Executive Summary / Key Takeaways

• Lithia & Driveway (LAD) is executing a differentiated omnichannel strategy, leveraging its vast physical network, digital platforms (Driveway, GreenCars), and strategic adjacencies (DFC, fleet, Pinewood) to drive market share and profitability in the fragmented automotive retail industry.
• First Quarter 2025 results demonstrate momentum, with record revenue of $9.2 billion (+7.2% YoY) and strong adjusted EPS growth (+25.4% YoY), driven by acquisitions, same-store growth in aftersales and F&I, and significant SG&A efficiency improvements.
• The company's technological ecosystem, including the MyDriveway portal and Pinewood DMS, provides quantifiable advantages in customer reach, operational efficiency, and data leverage, forming a key competitive moat against traditional and online-only rivals.
• Management is focused on realizing the full potential of its integrated model through disciplined cost control (targeting mid-50s SG&A as % of gross), growth in high-margin segments like DFC (targeting 20% penetration) and aftersales, and strategic capital allocation balancing accretive acquisitions ($2-$4B annualized target) with opportunistic share repurchases.
• While navigating market dynamics like potential tariffs and evolving vehicle margins, LAD's diversification, operational agility, and clear pathway to its $2 EPS per $1B revenue target position it for continued long-term growth and value creation.

The Engine of Growth: Building a Differentiated Ecosystem

Lithia & Driveway stands as the world's largest global automotive retailer, a position achieved through decades of strategic growth and a recent acceleration in building a unique omnichannel ecosystem. Founded in 1946, the company has evolved from a traditional dealership group into a diversified platform aiming to modernize personal transportation solutions across the entire vehicle ownership lifecycle. This ecosystem integrates a comprehensive network of physical locations spanning the United States, the United Kingdom, and Canada, with digital platforms, captive finance solutions, fleet management offerings, and other synergistic adjacencies.

The automotive retail industry remains massive yet highly unconsolidated, presenting significant opportunity for scaled players. LAD competes directly with large publicly traded groups like Penske Automotive Group (PAG), AutoNation (AN), Group 1 Automotive (GPI), and Asbury Automotive Group (ABG), as well as numerous smaller regional and independent dealers and emerging online-only platforms. While competitors like PAG boast a larger global footprint and AN demonstrates strong profitability margins and cost efficiency, LAD differentiates itself through its aggressive acquisition strategy, focus on integrating adjacencies, and a technology-driven approach to customer engagement and operational efficiency. LAD's ability to be a competitive buyer in this fragmented market is a core strategic advantage, supported by a track record of successfully closing acquisitions.

LAD's overarching strategy is built on three pillars: driving operational excellence and diversification, growth through acquisition and network optimization, and thoughtful capital allocation. This strategy is designed to leverage the company's scale and integrated model to capture market share, enhance customer loyalty, and ultimately drive profitability towards a stated long-term target of generating $2 in EPS for every $1 billion in revenue in a normalized environment.

A foundational strength of LAD's competitive position lies in its technological differentiation. The Driveway and GreenCars brands serve as e-commerce home solutions and key digital entry points into the ecosystem, significantly extending the company's reach far beyond its physical footprint. These platforms are designed to provide seamless, convenient, and transparent experiences, drawing in new users and fostering retention. Management highlights that these digital channels can access 50 times more customers than the core physical businesses, with over 98% of Driveway and GreenCars customers being new to the Lithia ecosystem. The company is targeting a significant lift in digital unit sales in 2025, aiming for approximately 50% growth, while simultaneously reducing burn rates by 40% through improved operating and advertising efficiency.

Further enhancing its technological capabilities, LAD has partnered with Pinewood Technologies, implementing their DMS software across its UK operations (over 90% converted by Q3 2024) and recently entering an agreement for Pinewood.AI to acquire Lithia's stake in their North American joint venture, securing deployment across US and Canada dealerships by 2028. This technology is intended to create a unified ecosystem for customers and associates, boosting productivity, enhancing the customer experience, and improving operational resiliency. Management anticipates substantial savings from this transition in the future. These technological investments and integrations provide tangible benefits in efficiency and customer engagement, contributing to LAD's competitive moat by creating a more connected and data-leveraged operation compared to many traditional competitors.

The company's historical journey, particularly the post-COVID era, has been marked by aggressive expansion through acquisitions, leveraging a period of higher profits and available capital to nearly triple revenue and earnings. This growth has allowed LAD to build out its network and fund strategic adjacencies like Driveway Finance Corporation (DFC), fleet management services (including the recent investment in Wheels), and technology platforms. This disciplined acquisition approach, targeting accretive opportunities in high-performing regions like the Southeast and South Central US, remains a core competency, with a target of $2 billion to $4 billion in annualized acquired revenues in the coming years.

Translating Strategy into Recent Performance

LAD's strategic execution is reflected in its recent financial and operational performance. The first quarter of 2025 demonstrated solid momentum, with the company reporting record revenue of $9,178.3 million, a 7.2% increase compared to the same period in 2024. This growth was primarily fueled by contributions from recent acquisitions and supported by same-store growth in key areas.

Total gross profit increased by 5.6% year-over-year to $1,410.4 million. While new vehicle retail gross profit per unit saw a 12.0% decrease on a same-store basis due to continued margin normalization, this was partially offset by a 2.4% increase in same-store aftersales revenue and a 7.5% increase in same-store aftersales gross profit, driven by higher warranty volumes. Used vehicle retail sales on a same-store basis saw a slight decrease in revenue (-0.9%) and units (-0.4%), but management noted sequential improvements and expects ongoing positive trends. Finance and insurance (F&I) income grew 7.0% overall, with same-store F&I revenue per retail unit increasing by $35.00 to $1,881.00.

Operational efficiency saw notable improvement. Selling, general, and administrative (SGA) expenses as a percentage of gross profit decreased to 67.5% in Q1 2025 from 70.0% in Q1 2024. On a same-store basis, excluding non-core charges, SGA as a percentage of gross profit improved to 67.0% from 68.5%, reflecting the impact of cost savings initiatives. Inventory levels saw significant improvement, with new vehicle days' supply decreasing to 43 days and used vehicle days' supply decreasing to 45 days by the end of Q1 2025, contributing to a $3.6 million decrease in floor plan interest expense.

The Financing Operations segment, primarily DFC, continued its positive trajectory, reporting income of $12.5 million in Q1 2025 compared to income of $1.7 million in the prior year period. This performance was driven by an expanding total interest margin (4.60%), reflecting a higher weighted average contract rate on the overall portfolio and decreased cost of funds, despite a decrease in the weighted average contract rate on new originations (9.10% vs 10.20% in Q1 2024) following Federal Reserve rate cuts. Portfolio quality remained strong, and the decrease in provision expense as a percentage of receivables reflected improved credit quality and recovery rates. DFC's portfolio balance grew to over $4 billion, with a US penetration rate of 13.7%.

Overall, net income attributable to Lithia Motors, Inc. increased significantly to $209.5 million in Q1 2025 from $162.6 million in Q1 2024, resulting in a diluted EPS of $7.94, a 34.8% increase. Adjusted diluted EPS grew 25.4% year-over-year to $7.66. Operating margin increased by 40 basis points, primarily due to the increase in gross profit outpacing the increase in SGA.

Competitive Landscape and Strategic Positioning

LAD operates in a competitive environment characterized by large public dealership groups and a multitude of smaller private operators. Comparing LAD's recent performance (TTM) against key public competitors like PAG, AN, and GPI reveals distinct positioning. LAD's TTM revenue growth rate, fueled by acquisitions, has generally outpaced that of its peers. Its TTM Gross Profit Margin (15.31%) and Operating Profit Margin (4.46%) are generally in line with or slightly below peers like PAG (16% GP, 4% OP), AN (18% GP, 5% OP), and GPI (16% GP, 5% OP), suggesting that while LAD is growing rapidly, it faces similar or slightly tighter margin pressures in core vehicle sales compared to some rivals.

LAD's Debt/Equity ratio (2.06 TTM) is higher than PAG (1.59), GPI (1.76), and ABG (1.51), indicating a more leveraged balance sheet, which increases financial risk but supports its aggressive acquisition strategy. Despite this, LAD's net leverage of 2.5x remains within its target range and well below bank covenant requirements.

The company's competitive advantages stem from its scale, diversified omnichannel model, and operational execution. The vast network provides geographic reach and inventory depth. The integrated digital platforms (Driveway, GreenCars) offer a competitive edge in reaching a broader customer base and streamlining the sales process, although some online-only players like Carvana (CVNA) present indirect competition with potentially lower cost structures in specific segments. LAD's focus on affordability across its offerings, from value autos to aftersales pricing competitive with independent repair shops, helps it cater to a wide range of customers. The captive finance arm (DFC) provides a significant advantage, allowing LAD to capture additional profit per unit and offer flexible financing solutions, reducing reliance on third parties and enhancing the customer experience.

In aftersales, LAD's strategy to leverage its growing installed base and capitalize on increasing complexity and recall work (like the widespread engine recalls mentioned) positions it well against both dealership and independent repair competitors. While aftersales margins are currently strong, the anticipated shift towards a higher parts mix with new propulsion systems may pressure margins long-term, though the average cost per repair is expected to be higher.

LAD's acquisition strategy is a key differentiator. Its track record and disciplined approach, targeting specific return thresholds and strategic objectives like diversifying brand and geographic mix, make it a competitive buyer in the consolidation landscape. However, management acknowledges that elevated acquisition pricing in the current market has led to a strategic shift in capital allocation, balancing M&A with share repurchases.

Outlook and Investment Thesis

Management expresses confidence in LAD's ability to continue delivering sustainable performance and capture market share. The outlook is underpinned by the belief in a return to higher SAAR levels, potentially reaching 16-17 million units or higher in the coming years, driven by pent-up demand. They anticipate ongoing positive trends in used vehicle sales and continued growth in the resilient aftersales business.

Key quantitative targets reinforce the long-term vision. The company aims to achieve SG&A as a percentage of gross profit in the mid-50% range, a significant improvement from current levels (67.5% in Q1 2025). This will be driven by continued operational efficiencies, leveraging scale, and productivity gains from technology integration. DFC is expected to maintain consistent profitability and increase its penetration rate towards a 20% target, providing a growing stream of high-margin income. The target of $2 in EPS per $1 billion in revenue in a normalized environment remains the guiding principle, with management outlining a clear pathway through operational improvements, network optimization, DFC growth, scale benefits, maturing adjacencies, and capital return.

Capital allocation remains a critical focus. Under the current strategy, free cash flow is allocated across acquisitions (35-45%), capital expenditures/innovation/diversification (25%), and shareholder return (30-40% via dividends and share repurchases). Given current market valuations, share repurchases are seen as an attractive use of funds, with $687.3 million available as of March 31, 2025. LAD declared a dividend of $0.53 per share in Q1 2025.

Risks to the outlook include potential impacts from tariffs, shifts in consumer sentiment and affordability, and volatility in vehicle margins and used vehicle values. The ABS term market for DFC securitizations is also noted as currently choppy, although warehouse facilities provide flexibility. While legal proceedings are a normal course of business, they are not expected to have a material adverse effect. LAD's diversification across brands, geographies, and business segments, coupled with its operational agility and focus on affordability, serves as mitigation against some of these risks.

The investment thesis for LAD centers on its position as the leading consolidator in a fragmented industry, executing a differentiated omnichannel strategy that leverages technology and high-margin adjacencies to drive superior long-term profitability and market share. The company's recent performance demonstrates progress on key operational and financial metrics, and management has articulated clear targets and a disciplined approach to capital allocation.

Conclusion

Lithia & Driveway is executing a bold strategy to redefine automotive retail through an integrated ecosystem. The first quarter of 2025 results underscore the momentum gained through strategic acquisitions, operational efficiencies, and the growing contribution of its Financing Operations. While facing market dynamics common to the industry, LAD's diversified model, technological investments, and focus on high-margin adjacencies provide a differentiated pathway to profitability. The company's clear targets for SG&A reduction, DFC penetration, and overall EPS per revenue serve as tangible indicators of its long-term potential. For investors, the story is one of a disciplined consolidator leveraging scale and innovation to capture value in a massive market, with the successful execution of its strategic initiatives and capital allocation decisions being critical factors to monitor.