Lithia (LAD)

Automotive retailer Lithia Motors (NYSE:LAD) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 4.9% year on year to $9.68 billion. Its non-GAAP profit of $9.50 per share was 10.4% above analysts’ consensus estimates.

Company Overview

With a strong presence in the Western US, Lithia Motors (NYSE:LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

Competitors in the auto retail space include AutoNation (NYSE:AN), Carvana (NYSE:CVNA), and Group 1 Automotive (NYSE:GPI).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $37.66 billion in revenue over the past 12 months, Lithia is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions.

As you can see below, Lithia grew its sales at an exceptional 20.4% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new stores and expanded its reach.

This quarter, Lithia reported modest year-on-year revenue growth of 4.9% but beat Wall Street’s estimates by 2.6%.

Looking ahead, sell-side analysts expect revenue to grow 1.4% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and indicates its products will see some demand headwinds.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Lithia opened new stores at a rapid clip over the last two years, averaging 15.4% annual growth, much faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Note that Lithia reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Lithia’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. Lithia should consider improving its foot traffic and efficiency before expanding its store base.

In the latest quarter, Lithia’s same-store sales rose 7.7% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

Lithia has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 15.6% gross margin over the last two years. Said differently, Lithia had to pay a chunky $84.41 to its suppliers for every $100 in revenue.

In Q3, Lithia produced a 15.2% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Lithia’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 4.4% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Looking at the trend in its profitability, Lithia’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Lithia generated an operating margin profit margin of 4.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lithia broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Lithia burned through $207.3 million of cash in Q3, equivalent to a negative 2.1% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lithia historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.8%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Lithia reported $417.1 million of cash and $9.16 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.87 billion of EBITDA over the last 12 months, we view Lithia’s 4.7× net-debt-to-EBITDA ratio as safe. We also see its $384.2 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Lithia beat analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its gross margin slightly missed and its EBITDA fell slightly short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock remained flat at $314 immediately after reporting.

Updated: December 4, 2025 at 9:39 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Lithia.

Lithia isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was decent over the last three years, it’s expected to deteriorate over the next 12 months and its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. And while the company’s new store openings have increased its brand equity, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets.

Lithia’s P/E ratio based on the next 12 months is 8.9x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $394.13 on the company (compared to the current share price of $325.01).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.