Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations.
Risks Related to Our Business
The automotive retail industry is sensitive to changing economic conditions and various other factors. Our business and results of operations are substantially dependent on new vehicle sales levels in the United States and in our particular geographic markets and the level of gross profit margins that we can achieve on our sales of new vehicles, all of which are very difficult to predict.
Our business is heavily dependent on consumer demand and preferences. A downturn in overall levels of consumer spending may materially and adversely affect our revenues and gross profit margins. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the level of discretionary personal income and credit availability. Additionally, other economic factors, such as rising and sustained periods of high crude oil and fuel prices and other inflation, may impact consumer demand and preferences. As we operate internationally, including across the United States, the United Kingdom, and Canada, changes in and the severity of economic conditions may vary by market. Economic conditions may be anemic for an extended period of time or deteriorate in the future. This would have a material adverse effect on our retail business, particularly sales of new and used vehicles. These economic conditions and other factors may also materially impact our parts and repair and maintenance aftersales, and automotive finance and insurance (F&I) products.
The economies of the United States, the United Kingdom, and Canada have recently experienced heightened inflationary pressures, impacting the costs of labor, fuel, and other costs. In an inflationary environment, depending on automotive industry and other economic conditions, we may be unable to raise prices to keep up with the rate of inflation, which would reduce our profit margins, and if we do raise prices, we may experience less demand. A period of sustained inflationary and interest rate pressures could impact our profitability.
Additionally, elevated interest rates, along with higher vehicle prices, have impacted new and used vehicle sales and vehicle affordability due to the direct relationship between interest rates and monthly loan payments, a critical factor for many vehicle buyers, and the impact interest rates have on customers’ borrowing capacity and disposable income. Consumer demand may be further adversely impacted if interest rates continue to increase or are sustained at current levels.
Natural disasters, adverse weather conditions, and public health emergencies can disrupt our business.
Our dealerships operate in geographic areas in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides, wind and/or hailstorms) or other extraordinary events have in the past, and may in the future, disrupt our dealership operations and impair the value of our dealership property. In addition, the occurrence of public health emergencies or other extraordinary events, such as regional epidemics or a global pandemic, such as COVID-19, and the governmental, business, and individuals’ actions in response to the event, particularly with respect to our stores that rely on in-person experiences, could also disrupt our operations. A disruption in our operations may adversely impact our business, results of operations, financial condition, and cash flows.
The automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters, adverse weather events, or public health emergencies may affect the flow of inventory or parts to us or our manufacturing partners. Such disruptions could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Intense competition among automotive retailers and new brands may reduce our vehicle sales and profit margins on vehicle sales and related businesses.
Vehicle retailing is a highly competitive business. Our competitors include many publicly and privately-owned dealerships. Our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area and many of our competitors sell the same or similar makes of new and used vehicles that we offer in our markets at competitive prices, as well as competitive vehicles we may not sell. We do not have any cost advantage in purchasing new vehicles from manufacturers due to the volume of purchases or otherwise.
Our F&I business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition from various financial institutions and others.
In addition, new manufacturers with whom we do not have franchises are entering the automotive industry. New companies have raised capital to produce fully electric vehicles or to license battery technology to existing manufacturers. Tesla and Rivian have demonstrated the ability to successfully introduce electric vehicles to the marketplace. Foreign manufacturers from China and India are producing significant volumes of new vehicles and are entering the United States and selecting partners to distribute their products. Because the automotive market in the United States is mature and the overall level of new vehicle sales may not increase in the coming years, the success of new competitors will likely be at the expense of other, established brands. This could have material adverse impact on our success in the future.
Changes to the retail delivery model and increased e-commerce and omnichannel competition could materially adversely affect our business, results of operations, financial condition, and cash flows.
Online and mobile applications have become a more significant part of the sales process in our industry as consumers are increasingly using these platforms to shop for new and used vehicles and vehicle repair and maintenance services. Some of our competition relies on or focuses exclusively on an online e-commerce business model. In addition, larger traditional automotive retailers are transforming their models to support omnichannel retail experiences, providing consumers with vehicle purchasing experiences outside of the traditional brick and mortar automotive dealership model.
In addition, there has been some growth in subscription business models that offer consumers and businesses pay-monthly access to vehicles that often include insurance, maintenance, and roadside assistance, often without a long-term commitment or lease. Other consumer delivery models may develop. We are uncertain as to the long-term effect on consumer delivery models that do no result in vehicle ownership by consumers.
We continue to develop our own technology, omnichannel experiences, and solutions to further expand the reach of the networks of service and delivery points in our geographic markets. We may face increased competition for market share with these other delivery models and omnichannel retailers over time which could materially and adversely affect our results of operations. There can be no assurance that our initiatives will be successful or that the amount we invest in these initiatives will result in our maintaining market share and continued or improved financial performance.
In addition, the growing use of social media by consumers increases the speed and extent that information and opinions can be shared, and negative posts or comments on social media about us or any of our stores could materially damage our retail brands, reputation, and sales channels.
We compete in a dynamic industry, and we may invest significant resources to pursue strategies, develop new offerings, and enter into adjacent businesses that do not prove effective or profitable.
The expectations and behaviors of vehicle customers are shifting as e-commerce and digital technology have become a more significant part of the sales process. We have made and may continue to make significant investments to drive the development of and support of e-commerce and digital technology capabilities, including the launch of Driveway, our e-commerce home solution, and DFC, our in-house consumer financing business. We have also recently invested in a dealer-management technology business and a fleet management business. Changes or additions to our offerings or businesses may not prove sufficiently profitable or attract or engage our customers, and may reduce confidence in our brands, expose us to increased market or legal risks, subject us to new laws and regulations, or otherwise harm our business.
Customers may prefer other channels for vehicle sales and related F&I services, because they may offer different or superior platforms, or because customers find those platforms easier to use, faster, or more cost effective than our services. We may not successfully anticipate or keep pace with industry changes, and we have and may continue to invest considerable financial resources, personnel, or other resources to pursue strategies that do not ultimately prove effective. A failure to capture the anticipated benefits of such investments could harm our results of operations and financial condition.
A decline of affordable and available vehicle financing may adversely affect our vehicle sales.
A significant portion of buyers finance their vehicle purchases. The primary finance sources our customers use in connection with the purchase of a new or used vehicle are manufacturer captive finance companies, DFC, and sub-prime lenders. These consumer vehicle financing sources rely to a certain extent on financing markets and sources to provide the capital necessary to support their financing programs. In addition, these financing sources, including DFC, will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio. In the event that the cost to customers to finance vehicles becomes more expensive, due to increases in interest rates by the financing sources or their sources of capital, lenders tighten their credit standards, or available vehicle financing declines, consumers may be unable or less willing to purchase vehicles, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Regulatory requirements to reduce emissions in response to climate change, changes in consumer demand toward fuel-efficient vehicles and manufacturers’ commitments to electric vehicles could adversely affect our new and used vehicle sales volumes, F&I and parts and service revenues and our results of operations.
Concerns over the impacts of climate change have led and may continue to lead to governmental initiatives aimed at mitigating those impacts. Consumers may also change their behavior as a result of these concerns, as well as having a preference for vehicles that require less fuel in response to increases in fuel prices.
Certain governments have declared commitments to various electric vehicle and zero emissions goals, such as the state of California’s executive order requiring all new cars and passenger trucks sold in the state to be zero-emission vehicles by 2035. The U.K. government has announced a ban on the sale of gasoline-only engines in new cars and vans after 2030, and beginning in 2035, only electric vehicles will be allowed to be sold. Manufacturers continue to invest in increasing production and quality of electric vehicles, including Battery-Electric Vehicles (BEVs), Hybrid Electric Vehicles, and Plug-in Hybrid Electric Vehicles. These vehicles generally require less maintenance than traditional cars and trucks. The effects of electric-based vehicles on the automotive industry are
uncertain and may include reduced after-sales revenues, as well as changes in the level of sales of certain F&I products such as extended warranty programs and lifetime lube, oil, and filter contracts.
Regulations around fuel economy standards and carbon emissions may continue to increase. New requirements may adversely affect any manufacturer’s ability to profitably design, market, produce, and distribute vehicles that comply with such regulations. Our ability to market and sell these vehicles at affordable prices and to finance these inventories could be adversely impacted. These regulations could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Adverse conditions affecting one or more key manufacturers may negatively affect our business, results of operations, financial condition, and cash flows.
We depend on our manufacturers to provide a supply of vehicles that support expected sales levels. Any event that adversely affects a manufacturer’s timely delivery of new vehicles may adversely affect us by reducing our supply of popular new vehicles, leading to lower sales in our stores during those periods than may otherwise occur. For example, the shortage of semiconductor chips and labor disruptions during 2021 and 2022 significantly constrained the supply of new vehicles resulting in reduced sales volumes and increased gross profit margins on retail vehicle sales. As new vehicle availability has improved, gross profit margins have been negatively impacted.
We depend on our manufacturers to deliver high-quality, defect-free vehicles. If a manufacturer experiences quality issues, our sales and financial performance may be adversely impacted. In addition, the discontinuance of a particular brand that is profitable to us could negatively impact our revenues and profitability.
Vehicle manufacturers would be adversely affected by economic downturns or recessions, adverse fluctuations in currency exchange rates, significant declines in the sales of their new vehicles, increases in interest rates, constraints on financing, port closures, labor strikes or similar disruptions (including within their major suppliers), supply shortages or rising raw material costs, rising team member costs, adverse publicity that may reduce consumer demand for their products, product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, or other adverse events. These and other risks could materially adversely affect any manufacturer and limit its ability to design, market, produce or distribute new vehicles, which, in turn, could materially affect our business, results of operations, financial condition, and cash flows.
New vehicles from five manufacturers, Honda, Toyota, Ford, BMW, and Stellantis, represent 25% of our sales. We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, or other issue affecting one or more of these manufacturers.
In the event of a manufacturer or distributor bankruptcy, we could be held liable for damages related to product liability claims, intellectual property suits or other legal actions. These legal actions are typically directed towards the vehicle manufacturer and it is customary for manufacturers to indemnify us from exposure related to any judgments associated with the claims. However, if damages could not be collected from the manufacturer or distributor, we could be named in lawsuits and judgments could be levied against us.
If manufacturers or distributors discontinue or change sales incentives, warranties, and other promotional programs, our business, results of operations, financial condition, and cash flows may be materially adversely affected.
We depend upon the manufacturers and distributors for sales incentives, warranties, and other programs that are intended to promote new vehicle sales or supplement dealer income. Manufacturers and distributors routinely make changes to their incentive programs. Key incentive programs include:
• customer rebates;
• dealer incentives on new vehicles;
• special financing rates on certified, pre-owned vehicles; and
• below-market financing on new vehicles and special leasing terms.
Our financial condition could be materially adversely impacted by a discontinuation or change in our manufacturers’ or distributors’ incentive programs. In addition, certain manufacturers use criteria such as a dealership’s manufacturer-determined customer satisfaction index (CSI score), facility image compliance, team member training,
digital marketing and parts purchase programs as factors governing participation in incentive programs. To the extent we do not meet minimum score requirements, we may be precluded from receiving certain incentives, which could materially adversely affect our business, results of operations, financial condition, and cash flows.
Franchised automotive retailers perform factory authorized service work and sell original replacement parts on vehicles covered by warranties issued by the automotive manufacturer. For the year ended December 31, 2025, approximately 25% of our aftersales revenue was for work covered by manufacturer warranties or manufacturer-sponsored maintenance services. To the extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty work, our aftersales volume could be adversely affected.
The ability of our stores to make new vehicle sales depends in large part upon the franchise agreements with manufacturers and, therefore, any disruption or change in our relationships could impact our business.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most popular vehicles usually produce the highest profit margins and are frequently in short supply. If we cannot obtain sufficient quantities of the most popular models, our profitability may be adversely affected. Sales of less desirable models may reduce our profit margins.
Each of our stores operates pursuant to a franchise agreement with each of the respective manufacturers for which it serves as franchisee. Each of our stores may obtain new vehicles from manufacturers, service vehicles, sell new vehicles, and display vehicle manufacturers’ brands only to the extent permitted under these agreements. As a result of the terms of our franchise agreements, manufacturers exert significant control over the day-to-day operations at our stores. Such agreements contain provisions for termination or non-renewal for a variety of causes, including service retention, facility compliance, customer satisfaction, and sales and financial performance. From time to time, certain of our stores have failed to comply with certain provisions of their franchise agreements, and we cannot ensure that our stores will be able to comply with these provisions in the future.
Our franchise agreements expire at various times, and there can be no assurances that we will be able to renew these agreements on a timely basis or on acceptable terms or at all. Actions taken by a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise agreements or otherwise could also have a material adverse effect on our revenues and profitability. If a manufacturer terminates or fails to renew one or more of our significant franchise agreements or a large number of our franchise agreements, such action could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Our franchise agreements also specify that, except in certain situations, we cannot operate a franchise by another manufacturer in the same building as the manufacturer’s franchised store. This may require us to build new facilities at a significant cost. Moreover, our manufacturers generally require that the store meet defined image standards. These commitments could require us to make significant capital expenditures.
Our franchise agreements do not give us the exclusive right to a given geographic area. Manufacturers may be able to establish new franchises or relocate existing franchises, subject to applicable state franchise laws. The establishment of or relocation of franchises in our markets could have a material adverse effect on the business, financial condition, and results of operations of our stores in the market in which the action is taken.
Changes to manufacturer distribution models may disrupt the way we do business and impact our revenues and profitability.
Generally, state dealer laws restrict the ability of vehicle manufacturers to directly enter the retail market. Manufacturer lobbying efforts and lawsuits have led to the repeal or revision of these laws. For example, Tesla received a favorable ruling in certain states allowing direct to consumer sales and service. In addition, some states have passed, or may consider introducing, legislation to permit direct to consumer auto sales in certain circumstances, allowing additional electric vehicle manufacturers such as Rivian to enter the market. In 2025, Scout Motors Inc. secured a dealer license in Colorado allowing it to sell vehicles directly to customers until October 2026, providing a temporary but official pathway to engage in direct-to consumer sales, which may serve as a catalyst for the expansion of the direct-to-consumer sales model. If manufacturers obtain the ability to directly retail vehicles in our markets, our role in the auto retail market would change and we could experience a loss of revenue and profits
and other negative impacts that have a material adverse effect on our business, results of operations, financial condition, and cash flows.
In addition, other changes by manufacturers to their distribution models may impact our operations in the United Kingdom. Certain manufacturers, such as Honda, Volvo, Volkswagen, Mini, Mercedes-Benz and Smart, have already transitioned to an agency model in the United Kingdom, whereby the consumer places an order directly with the manufacturer and names a preferred delivery dealer. We have such an agency relationship with Mercedes-Benz with our U.K. dealers. Other manufacturers have announced their intentions to transition to an agency model in coming years, including, among others, BMW, Ford, Jeep, Peugeot, Citroen, Jaguar and Land Rover. Under an agency model, our dealerships receive a fee for facilitating the sale by the manufacturer of a new vehicle but do not hold such vehicle in inventory. The agency model will reduce reported revenues (as only the fee we receive, and not the price of the vehicle, will be reported as revenue), reduce SG&A expenses, and reduce floorplan interest expense, although the other impacts to our results of operations remain uncertain. If manufacturers continue to transition to an agency model in the United Kingdom or another new model is implemented in the United Kingdom or other countries and regions in which we operate, including in the United States and Canada, for the sale of electric or other vehicles, it could negatively affect our revenues, results of operations, and financial condition.
Our indebtedness and lease obligations could materially adversely affect our financial health, limit our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much of our debt is secured by a substantial portion of our assets. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.
As of December 31, 2025, we had $5.1 billion of total non-vehicle long-term debt and $6.1 billion of vehicle inventory financing, as well as substantial lease obligations and non-recourse debt under our warehouse facilities and ABS structure. Our substantial indebtedness and lease obligations could have important consequences to us, including the following:
• difficulty satisfying our debt service obligations and maintaining financial covenants, which if we fail to comply with these requirements, an event of default could result;
• limitations on our ability to make acquisitions;
• impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes;
• reduced funds available for our operations and other purposes, as a larger portion of our cash flow from operations would be dedicated to the payment of principal and interest on our indebtedness;
• exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest; and
• increased risk in the event of an economic downturn.
In addition, our loan agreements and our senior note indentures contain covenants that limit our discretion with respect to business matters, including incurring additional debt, granting additional security interests in our assets, acquisition activity, disposing of assets, and other business matters. Other covenants are financial in nature, including current ratio, fixed charge coverage, and leverage ratio calculations. A breach of any of these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements.
We have granted a security interest in a substantial portion of our assets to certain of our lenders and other secured parties, including those under our $6.5 billion syndicated credit facility and $1.1 billion CAD Canadian syndicated credit facility. If we default on our obligations under those agreements, the secured parties may be able to foreclose upon their security interests and otherwise be entitled to obtain or control those assets.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of default has occurred, the outstanding indebtedness would likely be immediately due and owing.
If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be
forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with these agreements.
In addition, the lenders’ obligations to make loans or other credit accommodations under certain credit agreements is subject to the satisfaction of certain conditions precedent including, for example, the satisfaction of financial covenants and conditions and that our representations and warranties in the agreement are true and correct in all material respects as of the date of the proposed credit extension. If any of the conditions precedent are not satisfied, we may not be able to request new loans or other credit accommodations under those credit facilities, which could have a material adverse impact on our business, results of operations, financial condition, and cash flows.
Additionally, at various times in the future, we will need to refinance portions of our debt. At the time we must refinance, the market for new debt, or our financial condition or asset valuations, might not be favorable. It is possible that financing to replace or renew our debt may be unfavorable, which would adversely affect our financial condition and results of operations. In certain cases, we may turn to equity or other alternative financing.
Our floor plan notes payable, credit facilities and a portion of our real estate debt are subject to variable interest rates. As of December 31, 2025, 63% of our total debt was variable rate. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition, and cash flows. We may use interest rate derivatives to hedge a portion of our variable rate debt, when appropriate, based upon market conditions. See Note 12 – Derivative Financial Instruments, related to current hedge activity.
We may experience greater credit losses in DFC’s finance receivable portfolio than anticipated, which will create losses for us.
Customers who finance a vehicle purchase or lease a vehicle through a DFC auto loan or lease may be unable to repay the loans based on the original terms and the fair value of the vehicles used as collateral against the loans may not be sufficient to ensure full repayment. Credit and residual value losses are an inherent risk of our finance receivable portfolio and could result in a material adverse effect on our results of operations.
We estimate an allowance for credit losses based on a variety of assumptions about DFC’s portfolio of finance receivables. Although management prepares an estimate it believes appropriate based on available information, this allowance for credit losses may not be a sufficient reserve for loan and lease losses. For example, sudden economic changes such as an economic downturn or a change in consumer spending may result in additional losses incurred that we did not estimate in our original allowance for credit losses. Losses in excess of our allowance for credit losses could have a material adverse effect on our business and results of operations. In addition, finance companies are highly regulated by governmental authorities, as discussed in the risk factors under the heading, “Regulatory Risks.”
The growth and success of our DFC business is dependent upon obtaining sufficient capital to grow our finance receivable portfolio.
Changes in the availability or cost of financing to support our finance receivable portfolio under DFC could adversely affect our results of operations. Our finance receivable portfolio is funded through a combination of free cash flows from operations and securitized funding, including asset-backed securitization. Changes in the condition of the asset backed securitization market may result in increased costs to access funds in the market or require us to explore new financing options to fund new auto loans and leases. In the event that there is no alternative financing available, we may be forced to pause our auto loan and lease financing business for a period of time. The impact of reducing or pausing our auto loan and lease financing business could result in a material adverse effect on our results of operations.
In addition, securitizing our finance receivable portfolio decreases our credit loss exposure. Market conditions could result in our accumulating a significant portfolio without the ability to, or cost-effectively, securitize a portion of the portfolio.
Technology and Cybersecurity Risks
Technological advances could affect our sales and business.
Technological advances are facilitating the development of driverless vehicles. The eventual timing of availability of driverless vehicles is uncertain due to regulatory requirements, technological hurdles, and uncertain consumer acceptance of these technologies. The effect of driverless vehicles and other technologies that may result in lower vehicle ownership on the automotive industry is uncertain and could include changes in the level of new and used vehicle sales, the price of new vehicles, and the role of franchised dealers, any of which could materially and adversely affect our business.
Breaches in our data security systems or in systems used by our vendor partners, including cyber-attacks or unauthorized data distribution by team members or affiliated vendors, or disruptions to access and connectivity of our information systems could impact our operations or result in the loss or misuse of customers’ proprietary information.
Our information technology systems are important to operating our business efficiently. We employ information technology systems, including websites, that allow for the secure handling and processing of customers’ proprietary information. The failure of our information technology systems, and those of our partner software and technology vendors, to perform as we anticipate could disrupt our business and could expose us to a risk of loss or misuse of this information, litigation and potential liability.
Aspects of our operations are subject to privacy, data use, and data security regulations, which impact the way we use and handle data. We collect, process, share, disclose, transfer, and otherwise use personal information about identifiable individuals including, but not limited to, our customers, team members, partners, and vendors, and so are subject to U.S. and international laws and regulations, regarding data privacy and security such as the California Consumer Privacy Act and the U.K. General Data Protection Regulation. These laws impose comprehensive data privacy compliance obligations in relation to our processing of personal data, including providing privacy rights to the individuals whose data we process and introducing requirements to maintain policies, processes, and procedures regarding our data handing practices. Additionally, our expansion into Canada and the United Kingdom subjects us to additional privacy and security regulations which also impact the way we handle and secure data across borders.
Our internal and third-party systems have been and may in the future be subject to cyber-attacks, viruses, malicious software, ransomware, break-ins, theft, computer hacking, phishing, exploitation of system vulnerabilities or misconfigurations, team member error, or malfeasance or other security breaches or loss of service. We invest in commercially reasonable security technology to protect our data and business processes against many of these risks. We also purchase insurance to mitigate the potential financial impact of many of these risks. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming , human , acts of , or other events. Any security or event resulting in the , , or other disclosure of confidential information, or or of services provided by business systems, whether by us directly or our third-party service providers, or any other of access to such business systems, could affect our business operations, sales, reputation with current and potential customers, associates or vendors, as well as other operational and financial impacts derived from , , imposition of or other means. While we have policies and procedures in place for mitigating the impact of a cybersecurity event on our business, which adhere to widely recognized standards for managing cybersecurity risk, these policies and procedures may not ultimately be sufficient or otherwise as as intended to eliminate, or in some cases reduce or mitigate, the impact of a cybersecurity event on our business. For example, in June 2024, one of our third-party providers, Global CDK (CDK), information systems used by us in response to a cybersecurity impacting CDK. While we activated our cyber response procedures as a result of the , we still experienced to our business in North America, including to our CDK-hosted dealer management system, which temporarily resulted in in same store sales during that time. For more information regarding our cybersecurity policies and procedures, see Item 1C. Cybersecurity.
Regulatory Risks
Our dealerships and our new vehicle sales model may not be protected if U.S. or Canadian state or provincial dealer laws are repealed or weakened, a manufacturer becomes bankrupt, or there is a shift to other sales models.
State and provincial dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Certain U.S. state dealer laws allow dealers to file protests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. If dealer laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without an opportunity to cure or a showing of good cause. In Canada, although laws differ by province, provincial law generally provides that both a manufacturer and dealer each has a common law and statutory duty of good faith and fair dealing in performance and enforcement of any franchise agreement. are generally handled through the National Automobile Dealer Arbitration Program (NADAP). If a manufacturer wished to a franchise, there is no guaranty that we would such a . Without the protection of state and provincial dealer laws, it may also be more to renew our franchise agreements upon expiration or on terms acceptable to us.
As evidenced by the bankruptcy proceedings of both Chrysler and GM in 2009, state dealer laws do not afford continued protection from manufacturer terminations or non-renewal of franchise agreements. No assurances can be given that a manufacturer will not seek protection under bankruptcy laws, or that, in this event, they will not seek to terminate franchise rights held by us.
Our U.K. dealerships are subject to different regulatory frameworks than our U.S. and Canada operations, and changes to these regulatory frameworks could negatively affect our results of operations.
The majority of our dealerships in the United Kingdom currently operate under franchise agreements with vehicle manufacturers, however, unlike in the United States, the United Kingdom generally does not have automotive dealership franchise laws and, as a result, our U.K. dealerships operate without these types of specific protections that exist in the United States. In addition, our U.K. dealerships are also subject to U.K. antitrust regulations prohibiting certain restrictions on the sale of new vehicles and spare parts and on the provision of repairs and maintenance. For instance, authorized dealers are generally able to, subject to manufacturer facility requirements, relocate or add additional facilities throughout the EU, offer multiple brands in the same facility, allow the operation of service facilities independent of new car sales facilities and ease restrictions on cross supplies (including on transfers of dealerships) between existing authorized dealers within the EU. However, under the EU Motor Vehicle Block Exemption Regulation, which was retained in U.K. law following the United Kingdom’s exit from the EU on January 31, 2020, certain restrictions on dealerships are permissible in franchise agreements provided certain conditions are met. In October 2022, the Competition and Markets Authority of the U.K. published recommendations to introduce an updated U.K. equivalent broadly similar to the EU Motor Vehicle Block Exemption Regulations, however, changes to these protections or rules could negatively affect our revenues, results of operations and financial condition.
Changes to laws or regulatory frameworks applicable to automotive consumer financing transactions could negatively affect our results of operations.
Our financing activities are subject to federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations, as well as motor vehicle finance laws, installment finance laws, insurance laws, usury laws, and other installment sales laws and regulations. Some jurisdictions regulate finance, documentation, and administrative fees that may be charged in connection with vehicle sales. In recent years, private plaintiffs and state attorneys general in the United States have increased their scrutiny of advertising, sales, and F&I activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected. Further, the Consumer Finance Protection Board has supervisory authority over certain non-bank lenders, including automotive finance companies, such as our captive auto finance company DFC. The CFPB can use this authority to conduct supervisory examinations or initiate enforcement actions and/or litigation to ensure compliance with various federal consumer protection laws.
Auto finance agreements between consumers and finance lenders typically include amounts to be paid as commissions to the dealership of purchase. In October 2024, the U.K. Court of Appeals ruled that brokers, including car dealerships, could not lawfully receive commissions from finance lenders without obtaining the customer’s fully informed consent to the commission payments. This ruling is now on appeal to the Supreme Court of the United Kingdom. As a result of the appeals court ruling, car dealerships in the United Kingdom are now required to explicitly disclose to their customers the commissions they receive in connection with auto financing arrangements. In response to this ruling, several major finance lenders in the United Kingdom temporarily stopped underwriting new auto finance agreements to review their policies and practices and make any updates necessary to ensure compliance with the new requirements. While these lenders have resumed underwriting since, the initial pause caused significant disruption in the U.K. motor finance market and led to reduced sales volume. Because many of our customers in the United Kingdom rely on financing arrangements to purchase their vehicles from us, any additional judicial or legislative development that changes any of our or third parties’ obligations with respect to auto finance transactions could lead to further disruption that causes our U.K. sales volumes and related commissions to . Similarly, any law, regulation, or court ruling that has a similar impact with respect to auto finance transactions in the United States or Canada could lead to reduced sales volumes and related commissions in those regions. If our sales volume or commissions are reduced as a result of any such changes in the United Kingdom, the United States, or Canada, it could affect our revenues, results of operations, and financial condition.
Import product restrictions, currency valuations, tariffs, U.S. and foreign trade policies and risks may impair our ability to sell vehicles or parts profitably.
A significant portion of the vehicles we sell are manufactured outside of the geographic regions in which we operate, and all of the vehicles we sell include parts manufactured outside of the geographic regions in which we operate. As a result, our operations are subject to customary risks of importing merchandise, including currency fluctuation, import duties or tariffs, exchange rates, trade restrictions, work stoppages, transportation costs, natural or man-made disasters, and general political and socioeconomic conditions in other countries. The United States or the countries from which our products are imported, may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices. Changes in U.S. trade policies, including policies intended to penalize foreign manufacturing or imports, and policies of foreign countries in reaction to those changes, could increase the prices we pay for, or limit the supply of, the new vehicles and parts we sell. Any changes that increase the costs of vehicles and parts generally, to the extent passed on to customers, could negatively affect customer demand and our revenues and profitability. If not passed on to our customers, any cost increases will affect our . Any cost increase that applies to manufacturers that sell to us could affect our business compared to other vehicle retailers.
Our operations are subject to extensive governmental laws and regulations. If we are found to be in violation of or subject to liabilities under any of these laws, or if new laws or regulations are enacted that adversely affect our operations, our business, operating results, and prospects could suffer.
We are subject to federal, state, and local laws and regulations in the geographic regions in which we operate, such as those relating to franchising, motor vehicle sales, retail installment sales, leasing, F&I, marketing, licensing, consumer protection, consumer privacy, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety, as well as consumer financing as discussed above. In addition, with respect to employment practices, we are subject to various laws and regulations, including complex federal, state, and local wage and hour and anti-discrimination laws. New laws and regulations are enacted on an ongoing basis. With the number of stores we operate, the number of personnel we employ and the large volume of transactions we handle, it is possible that technical mistakes will be made. These regulations affect our profitability and require ongoing training. Current practices in stores may become prohibited. We are responsible for ensuring that continued compliance with laws is maintained. If there are unauthorized activities, the jurisdictional authorities have the power to impose civil penalties and sanctions, suspend or withdraw dealer licenses or take other actions. These actions could materially impair our activities or our ability to acquire new stores in those states where occurred. Further, private causes of action on behalf of individuals or a class of individuals could result in significant or injunctive relief.
We may be involved in legal proceedings arising from the conduct of our business, including litigation with customers, team member-related lawsuits, class actions, purported class actions and actions brought by or on
behalf of governmental authorities. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealers by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil fines and penalties, and damage our reputation and sales.
In the United Kingdom, the Financial Conduct Authority (FCA) regulates financial services firms and financial markets, including the practice of dealerships acting as the broker in arranging the financing for vehicle sales. The FCA is investigating the historic use of discretionary commission arrangements amid concerns that this practice may have been unfair to customers. We await the outcome of the FCA’s investigation which is expected sometime in 2026. Any regulatory or judicial outcome that ultimately results in the refund of historical commissions paid to us or that reduces the commissions paid to us could materially and adversely affect us. Similarly, the U.S. Federal Trade Commission recently has attempted to prohibit certain automotive sales and marketing practices and establish significant new dealer disclosure and record-keeping requirements broadly applicable throughout the car-buying process. Depending on the results of ongoing litigation, regulatory review, and the final scope and implementation of the proposed rule, we may be subject to new administrative burdens that would likely increase our costs and could expose us to significant , other , and/or publicity.
If we or any of our team members at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief, and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities. Jurisdictional statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such statutes. In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material effect on our business, results of operations, financial condition, cash flows, and prospects.
Structural and Organizational Risks
Our ability to increase revenues and profitability through acquisitions depends on our ability to acquire and successfully integrate new vehicle franchises.
The vehicle industry in the jurisdictions in which we operate is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. Accordingly, a principal component of our growth strategy is to make dealership acquisitions in our existing markets and in new geographic markets. Restrictions by our manufacturers and limitations on our access to capital resources may directly or indirectly limit our ability to acquire additional dealerships. In addition, increased competition for acquisitions, including from other national, regional, and local dealership groups, and other strategic and financial buyers, some of which may have greater financial resources than us, could result in fewer acquisition opportunities for us and higher acquisition prices in the future.
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a franchised store, which typically takes 60 to 90 days. In determining whether to approve an acquisition, a manufacturer considers factors including the number of such manufacturers’ stores currently owned, ownership of stores in contiguous markets, performance of existing stores, frequency of acquisitions, and our financial condition. In the past, manufacturers have not consented to our purchase of certain franchised stores and we cannot assure you that manufacturers will approve future acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.
We make a substantial capital investment when we acquire dealerships. We finance acquisitions activity primarily with cash flows from our operations, borrowings under our credit arrangements, mortgage financing proceeds, and we may obtain financing from debt and equity capital market offerings. The size of our acquisition activity in recent years magnifies risks associated with debt service obligations. These risks include potential lower earnings per share, our inability to pay dividends and potential negative impacts to the debt covenants we negotiated under our credit agreement. In addition, issuances of equity securities could result in dilution to existing shareholders.
We face other risks commonly encountered with growth through acquisitions. These risks include, without limitation:
• failing to identify suitable acquisition candidates and negotiate acceptable terms;
• failing to assimilate the operations and personnel of acquired dealerships;
• straining our existing systems, procedures, structures and personnel, including by disrupting our ongoing business and diverting our management resources;
• failing to achieve expected performance levels;
• incurring significantly higher capital expenditures and operating expenses, including incurring additional facility renovation costs or other expenses required by the manufacturer;
• entering new, unfamiliar markets;
• encountering undiscovered liabilities and operational difficulties at acquired dealerships;
• failing to maintain uniform standards, controls, and policies;
• impairing relationships with team members, manufacturers, and customers; and
• overvaluing entities to be acquired.
Our failure to address these risks or other problems encountered in connection with our acquisitions could cause us to fail to realize the anticipated benefits of these acquisitions, cause us to incur unanticipated liabilities and otherwise harm our business. Any of these risks, if realized, could materially and adversely affect our business, financial condition, and results of operations.
Risks associated with our international operations may negatively affect our business, results of operations and, financial condition.
We operate dealerships in the United States, the United Kingdom, and Canada. While our operations outside of the United States currently represent 22% of our revenues, our international operations may expand. We face regulatory, operational, political, and economic risks and uncertainties with respect to our international operations that may be different from those in the United States. These risks may include, but are not limited to, the following:
• fluctuations in foreign currency translations within our financial statements driven by exchange rate volatility;
• inability to obtain or preserve franchise rights in the foreign countries in which we operate;
• changes in distribution models in the foreign countries in which we operate;
• compliance with changing laws and regulations;
• compliance with U.S. Foreign Corrupt Practices Act and other anti-corruption laws;
• wage inflation;
• treatment of revenue from international sources and changes to tax rules, including being subject to foreign tax laws;
• difficulties in managing foreign operations and dealing with different customs, practices, and local regulations with which we are less familiar;
• large uncertainties, timing delays, and expenses associated with tariffs, labor matters, import or export licenses, and other trade barriers; and
• changes in a country’s economic or political conditions, including inflation, recession, and interest rate fluctuations, and exposure to regional or global public health issues, pandemics, or epidemics, such as the outbreak of the COVID-19 pandemic.
The loss of key personnel or the failure to attract additional qualified management personnel could adversely affect our operations and growth.
Our success depends to a significant degree on the efforts and abilities of our senior management. Further, we have identified Bryan B. DeBoer in most of our store franchise agreements as the individual who controls the franchises and upon whose financial resources and management expertise the manufacturers may rely when awarding or approving the transfer of any franchise. If we lose these key personnel, our business may suffer.
In addition, as we expand into new markets and develop our digital e-commerce solutions, we will need to hire additional managers, engineers, data scientists, and other team members. The market for qualified team members in the automotive and technology-related industries is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key team members or the inability to attract additional qualified personnel could have a material adverse effect on our business, results of operations, financial condition, and cash flows. In addition, the lack of qualified managers or other team members employed by potential acquisition candidates may limit our ability to consummate future acquisitions.
Risks Related to Investing in Our Common Stock
Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover, which could impair the market price of our common stock.
We are an Oregon corporation, and certain provisions of Oregon law and our Restated Articles of Incorporation may have anti-takeover effects. These provisions could delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in his or her best interest. These provisions may also affect attempts that might result in a premium over the market price for the shares held by shareholders and may make removal of the incumbent management and directors more difficult, which, under certain circumstances, could reduce the market price of our common stock.
We may not be able to satisfy our debt obligations upon the occurrence of a change in control under our debt instruments.
Upon the occurrence of a change in control as defined in our credit agreement, the agent under the credit agreement will have the right to declare all outstanding obligations immediately due and payable and to terminate the availability of future advances to us. Upon the occurrence of a change in control, as defined in the indentures governing our senior notes, the holders of our senior notes will have the right to require us to purchase all or any part of such holders’ notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under the credit agreement in the event of a change in control or fundamental change. In the event we were unable to satisfy these obligations, it could have a material adverse impact on our business and our common stock holders. A “change in control” as defined in our credit agreement includes, among other events, the acquisition by any person, or two or more persons acting in concert, in either case other than Lithia Holdings Company, L.L.C., Sidney B. DeBoer or Bryan B. DeBoer, of ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 35% or more of the outstanding shares of our voting stock on a fully diluted basis.
Our issuance of preferred stock could adversely affect holders of common stock.
Our Board is authorized to issue a series of preferred stock without any action on the part of our holders of common stock. Our Board also has the power, without shareholder approval, to set the terms of any such series of preferred stock that may be issued, including voting powers, preferences over our common stock with respect to dividends or if we voluntarily or involuntarily dissolve or distribute our assets, and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the price of our common stock could be adversely affected.
Item 1C. Cybersecurity
Assessing, identifying, and managing material risks from cybersecurity threats
We are committed to maintaining cybersecurity practices designed to safeguard our information assets and ensure the confidentiality, integrity, and availability of our operations. We employ a comprehensive risk-based approach to assess, identify, and manage risks arising from cybersecurity threats that could reasonably be expected to materially affect our business, financial condition, results of operations, or reputation. The identification and oversight of material cybersecurity risks is integrated into our enterprise risk management (ERM) program and included in ongoing ERM Committee and Board meetings and reporting.
We complete regular cybersecurity risk assessments to identify potential vulnerabilities and threats, analyzing our infrastructure, systems, and data. Assessments are conducted both internally and by third parties and consider internal and external factors, technological changes, regulatory requirements, and emerging cyber threats. Our cybersecurity program is informed by widely recognized standards for managing cybersecurity risk, including the National Institute of Standards and Technology Cybersecurity Framework, Center for Internet Security Controls and U.K. Cyber Essentials.
We use threat detection and monitoring tools and technologies to identify potential cybersecurity risks. This includes continuous monitoring, mechanisms designed to detect unusual or anomalous activity, to promptly identify any unusual activities or security breaches. Threat intelligence sharing with industry partners helps us stay informed about the latest cybersecurity threats.
We assess cybersecurity risks for their potential impact on our operations, data, financial condition, and reputation. Risks are prioritized based on their severity and likelihood of occurrence before implementing appropriate controls, safeguards, and mitigation measures designed to manage and reduce those risks to acceptable levels.
We have developed a documented information security incident response plan that outlines procedures to be followed in the event of a cybersecurity incident. The plan is periodically tested through tabletop exercises and simulations with incident response team members and includes processes for identification, categorization, escalation and reporting of incidents and remediation, as appropriate. Team members are regularly trained on key cybersecurity subjects to ensure awareness.
While no company can or will be completely immune from cybersecurity threats, especially as they relate to vendors and government agencies that we rely on, we know of no cybersecurity incident that has or is reasonably likely to materially affect us, our business strategy, or our results of operations, or financial condition.
Board of Directors Cybersecurity Oversight
Our Board oversees our cybersecurity and data protection strategy and has designated a director to lead its cybersecurity efforts. Our Board is briefed on our cybersecurity posture, current and future risks and potential incidents or vulnerabilities on a quarterly basis. Board members and executives participate in engagements on cybersecurity, such as simulated cyber incident response and crisis management exercises. Our Board also receives and reviews third-party cybersecurity assessments at least annually, which include assessments of our cyber maturity and cyber risk.
Management’s Assessment and Response to Material Risks from Cybersecurity Threats
Our information security team and its leadership have primary responsibility for assessing and managing cybersecurity risks, within the scope of the overall ERM Committee.
Our Senior Director of Information Security is responsible for identifying, assessing, and managing risks from cybersecurity threats. The Senior Director of Information Security manages our cybersecurity program and receives information regarding cybersecurity incidents and threats from our information security management team, through internal cyber risk management processes. The Senior Director of Information Security reports to the Chief Innovation and Technology Officer (CITO) and provides frequent, up-to-date reporting on cyber risk to our ERM Committee, a cross functional executive-level steering group, which includes the CITO. The ERM Committee meets on a quarterly basis or as necessary to assess and respond to enterprise risks, including cybersecurity, and reports updates to the Board. Management has authority to escalate significant cybersecurity matters to the Board as appropriate.
The Senior Director of Information Security has over 10 years of experience in senior level information security roles, has over 20 years' experience in Fortune 500 enterprise IT roles, and holds Associate and Bachelor Degrees and the Certified Information Security Manager (CISM) Professional certification. The members of our information security management team have extensive experience in technology and security roles, possessing cybersecurity certifications such as Certified Information Systems Security Professional (CISSP), Cisco Certified Network Professional (CCNP) and Global Certified Incident Handler (GCIH).
