Lithia & Driveway Q4 2025 Earnings Call - Used Sales and DFC Scale Offset New-vehicle Margin Squeeze

Conference Operator: Greetings and welcome to the Lithia & Driveway 2025 fourth quarter 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin.

Jardon Jaramillo, Senior Director of Finance, Lithia & Driveway: Good morning. Thank you for joining us for our fourth quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, 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. 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 under-reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures.

Please refer to the text of today’s press release for reconciliation of comparable GAAP measures. We have 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 Bryan DeBoer, President and CEO.

Bryan DeBoer, President and CEO, Lithia & Driveway: Thank you, Jardon. Good morning and welcome to our fourth quarter earnings call. In the fourth quarter, we achieved record revenues driven by impressive used vehicle sales that greatly outpaced the market. Quarterly revenue was $9.2 billion, setting a new record for full-year revenue of $37.6 billion, up 4% from 2024. Adjusted diluted EPS was $6.74 for the quarter, with full-year adjusted EPS of $33.46, up 16% from 2024. Our operational leaders leaned into growing our top line and flexing their muscles across all aspects of our ecosystem, including DFC, which saw a $19 million year-over-year increase in pre-tax income and delivered a 16.7% penetration rate in December, exemplifying auto-done easy. I’d like to commend our ops leaders for leaning into used cars, especially value autos, focusing on the customer experience, and earning considerably more share in positioning us again at the top of our peer group.

Together, we’re challenging our store and sales department leaders to reinvent their profit equation through more dynamic pricing and reducing SG&A while outperforming in volume. Growing our market share and increasing volume is a turbo boost to our ecosystem’s future profitability as we increase DFC penetration, after-sales retention, and benefit from the waterfall of used vehicle trade-ins. During the quarter, our same-store revenues were essentially flat, and gross profit was down 1.2%, reflecting strong execution relative to the market. Total vehicle GPU was $39.46, down $258 year-over-year, in line with industry-wide compression in both new and used vehicle margins. Despite these headwinds, our diversified earnings mix and focus on market share delivered double-digit growth in after-sales and stable F&I performance to help offset front-end pressures. Note that all vehicle operation results will be on a same-store basis from this point forward.

New vehicle revenue declined 6.6%, on an 8.3% unit decline as industry demand softened and supply normalized. New vehicle GPU was $27.66, down $300 over last year. Performance varied by brand, with luxury brand revenue down 12.7% year-over-year, partially due to the difficult prior-year comp. Domestic and import brands were also soft, particularly late in the quarter when sales promotions didn’t materialize. Our used retail performance has returned to our historical industry-leading mid-single-digit growth levels, with used revenue up 6.1%, driven by 4.7% unit growth. Our Value Auto platform continued its strong momentum with 10.9% unit growth, demonstrating our growth at the most affordable price points. Used GPU was $1,575, down $151 year-over-year as we increased market share considerably, while now turning to the opportunity to improve unit profitability as well.

Our focus on this high ROI area provides a stable anchor to new vehicle cycles and allows us to increase the number of customers in our ecosystem while growing our F&I and after-sales profitability. F&I per unit was $1,874, up $10, demonstrating the resilience of this high-margin business. This steady growth came despite our record DFC penetration, where we intentionally shift finance gross profit from F&I to our captive finance platform. Adjusting for these mix shifts, underlying F&I product attachments and pricing was healthy, reflecting strong execution across our network. Inventory levels remain consistent, with new vehicle day supply at 54 days, essentially flat from 52 days last quarter, and used inventory at 40 days compared to 46 days in Q3. Flat inventory plus lower interest costs drove $6.5 million in year-over-year floor plan interest.

After-sales was also up nicely, with 10.9% growth in revenue and 9.8% growth in gross profit while delivering 57.3% gross margin. We saw consistent growth across all categories, with customer-paid gross profit up 10.9% and warranty gross profit up 10.1%. This stable, broad-based growth demonstrates the underlying strength of our after-sales business model and its power to create customer loyalty. Our sales departments have been challenged and are responding to improved SG&A leverage and ensuring more of our gross profit is realized on the bottom line. This quarter GPU compression outpaced our cost reduction efforts, which Tina will talk to in just a moment. As we look ahead into 2026, we’ve flattened the organization, continued to focus on efficient customer experiences, and are making technology investments that will drive efficiency.

In the UK, our teams delivered a 10% increase in same-store gross profit while navigating challenging market conditions as well as regulatory labor cost increases. We’re capturing market share in our high-margin after-sales business across the UK network while focusing on sales throughput, particularly in used vehicles. Adjusted pre-tax income for the UK increased 53% for the full year compared to 2024, and we see continued opportunities to strengthen our results in 2026. Well done, Neil, and well done, UK team. Our digital platforms continue increasing our reach and enhancing the customer experiences to make shopping, financing, and servicing simpler and faster.

Our partnership with Pinewood AI has delivered exceptional returns, and we’re excited to pilot the Pinewood Dealer Management System in our first North American store soon, creating a single modern platform and reducing complexity, accelerating workflows, and placing our team members in the same systems as our customers to deliver faster, more seamless customer experiences. Together, these technology investments deepen customer retention, support operational efficiency, and reinforce the power of our integrated ecosystem. Driveway Finance Corporation continues to scale profitably with record income, healthy net interest margins, and disciplined credit quality. Our expanding market share creates a larger origination funnel and a path to our long-term 20% penetration target that will convert more sales into recurring countercyclical income. As DFC continues to scale, this platform will differentiate our customer offerings while driving higher quality, more diversified earnings streams.

Now, on to capital allocation, where we remain focused on maximizing shareholder return through disciplined deployment. With our shares trading at a deeply discounted valuation, we accelerated repurchases this year, retiring 3.8% of our shares in the quarter and 11.4% of our shares in 2025 at prices that we should drive meaningful accretion with. We also strengthen our balance sheet through opportunistic refinancing while preserving capacity for our growth investments. Going forward, we’ll maintain this balanced capital strategy between buybacks, selective M&A, organic investments, and balance sheet strength. Our integrated ecosystem continues to strengthen. Growing after-sales profitability, accelerating used vehicle growth, expanding DFC penetration, and ongoing operational improvements in our sales departments will create a stronger earnings base.

With improving operational efficiency, robust free cash flow generation, and disciplined capital deployment, we’re well-positioned to deliver compounding earnings growth in 2026 as industry conditions normalize by doing what we do best: growing through the power of our people. Strategic acquisitions remain a core pillar and key differentiator, and in the past six years, we’ve more than tripled our revenue while pairing scale with consistent EPS growth. This growth was accomplished while also building a more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow through higher-return acquisitions. We remain disciplined and strategically focused on prioritizing stores that strengthen our network density and elevate our brand mix in high-opportunity markets. In the fourth quarter, we added iconic luxury stores, improved our import mix, and expanded a little bit with our Canadian footprint.

For the full year, we acquired $2.4 billion in expected annualized revenues, diversifying our portfolio and expanding our reach. Our results over the past decade have yielded high rates of return. We achieved nearly double our 15% after-tax hurdle rate through consistent and disciplined acquisitions, targeting purchase prices of 15%-30% of revenue, or 3-6 times normalized EBITDA. Looking ahead in 2026 and over the long term, we continue to target $2-$4 billion of acquired revenue annually, balancing our share valuation and acquisition prices to strategically accelerate shareholder return. With a half a decade of tremendous results behind us, we are looking ahead to 2026. Our strategic design is showing durable results as the industry normalizes.

The elements that support our long-term $2 of EPS per $1 billion of revenue targets continue to build momentum as we lift store-level productivity and throughput, expand our footprint and digital reach to grow U.S. and global share, increase DFC penetration, reduce costs through scale efficiencies, optimize our capital structure, and finally capture rising contributions from omnichannel adjacencies. The continued development of these levers will convert momentum into durable EPS and cash flow growth. Our network and digital platform create engagement across the entire ownership lifecycle, while our strengthening used vehicle after-sales and DFC businesses deepen customer relationships throughout economic cycles. Leaders across our organization are unlocking store potential, integrating adjacencies, and enhancing customer experiences. These capabilities demonstrate resilience, operational flexibility, and the compounding momentum that will drive sustained shareholder value creation. With that, I’ll turn the call over to Tina. Thank you, Bryan.

Our fourth quarter results reflect the more challenging environment, with year-over-year earnings pressure driven by margin compression and SG&A de-leverage. At the same time, our results in financing operations continue to demonstrate the strength of our diversified model, and our solid free cash flow generation supported meaningful share repurchases while maintaining balance sheet discipline. Our leverage remains comfortably below target levels, with ample liquidity to opportunistically fund acquisitions and return capital to shareholders. It’s important to note that prior quarter results included the benefit of a large insurance recovery related to the CDK outage. Adjusting for this $0.53 prior-year impact provides better year-over-year comparison. Our year-over-year results reflect class-leading top-line and gross profit trends, and as we have historically seen, responding to quickly declining vehicle margins occurs on a lag as our sales departments work to rebalance their cost structures.

The benefit of the design of our business and disciplined approach is the optionality provided by our resilient cash engine and the long-run operational efficiency generated by our size and scale that will compound value over time. Adjusted SG&A as a percentage of gross profit was 71.4% versus 66.3% a year ago, with top quartile SG&A performance of 67.9% in North America. These increases reflect the pressure of normalizing GPUs on our sales departments. Our teams continue to focus on managing costs through growing market share and gross profit. More specifically, our sales departments are navigating volume, gross profit pressures, and productivity to meet market conditions and manage efficiency while effectively serving our customers.

Beyond near-term cost management, we’re executing structural improvements across our network that will compound over time: raising productivity through performance management and technology solutions, including early investments in AI-powered chatbots and customer service automation, simplifying the tech stack and retiring redundant systems, renegotiating vendor contracts at scale, and automating back-office workflows. These efforts are building momentum quarter by quarter, with benefits from our Pinewood AI investments expected to materialize over time as we scale deployment and realize efficiency gains. As Brian mentioned, the most effective strategy to improve future SG&A leverage is to improve market share and volume. Combined with our unique ecosystem, we accelerate profitability as we build customer loyalty and increase the value of our adjacencies. Driveway Finance Corporation delivered strong, profitable growth in Q4, with financing operations income of $23 million, bringing full-year 2025 income to $75 million, an increase of $67 million from the prior year.

Our managed receivables portfolio grew to $4.8 billion, up 23% year-over-year, while net interest margin expanded to 4.8%, up 55 basis points. North American penetration reached 15% for the quarter, up 650 basis points. Credit performance remains exceptionally strong, with an annualized provision rate of 3% supported by an average origination FICO score of 751 and 95% LTV in the fourth quarter. Our ability to originate loans at the top of the demand funnel creates a fundamental advantage in credit selection and keeps capital requirements efficient. With a steadily growing portfolio approaching $5 billion and increasingly efficient securitizations, steadily improving margins, and clear runway for penetration growth, DFC is delivering on its significant promise as we scale toward our long-term profitability targets. Now moving on to cash flow and balance sheet health.

We reported adjusted EBITDA of $364.1 million in the fourth quarter, an 8.9% decrease year-over-year, primarily driven by lower net income. We generated $97 million of free cash flow during the quarter, and our strong balance sheet allows us the ability to repurchase shares and acquire stores in strategic markets while diversifying our brand mix. We are committed to maintaining investment-grade discipline, with our leverage ratio targeted to remain below three times. Our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder returns. This quarter, we continued our commitment to focus on share buybacks while balancing accretive acquisitions. Our shares continued to trade significantly below intrinsic value, and we allocated approximately 40% of capital deployed to share repurchases, buying back 3.8% of outstanding shares at an average price of $314.

In 2025, we repurchased 11.4% of our float at an average price of $314. We remain committed to allocating capital to opportunistic share repurchases while our shares trade at a discount to intrinsic value. Approximately 40% of capital was deployed to high-quality acquisitions, and the remainder to store capital expenditures, customer experience, and efficiency initiatives. As we look ahead to 2026, our capital allocation philosophy will remain disciplined and opportunistic. With leverage below our three-times target, regenerative cash flows, and ample liquidity available, we will maintain our balanced approach, allocating free cash flows to repurchases when relative valuations are attractive and investing in accretive acquisitions at the right price. This balanced deployment allows us to compound returns for shareholders through buybacks while simultaneously expanding our footprint through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio.

Our resilient model generates differentiated earnings and cash flows from an omnichannel platform that serves the full ownership lifecycle. With talented teams, class-leading digital and financing capabilities, and a strong balance sheet, we’re executing with the same discipline that’s powered the growth of our business over the last 10 years. Our diversified model responds with agility as macroeconomic conditions evolve, while preserving capital flexibility to deploy where returns are highest. As we move into 2026, we’ll continue focusing on increasing profitability, scaling high-margin adjacencies like DFC, and translating share gains into cash flows and compounding value per share. This concludes our prepared remarks. With that, I’ll turn the call over to the operator for questions. Operator? Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Ward with Citi. Please proceed with your question. Thanks. Good morning, everyone. On page 19 of your slide deck, you have an interesting chart that shows the retention levels on the after-sales business, and it seems like you’ve had some pretty big increases, particularly with some of the older vehicles. That’s just from last year. How much of that growth is tied into the extended service contracts that you’re dealing with F&I?

I don’t know if you can share with us any details on what the take rate is for the extended service contracts. Hi, Mike. This is Brian. Thanks for joining us today. When we think about retention, we’re up slightly, as a percentage relative to a state average, okay, over last year. We sit typically around 8% or 9% better than average, okay, and it’s up slightly year-over-year. When we think about the take rates and how much of our business is driven off of after-sales and customer pay, it’s less than 25% of our business in customer pay.

Now, when people buy cars from us, I think we were sitting at 37% penetration on service contracts, and then some were just under 20% penetration in lifetime oil, okay, and that obviously still includes, you know, the denominator of that still includes full-electrified vehicles that we don’t we don’t sell lifetime oil on, so. Okay. The second thing, it looks like it with the shifting priorities, you’re really generating a lot of cash and returning it to shareholders. Any reason that’s going to shift in any direction over the next, you know, couple of years? There’s one big reason.

If our stock price increased in value relative to acquisitions, then it may make sense, but we really believe that at these prices, it’s quite a value, and Tina, myself, and the rest of our capital allocations team are quite focused on it and imagine, you know, we’ll continue to back up the truck and buy shares because that’s an easy return to each of you, as well as ourselves, so. So there’s less cash needed to grow Driveway Finance, and so that’s freeing up more capital to do this? Great, great, great point. I mean, we hit max cap cash outlay a couple quarters ago, which was just under $1 billion, around $900 million, and because our over-collateralizations are now so efficient where we’re only over-collateralizing, you know, mid-single digits typically.

When we started, we were over-collateralizing upwards of 25%. That obviously is where the capital comes back in, and as those loans begin to age, the 25% turns into 3% or 4%, and we get 22% back. So we really believe that the $15-$17 billion mature portfolio at a 20% penetration rate really takes about 3%-5% to be able to manage that, which means we could probably continue to grow and still recapture a couple hundred million dollars over the next four or five years. That’s great news. Thank you, Bryan. Thank you, everyone. Thank you, Mike. Our next question comes from the line of John Saager with Evercore ISI. Please proceed with your question. Hey, guys. Thanks for taking my call.

In Q4, SG&A as a percentage of GP came in a bit higher than we were expecting, so I wonder if there was anything specific that drove that number during the quarter. And maybe could you explain how much of Q4 SG&A’s dilution from the M&A activity? Sure, John. This is Bryan. Maybe I’ll take a shot at the first part of the question. I’ll let Tina deal with the dilution. We would classify the quarter as such. It continually weakened. We’re typically in the fourth quarter. You get a good close at the end of November, at the end of December, and we saw a mediocre close at the end of November, but we did not see sales materialize like we typically do in the last 10 days of December.

We were pushing marketing budgets and so on to be able to drive volume, and when it doesn’t materialize or GPUs don’t materialize, the two combined created a bit of an uptick in SG&A. The neat part is our stores are trying to find that nice balance between volume and net because what we do know is that volume is what drives the future of our entire ecosystem, specifically referring to that waterfall effect of used car trade-ins, big part of that. That drives the reconditioning of service and parts, and all of those drive sales, which generates after-sales business and DFC business. So we believe it’s the right model to go after volume. I think we just got. I think the market was a little softer than our teams expected. Yeah. When we look at this is Tina.

When we look at the same store SG&A as a percentage of gross profit, it’s relatively similar to our total company at 71.2%. You know, the big differentiator really is the UK versus North America, and as we talked about in the prepared remarks, you know, our North America SG&A as a percentage of gross profit continues to be in the top-performing quartile, you know, when you look at us versus our peers. So good strength there. As Bryan mentioned, a lot of it’s driven by that top line, you know, movement that we’re seeing. Okay. Thanks. And then taking a broader view of staying focused on that SG&A as a percent of GP, you ended up the year at 68.8%, up, I think, 130 basis points versus 2024.

Would you be willing to stake a claim for where SG&A can get to in 2026 en route to your longer-term targets of 60%-65% overall? John, we can sure take that question offline, too, but I think most importantly, SG&A is primarily a function of what your GPUs look like and what your volume looks like, okay, and then the response that you take to that. So it is difficult, especially when we’re starting to feel some pressures in terms of volumes, and I think you saw that across the entire sector. We were very fortunate that we beat the heat in terms of revenue growth, obviously looked real good in used car growth and after-sales growth, but generally speaking, everyone’s softening on new cars, and that has major implications for SG&A.

But one thing I know is that our team has the ability to adjust their cost structures, and we’re out there challenging them, and I know my operational presidents and vice presidents are actively working on that to be able to do the best that we possibly can. Okay. Thanks, guys. Thanks, John. Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your question. Hey. Good morning, Bryan. Tina. Hi, Ryan. Want to stay on a little bit on those topics, but you mentioned kind of weakening sequential trends in Q4, a little bit of a lagged marketing strategy change, I guess, to align. But Q1, we’ve heard thus far any demand trends that you’re willing to call out, and then we’ve heard kind of some weather impact in January. March has an impossibly high comp.

but I guess, have those trends continued into Q1 is ultimately my question, and then what are you doing from a spend standpoint to align to that? Sure, Ryan. And you are correct. I mean, we do have some northeast business that is affected a little bit by weather, but overall, the trends are very similar to what we saw in the latter two months of Q4, assuming that we’re hoping that once the thaw happens, that March sales return. And you know, I think when you think about Lithia and Driveway, we do look at Q4 as our softest quarter, and a lot of that is because the United Kingdom doesn’t have that big month like a September and March in it.

So the variation now between Q4 and Q1 can be quite large, which is a nice, you know, wind in our at our tail. And as we mentioned, I mean, the UK’s was up 50-some% year-over-year in net profit, so that’s a nice number. So, you know, we’ve got that advantage coming in the month of March, and they had a decent January, so we always have that little benefit now where Q1 and Q4 used to be relatively both our softest quarters, so nice little boost there, hopefully. Yeah. Nice to see the UK turning to a nice tailwind, given the challenges in the market. DFC, for my second question, if I look at slide 12, $62 million, nice 2025 finish for the year.

That medium-term $150 million-$200 million, given you’re getting closer to that 16% penetration, kind of all the assumptions and everything is normalizing, I guess, is that medium-term kind of within the next couple of years or any time frame to get there, and then any commentary to kind of bridge 2026 into that medium-term? Yeah. Great. Ryan, this is Chuck. Thanks for your question. In terms of kind of last year, you know, we were pretty pleased that we were sort of guiding that, you know, kind of $50 million-$60 million for our total financing income and delivered $75 million, which is a great result for last year. But kind of looking forward, we would certainly, you know, kind of expect that to be consistent, predictable, and repeatable in terms of our growth.

And so we see kind of a 20%+ kind of growth rate of our financing income operations, and that, you know, kind of does align pretty well with your, you know, within a year or two or a couple of years, I should say, of hitting sort of that midterm kind of growth target that we’re showing there. Chuck, don’t be shy. Talk to him about our penetration rate in January. Yeah. Great. Thanks, Brian. You know, January penetration rates were record for DFC at about 17.5%. And we really see clear line of sight to getting to that 20% pen rate a little faster now.

That is going to put pressure on financing income, you know, projections as we continue to accelerate the growth, due to the CECL reserves, but we think that’s the right strategy to continue to make those investments in DFC and continue to partner with our stores and deliver better outcomes for our investors. Thanks, Chuck. If I may, just a quick follow-up there. You mentioned kind of the 25% CAGR on the, the financing income but also higher penetration kind of as a near-term negative. So I guess, is that 25% a longer term, or, or can we assume that for 2026 when things kind of normalize from a penetration standpoint throughout the year? Just a slight correction, I said 20%+ CAGR.

So 25 is obviously the goal, but I think, you know, to your point to the question, yes, you know, as we continue to accelerate growth, that could be a headwind, but we think 20% would be on the low side of that range. And if for some reason our growth rates were to slide, that would obviously put pressure on the pressure on the top end of that range, which is why sort of I said 20%-plus. But we’re still very confident. Very good. Thank you. That, you know, we can hit long-term that $500 million of pre-tax income for our, our financing operations within, you know, a very achievable time frame. Thanks, Ryan. Thanks a lot, guys. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question. Great. Thanks for taking the question.

I had a quick question on the used GPUs. It’s been, it’s been under pressure for quite a few quarters now. I mean, obviously, nice performance on the unit side. I’m curious, like, are we at a new run rate on used car GPUs? Anything you would call out that’s causing some pressure there, you know, would be helpful and have a follow-up. Sure, Rajat. This is Bryan. I this is the fun part of the business for me, and I think there’s a stage and an evolution that occurs in selling used cars that I think we’ve got the right formula now that our stores are keeping the older cars.

What we’re also starting to realize, and two of my operational vice presidents have been doing some heavy lifting, on what does our pricing models look like, and they did uncover some pretty healthy pricing gains primarily in two areas. And it’s we basically do these studies that is price to market of what we believe cars sell for and then what we sell those cars for. And the biggest single delta was in our Value Auto cars, which is over 9-year-old cars, that we had a 12%-13% delta between what the marketplace was selling the cars for.

So even though I’m excited, I’m motivated by the fact that we’re up low single digit or low double digits in Value Auto, we’re still having tendencies to give them away or think that there’s a more sensitive pricing on those scarce older cars, and there’s not, okay? So what we’re trying to do is reeducate store leaders to inflate the pricing on those cars and understand that it’s not necessary that the velocity of that car turns within four days. It’s okay if it turns in 24 days, okay, because that scarce car will bring in additional traffic. And then ultimately, if our average Value Auto car is around $16,000-$17,000, an extra 12% is an extra $2,000 a deal, okay? So that’s a big number.

The other soft spot that we have in pricing is what we would call scarcer late model used cars, which is basically lower mileage cars than what their model year is, meaning they are driving 4,000 or 5,000 miles a year instead of 10,000-12,000 miles a year, that we’re underpricing those cars by almost 8%, okay? Those cars are a $30,000 average. Again, it’s a pretty darn big number that we’ve just got to get better at pricing, okay? This is where some of our data is starting to be used, but it’s finally getting disseminated into the field. We hope in the first few quarters of 2026 that we see some of the lift on pricing.

And that’s what I would say is most of the GPU dilemma, okay, is that sacrifice of volume and then not understanding what the pricing is because a lot of those stores, they’re still afraid and thinking that an old car they don’t have customers for or they shouldn’t maybe be selling quite yet because we’ve never done it in the past, and then they cheap-sell it. That’s something that will help guide them, and they’ll mature as they do it more often. Got it. That’s helpful, Tyler. And just to follow up on after-sales parts and service, I mean, pretty remarkable growth there, in the fourth quarter.

I know, you know, it looks like some of the initiatives are coming through, but would you be able to double-click on maybe one or two areas that are driving that kind of growth, and what’s a good ballpark assumption that we should bake in, you know, for 2026, in that segment? Thanks. Sure, Rajat. I think when we think about what drives same-store sales growth in our after-sales department, it’s all about relationships with customers, okay? And I think many of our stores now are understanding that the relationship is built off doing things their way other than our way. And I think that’s been a lot of our opportunity is coming from we have processes.

We want customers to follow within those processes, but the My Driveway portal of what we do today allows customers to schedule their own appointments, which makes it easier and makes it more collaborative, okay? And then when they come in, we know who they are a little bit better, okay? And hopefully, we can focus our attentions on opening our ears and having our heads up rather than texting or thinking about our processes and really delighting and creating memorable experiences. So I, I would say that if we look forward at after-sales growth, I believe that a mid-single-digit number is a realistic number for the near term, okay? We do have some harder comps coming up because of some big recalls, okay? But those, as we all know, don’t just end, okay?

They kind of have tails to them, and there’s always laggards of people that haven’t done those recalls that you’ll get, and then the next recall comes in. And in fact, I was mentioning to Tina and Jardon that I got three cars in service right now that all have all have recalls, and it’s like, "Oh my God. One of them had three." So anyway, so lots of opportunities in after-sales, but I think for our team, it’s about focusing on the individual needs of each and every customer. Our next question comes from the line of Jeff Lick with Stephens. Please proceed with your question. Good morning. Thanks for taking my question. Bryan, you know, you’ve hi, you know, you’ve normally had some, you know, pretty in-depth points of view on, you know, the path of travel with new GPUs.

You know, you finished at 2,781, you know, 2,958 for the year, which was at the high end of your guys’ kind of guidance of 2,800-3,000. Just curious, as we go into next year, I mean, you know, some of your peers have said, "Hey, look, it feels like things are bottoming." Maybe a couple others have thought, "Hey, you know, there’s maybe some give-back with some of the brands that haven’t given back, such as Toyota." Just curious your thoughts on where you see GPUs going in 2026. Yeah. Sure, Jeff.

I think the neat part is I think our manufacturer partners have figured out how to throttle up and down inventory a little more effectively than they’ve done in the past, whether it’s, you know, whether it is true production capacity issues or whether it’s just, "Hey, we’re going to control our inventory so both our gross profits and our dealer’s gross profits are stabilized." And we’re quite proud of our Toyota partners and our other partners for trying to control inventory because it does matter. It does feel, and I’d probably agree with the rest of our peers, that it feels like it’s bottoming out, okay, which is nice.

We are still seeing some weakness when it comes to BEVs, but again, I think that’s just the backlash of the incentives being gone and us needing to continue to push volume for the lessened CAFE standards and those type of things. But all in all, you know, we’re things look pretty good, and I think most importantly, our focus is a lot on that used cars and hopefully getting the GPUs out of that in the event that the GPUs on new that are kind of dictated by the marketplace and supply, you know, that maybe we’re not able to control those quite as much as we can on used. We’ll just make sure that we figure out how to balance that.

And then just a quick follow-up on, you know, just doubling back on the SG&A, and I was wondering, like, back in the day, you know, one of the big talking points for the dealers was always, you know, a very variable cost-expense structure. Just curious, just more on a, you know, in-the-weeds level, when volume doesn’t pan out, I get advertising is what it is. So if you advertise for thinking, "Hey, we’re going to do 100 units per month at a store and end up doing 80," and yet advertising is what it is, what are some of the other expenses that you get caught with when volume drops? The biggest typically is personnel costs, okay? And you’d think that they would be volume-based, but unfortunately, there’s still guarantees, and there’s other factors at play.

We’re being pretty diligent on modifying compensation plans with what’s something that we call XY pay plans. It’s basically a grid type of pay plan that’s really trying to motivate both volume and ecosystem effectiveness, we call it, as well as net profit. And some of our leaders have really, you know, asked for those type of pay plans to drive their performance. And Jeff, I’d say this, okay? We as an industry do spend a lot of money on personnel and marketing to drive things that we probably would be able to sell without a lot of that marketing or personnel. So I think as we think about our future, we think about leveraging our best people to be able to do more with less.

As we think about the future and we think about Pinewood AI and the ideas of placing our customers and our team members into the same IT ecosystem, there’s massive amounts of savings that should be able to be realized over time. We’re really in the infancy of putting our numbers on that, and the U.K.’s teams are a little bit further ahead than us, but we still see a nice pathway to that mid- to high-50% range despite being a little higher this quarter in our weakest typical quarter of the year. So nice improvements, but we’ve got our pulse on this and know that that’s where the money can be made in the industry. And ultimately, that’s where the relationships with the customers can be leveraged to create more wallet share, you know, more of us getting their wallet share, so.

All right, Jeff. Thanks. Oh, and just last real quick, can you define what you meant by medium term in the SG&A slide in terms of time? That’s typically 3-4 years. Awesome. Thank you very much. Thanks, Jeff. Our next question comes from the line of John Babcock with Barclays. Please proceed with your question. Hey, good morning. Thanks for taking my questions. Just firstly, I, I think you mentioned earlier, and obviously, correct me if I’m wrong, but I think you were saying that you were seeing trends similar to the last 2 months of, currently similar to the last 2 months of the fourth quarter. Out of curiosity, does that apply to the used market? And, and also just broadly, you know, it does seem like the used vehicle market is, is at least showing some decently positive indicators.

I mean, it seemed like pricing was up pretty decently in January, and, you know, everything we’re hearing on the wholesale side sounds like that’s pretty strong. So I guess just overall, if you could talk about the used vehicle market and what you’re seeing there, that would be helpful. That’s accurate. The trends that I mentioned are similar in used, new, and after-sales, so we’re real pleased with that. We do have two less days in after-sales in January, so it’s a little bit hard to extrapolate, which implies that there’s 8% less days to be able to turn wrenches, but that usually will get made up in February and March. In any given quarter, it usually doesn’t have that big a difference.

When we think about the used car market, this is the typical time that it does begin to strengthen. We are a little surprised that it showed the strength that it did. To be fair, that’s not really how we think about our used car business. I mean, we typically look at our inventories and then look at our turn rates and see which segments are moving quickly and then go target our buying habits on those areas and elaborate and buy in the areas that things are turning quickly, okay? I mentioned that idea of how do we make sure our used cars are turning, and how do we capture all parts of the marketplace? That’s how we think about the used car business. It’s about affordability.

So as long as I’ve got a broad range of 1-10-year-old cars, whatever happens with pricing, we clear it out in less than 2 months anyway, so it doesn’t affect us as retailers as much other than we do think about affordability and making sure that we touch every possible affordability level in used cars. Good. Thanks for that. And then, just my last question. On the affordability point, you know, there was some discussion at NADA about offering Chinese brands in the U.S. I’m just kind of curious. I mean, have you been approached by Chinese brands to offer their products? And then also, what is your interest level in doing that? Sure. A good question, John. I think, let me start with we have growing relationships with the Chinese with three Chinese manufacturers in the United Kingdom.

We now have a double-digit store count, and they are taking some market share there. I think it’s important to remember that with our Chinese partners, that the market share gains that they’re making in Western Europe isn’t coming from electrification. Their initial flurries into the Western European markets came on the back of electrified vehicles, and it didn’t go very well. There wasn’t very much traction, and it wasn’t until they brought in ICE engines until they basically 10X their sales. So we’re quite excited that we’ve got that opportunity in the United Kingdom, but there’s a big fundamental difference. In the United Kingdom, we’re allowed to do what’s called dueling of franchises, meaning that if I have a certain brand and that brand is not performing as well as another brand, meaning that if the Chinese brand - let’s use Chery, for example, okay?

is conquesting market share from Stellantis, it’s typical that Stellantis will allow us to put the Chery brand right next to them in the same showroom with somewhere less than $100,000 in capital expenditure to do it, okay? Why is that important? Because it gives us additional new cars and maybe used car sales. Here’s the problem. There’s no units in operation when you’re opening these Chinese brands, okay?

So I think we’re, we would probably not be early adopters when it comes to the United States or possibly even Canada, primarily because we’re usually not in a dual franchise situation, meaning that I can have my Stellantis brand that has this great units in operations even though their new car volumes are dropping, okay, that offsets the fact that the Chinese brands are now selling cars, new cars, maybe a few used cars, are you following me, and no service and parts business. So it’s a balancing act.

And I think when we extrapolate that over the North American footprint, I think it would have to be a broader relationship than a dealer, okay, where we would have more influence over the after-sales and the life cycle experiences that you would have with that, possibly even more control over pricing, which would mean we’d need, you know, market control to some extent to be able to make it make sense that you’re going to be opening points with out-of-service and parts base to start with it. And remember, we do get 50%-60% of our profits from service and parts, so it’s quite a difficult venture, but we’ll, we’ll approach that. We do have, building relationships with a number of different Chinese brands and have a pretty good Chinese, contingency operationally with Brian Lam, who’s done some work with that.

You know, we’ll keep our minds open and look at what the opportunities that present us in the future. Hopefully, that answered your question, John. Yeah, that’s perfect. Thanks for all the detail. You bet, John. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question. Hey, guys. Could you give us a little more color on luxury? I guess you mentioned that there was some timing issue as but I think on the third-quarter call, you talked about seeing some softening amongst that high-end consumer. How much is product versus pull forward versus, you know, more of a macro consumer sentiment issue? It’s a little of both, Bret. Our luxury was down somewhere in the 11%-11% range.

but what we’re feeling is that we’re fortunate that their service and parts business is still fairly strong, which helps balance some of those things out. I do have, I mean, some specific numbers. It looks like BMW and Porsche were probably the hardest hit, you know, but they’re all within 4 or 5 percentage points of each other in terms of same-store sales. And when you start to get down into net profit, there’s, you know, some more punitive numbers if you get into some of the lesser German brands, so, you know. But we’re working on that, and we still got, we announced what? Last week, we had our LPG or our Lithium Driveway Partners Group announcements.

Our number one store in the company - and this will tell you the power of people - our number one store that won our Founders Cup is an Infiniti store, okay? So if you get if that’s about as hard a brand as you could have last year, and somehow that per-person managed to turn lemons into lemonade, and we’re quite proud of the accomplishment of all our LPG winners, including some of those sales departments and service departments that really found ways to buck the trends, with certain manufacturers, so. Okay. And then one follow-up question on used. Obviously, the margin rate on used is well below where it was sort of pre-pandemic. And when you think about that, you know, between mix of value versus core and all, but where do you see the margin rate coming back to?

Are we structurally less profitable because you’ve got better internet price transparency, or is it a supply issue? And if off-lease cars come back, you can see real margin recovery in that category? Bret, I want to believe that this is just a maturity thing. We’ve added two-thirds of our businesses, haven’t really ever got into these businesses, okay? So I think that we will get that knowledge into those stores, and they’ll start to understand and be more dynamic in their pricing, that if they do have scarce cars, they’ve got to price those differently than less scarce cars. And, you know, we’ve got certain tools that the stores use at times that are there for reference rather than as a Bible, and they have tendencies to look at it all as a Bible.

Those tools don’t always delineate between a low-mileage car and an average-mile car, and they don’t delineate between a 9-year-old car versus a 9-month-old car. There are massive differences, and that’s where we’re relying on our general managers, our general sales manager and used car managers, to watch what’s happening on their lots, okay, and be sensitive to that and establish pricing that is appropriate for the marketplace and not give the cars away because they happen to be able to steal a trade-in. That’s really the underpinnings of this, is they’re able to negotiate trade-ins at a 1:1 negotiations that are less than market conditions. We still are able to buy our cars, you know, 5%-7% below what our competitors typically do that aren’t new car dealers. Why? Because of that 1:1 negotiation.

And then, sadly, we pass it along to the next customer rather than sit and wait for the right customer and spread the visibility of that car through Driveway.com or GreenCars, where you get enough eyes on it that, that you finally find a customer that will pay you the true market value of that car. So I believe, Bret, that this is all about maturity, and you’re starting to see the I mean, I think last year this time, we were minus 6 or 7% used car, same-store sales, and we’re the exact inverse of that this year. So that’s the sign we want to see first. Now, we’re going to start constructively working on pricing and maturity and finding these cars and being able to turn them. Great. Thank you. You bet, Bret. Our next question comes from the line of Daniela Haigen with Morgan Stanley.

Please proceed with your question. Thanks. Just switching gears a little bit to a more strategic question. We’re seeing this big inflection point this year and next few years in autonomous driving. And as legacy OEMs are also emphasizing their push into these passenger vehicles, L2 and L3 ADAS, they’re embedding more advanced sensor suites, radars, lidars. Essentially, what I want to understand is, what is Lithia’s capabilities in servicing these advanced sensor suites and EVs with sensor telemetry for autonomy? Thank you. Well, this is great, Daniela. Nice to hear from you. It’s pretty cool to be able to see these cars have these type of skills, but with that comes massive amounts of technology and massive cost to that technology. I think an average aftermarket lidar is around $45,000 and has so many different parts.

I imagine as our cars become more so that way, what you find is that proprietary technology that we need to fix those things brings customers back into our dealerships, okay, which is beneficial. So we are downstream to ultimately all of this. So whatever our manufacturers decide to upfit the cars with and whatever consumers are really demanding, we get the benefits of it. So this technology creates a lot higher breakage rates, and I think that’s why it’s fairly easy to contend that a mid-single-digit same-store sales growth rate for the next 5-10 years is probably a pretty nice, pretty nice number. In terms of what can Lithia do differently, I think the single biggest thing that we can do is create optionality and go into people’s homes to make a difference, okay? Make it convenient, make it simple, make it transparent.

And that’s how we try to differentiate ourselves alongside the brand names that are on our buildings. Thank you. And then, shifting to auto credit, we’ve gotten a lot of questions. You’ve seen rising delinquencies in both prime and sub-prime in January. Obviously, DFC is skewed much higher on the credit quality curve, but any color you can share on how you’ve adjusted underwriting standards, if at all, to address the risk there? Have you seen any change in consumer behavior starting in 2026? Yeah, Daniela. This is Chuck. You know, first, I’d just like to say that, you know, every year for the last four years, DFC, we have improved our credit quality on our three key metrics. Our average FICO has increased. Our payment-to-income percentage has declined, and our front-end LTV percentage has declined. That speaks to the consistency of our underwriting standards.

And while we tightened up, you know, kind of our credit standards in that 2021 kind of time period where we could see a lot of choppiness in the market, we have been incredibly disciplined, incredibly focused on maintaining our credit discipline. And that really is bearing fruit today. And that when we look at, you know, kind of our year-over-year delinquency trends, we’re down 36 basis points in the 31-plus bucket. That’s bucking the trends of the market right now. And that, again, really just proves out the overall DFC hypothesis of being top of funnel. That really gives us a leg up in terms of our credit quality, and we see those trends continuing as we go forward. Thanks for your question, Danielle. Great. Thank you both. Thanks, Danielle. Just call tell her it’s the last one.

Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question. Hi. Thank you very much for fitting in here. Just one quick one for me on, on M&A. You know, I picked up here in 4Q, and, you know, understand the capital allocation going forward will be more, opportunistic with respect to share repurchases. But, you know, can we expect this year to be kind of a normal year in the $2 billion-$4 billion of acquired revenue? Mark, this is Bryan. I, that’s definitely what we’re seeing today. And obviously, we’re starting to drop off some pretty good profitability years, which helps pricing on M&A. But right now, the market is kind of static. I mean, we’re definitely finding some deals. We announced those nice deals in Beverly Hills.

We found a small little deal up in Canada and a few others under contract. So I think that that’s a pretty good pace for us. And again, depending on what our stock price is versus what those acquisitions are out there for helps dictate how much we’ll end up doing. Perfect. Thank you very much. Thanks, Mark. We have reached the end of the question-and-answer session. Mr. Tabor, I’d like to turn the floor back over to you for closing comments. Thank you, Christine. And thank you, everyone, for joining us today. We look forward to speaking to everyone again, on our call in April. All the best. 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 wonderful day.