Prepared remarks
Greetings. Welcome to Lithia Motors & Driveway Second Quarter 2026 Results Call. Please note this conference is being recorded. I will now turn the conference over to Jardon Jaramillo, Director of Finance. Thank you. You may begin.
Good morning. Thank you for joining us for our second 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 Corporation. 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 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 undue 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 today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our second quarter results. With that, I would like to turn the call over to Bryan.
Thank you, Jardon. Good morning, and welcome to our quarterly earnings call. The second quarter was another record for Lithia & Driveway. We delivered revenues of $9.8 billion and adjusted diluted EPS of $10.03, up 9% from last year as our leaders continue to demonstrate the earnings power of our diversified model in a somewhat dynamic environment. The quality of these earnings is what really stands out to me. New vehicle margins continue to be stable. Used vehicle profitability strengthened considerably, and we drove meaningful sequential improvements in SG&A as a percentage of gross profit. Driveway Finance Corporation delivered another quarter of record originations, growing income more than 70% over last year. Our ecosystem is built so that each business line reinforces the others. And this quarter, every part of the engine contributed. Our growth is powered by our people and winning share in our local markets alongside improved pricing and cost efficiencies that flow straight to the bottom line. What's so special is that each of those relationships compounds, the customer we finance through DFC today becomes tomorrow's service visit and eventually the trade-ins for our used inventory. During the quarter, same-store revenues declined 1.6% and total gross profit declined 2.7%. This was quite resilient performance against our toughest comparison of the year as we lapped an exceptionally strong second quarter of 2025. Total vehicle GPUs rose to $4,119, up nearly $200 sequentially from the first quarter, giving us real momentum. As a reminder, all vehicle operations results from this point forward are on a same-store basis. Our diversified earnings mix again provided balance with used vehicle gross profit up 1.2% and aftersales gross profit up 3.1%, both on the strength of improved margins. New vehicle revenue declined 1.5% on 2.2% lower units, solid performance against a demanding comparison to last year's Q2 tariff pull-forward. New vehicle GPU of $2,718 was essentially flat with the first quarter, making it the third consecutive quarter of stability. Looking at brand mix, imports grew 5%, while domestic declined 7% and luxury declined 4%. We view these conditions as cyclical. And with the most difficult comparison now behind us, our teams carry the momentum into the second half of the year. In used vehicles, our profitability strategy is delivering and a real testament to our ecosystem, AI and people all working closely together. Used GPU of $2,019 improved $339 sequentially from the first quarter and total gross profit grew 1.2%. The work on dynamic pricing we discussed earlier this year is taking hold and used is one of the highest return areas of our business and a stable anchor through new vehicle cycles. It is also a key entry point into our ecosystem for all affordability levels and a feeder to grow F&I, aftersales and DFC over time. F&I was consistent at $1,811, showing strong product attachment and total financing penetration rising 140 basis points. Keep in mind that DFC's growing penetration intentionally moves a portion of the finance gross profit out of F&I and into our captive platform, where it converts into recurring countercyclical income that is three times more profitable over the life of each loan. Adjusted for this shift, F&I continued to build momentum and grow. Aftersales continues to be a source of resiliency, high-quality earnings and substantial and predictable gross profit that converts into considerable operating profits. Gross profit grew 3.1% on revenue growth of 1% with margins expanding 120 basis points year-over-year to 59.2% and customer paid gross profit growing 2.6% and warranty up 5.4%. Aftersales earns its margin on every vehicle in operations, not just every vehicle sold by us, giving us a dependable earnings base through every phase of the cycle, creating consistency through intentional design. Aftersales continues to be our largest business line, contributing 42.2% of our gross profit with significantly lower SG&A than retail vehicles and driving the majority of our operating profit. Adjusted SG&A as a percentage of gross profit was 68.6%, a 290 basis point improvement from the first quarter. More importantly, the cost reductions completed thus far are now visible in absolute dollars with same-store SG&A declining year-over-year, led by nearly a 3% reduction in personnel costs, and June's SG&A percentage improved versus the prior year. This is exactly the exit rate we wanted heading into the second half of 2026. These results reflect real structural changes, not one-time cuts. Our sales departments are rearchitecting how they operate with combined roles removing layers, remote functions and extending leaders across multiple stores and departments. Our back office continues to get leaner through automation and vendor consolidation as we prepare for a simpler technology future, led by the early contributions from AI tools in the U.K. Each quarter of this execution moves us closer to our sub-60% SG&A target. And as vehicle margins stabilize and volumes improve, that leverage flows straight to earnings. In the U.K., the momentum keeps building. Gross profit grew 12% and adjusted pretax income rose 78%, while SG&A as a percentage of gross improved 200 basis points year-over-year. Used vehicles led the way with gross profit up nearly 33% and new vehicle units grew 16%, driven by a strong execution and expanding Chinese OEM partnerships. The past few focused years of network optimization is translating into consistent and profitable growth globally. On the digital front, we keep making it simpler, faster and more transparent for our customers to shop, finance and service with us in whatever channel they choose. The centerpieces today are Lithia, DFC, Driveway and GreenCars and beginning to be amplified by our partnership with Pinewood.AI. Its industry-leading DMS and AI solutions are in full swing in the United Kingdom with the North American rollout just around the corner later this year. The power of Pinewood's technology and AI bring a potential 10x scale multiplier to Lithia & Driveway's global cost savings. We are pleased that Ridgeview Partners is acquiring Pinewood.AI and our strategic alignment is unchanged. We continue to build an even stronger technology future on the same platform with the same shared priorities. Ridgeview arrives with the conviction to accelerate what Pinewood.AI has built, and we expect the transaction to generate a meaningful valuation gain on our investment. By moving our team members onto the same AI-native environment, cost and complexity is taken out of the business, deepens retention and strengthens the connective tissue of our ecosystem, all while empowering both our team members and customers to create unique and trusted relationships. Driveway Finance Corporation continues to scale exponentially and profitably. Financing operations income reached $37 million for the quarter with DFC more than doubling its profitability. This growth was driven by record originations of $884 million, net interest margin expansion of 20 basis points to 4.8% and continued strong credit experience from a captive high-quality portfolio. With managed receivables now above $5 billion and penetration climbing towards our target of 20% or more, DFC is doing exactly what we built it to do, converting vehicle sales into recurring countercyclical income with considerably greater customer impressions and earnings power. Turning to capital allocation. Our philosophy is consistent and simple: deploy capital where it generates the highest returns for our shareholders. With our shares trading well below intrinsic value, repurchases remain our top priority. We bought back $242 million of stock in the quarter, retiring approximately 4% of our outstanding shares, and our share count is now 17% less than it was just one year ago. Our strong cash generation allows us to both return meaningful capital to shareholders and grow our network when the opportunity is right. In the first half of the year, we made strategic acquisitions of $765 million in revenue and divested $120 million of underperforming revenue that also generated extra capital to put to work more efficiently in other places. We continue to diversify our U.K. portfolio with emerging Chinese OEMs and expand our presence with existing brands. These early Chinese OEM partnerships capture growth and position us to both learn and become larger partners if we choose as these manufacturers expand their presence internationally. This growth is always underwritten with discipline and consistent execution. We target purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA. This framework has delivered returns of more than 25% for more than a decade, well above our stated 15% after-tax hurdle rate. That's pretty good in an unconsolidated industry. Looking ahead, we will keep balancing share repurchases, acquisitions, organic investment and our balance sheet strength, strategically generating the highest returns for our shareholders. Our confidence is reinforced by this quarter's results all nicely coming together with sequential SG&A improvement, record DFC income, a used vehicle engine gaining momentum and strength in aftersales, all creating improved earnings quality. As these levers compound alongside opportunistic capital allocation, they keep us squarely on the path to our longer-term target of $2 of EPS for every $1 billion of revenue. Our teams are building that future one customer at a time as our differentiated and highly diversified model shifts into high gear. With that, I'll turn the call over to Tina.
Thank you, Bryan. Our second quarter showed strong sequential improvement in earnings with year-over-year comparisons reflecting the margin normalization and impact of prior year demand pull forward. Beneath these comps, the model performed exactly as designed. Resilient cash generation funded meaningful capital returns and continued growth, all while maintaining balance. This optionality to return capital, invest in the business and protect the balance sheet at the same time comes from our scale and our diversified earnings streams. These strengths run throughout the company where our leaders are focused on performance through our people. As Bryan mentioned, adjusted SG&A as a percentage of gross profit was 68.6% for the quarter on a same-store and consolidated basis. This year-over-year trend reflects the impact of top-line pressure in the comparison. This quarter's results demonstrate our ability to maintain cost structure discipline while increasing top-line profitability in GPUs and aftersales. Importantly, personnel, our largest cost category, improved 30 basis points as a percentage of gross profit. And on a same-store basis, total SG&A dollars declined. Our stores, especially in the sales departments, are gaining momentum in rebalancing their cost structures, improving the compensation plans to reward profitable growth, aligning staff with throughput and consolidating roles where technology allows, all while strengthening the customer experience. Beyond the sales departments, we continue to advance structural improvements across the business, lifting store and back-office productivity through performance management, consolidating our technology footprint as we retire legacy systems, improving vendor economics at our scale and removing manual work from the back office through automation. The early savings are visible in this quarter's results, and they build with each initiative we complete. Pinewood.AI is an important part of that trajectory, and we are deliberately pacing the rollout so that the gains we capture endure and never disrupt operational success. Moving on to financing operations. As Bryan mentioned, DFC delivered another exceptional quarter. Originations reached a record $884 million, and net interest margin was 4.8%, up 20 basis points from a year ago, reflecting a business that continues to mature and a cost of funds that improves as we scale. North American penetration reached 18%, continuing its steady climb toward our long-term target. Credit performance continues to reflect our disciplined underwriting. Origination FICO scores averaged 748. Front-end LTVs held steady at 96%, and our provisioning needs continue to decline as our conservative lending approach pays off. These results demonstrate the advantage of underwriting at the top of the funnel. Our portfolio crossed the $5 billion mark this quarter and scale is compounding our advantages: deeper access to the securitization markets, stronger funding execution and fixed costs spread across a larger earnings base. With penetration still below our 20% plus target, we have significant runway ahead and expect margins to keep building. DFC is delivering on its potential, adding a second engine of durable, high-quality earnings to our ecosystem. Next, I'll discuss the strength of our cash flows and balance sheet. We reported adjusted EBITDA of $445 million in the second quarter, down a modest 2% year-over-year. Adjusted cash flow from operations, our representation of free cash flow, was $228 million for the quarter, up 76% from a year ago, bringing our first half total to $609 million after adjusting for the one-time benefit related to our used vehicle floor plan in Q1. This regenerative cash engine is what funds our flexibility. In the quarter, it supported our share repurchases and dividends, along with our continued investment in the network. Repurchases were executed at an average price of $284, a meaningful discount to our view of intrinsic value. We also raised our dividend 23% to $0.70 per share, a reflection of our confidence in the durability and trajectory of our cash generation. Through the first half of the year, we have returned more than $560 million to shareholders across buybacks and dividends. As we move through the second half of the year, our approach remains disciplined and opportunistic. With growing free cash flow and ample liquidity, we will keep directing capital to repurchases when relative valuations are attractive and to acquisitions that clear our return hurdles and further leverage our ecosystem, including DFC. That flexibility lets us create value through buybacks while strengthening and diversifying our network. Over the past several quarters, we have been laying the foundation for the growth ahead. Our share repurchases mean our share count now stands meaningfully below where it was a year ago, compounding earnings growth and improving cost structure. New vehicle margins finding their footing, strengthening used vehicle performance and DFC scaling means that as volumes build through the second half, the earnings leverage in our model flows through amplified. We are confident this combination of durable cash flow, prudent capital deployment and the compounding power of our ecosystem will continue creating long-term value for shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions.
Questions and answers
Our first question is from Michael Ward with Citi Research.
Bryan, you mentioned 200 basis point improvement in SG&A in the U.K. To what extent and how much did Pinewood contribute to that? And is that what we can expect as you roll it out throughout the U.S.?
Mike, this is Bryan. The 200 basis points that we mentioned in the U.K. is about half driven off of the new Pinewood.AI solutions. I'm very happy to report that the integration of that product a couple of years ago into the entire 150-store platform in the United Kingdom was extremely smooth and is the pathway into the United States. The AI solutions that we've talked about now for the last few quarters— a couple of quarters ago, we had almost 150 different edits that needed to be completed to be able to get the agentics to work properly and the other benefits of the AI to work properly. And I'm proud to report that it's less than a dozen today and that the teams in the U.K. are ecstatic about what's happening and can see the pathway to the original numbers that we provided, which I believe was 447,000 hours on an annualized basis, which they should be able to realize at least half of those through the end of the year. So big numbers. And I think the important part to remember, Mike, and you obviously know this, is the read-through into the United States: having 10x the expense and cost structure means that those benefits from the progress that we're making in the U.K. are pretty easy read-throughs into the United States, which will be one of the catalysts and the engines to drive us to a sub-60% SG&A.
That's what it sounds like. Chuck, on the DFC side, that was stronger than expected. Are we at a new level just because of some of the things Tina pointed out as far as scale, cost, those sorts of things? Is this the new benchmark for a quarter, this $35 million to $40 million?
Mike, this is Chuck. Thanks for your question. I would say we're very pleased with the DFC results. And yes, this was definitely an improvement and really just validated a lot of what we've been talking about in prior quarters about the strength of being top of funnel and getting preferential selection from a credit quality performance and just some of the economies of scale that you brought out. With regards to your question about is this sort of the new normal, I would say the second half, while we still are very optimistic that we can achieve similar types of profitability, there is seasonality that we will have to deal with as a normal matter in the second half of the year. But again, we're very confident about our forward-looking growth trajectory for DFC, and we're well on our way toward our path to our long-term goals.
Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group.
Kudos on the conviction and timing of your buybacks with the stock at all-time highs today. GPUs on the used side were really strong, incrementally relative to expectations and kind of that build with the dynamic pricing starting to layer in. How do you think about the strategy? How do you think about the second half of the year? Help us with the cadence of that GPU improvement this quarter relative to go forward.
Sure, Ryan. I think on the past few calls, we've talked about looking at price to market and knowing that some value autos we had been selling for under market value, as well as low-mileage examples selling below market. Our AI alongside our people in the field are repricing cars at the appropriate level. When we think about moving forward, this quarter really highlights how we're thinking about it going forward: we are finding the balance between volume and margins to ensure that we realize our 2026 goals, which we've made very clear across our global store footprint that it's about nothing but net. That net is what shows the benefits of the entire ecosystem we've built and the differentiation between other models. I'm pretty excited about it. I'm really proud of our team, and I'd like to congratulate our general managers and each of them for finding that balance between both volume and margin.
And just following up on DFC. You raised the midterm target—remind us what that time frame is? And then secondly, on Q2 specifically, there was a much lower provision. Was there a one-time benefit from a reserve release? Or is there a structural change in the underlying credit profile or go-forward assumptions as you go forward with that business?
Yes, Ryan, this is Chuck again. With regards to the provision, this is just a testament to DFC's credit performance, and I'll give you some further stats. Our 30-plus delinquency in the credit bucket actually improved on a year-over-year basis. That improvement ranged between 12% and 20-plus percent depending on the bucket. If you look at Equifax year-over-year performance, it was essentially flat. So we feel very confident that our provision expense had a small, fairly immaterial adjustment, but our portfolio is strong and our underwriting disciplined and consistent. All of that will continue to allow us to see consistent, predictable and repeatable earnings going forward. With regards to the midterm target, I think we're getting much closer to line of sight to that. It's still probably a couple of years out, but a lot of that depends on how quickly we choose to grow the portfolio and get to that 20% penetration rate because we will have front-loaded CECL reserves. To some extent, that's achievable in the near term, but how much and when we grow the portfolio could be a headwind towards that.
Our next question is from Rajat Gupta with J.P. Morgan.
Congrats on the good execution. I wanted to double click on SG&A performance broadly for the company in the second quarter. Used car GPUs were strong. U.K. had progress. You also saw a seasonal lift in volumes 1Q to 2Q. In the past, when volume lift quarter-to-quarter lagged, SG&A underperformed. Can you unpack the sequential pickup: how much was driven by volume leverage versus GPUs, so we can get comfortable with sustainability in the back half?
Great, Rajat. Let me dig into SG&A a little deeper. We've spoken about driving down costs through U.K. AI and the future North American AI, but the most important driver is performance through people. That's coming through reductions in a lot of different areas. We've talked about job combinations in the past; that's starting to take hold. We're consolidating functions—service and parts managers combined, used and new car managers combined. Our remote F&I is gaining traction in about a dozen stores, which yields significant cost savings and time savings and allows F&I personnel to be where they are most effective. Alongside that, our procurement is starting to gain traction with contract renegotiations. With our scale, there are meaningful cost savings available. The last thing I would say is that our North American SG&A was 66.2%. We believe this will be the first time Lithia & Driveway returns to the number one position in prominence as the lowest SG&A in North America in almost a decade. It's a lot of heavy lifting and hard work. I'm proud to report that June was our first year-over-year month with lower SG&A by almost 60 basis points. Looking at trends, two quarters ago we were almost 500 basis points up year-over-year, last quarter about 330 basis points, and this quarter at about 140 basis points—massive sequential improvement, also knowing that SG&A in June was actually down. In terms of volume, our volumes are slightly down in both new and used on a same-store basis. Ultimately, this is truly cost savings combined with the $339 increase in used car GPU. This is finding the balance between volume and margin and leveraging everything we've done in the ecosystem: DFC, driveway.com, the MyDriveway consumer portal, GreenCars, and Pinewood.AI. These are all defining features of our diversified model.
Understood. A quick follow-up on the used car side: very strong GPUs. U.K. looks like a benefit. Typically, when new car volumes are down on a same-store basis, we see used flow through similarly. It was somewhat disconnected this quarter. Was there a strategic shift prioritizing GPU over volume this quarter, and should we think about that near-term?
Great, Rajat. It is important to find the balance between volume and gross profit because that makes SG&A and cost structure more predictable. You will see us continue to do that; that's the message our operational leaders and I are promoting. Year-to-date, retail SAAR as a country is down 4%, while we're down 1% year-to-date, meaning we picked up about 3% market share on new cars. On the used side, the market was down about 1% and we were flat, implying we gained 1% market share. So we did pick up market share and gained sequentially a significant amount in GPU, which helps us manage cost structure. Thanks for the question.
Our next question is from Alex Perry with Bank of America.
Congrats on a strong quarter. On the used side, how should we think about used unit comps in the back half, especially with increased off-lease supply the industry is discussing? Within used, can you talk about performance by CPO/core versus value auto and expectations there?
Sure, Alex. Looking forward, flat to up mid-single digits is our forecast range. Driveway growth is high-teens year-over-year, which supports store performance. We're looking at a 3% to 5% growth rate in used car volume for our stores. The over-9-year-old vehicles make up 63% of total used cars sold nationally, while only 17% of our mix is over nine years old—so there's a significant opportunity. Our recent growth has come from certified pre-owned; certified breached over 40% in the quarter. That helps us gain customers because trade-ins often produce easier financeable cars and back-of-book opportunities. Value autos contain a large part of our GPU opportunity; our team must price those vehicles to market to capture an additional roughly 10% that we previously were not realizing. We picked up about 3% from last quarter, which on an average $17,000 car would imply about $1,700 incremental capture on the bulk of our business. We'll pursue whatever is necessary to create that waterfall effect, and our store teams are focused on that.
That makes sense. On new vehicle GPUs, they've compressed a bit but seem stable. What's driving that compression? When do we find a floor in new GPUs and how should we think about new GPUs into the back half?
Great question, Alex. It feels like new GPUs have stabilized. This is our third quarter in a row around the $2,700 to $2,800 range for front-end GPUs on new vehicles, the first time we've seen that stability in six years. So it appears to be a new normal. I would caveat that the macro environment has influence, but compared to a few months ago when things were softer, we're feeling much more confident about the path forward. The end result is good stability in front-end new vehicle GPU.
Our next question is from Jeff Lick with Stephens Inc.
Congrats on a great quarter. Can you break down service and parts? Same-store sales were up 1% but against an 8.5% comp, so two-year comps get easier in Q3 and harder in Q4. How sustainable is this? Any dynamics in customer pay versus warranty and what's driving the 160 basis point gross margin improvement to 59.3%? How sustainable is that?
Great, Jeff. The highlight is that as new vehicle propulsion systems diversify—hybrids, plug-in hybrids, BEVs—service and parts work is becoming a larger portion of labor. That has helped lift margins toward 59%. We're fortunate that warranty periods are longer, adding to aftersales growth over time. Customer pay gross profit was up 2.6% and warranty was up 5.4%. Some franchise laws in Eastern states have helped on warranty labor rates, which has been a catalyst. The stability of our aftersales business is improving due to longer warranty periods and more complex propulsion systems that require service in early model years. Another point: in the first quarter we had our first quarter in company history where new vehicle sales were over 50% electrified—almost 55% electrified in new vehicle sales, and about 46.5% were hybrids. The advent of hybrids from Toyota, Honda, Hyundai and some domestic models is improving affordability and benefits aftersales over the long run.
Quick follow-up on franchise laws and Stellantis: any comment on how they're handling franchise agreements with one of the larger used car competitors?
I don't have much of an opinion on that specifically. Of the three domestic manufacturers, Stellantis performed best on a same-store basis for us. We aren't seeing a major impact; our Dodge and Jeep teams have been performing well. Consumers want more transparent, simple and convenient ways to transact, which aligns with how we think about Driveway experiences and in-store experiences. Our team is prepared to compete with those solutions through our strong e-commerce presence in both new and used via Driveway platforms and our local brand footprint.
Our next question is from John Babcock with Barclays.
On Pinewood, you're starting the North American rollout later this year. How do you think about disruption at the store level into next year? We've seen notable disruptions at some peers. Any way to frame that for us with Pinewood?
Yes. We spent nearly five years looking for a partner and found Pinewood.AI embedded in a United Kingdom retailer, Pendragon. About one-third of our footprint globally—150 stores—are already on Pinewood.AI. They're now on the second generation product with AI embedded, which is where we're achieving many cost savings. That will come to the United States. The enterprise-level functionality, SaaS control environment and customer-facing operations have been tested in the U.K., and the U.K. teams are communicating with U.S. teams. Transitioning a DMS sounds large, but we've done similar transitions before. Lithia moved to one platform over 25 years ago with CDK. The Pinewood.AI move was constructive and supported by experienced leadership, including Bill Berman, who helped build solutions that align consumers and team members in the same environment. We do not expect major disruption in our stores because our teams are used to transitions, are bought into the platform and we own a large portion of the change. For us, the transition will be smooth and efficient. The cost on an overall tech stack portfolio with Pinewood.AI and other vendor savings is in the range of a 20% to 50% reduction in overall costs. There will be redundancies for some period, but ultimately it's a lower cost solution that helps drive sub-60% SG&A.
Have you shared efficiency metrics after Pinewood implementation in the U.K.?
What I've shared on Pinewood.AI—the modern generation—is the 447,000 hours annualized figure in the United Kingdom, equivalent to about $10 million to $11 million in U.S. dollars. About 80% of that benefit sits on the service side. Sales functionality and agentic customer interactions could yield additional benefits. The U.K. should provide more numbers in early 2027 as they move from service punch-list items to AI coding for sales. My view is that roughly half of the cost savings to reach sub-60% SG&A will come from AI solutions and the other half from job combinations, multifunction roles, procurement scale improvements, vendor consolidation and remote functions. Our consumers are seeking convenience, simplicity and empowerment, and this tech trajectory supports longer and more profitable customer relationships.
Our next question is from Bret Jordan with Jefferies.
On fixed ops—parts and service—can you talk about price versus traffic contribution to growth? One peer noted Tekion rollout and possible pricing adjustments. Is there more competition, affordability pressure, or independent aftermarket challenges? Do you see dynamic change in parts and service this year?
Parts and service are stable. Improvements are coming about 50/50 from price and volume. Affordability is top-of-mind; we sell non-OEM parts post-warranty to help customers feeling pricing pressures, and we encourage teams to do that to reduce defection after warranty. If we can serve customers for 10 years rather than 3 to 5, we all win. Being top of funnel helps: delighting service customers increases the likelihood they return for future purchases. The MyDriveway portal, DFC communications and Driveway options let us engage customers frequently—payments, trade-in valuations, equity positions—and AI powers much of that. It's a strategic advantage to create multiple touchpoints each month rather than once every few years.
Quick follow-up on the U.K.: new units up 16% and you mentioned Chinese brand expansion. Which brands are seeing success and how does Chinese product GPU stack up versus legacy U.K. product?
I'll caveat that read-through to North America may not be a straight line. In the U.K., we're able to dual Chinese brands with other European brands, and about half of our lift is from Chinese brands. They are decent product and priced competitively, helping affordability in the U.K., but they don't yet contribute materially to aftersales because they are new and have little units in operation. The capital cost to add these brands in the U.K. is low—under $100,000 and up in about 60 days. In North America, exclusive dealerships for new Chinese brands could cost $5 million to $20 million with no aftersales base, which makes us cautious as a dealer because aftersales absorption covers a lot of fixed costs here. We are excited about global relationships and will take a measured approach to North American adoption.
Our next question is from Daniela Haigian with Morgan Stanley.
Bryan, good color on Pinewood and SG&A. On capital allocation: you raised the dividend, added buyback authorization and repurchased 4% of shares this quarter. How are you sequencing capital returns versus M&A appetite? You provided a helpful framework on target multiples. Second, how do you characterize stores, brands or geographies you're looking to add?
Great questions, Daniela. It's easy to see our share price and think we'll shift entirely to acquisitions, but Lithia & Driveway will take a balanced approach. We still believe at higher prices we have intrinsic undervaluation and strong optionality for investment. Today we would likely allocate about one-third to buybacks, one-third to M&A, and the rest to dividends and internal investments. We want to invest in what's going to yield high returns at low cost and create strong customer experiences while providing career opportunities for our team. The legs of our portfolio—DFC scaling beyond initial targets, Wheels synergies, Pinewood.AI investment—position us well. Our people are focused on cost management and market share. So there's no big change in our capital allocation approach; we'll remain disciplined and opportunistic.
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Bryan for closing remarks.
Thank you, everyone, for joining us today. We had a great time. We're excited to see the power of our ecosystem and the quality of our earnings all align in the quarter and look forward to doing the same in Q3 and talking to you in October. All the best.
Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.