Lithia Motors Q4 2024 Earnings Report

Lithia Motors EPS Results

• Actual EPS: $7.79
• Consensus EPS: $7.33
• Beat/Miss: Beat by +$0.46
• One Year Ago EPS: N/A

Lithia Motors Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $8.99 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Lithia Motors Announcement Details

• Quarter: Q4 2024
• Date: 2/12/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, February 12, 2025
• Conference Call Time: 10:00AM ET

Lithia Motors (NYSE:LAD) operates as an automotive retailer worldwide. It operates in two segments, Vehicle Operations and Financing Operations. The company's Vehicle Operations segment sells new and used vehicles; provides parts, repair, and maintenance services; vehicle finance; and insurance products. Its Financing Operations segment provides financing to customers buying and leasing retail vehicles. The company sells its products and services through the Driveway and Greencars brand names through a network of locations, e-commerce platforms, and captive finance solutions. Lithia Motors, Inc. was founded in 1946 and is headquartered in Medford, Oregon.

Lithia Motors Q4 2024 Earnings Call Transcript

Presentation

[Operator]

and welcome to the Lithia Motors Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jarden Jaramillo, Senior Director, Investor Relations.

[Operator]

Thank you, sir. You may begin.

[Jardon Jaramillo, Senior Director - FP&A & Investor Relations at Lithia & Driveway]

Good morning. Thank you for joining us for our fourth quarter earnings call. With me today are Brian DeBoer, President and CEO Adam Chamberlin, Chief Operating Officer Tina Miller, Senior Vice President and CFO and finally, Chuck Leitz, Senior Vice President of Driveway Finance. 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.

[Jardon Jaramillo, Senior Director - FP&A & Investor Relations at Lithia & Driveway]

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, which 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 reconciliation of comparable GAAP measures.

[Jardon Jaramillo, Senior Director - FP&A & Investor Relations at Lithia & Driveway]

We've also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

[Bryan DeBoer, President & CEO at Lithia Motors]

Thank you, Jardan. Good morning and welcome to our fourth quarter earnings call. Our Lithium Driveway teams continue to deliver strong results demonstrating the power of our integrated and scalable mobility ecosystem and the strength of our talented people. During the fourth quarter, we generated adjusted diluting earnings per share of $7.79 Though the earnings power of our ecosystem and design is just beginning to reveal its potential, these results underscore the effectiveness of our strategy to serve our customers seamlessly across digital and physical channels, leverage highly profitable adjacencies, while remaining grounded to our disciplined execution. Our ability to align our people, platform and processes has enabled us to maintain momentum in unlocking our potential by increasing market share and driving differentiated operational efficiencies.

[Bryan DeBoer, President & CEO at Lithia Motors]

Our focus on building customer loyalty through our diversified business model continues to drive profitability and strengthen our market position. Investments in our adjacencies are now contributing meaningfully to our earnings trajectory. Our omni channel ecosystem has driven substantial improvements in customer engagement and unit sales, further reinforcing Labs' effectiveness. Looking ahead, our focus remains on loyalty, potential and growth. Through disciplined execution and strategic investments, we are confident in our unique ability to deliver sustainable performance, capture market share and unlock the profitability of our ecosystem.

[Bryan DeBoer, President & CEO at Lithia Motors]

With our foundational strengths firmly in place to continue our growth as the world's largest auto retailer in 2025 and beyond, we are well positioned to build our recent momentum and continue our path to achieving $2 of EPS per $1,000,000,000 in revenue. Now on to key results for the fourth quarter. Lithium driveway grew revenues a record $9,200,000,000 a 20% increase from Q4 of last year. We are pleased to see our first quarter year over year operating profit increase in nine quarters. This increase is a result of continued market share gains and our disciplined cost management efforts, which drove the full realization of our $200,000,000 in annual cost savings targets.

[Bryan DeBoer, President & CEO at Lithia Motors]

Our teams have embedded consistent cost discipline into our daily operations and we are seeing the benefits as we have now delivered two consecutive quarters of absolute sequential decreases in SG and A. As we begin 2025, we see even more opportunities for market conquest, adjacency profitability and productivity improvements as we realize the full potential of our unique ecosystem. Our stores are well positioned to capitalize on a return to historical SAR levels and we saw significant growth in new unit sales in the fourth quarter. We are now seeing total vehicle GPU stabilize near our long term expectations. We saw improvements in our used unit sales trends, which continue to be a key focus and our after sales business delivered robust performance this quarter, which reflects a dedication of our team and our ownership in making decisions closest to our customer.

[Bryan DeBoer, President & CEO at Lithia Motors]

Our investments in adjacencies are now integrated as a platform for sustainable and meaningful profitability. Financing operations delivered profitability for the full year, demonstrating the strong earnings trajectory ahead. Additionally, we continue to refine our e commerce strategies, bringing in new customers as part of our omni channel strategy. This quarter also delivered strong returns on our wheels investments and we look forward to realizing the synergies presented by our partnerships. In 2025, we continue to focus on unlocking the profitability of our ecosystem by decisively acting to create customer loyalty, achieve our potential and unlock the growth in our ecosystem by delivering on our core strength, execution.

[Bryan DeBoer, President & CEO at Lithia Motors]

The foundation of the LAD strategy lies in our vast physical network, supported by the industry's most talented people, high demand inventory and dense store footprint. We continue to expand this network, adding new locations, developing key adjacencies and forming strategic partnerships all aimed at enhancing customer experiences and unlocking the potential of our platform. We operate as the largest retailer in one of the largest addressable retail markets globally And our ability to grow profitability across every aspect of our business is now stronger than ever. We believe being the most competitive buyer in one of the largest and least consolidated retail markets is a key strategic advantage. Our steadfast strategy of delivering customer solutions that are simple, convenient and transparent enables us to capture a greater share of the customer's wallet and create durable customer loyalty throughout their ownership lifecycle.

[Bryan DeBoer, President & CEO at Lithia Motors]

These solutions are tightly integrated with our digital platforms, fostering a natural and lasting retention of our customers within our ecosystem, while brands like Driveway and Green Car significantly extend our reach to 50 times more customers than our core physical businesses provide. The LAD digital ecosystem continues to deliver positive momentum. We recently launched the My Driveway portal offering customers two fifty plus functions to provide more visibility and control while shopping and servicing. Our teams continue to deliver exceptional digital and physical customer experiences with a clear focus on extending our reach and expanding market share. The strength of our platforms, financial discipline, regenerative free cash flows and a culture that inspires growth powered by people enables us to be agile in responding to customer needs and capitalizing on the tailwinds the industry carries into 2025.

[Bryan DeBoer, President & CEO at Lithia Motors]

Our strategic positioning and the rollout of the My DRIVEWAY consumer portal allows us to increase touch points throughout the customer's lifecycle across our adjacencies and equip our stores with the tools to improve market share, loyalty, growth and ultimately profitability. Acquisitions remain a core competency and we continue our disciplined approach to look for accretive opportunities that can improve our network focusing on The United States. We target a minimum after tax return of 15% and acquire for 15% to 30% of revenues or three to six times normalized EBITDA. Life to date, our acquisitions have yielded over a 95% success rate and an after tax return of over 25% demonstrating that LAD is not your typical high risk roll up strategy. In the near term, we are watching acquisition pricing and remaining disciplined as we look for strong opportunities, while balancing this with the attractiveness of our own share buybacks.

[Bryan DeBoer, President & CEO at Lithia Motors]

Our capital generation and improving earnings allows us the flexibility to do both and are reiterating our expectation that estimated future annual acquired revenues will be in the range of $2,000,000,000 to $4,000,000,000 per year. We remain focused on growth and view industry consolidation as a driver of continued strong long term returns. With the capital engine we built, we are able to deploy our free cash flows to generate the highest returns remaining flexible to market conditions. We are maintaining our adjusted capital allocation to balance acquisitions and buybacks equally, especially given the attractive relative values of our own shares. During the quarter, we repurchased $93,000,000 or 0.9% of our outstanding shares.

[Bryan DeBoer, President & CEO at Lithia Motors]

We continue to evaluate acquisitions and share repurchases and will focus on share buybacks in the near term given market pricing dynamics on acquisitions. These elements combine for a clear and compelling pathway to generating $2 of EPS for every $1,000,000,000 in revenue in a normalized environment as illustrated in Slide 14 of our investor presentation. The key factors underlying our future steady state are now totally within our control and include the following: First, continue to improve our operational performance by realizing the massive potential that we have built in our own existing stores. This includes increasing our share of wallet through greater customer lifecycle interactions, sustained productivity gains, cost efficiencies and growing each store's new, used and after sales market share. Through these levers in our business, we see a pathway to achieve SG and A as a percentage of gross profit in the mid-fifty percent range.

[Bryan DeBoer, President & CEO at Lithia Motors]

Second, optimizing our network by acquiring and driving high performance in larger automotive retail stores in the stronger profitability regions of the Southeast and South Central United States. This alongside our digital channels will bring U. S. Market share to 5%. Today, we have a combined new and used vehicle market share a little over 1%.

[Bryan DeBoer, President & CEO at Lithia Motors]

Third, financing of up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves as you can see in our results. Our financing operations achieved full year profitability in 2024 and we expect meaningful profitability growth from here. Fourth, through scale, we are driving down our vendor pricing with solutions like Pinewood, leveraging corporate efficiencies and lowering borrowing costs as we path towards an investment grade credit rating. Fifth, maturing contributions from our horizontals including fleet management, DMS software, charging infrastructure and captive insurance. And finally, delivering ongoing return on capital to shareholders through increased share buybacks and dividends.

[Bryan DeBoer, President & CEO at Lithia Motors]

We are well positioned to grow our complete mobility ecosystem that leverages unique scale and capabilities to create more frequent, meaningful and durable customer experiences throughout the ownership lifecycle. With the foundational elements of our strategy firmly in place, we are now fully focused on execution and our confidence in our ability to drive to new levels of performance and establish a new standard for the industry. Now I'd like to turn the call over to Adam for an overview on key operating performance and how we are igniting our store and department potentials.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

Thank you, Brian. In quarter four, our team demonstrated our ability to deliver exceptional customer experiences, focus on cost discipline and importantly, grow market share. Our focused approach of having the right leaders and the right products resulted in clear sequential improvement in sales trends, and we are confident in our ability to strengthen our opportunity areas, particularly used vehicle sales. I proudly stand by our leaders as they set a new bar for the industry in the months ahead. I'd like to focus today on three opportunities to drive profitability revenue growth, inventory trends and SG and A execution.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

As Brian mentioned, we delivered our first year over year growth in operating profit in nine quarters with positive contributions from new vehicles, after sales and value autos, all supported by continued strength in SG and A execution. We are confident in our ability to continue delivering on our growth strategy in 2025. Let's now turn to our same store sales performance, where we saw strong performance in new vehicles and value orders. Total revenues increased by 3.1% and gross profits declined 3.7%, primarily due to the normalization of GPUs. Total unit sales increased 1.7% year over year, while total gross vehicle profit of 4,535 was consistent with the prior sequential quarter and was down $444 compared to the same period last year.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

New vehicle units increased 7.4% year over year with particular strength in import manufacturers. Our front end GPUs remain resilient at 3,082, decreasing sequentially from 3,188. Used vehicle units were down 4.3% year over year. We saw strong performance in value orders, which were up 24.6% year over year and we saw improvement in certified and core unit trends. Front end GPUs for used vehicles are stable year over year at $19.59 dollars and declined sequentially by $177 Used autos continue to be the focus of our operations and whilst we're encouraged by our progress, we expect to see significant improvement in the quarters ahead.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

An opportunity also remains with our after sales performance and this will be a key driver of growth in 2025. In the quarter, after sales revenues were up 3.4% compared to the prior year, delivering a 55.8% gross profit margin. Warranty work was core to this growth with a 19.9% increase in gross profit year over year. Our ability to manage technician headcount and drive operational efficiencies has positioned us well to meet ongoing demand, whilst also maintaining a strong focus on providing exceptional customer experiences in our after sales departments. Now turning to inventory, where we saw an overall decrease of approximately $200,000,000 on our inventory balances from quarter three.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

We continue to see opportunity to decrease our inventory balances and are targeting 50 DSO for new and 40 DSO for used inventory balances in the second quarter as we look to achieve further flooring interest savings. The execution on our original cost saving plan of $200,000,000 was fully realized in quarter four. Our adjusted SG and A as a percentage of gross profit was 66.3 during the quarter and 66.8% on a same store basis, despite the typically higher SG and A we experienced in quarter four due to seasonality. Whilst we are pleased with two consecutive quarters of strong SG and A performance, we remain dedicated to achieve continued cost savings and maintain a focus on disciplined cost management as we move through 2025. Opportunities to improve our cost structure remain with a potential to achieve SG and A of $65,500,000 to $67,500,000 on a same store basis in 2025 through continued efforts in North America and our UK network where optimization remains.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

Our team's relentless focus on delivering exceptional customer experiences and achieving performance through people this quarter is impressive. I'm proud of the team's progress in 2024 and confident in our outlook for 2025 and look forward to inspiring customer loyalty, achieving the potential of our stores and igniting growth across our ecosystem. I will now turn the call over to Tina to walk us through our key financial highlights.

[Tina Miller, SVP & CFO at Lithia Motors]

Thank you, Adam. The clear momentum Adam outlined in our operations has enabled us to accelerate our focus on creating value through our financing operations segment, efficient capital allocation and disciplined balance sheet management. Starting with our financing operations segment, primarily driven by DFC, we continue to see solid progress with profitability of $9,000,000 this quarter compared to a loss of $2,000,000 in the same quarter last year. The benefits of our diversification strategy are apparent as our seasoned portfolio continues to grow and our capital and securitization efficiency improves with the market building confidence in our operations. 2024 was the turning point with profitability of $15,000,000 for the full year.

[Tina Miller, SVP & CFO at Lithia Motors]

We expect to continue to see this profitability trajectory in 2025 as we balance yields, growth and risk with an emphasis on high quality loans and disciplined underwriting. The financing operations portfolio balance is now over 3,900,000,000 with DFC originating $5.00 $1,000,000 in loans during the quarter. Our portfolio quality continues to be strong with new origination FICO scores expected to average $7.3 in 2025 and sustained improvements in net interest margin, which increased 135 basis points year over year and 55 basis points sequentially. Overall, our financing operations continues to deliver on our financial milestones ahead of schedule. The adjacency is a key element of our $2 EPS for every $1,000,000,000 of revenue target as each loan originated by DFC contributes up to $1,500 more profitability than traditional indirect lending.

[Tina Miller, SVP & CFO at Lithia Motors]

We remain confident in this segment's long term earnings growth and expect increasing profitability with a fully seasoned portfolio. Now moving on to our cash flow performance and balance sheet. We reported adjusted EBITDA of $419,000,000 in the fourth quarter driven by relatively flat net income as higher unit sales offset continued GPU normalization and higher floor plan interest expense year over year. During the quarter, we generated free cash flows of $180,000,000 Free cash flows were impacted by higher floor plan interest expense and an increase in capital expenditures compared to the prior year mainly related to construction to meet manufacturer requirements at recently acquired locations. Our capital deployment strategy focuses on the efficient allocation of our business's regenerative cash flows preserving the quality of our balance sheet while supporting our growth initiatives and allowing us to respond opportunistically to a complex environment.

[Tina Miller, SVP & CFO at Lithia Motors]

This quarter, we continued our focus on closely balancing acquisitions with shareholder return as we see elevated pricing on store acquisitions even as margins normalize compared to our shares' current valuations. Prospectively, we look to allocate 30% to 40% of free cash flows to share repurchases. Our capital allocation strategy is guided by M and A transaction pricing. And as acquisition pricing normalizes, we will actively reassess. Capital expenditures have trended down and are now primarily related to network optimization and OEM requirements.

[Tina Miller, SVP & CFO at Lithia Motors]

Under this rebalanced focus in the fourth quarter, we repurchased nearly 1% of our outstanding shares at a weighted average price of $377 4 60 9 million dollars remains available under our share repurchase authorization. We ended the quarter with net leverage of 2.5 times in line with our long term target planned growth and target leverage below three times. These planned growth and target leverage below three times. These metrics adjust for the impact of floor plan debt, which is unique to our industry and related to the financing of vehicle inventory. This financing is integral to our operations and collateralized by our inventory.

[Tina Miller, SVP & CFO at Lithia Motors]

The industry treats the associated interest as an operating expense and EBITDA and excludes this debt from balance sheet leverage calculations. Similarly, we have ABS warehouse lines and issuances to capitalize DFC, which are also excluded from our leverage calculations. Our strategy is to achieve strong consistent growth and best in class shareholder returns through our omni channel platform. We have the right team, tools and financial foundation in place to drive scale and profitability in our core business and adjacencies. Our diverse and talented team is committed to delivering exceptional customer experiences to build loyalty and we have the foundation to ignite our potential as we grow in 2025 and beyond.

[Tina Miller, SVP & CFO at Lithia Motors]

This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?

[Operator]

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Ryan Sigdahl with Craig Hallum. Please proceed with your question.

[Ryan Sigdahl, Partner & Senior Research Analyst at Craig-Hallum Capital Group LLC]

Hey, good morning, Brian, Tina, Adam. I want to start with what you're seeing in the current environment. So clearly sentiment has improved, SAR has improved kind of towards the tail end of Q4. It seems like trends have continued in January despite some weather and various impacts. But curious what you guys are seeing from a trend standpoint, kind of how you view the new administration, tariffs if there's any impact and noise kind of recently, but just kind of a current market update would be great?

[Bryan DeBoer, President & CEO at Lithia Motors]

Thanks, Ryan. This is Brian. I think we're pretty excited entering the year because we're finally seeing the tailwinds of volume coming back whether those are driven by economic change or political changes. We definitely see a pathway by year end exiting the year at $17,000,000 SAR and more likely that we believe that there could even be an $18,000,000 year in the future knowing that there's about $11,000,000 to $12,000,000 units that have been suppressed or not sold over the last five years that things look pretty good. Now if we're looking at other macro issues, I think tariffs is probably one of the larger things.

[Bryan DeBoer, President & CEO at Lithia Motors]

And I'd probably never thought I'd be sitting here saying I'm glad I have an extra twenty days of inventory over most of the industry, but we are sitting in a nice position with inventory of tariffs do end up coming in. The tariffs for us, we have about 36% to 38% of our vehicles we estimate that could be impacted by tariffs. And being that we've got a fifty plus day supply, we should be sitting quite nicely to be able to work through any negotiations that are happening between the two countries or three countries or four countries or whatever it ends up being at. So all in all, the market is there, okay? And I think in terms of our performance this quarter, I don't believe that we captured all of our opportunity, okay?

[Bryan DeBoer, President & CEO at Lithia Motors]

We did a solid job in the new cars, okay? But that gives indication that there was a market there that we did not capture on used cars, okay? I believe that it's highly likely that we could see double digit same store sales growth on used cars in the coming years, okay, as well as possibly on new cars and that's a good sign for the industry as well. When it comes to after sales, again, I think our warranty business filled our shops at up 20% and our customer pays were sacrificed because of it up only 2%. Okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

We've got to be able to walk and chew gum in our service departments at the same time, meaning that when warranty goes up, we're still servicing our customer pay work. So all in all, lots of opportunity for us knowing that our ecosystem is fully built and grounded. We're 100% focused on capturing that opportunity.

[Ryan Sigdahl, Partner & Senior Research Analyst at Craig-Hallum Capital Group LLC]

That's great. My follow-up question, just looking at your 2025 new vehicle GPU outlook, it seems a little more pessimistic or maybe conservative, I guess, however you want to view that, versus some of your peers that are saying we're closer to the bottom and new normal than we are kind of needing a lot more normalization to go. I guess the question is what are you seeing in terms of is it industry dynamics, is it conservatism? And then kind of secondly to that is the $2,500 to $2,700 of new vehicle GPU, is that the target new normal, which I think you've said in the past? Or is that the average that you expect for the year from a kind of guidance standpoint?

[Bryan DeBoer, President & CEO at Lithia Motors]

Ryan, I think when we think about GPUs that I think this has been the theme probably for the last four or five years that we're a little bit more conservative on GPUs. We think if we don't do that, then people get out of control on their cost structure. So with our rightsizing plans and our sixty day plans in place, it's imperative that we match GPUs with our cost structure. So we probably are a little more conservative because of that reason. In terms of the $2,500 to $2,700 that is what we're looking at for the year.

[Bryan DeBoer, President & CEO at Lithia Motors]

We believe that the normalized level is somewhere in the $2,300 to $2,500 level, okay. And add another $2,000 in F and I get you to the $4,300 to $4,500 okay. So there is some that will come out, but I really believe if demand is at where it's at today and we're in the middle of winter, okay, I really believe that we've got a lot of upside when it comes to Q2, Q3 when seasonality for us really starts to take hold.

[Ryan Sigdahl, Partner & Senior Research Analyst at Craig-Hallum Capital Group LLC]

Thanks, guys. Good luck.

[Bryan DeBoer, President & CEO at Lithia Motors]

Thanks, Ryan.

[Operator]

Our next question comes from the line of Brett Jordan with Jefferies. Please proceed with your question.

[Bret Jordan, Managing Director at Jefferies LLC]

Hey, good morning, guys. I think you talked about significant improvement in used. And I guess sort of could you parse out what is volume versus GPU there sort of where you see us in the used profit cycle?

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

I think we are obviously pleased with our value orders as I said in my remarks with solid growth both through the quarter and on a full year basis at W2 as well. But overall, we have to be disappointed with

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

a decline in performance overall.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

And we've got a significant focus on driving used in 2025, especially when we can show we're up on new cars, 55% of our used cars are sourced through trade in. So there's no logic trail to say why we should be different on used, if that makes sense. In terms of GPUs on used cars, we saw a lot of volatility in pricing in 2024. If we look at historical norms, we think there may still be a slight upside on used cars, but that remains to be seen as we kind of try and drive volume back as well. Does that make sense?

[Bret Jordan, Managing Director at Jefferies LLC]

Thank you. And I guess you also mentioned in prepared remarks, improving UK efficiency and SG and A. Could you just give us an update where you are, what inning there?

[Bryan DeBoer, President & CEO at Lithia Motors]

Sure, Brett. This is Brian again. We're actually quite pleased with what's occurring in The UK relative to market conditions. It's obviously a little softer market. You probably saw that from some of our peers as well.

[Bryan DeBoer, President & CEO at Lithia Motors]

But we have improved our position when it comes to cost management. I think we were around just over 80% SG and A as a percentage of growth, which is still far from the 75% that we're targeting. Okay. But going through the winter months and knowing those gloomy days over The United Kingdom are there, we're pretty positive of where we're at. We've right sized that part of the organization.

[Bryan DeBoer, President & CEO at Lithia Motors]

So you'll start to see that come into same store sales this quarter, okay? So you'll get to see some of those improvements. But all in all, we're really pleased with the investment. We are getting our feet on the ground a little bit when it comes to reporting and it comes to that idea of performance through people and managing people. But you know what?

[Bryan DeBoer, President & CEO at Lithia Motors]

We've got great leadership over there with Neil and his teams and we're excited with what the future holds. Lastly, we also have cleaned up entire the entire mess that I would say that we bought. If you recall, there was those 30 to 50 businesses that were too small to operate. All of those have been shuttered now or they've been sold. We've monetized on all of them, but two and the remaining two will get monetized by the March, Okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

So we're pretty pleased with where we sit on that. In terms of the associated real estate, our leaders in The UK did a nice job. We're almost 100% gone on selling all those properties. In terms of the lease properties, We've got work through almost 70% of the equivalent pounds that those costs. So we're real pleased where we sit on that as well.

[Bret Jordan, Managing Director at Jefferies LLC]

Great. Thank you.

[Operator]

Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

[Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co]

Great. Thanks for taking the question. Just first one on the SG and A curve. I think Adam decided like there's more opportunities here. Could you elaborate what areas that might be?

[Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co]

Is it more in The UK versus The U. S? Just curious if you could dive a little bit deeper there and I have a quick follow-up.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

Hey, Rajat, thanks for the question. Yes, I think if we look at, if you remember, we had our sixty day plan, I think we talked to you about it in the late summer last year. We kind of realized the measures identified in that and through the fourth quarter, we took out a further $200,000,000 in inventory. So that was promising. I think we still believe there's another $50,000,000 to $70,000,000 in vehicle inventory to kind of clean up and manage through the quarter into quarter two.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

And then I think we're in good shape. But of course, the underlying premises, we remain disciplined as we move forward through our store leaders or ops leaders to make sure that we don't just jump back and add the cost. And so I think we talk about SG and A discipline as a kind of everyday buzzword now, but to be specific to your question, the new car inventory should decline by another 50 to 70. And I think Brian probably is best positioned to comment on UK, Roger.

[Bryan DeBoer, President & CEO at Lithia Motors]

You bet. In fact, let me just recap a little bit on the entire organization. If you remember, we've finished $200,000,000 in cost reduction. There's another $50,000,000 to $70,000,000 in cost savings coming from inventory. We also found another almost $50,000,000 in personnel costs at the support functions, okay, as well as tech costs.

[Bryan DeBoer, President & CEO at Lithia Motors]

Those will be realized in the first half of twenty twenty five for an aggregated total of almost $320,000,000 There's another $20,000,000 to $30,000,000 that's in The U. K. But like I said, you'll see that in the same store sales results this coming quarter. I think most importantly, when you think about driving down SG and A, we're talking about approximately 1.5% SG and A reductions over the coming five years, okay, to drop us into that mid 50% range. Okay, that's going to come through growth of top line.

[Bryan DeBoer, President & CEO at Lithia Motors]

So it's imperative that we're able to grow our same store sales growth and then do it in a way that it's cost efficient. We announced the release of the driveway portal in those two fifty functions that help our team members and associates do things easier and gain productivity. That's part of it. Okay. If our customers can do their work and have transparent, simple and empowered experiences within that portal that relieves some of the pressure in the service departments and the sales departments as well.

[Bryan DeBoer, President & CEO at Lithia Motors]

So it's a combination of those two elements top line growth and disciplined reductions that are coming from the uniqueness of our ecosystem that we're going to be able to get to that mid-fifty percent SG and A cost. Thanks, Rajat.

[Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co]

Just one follow-up ahead and thanks for all that color. On points and services, you had pretty good warranty growth as you talked about. I was still a little surprised to see just 3.5 like revenue growth, 4.5% gross profit growth. I mean, curious how do you accelerate that to the mid single digit guidance for the full year? You also have some easy compares from the CDK outage in 2Q, 3Q.

[Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co]

So I would imagine it would be higher than the mid single digits, but any more color you could give there on these initiatives in that business, where you are in technician ads, etcetera, that can give us some comfort in the acceleration? Thanks.

[Bryan DeBoer, President & CEO at Lithia Motors]

Sure, Raj. This is Brian. I think after seeing our peers, we're not happy with 3.5%, okay. That didn't meet market, okay, which is important. The exciting thing is I think I can I think Adam and I can both sit here and say that we've got the challenge out there for our after sales leaders to be able to reach higher, okay?

[Bryan DeBoer, President & CEO at Lithia Motors]

It won't turn in months, it'll turn in a few quarters, But we've established multiple things of how we can actually grow warranty and grow CP. It's not a tech issue, okay. It's more of a mindset issue from the service advisors in the organization and management that they believe that there's only so many hours there and they can find the efficiencies, okay? We just announced the release of what we call our Lithium Driveway Partners Group. That was at a store manager level only, okay?

[Bryan DeBoer, President & CEO at Lithia Motors]

That's now getting rolled out to department level managers and that's something that's going to grow the pride for performance within our stores. And that should that's tied directly to a departmental potential exercise, which is setting a higher bar that again is establishing that there's a market there, we need to capture it. So I really look at it. We could be high single digits, low double digits again like we were pre COVID within the coming, I would say three to four quarters. The marketplace is there and the optionality that we're providing through the portal or through in home service functions should be able to take market share and grow that business.

[Bryan DeBoer, President & CEO at Lithia Motors]

We've outrun, I would say, the regional differences in population growth, okay? There isn't really big differences any longer. So there's not a good excuse for why we were at 3.4 and others were pushing high single digits. So we'll get there, Raja. Thanks for pointing that out.

[Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co]

Thank you. Thanks for all the color and good luck.

[Operator]

Our next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed with your question.

[Chris Bottiglieri, Analyst at BNP Paribas]

Hey, thanks for taking the question. Hey guys. I wanted to follow-up the first one on the guidance for 25% on the gross margin rate for service. Looks like you've been doing really good like 56% grosses. Looks like you have that dropping for some reason next year to 52% to 55%.

[Chris Bottiglieri, Analyst at BNP Paribas]

Is that just mix with customer pay? Or is that anything you're doing with wheels for next year? Just trying to understand why.

[Bryan DeBoer, President & CEO at Lithia Motors]

Chris, this is Brian. Yes, it's more of a mix between the labor part of the after sales and the inventory part. So service versus parts, we believe that as cars become more complex and more rip and replace that there's a bigger parts content on cars than there is a labor content. So you're going to generally see us lean towards margin reductions because of the bigger parts mix. Okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

It's not that we got smaller business. It's purely just the mix of those. And it may end up happening slower than what we expect, but we do hedge that on the more conservative side because of the parts mix.

[Chris Bottiglieri, Analyst at BNP Paribas]

Got you. Okay. And then two, just wanted to kind of get a sense for the GPU guide. If you look at the GPU guide on the used side, you did 1,800 like 1,800 to 2,300 same store guide, pretty wide range, but you have UK slipping into the comp base. You're exiting at 1,700 in Q4, '18 hundred in Q3.

[Chris Bottiglieri, Analyst at BNP Paribas]

So at a big the midpoint is a pretty big snapback relative to 24. Just trying to get a sense, were there like underappreciated headwinds in '25 I mean 24 like inventory write downs or anything that maybe you weren't calling out that kind of gives you visibility to the snapback in '25 or in your view what drives that recovery into used GPU? And then I guess similarly F and I seems that a little bit of a snapback in the '25 guide?

[Bryan DeBoer, President & CEO at Lithia Motors]

Chris, this is Brian again. I think when it comes to the GPUs, the major factor is The UK, okay, because obviously they're considerably lower. The other thing is in The UK, F and I is much lower as well. So that has implications on that. I do believe that there's opportunity to grow our F and I.

[Bryan DeBoer, President & CEO at Lithia Motors]

And obviously, I mean, we're targeting that 2,000 number. But as ASPs get higher, the financing amounts get higher as well. And obviously, that drives F and I profitability. So I do believe that there's some nice upside that we could also realize. And again, we try to be realistic as we can with what we see in the current marketplace.

[Chris Bottiglieri, Analyst at BNP Paribas]

Got you. Okay. Thank you.

[Bryan DeBoer, President & CEO at Lithia Motors]

Thanks, Chris.

[Operator]

Our next question comes from the line of Jeff Lip with Stephens. Please proceed with your question.

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

Good morning, Brian, Tina, Adam and Jardone. A couple of one first question, your store count went from four sixty seven to four fifty nine. There really wasn't any press releases kind of highlighting that. I don't recall you're talking about it. Could you elaborate on what drove that what were those stores and why it went backwards in that regard?

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

And then also on the after sales guidance, I was just curious the $52,000,000 to $55,000,000 is what are the puts and takes like what would cause you to be closer to $52,000,000 versus closer to $55,000,000?

[Bryan DeBoer, President & CEO at Lithia Motors]

Sure. So on store count that is purely the divestiture and closures of stores in The UK that were disclosed a year ago. Okay. So those got finalized, which is great to have that a lot cleaner. In terms of the $52,000,000 to $55,000,000 the biggest variance is typically are what happens on recalls and how much of its parts.

[Bryan DeBoer, President & CEO at Lithia Motors]

Okay? So as I like I just went through a few minutes ago that parts mix is why we give that range. I do believe that a 54% to 55% is probably appropriate for the near term. So you shouldn't see much you shouldn't see I wouldn't even call it margin degradation, I'd call it mix change, okay. Because remember on parts, our profitability level is about 30% and on labor sales in the service department, they're 65%, Okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

So big differences that purely that can move things pretty quickly if you have an RO that happens to be 60% parts versus 60% labor.

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

And then just a couple of quick follow-up clarifications for Adam. One was Adam, you mentioned 55% of new that statistic you were referring to that each again the 55 of the new deals come with the trade because I don't think that was you weren't implying that 55% of your used to source.

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

That.

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

It's the source of our

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

yes, it's a great question, Jeb. It's the source of trade it's the source of our used cars. So 55% are sourced from customer trade ins. People who bought a new car trade in trade one in and we try and sell that.

[Bryan DeBoer, President & CEO at Lithia Motors]

Here's the actual here's our breakdown. It's 55% trade in, 1% buying them off the service drive, four percent lease, 8% private party and 2% through driveway for a total of 70% that comes from the consumers. Okay. The rest is service loaners dealer from other dealers, wholesalers, rental companies and auctions.

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

And then one quick last quick one. When you mentioned Adam that the SG and A benefits were fully realized, you were referring to just this quarter, right? You still have a couple more quarters to go where you're going to be running 50 plus through?

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

Yes. Great question. I think Brian talked about that. For the quarter, we realized we still see opportunity in inventory floor plan, as

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

I talked about $50,000,000

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

to $70,000,000 and then as we grow top line revenue and growth, we see an opportunity as Brian said to decrease sequentially across the coming

[Adam Chamberlain, Executive VP & COO at Lithia Motors]

years.

[Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc]

Awesome. Well congrats on a great quarter and give my best to Sid.

[Bryan DeBoer, President & CEO at Lithia Motors]

Will do. Thank you.

[Operator]

Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

Good morning, guys. Without the exact data in front of me, but I think it's fair to make a statement that you guys have been one of the biggest or the biggest acquirer in the last few years in the market. And the statement that you're making now that multiples are a little bit on the high side currently and that your stock is a little bit more attractive, it's a pretty big statement for the entire market. So Brian, I was just curious what too high means? I mean, you mentioned 15% to 30% of sales or three to six times EBITDA.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

Do you think the market how rich do you think the market is right now? And how do you think it gets normalized hopefully over the coming quarters?

[Bryan DeBoer, President & CEO at Lithia Motors]

Great question, John. I think you probably heard some confidence in my voice ninety days ago on the call that we thought things were softening a little bit in pricing. And I guess I'm sitting here with a little bit different perspective that there's been some pretty high prices paid for transactions. And the difficulty of what we're seeing John is that when you're talking about us buying at a three to six times normalized earnings multiple, you've got two factors happening. Though there's high multiples of six to 10 times in many places in the country still because there is still a lot of cash out there.

[Bryan DeBoer, President & CEO at Lithia Motors]

And then you add another 50 depending on manufacturers I should say another 15 to double the earnings levels on a three year look back. You start to get into multiples and returns that are low to mid single digits that it just doesn't make sense for us. And when we sit and trade at a forward looking multiple of somewhere around high single digits, low double digits, it just doesn't make any sense for us to do that when we know that our ecosystem is built. We know that the $15,000,000 that we made in DFC is going to be $50,000,000 to $60,000,000 this year and we know that long term it's $500,000,000 at a 20% penetration rate. So these are things that we're not even realizing in our own earnings potential.

[Bryan DeBoer, President & CEO at Lithia Motors]

So why would we just not buy our shares back? And that's where we are actually in a nice position that we're generating lots of capital that when the market turns acquisition wise then we can turn our attention back to that. I do believe it's probably still a few quarters away. I think we can probably hit $2,000,000,000 in total revenue for the year, okay? But and again, that's going to be in The United States Ninety Percent of it, okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

But we have to pick and choose those opportunities of stores that really haven't realized the profit potential that we're able to find for that three to six times normalized earnings, which is where we're really going to be sitting. So it may take another few years for it truly to normalize because people made a lot more money than what they typically had. And that's something that we try to tell them, you already got that money. We're not going to pay twice for something when your earnings are normalized. So we typically do ask for financial statements for the last few months and then try to look at the trajectory and explain that to them and hold their hand through it so they can still monetize.

[Bryan DeBoer, President & CEO at Lithia Motors]

The important thing to remember that is that as Lithia, we have done about half of the transactions over the last decade and a half that have been done by public companies, okay. And we are sitting there as a buyer that has closed every single one of those transactions other than two, okay. So over our three decades of purchasing, we've only had two transactions out of almost 600 transactions that fell apart. Okay. That's not typical in the industry.

[Bryan DeBoer, President & CEO at Lithia Motors]

Typically about four out of 10 transactions get completed even once they are contractually committed, meaning that six fall out out of 10.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

That's helpful. And just one follow-up on one of the other comments you made. You said ninety five percent success rate, which indicates 5% don't work out as well as expected. Does that mean that those stores eventually fall in into divestiture or are they stores that get closed or fixed?

[Bryan DeBoer, President & CEO at Lithia Motors]

You nailed it. In The U. S, we haven't really had to close stores. In U. K, we did because they were just so microscopic in size.

[Bryan DeBoer, President & CEO at Lithia Motors]

But in that 95%, what makes up the 5%? Typically, what makes up the 5% is us not missing a target on an acquisition. It's us buying a group that may have had one or two underperforming stores in it. And then it's just a matter of trying it for six to nine months. And if it doesn't meet our thresholds, then we typically divest it.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

Got it. And then just one last quick question on the outlook. When you're talking about the front end growth of $4,100 to $4,300 you kind of mentioned there might be some downside in the new GPU, but it sounds like the you're pretty comfortable with the other two components there being used in F and I. As we think about that front end gross going forward, which is the most important number out of those four there because you're working a deal, Do you think that's going to settle in closer to $4,000 plus or minus? I mean, because that's really the number you run the business on.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

So what's the upside downside on that and the range you think is normal?

[Bryan DeBoer, President & CEO at Lithia Motors]

Yes. John, that's a great question. And I think I'm going to answer this from a lithium driveway standpoint, not from an industry standpoint, because it's imperative to remember that lithium pre COVID had a lot of its business in the Western States and a lot of small stores that didn't generate GPU, okay. So we not only purchased a lot of luxury stores and doubled our mix percentage of luxury, We also purchased stores in the Southeast and South Central that have about $1,000 higher GPUs than the rest of the country. So our lift in GPUs is different than what the industry's lift is.

[Bryan DeBoer, President & CEO at Lithia Motors]

So we're not looking at what the industry is doing. We're looking at what we're doing when we say $4,200 to $4,500 okay? Now where does the variation come from? We believe that we've already troughed on used and there's a lot of up side on used vehicle GPU that should come back over time, okay? So in our modeling, we're assuming that there's $200 to $400 of improvement in front end gross profit on used vehicles that will offset some of the reductions in new vehicles because we are still sitting at about $1,000 higher as an industry.

[Bryan DeBoer, President & CEO at Lithia Motors]

We think because of our mix, we're only sitting about $500 to $600 higher, okay. And then obviously add back in the F and I lift of another couple of hundred dollars and you get to the $42 to $4,500

[John Murphy, Managing Director at Bank of America Merrill Lynch]

And that's you think that the normalized range for you probably over time. We'll see how the market does to make that's the target. Got it.

[Bryan DeBoer, President & CEO at Lithia Motors]

Correct. Based on our new footprint and growing footprint, okay. So the mix and the footprint are the main reasons why we move from $3,700 which was our pre COVID level to almost $500 to $800 higher, okay? Remember on F and I too, we typically had grown F and I about $60 to $70 It's been five years at $300 okay, that you can apply to it. So there's not a big lift here.

[Bryan DeBoer, President & CEO at Lithia Motors]

It's truly we are at the point that our goal as leaders is to be able to change the mindset of our department and our store leaders, okay. And I think this idea of performance through people, we've got to help paint a picture for our store leaders. How do they find their next gear? Because I think we're all in this rut that believes that the market still may be a little soft. We know it's not okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

That SAR is going to return and GPUs are still quite strong, especially with upside in the used vehicle area. And obviously, F and I is always there to be commanded and to be captured through better people and better performance.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

That's great. And thanks for saying 18,000,000 units in the next couple of years because that's what our forecast is and everybody thinks we're way too high. But I'm certainly at the same mindset. I think we're going to get there in 2027, '20 '20 '8.

[Bryan DeBoer, President & CEO at Lithia Motors]

All right.

[Bryan DeBoer, President & CEO at Lithia Motors]

Well, we'll have dinner when that happens, okay? Hopefully it's within the next four or five quarters.

[John Murphy, Managing Director at Bank of America Merrill Lynch]

We'll

[John Murphy, Managing Director at Bank of America Merrill Lynch]

share that. Thank you.

[Bryan DeBoer, President & CEO at Lithia Motors]

All right, John. Take it easy.

[Operator]

Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.

[Colin Langan, Automotive & Mobility Analyst at Wells Fargo]

Oh, Great. Thanks for taking my questions. Just wanted I'm not sure if I missed this in your commentary. New GPUs were down sequentially, others that have reported have been flat up. Any explanation of sort of the relative performance being different?

[Colin Langan, Automotive & Mobility Analyst at Wells Fargo]

Is this just a UK factor driving some of that? Or why not seeing that seasonal help that others have seen?

[Bryan DeBoer, President & CEO at Lithia Motors]

It could be a little bit of GPU, Colin, but I think it might be mixed differences of manufacturers. But you know what, I'll own it. Adam will own it. It's us, okay? There's opportunities and we've got to get out of our mind that somehow the market is soft when the market is quite robust, okay?

[Bryan DeBoer, President & CEO at Lithia Motors]

So that's just something that I think after reflecting on the peers, it gives us upside as the largest retailer in the world that you know what, if we can figure that out and we can change the mindset of our people and inspire them to find the next gear and we're going to be able to exceed. So I don't want to really assign a reason, but I would say that that's it's probably more us than anything else and let's own that and move forward and capture that.

[Colin Langan, Automotive & Mobility Analyst at Wells Fargo]

Okay. All right. And I just want to follow-up on a prior question. I think it was asked about the 2025 outlook on used and F and I. And I mean, if I look at consolidated, which is going to be the same store base, you're at like 1,700 unused in Q4 and the guide is 18 to 21.

[Colin Langan, Automotive & Mobility Analyst at Wells Fargo]

The prior answer sounded sort of explained why it would be down, but the guide would imply that improves. So just trying to make sure I understand what is driving used in F and I, because even at the midpoint on F and I would be better. What is driving it better than at least the Q4 rate that we're looking at currently?

[Bryan DeBoer, President & CEO at Lithia Motors]

So really quickly on F and I, it's truly people performance, okay. It's managing the performance of the people. When it comes to the used car market Colin, we do have seasonality in used vehicles on GPUs. And as we all know, it's been quite volatile over the last few years that have been driven off of the inventory demands or lack of demands on supply of new vehicles. So I really believe that that's going to normalize.

[Bryan DeBoer, President & CEO at Lithia Motors]

We've got Q2, Q3 coming which usually means strengthening of used cars and I believe that we've got a lot of opportunity internally to be able to improve and find scarce vehicles and effectively use our AI and our reporting tools to look at price to market and cost to market to be able to grow our performance. And that's really where our opportunities lie and why we believe 1,700 isn't an appropriate level on a normalized basis. I think that's a depressed level still that's troughed out now for almost what six, eight quarters, okay. And it's time to capture the opportunity that's there and respect that we've got the scarcest cars in the country and they should command more money and let's let the world see those through driveway and green cars and find those 50 times more customers to help drive price to market up.

[Colin Langan, Automotive & Mobility Analyst at Wells Fargo]

Got it. All right. Thanks for taking my questions.

[Bryan DeBoer, President & CEO at Lithia Motors]

Thanks, Colin.

[Operator]

Our next question comes from the line of Ron Josey with Citi. Please proceed with your

[Ron Josey, Analyst at Citigroup]

question. Great. Thanks for taking the question. Brian, I wanted to ask just a little bit more about the online approach that you all have. I know we pulled back some in '24.

[Ron Josey, Analyst at Citigroup]

So any insights on the vision here would be helpful in terms of how you're thinking online can grow, particularly from a used perspective, just given the importance of used with trade, with profitability, after service? And then do you think we'll get to online growing as a channel here in 2025 or is that more of a 2026 and beyond? Thank you.

[Bryan DeBoer, President & CEO at Lithia Motors]

Thanks, Ron. And it's a big part of our ecosystem of how we thought about the design and that idea that you have the potential of 50 times more customers. I think what we've done is we've relaxed the pushing of our physical network to actively involve. If they don't get it, they're going to fall behind because our internal and our external approaches to our online business are growing. Okay.

[Bryan DeBoer, President & CEO at Lithia Motors]

We're quite excited to see what's happening in green cars and driveway. It is an integrated model that is integrated now fully into the stores. We developed some new reporting on what we call ecosystem effectiveness. It includes some loyalty metrics in sales and service. It includes some online functionality.

[Bryan DeBoer, President & CEO at Lithia Motors]

It includes now the My Driveway portal. Okay. And this idea that customers are going to be able to now easily access our online services. And we didn't talk a lot about the My Driveway portal, but we're going to be dumping almost 70,000 customers into that portal come March, which are all of our DFC customer base. So they're going to be making all payments through there.

[Bryan DeBoer, President & CEO at Lithia Motors]

They're going to be doing all payoffs through there. They can get their valuations through there. Customers can already book service appointments. They can attach themselves to any store through there. They can have different cars attached to different stores.

[Bryan DeBoer, President & CEO at Lithia Motors]

It's quite functional and it's really empowering. So we really believe that the snowball effect that will occur from the My Driveway portal will help integrate everything together to make those customers experiences more seamless. We are targeting some pretty good lift in driveway and green cars this year to the tune of about 50% lift. Okay? And we're starting to see that in the early part of the year through just figuring out efficiencies and again managing performance through people to be able to really improve.

[Bryan DeBoer, President & CEO at Lithia Motors]

We've also changed compensation plans within our e commerce businesses to help motivate people to do more with less, okay? We're also looking at how do we align our stores' compensation plans with the ideas of loyalty potential and growth, okay? And those are things that over the next coming years we'll be working on with new departmental leaders and new store leaders as they come into the organization to align that top line growth as well and make sure that it follows through with SG and A cost improvements. So hopefully that gives you a little bit of color, Ron, on where we sit on the online approach, but we're pretty excited of reaching this point where the ecosystem is built. Now it's a matter of leveraging it.

[Ron Josey, Analyst at Citigroup]

Certainly does. Thank you, Brian.

[Operator]

Our next question comes from the line of David Whiston with Morningstar. Please proceed with your question.

[David Whiston, Equity Strategist - U.S. Autos at Morningstar]

Thanks. Good morning. Brian, you've talked a couple of times about a mindset change being needed such as warranty crowding out customer pay and having customer pay underperform. Like, can you be a little more specific as to what you mean by that? Like what actual action items do you want to see happen to have this change take place?

[Bryan DeBoer, President & CEO at Lithia Motors]

I think it starts with believing in your North Star, which is potential. Okay. We went through a potential exercise in November and December and there's a lot of low bars being established when there's units in operations in those stores. So that's when I talk about mindset change, it's our RVPs, our group leaders and our regional presidents sitting down with general managers and departmental managers and diagnosing where the opportunities lie and building plans fundamentally how to take the actions to capture that market share. It's as small of things as in after sales, what is my percentage of vehicles that are driveway repair, meaning I'm repairing a car in someone's driveway or it's driveway pickup, meaning I'm picking up the car from someone's driveway and I'm taking it back to the store and fixing it.

[Bryan DeBoer, President & CEO at Lithia Motors]

If they're not involved with those things, they're not involved with automotive service retail today because there's not an optionality. And David, there's probably 30 things in each of the key departments that need to be done. But it starts with that ability to engage leaders to see things that they're not seeing today, okay. We have something that we call store visits. You obviously know about our store performance scorecards that lays out the foundation to what is high performance look like.

[Bryan DeBoer, President & CEO at Lithia Motors]

Underpinning all of that are second tier reports that get into the details of these in store visits that are pointing those leaders towards that. The mindset that we need to change above the store is if there's not movement within sixty to ninety days of doing that sit down then that person that's in that departmental role or that store role they don't believe, which means we need to be looking for a way to change their mind again or exit them from that leadership position. That may mean that they can find another position in the company, but there's been way too soft of management when and lip service coming from the stores. If the performance isn't getting changed quickly, it's never going to get changed. Sixty days to ninety days is our new mantra, okay?

[Bryan DeBoer, President & CEO at Lithia Motors]

It was that way five to seven years ago. It's that way again. And I know Adam and the RPs and RVPs believe in that strategy. They've just got to go execute on it again, okay? And our store leaders need to understand that change management is a mindset.

[Bryan DeBoer, President & CEO at Lithia Motors]

It's about helping people see things that they can't see on their own. It's about shifting them into the next gear and helping them find that gear and then looking towards that next gear on top of that to be able to continuously improve in our organization. Hopefully that gives you some insights David. If you want to take it offline, we can sure talk to you about it at a departmental level and what the key drivers are that we'll be working on.

[David Whiston, Equity Strategist - U.S. Autos at Morningstar]

I really appreciate you flushing it out. That's helpful. Just to be clear then, you're not really short techs and short service base?

[Bryan DeBoer, President & CEO at Lithia Motors]

No. I mean, that's more of a symptom in some locations, but it is not the effect. Okay. We don't have the ability to have tech shortages because we grow techs internally. Yes, and maybe Texas there's some soft spots still, but outside that, that's not the reason.

[Bryan DeBoer, President & CEO at Lithia Motors]

It is truly a mindset of the people in the stores that believe that they can't do more with less and they can. Okay, they can do more with less. We've just got to help them see it.

[David Whiston, Equity Strategist - U.S. Autos at Morningstar]

Great. Thank you.

[Bryan DeBoer, President & CEO at Lithia Motors]

You bet, David. Thanks.

[Operator]

Mr. DeBoer, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments.

[Bryan DeBoer, President & CEO at Lithia Motors]

Well, thanks, Christine. Thank you, everyone, for joining us today. We look forward to seeing you on the Lithium DRIVEWAY first quarter call in April. All the best. Thanks, everyone, for joining us.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a participation and have a wonderful day.

Participants

Executives

• Bryan DeBoer, President & CEO
• Adam Chamberlain, Executive VP & COO
• Tina Miller, SVP & CFO

Analysts

• Jardon Jaramillo, Senior Director - FP&A & Investor Relations at Lithia & Driveway
• Ryan Sigdahl, Partner & Senior Research Analyst at Craig-Hallum Capital Group LLC
• Bret Jordan, Managing Director at Jefferies LLC
• Rajat Gupta, Executive Director, Autos at JP Morgan Chase & Co
• Chris Bottiglieri, Analyst at BNP Paribas
• Jeff Lick, Managing Director & Equity Research - Consumer & Auto Ecosystem at Stephens Inc
• John Murphy, Managing Director at Bank of America Merrill Lynch
• Colin Langan, Automotive & Mobility Analyst at Wells Fargo
• Ron Josey, Analyst at Citigroup
• David Whiston, Equity Strategist - U.S. Autos at Morningstar