15% after-tax return hurdle rate.
• Capital Allocation: Due to its stock trading at a "meaningful discount" to intrinsic value, LAD is prioritizing share repurchases, allocating approximately 50-60% of free cash flow to buybacks. The company repurchased 8% of outstanding shares year-to-date 2025 at an average price of $313. As of September 30, 2025, $910.10 million remained available for repurchases.
• SG&A Efficiency: LAD is targeting further SG&A reductions of approximately 1.5% over the next five years to reach the mid-50% range. This will be achieved through top-line growth, productivity gains from digital tools like MyDriveway and Pinewood.AI, and scale efficiencies.
• DFC Growth: DFC is expected to achieve "meaningful profitability growth," with a target penetration rate of 15% (already achieved) moving towards 20%. This growth will be driven by disciplined underwriting, strong FICO scores, and expanding net interest margins.
• Aftersales Performance: Aftersales operations are targeted to grow at high single to low double-digit rates in the coming quarters, driven by improved technician productivity and customer pay work.

Conclusion

Lithia & Driveway is executing a compelling investment thesis centered on its integrated omnichannel ecosystem, which is proving to be a powerful engine for profitable growth. The company's Q3 2025 results demonstrate an inflection point, with strong revenue and adjusted EPS growth driven by robust performance in its high-margin used vehicle and aftersales segments, complemented by the accelerating profitability of its Financing Operations. LAD's strategic investments in technological differentiators like Pinewood.AI and the MyDriveway portal are streamlining operations, enhancing customer engagement, and providing a clear pathway to significant SG&A leverage.

Despite market headwinds such as normalizing new vehicle GPUs and evolving tariff discussions, LAD's diversified business model and disciplined capital allocation strategy, which prioritizes aggressive share repurchases at current valuations, position it for continued value creation. The company's focus on operational excellence, strategic acquisitions in high-growth regions, and leveraging its technological leadership underscores its confidence in achieving its long-term target of $2 EPS per $1 billion in revenue. LAD's ability to adapt to market dynamics, coupled with its commitment to customer loyalty and efficiency, makes it a compelling opportunity for discerning investors seeking durable growth in the automotive retail sector.