Financial Performance Highlights for Lithia and Driveway

Lithia and Driveway (NYSE: LAD) is one of the largest global automotive retailers, providing a wide array of products and services throughout the vehicle ownership lifecycle. The company has delivered consistent profitable growth by focusing on operational excellence, innovation, diversification, and strategic acquisitions.

Revenue and Profit Trends

Lithia and Driveway experienced strong revenue growth in 2024 compared to 2023, driven primarily by increases in vehicle sales volume from acquisitions. Total gross profit also grew, supported by same-store increases in aftersales revenue. However, new and used vehicle retail gross profit declined due to continued normalization of margins.

In the third quarter of 2024, total revenue increased 11.4% year-over-year to $9.2 billion. New vehicle retail revenue grew 14.0%, used vehicle retail revenue increased 8.5%, and aftersales revenue rose 20.9%. For the first nine months of 2024, total revenue increased 15.6% to $27.0 billion.

Despite the revenue growth, net income declined compared to the prior year. This was primarily driven by the margin normalization in new and used vehicle sales, increased interest expense, and higher selling, general and administrative (SG&A) expenses as a percentage of gross profit.

Operational Strengths and Weaknesses

A key strength of Lithia and Driveway is its diversified business model, which includes new and used vehicle sales, financing and insurance products, and automotive repair and maintenance services. This diversification helps reduce the company’s dependence on any single manufacturer and mitigates risks from changing consumer preferences.

The company’s focus on operational excellence, innovation, and data-driven decision making also contribute to its competitive advantage. Lithia and Driveway utilizes proprietary performance measurement systems and an entrepreneurial store-level model to improve market share, customer loyalty, and profitability.

However, the company has faced some challenges, including increased SG&A expenses as a percentage of gross profit. In the third quarter of 2024, SG&A as a percentage of gross profit was 66.0%, up from 62.0% in the same period of 2023. This increase was primarily due to higher personnel, rent, and facility costs associated with the company’s growth, particularly in the U.K. market.

Another potential weakness is the company’s reliance on acquisitions for growth. While Lithia and Driveway has a disciplined approach to acquisitions, targeting a return on investment of more than 15% by the third year of ownership, the current market environment of elevated acquisition prices may limit the company’s ability to find attractive targets that meet its criteria.

Outlook and Future Prospects

Looking ahead, Lithia and Driveway remains focused on its long-term strategy of driving operational excellence, innovation, and diversification, as well as growing through strategic acquisitions and network optimization.

The company’s investments in modernization, including digital shopping experiences and home delivery, are expected to continue attracting a larger population of digital consumers seeking transparent and flexible buying and servicing experiences. Additionally, the company’s captive auto finance division and fleet funding and management offerings provide opportunities for further diversification and growth.

However, the company faces several risks and uncertainties, including the potential for continued margin normalization in new and used vehicle sales, rising interest rates and their impact on consumer demand, and the challenges of integrating and optimizing acquired businesses. The company’s forward-looking statements also caution about the potential impact of evolving consumer preferences, sustainable vehicle trends, and regulatory changes on its business.

Capital Allocation and Liquidity

Lithia and Driveway manages its liquidity and available cash to support its long-term growth plans, including acquisitions and investments in its existing business, technology, and adjacent offerings. As of September 30, 2024, the company had available liquidity of approximately $1.1 billion, comprising $209.8 million in unrestricted cash, $53.9 million in marketable securities, and $863.2 million in available credit on its facilities.

In the current market environment of elevated acquisition prices, the company has adjusted its free cash flow deployment strategy. Under current conditions, Lithia and Driveway may allocate 50% to 60% of its free cash flow to acquisitions, 25% to capital expenditures, innovation, and diversification, and 15% to 25% to shareholder returns in the form of dividends and share repurchases.

During the first nine months of 2024, the company invested $271.9 million in capital expenditures, paid $42.4 million in dividends, and repurchased $273.2 million of its common stock. The company’s disciplined approach to capital allocation and its available liquidity position it to continue pursuing its growth strategy, while also providing flexibility to adapt to changing market conditions.

Conclusion

Lithia and Driveway has demonstrated its ability to deliver consistent profitable growth through its diversified business model, focus on operational excellence, and strategic acquisitions. However, the company faces challenges, including increased SG&A expenses, margin normalization in vehicle sales, and the current environment of elevated acquisition prices.

Looking ahead, the company’s investments in modernization, diversification, and strategic acquisitions are expected to drive continued growth and value creation for its customers, employees, and shareholders. Lithia and Driveway’s strong liquidity position and disciplined capital allocation strategy provide it with the flexibility to navigate the evolving automotive retail landscape and capitalize on future opportunities.