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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
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Lithia Motors, Inc.
(Exact name of registrant as specified in its charter)
Oregon001-1473393-0572810
(State or other jurisdiction of incorporation or organization)(Commission File Number) (I.R.S. Employer Identification No.)
150 N. Bartlett Street,Medford,Oregon97501
(Address of principal executive offices)(Zip Code)
(541) 776-6401
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock without par valueLADThe New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerNon-accelerated filerAccelerated filerSmaller reporting companyEmerging growth company
 ☒ ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $3,392,434,000 computed by reference to the last sales price ($151.33) as reported by the New York Stock Exchange for the Registrant’s Class A common stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2020). As of February 19, 2021, there were 26,432,376 shares of the registrant’s Class A common stock outstanding and 200,000 shares of the registrant’s Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2021 Annual Meeting of Shareholders.



LITHIA MOTORS, INC.
2020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item NumberItemPage
None
Not applicable
Not applicable
The company has early adopted the removal of the disclosure required by this item, as permitted by SEC rule changes effective February 10, 2021.
Results of operations
Liquidity and capital resources
Critical accounting estimates
None
None
Item 16.Form 10-K SummaryNone
SIGNATURES

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PART I

Item 1. Business

Forward-Looking Statements
Certain statements in this Annual Report, including in the sections entitled “Risk Factors,” Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” constitute forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”, “outlook,” “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terms. Examples of forward-looking statements in this Form 10-K include, among others, statements we make regarding:

Future market conditions, including anticipated vehicle sales levels;
Anticipated impacts of the continued COVID-19 pandemic on the U.S and local economies in which we operate, our business operations and consumer demand;
Continuation of our sales and services, including in-store appointments and home deliveries;
Expectations regarding our inventory levels and manufacturer and lender incentives;
Expected growth from our e-commerce home solutions and digital strategies;
Expected operating results, such as improved store performance; continued improvement of selling, general and administrative expenses (SG&A) as a percentage of gross profit and all projections;
Anticipated integration, success and growth of acquired stores;
Anticipated ability to capture additional market share;
Anticipated ability to find accretive acquisitions;
Expected revenues from acquired stores;
Anticipated synergies, ability to monetize our investment in digital innovation;
Anticipated additions of dealership locations to our portfolio in the future;
Anticipated financial condition and liquidity, including from our cash, availability on our credit facilities and unfinanced real estate;
Anticipated use of proceeds from our financings;
Anticipated allocations, uses and levels of capital expenditures in the future;
Expectations regarding compliance with financial and restrictive covenants in our credit facility and other debt agreements;
Statements regarding furloughed employees and cost reductions;
Our strategies for customer retention, growth, market position, financial results and risk management; and
Expectations regarding programs and initiatives for employee recruitment, training and retention.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Forward-looking statements are not guarantees of future performance, and our actual results of operations, financial condition and liquidity and development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements in this Annual Report. Therefore, you should not rely on any of these forward-looking statements. The risks and uncertainties that could cause actual results to differ materially from estimated or projected results include, without limitation, the factors as discussed in Part I, Item 1A. Risk Factors, and in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and, from time to time, in our other filings we make with the Securities and Exchange Commission (SEC).

Any forward-looking statement made by us in this Annual Report is based only on information currently available to us and speaks only as of the date on which it is made. Except as required by law, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview
Lithia Motors, Inc. is a growth company powered by people and innovation with a long-term plan to profitably consolidate the largest retail sector in our country. As a leading provider of personal transportation solutions reaching 100% of the United States within 400 miles, we are among the fastest growing companies in the Fortune
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500 (ranked #252 on the Fortune 500 list for 2020). As of December 31, 2020, we operated 209 locations representing 33 brands in 22 states. All of our revenues are generated within the U.S. and all of our property and equipment is located within the U.S.

We offer a wide array of products and services fulfilling the entire vehicle ownership lifecycle including new and used vehicles, finance and insurance products and automotive repair and maintenance. We strive for diversification in our products, services, brands and geographic locations to reduce dependence on any one manufacturer, reduce susceptibility to changing consumer preferences, manage market risk and maintain profitability. Our diversification, along with our operating structure, provides a resilient and nimble business model.

Our omni-channel strategy pragmatically disrupts the industry by leveraging our experienced teams, massive selection of owned inventories, technology and physical logistics network. We seek to provide customers with a seamless experience across online and physical offerings, broad selection and access to specialized expertise and knowledge. Our physical logistics network enables us to provide convenient touch points for customers and provide services throughout the entire ownership life cycle. We use digital technologies to further activate our physical network and generate additional revenues. This unique growth model generates significant cash flows, which funds innovation and the expansion of our nationwide network, creating personal transportation solutions wherever, whenever and however consumers desire.

Founded in 1946 and incorporated in Oregon in 1968, we completed our initial public offering in 1996.

Business Strategy
We seek to provide customers a seamless, blended online and physical retail experience with broad selection and access to specialized expertise and knowledge. Our physical network enables us to provide convenient touch points for customers and provide services throughout the vehicle life cycle. We seek to increase market share and optimize profitability by focusing on the consumer experience and applying proprietary performance measurement systems fueled by data science. In July 2020, we introduced Driveway, a convenient, simple and transparent platform, that serves as our e-commerce home solution and allows us to deliver differentiated, proprietary digital experiences. We believe Driveway will allow us to further activate our physical network and capture additional earnings.

Our long-term strategy to create value for our customers, employees and shareholders includes the following elements:

Driving operational excellence, innovation and diversification
We remain focused on achieving performance through increasing market share and profitability at each of our locations. By promoting an entrepreneurial model, we build strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we strive to increase market share, drive operational performance, develop high-performing teams and foster manufacturer relationships.

In response to evolving consumer preferences, we invest in modernization that supports and expands our core business. These digital strategies combine our experienced, knowledgeable workforce with our owned inventory and physical network of stores, enabling us to be agile and adapt to consumer preferences and market specific conditions. Our investments in modernization are well under way and are taking hold with our teams as they provide digital shopping experiences, contactless test drives and home delivery or curbside pickup for vehicle purchases. Our people and these solutions power our national brands, overlaying our physical footprint in a way that we believe attracts a larger population of digital consumers seeking transparent, empowered, flexible and simple buying and servicing experiences.

Our performance-based culture is geared toward an incentive-based compensation structure for a majority of our personnel. We develop pay plans that are measured based upon various factors such as customer satisfaction, profitability and individual performance metrics. These plans serve to reward team members for creating customer loyalty, achieving store potential, developing high-performing talent, meeting and exceeding manufacturer requirements and living our core values.

We have centralized many administrative functions to drive efficiencies and streamline store-level operations. The reduction of administrative functions at our stores allows our local managers to focus on customer-facing opportunities to increase revenues and gross profit. Our operations are supported by regional and corporate
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management, as well as dedicated training and personnel development programs which allow us to share best practices across our network and develop management talent.

Growth through acquisition and network optimization
Our acquisition growth strategy has been successful both financially and culturally. Our disciplined approach focuses on acquiring new vehicle franchises, which operate in markets ranging from mid-sized regional markets to metropolitan markets. Acquisition of these businesses increases our proximity to consumers throughout the United States. While we target annual after tax return of more than 15% for our acquisitions, we have averaged over a 25% return by the third year of ownership due to a disciplined approach focusing on accretive, cash flow positive targets at reasonable valuations. We have a greater than 95% acquisition employee retention rate, demonstrating the valuable career opportunities we provide to our employees. In addition to being financially accretive, acquisitions aim to drive network growth that improves our ability to serve customers through vast selection, greater density and access to customers and ability to leverage national branding and advertising.

As we focus on expanding our physical network of stores, one of the criteria we evaluate is a valuation multiple between 3x to 7x of investment in intangibles to estimated annualized adjusted EBITDA, with various factors including location, ability to expand our network and talent considered in determining value. We also target an investment in intangibles as a percentage of annualized revenues in the range of 15% to 30%.

During 2020, we acquired thirty stores and divested five stores. We invested $1.2 billion, net of floor plan debt, to acquire these stores and we expect these acquisitions to add over $3.5 billion in annual revenues. We invested approximately $861 million in intangibles, implying a 6.0x multiple of estimated annualized adjusted EBITDA and an investment in intangibles as a percentage of annualized revenues of 24% without taking into account any synergies. The remaining amount invested of approximately $340 million related to real estate purchased, used vehicle inventory acquired, and other assets and liabilities.

We regularly optimize and balance our network through strategic divestitures to ensure continued high performance. We believe our disciplined approach provides us with attractive acquisition opportunities and expanded coast-to-coast coverage.

Thoughtful capital allocation
We manage our liquidity and available cash to support our long-term plan focused on growth through acquisitions, investments in Driveway, our national e-commerce home solution, and support for our existing business. Our capital deployment strategy targets an allocation of 65% investment in acquisitions, 25% investment in capital expenditures and 10% in shareholder return in the form of dividends and share repurchases. During 2020, we invested in our facilities, utilizing $167.8 million for capital expenditures, and paid $29.1 million in dividends. As of December 31, 2020, we had available liquidity of $1.4 billion, which was comprised of $160.2 million in cash and $1.2 billion availability on our credit facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $471 million.

Marketing
One of our core values, Earn Customers for Life, defines our market strategy by appealing to our consumers’ desire for affordability, transparency and convenience. We employ national, regional and local brands to connect with consumers with advertising tailored to the individual brand and market. Utilizing data analysis and multi-channel communications, we strive to attract and retain customers throughout the vehicle ownership life cycle.

With vast selection represented by the nation’s third-largest vehicle inventory for sale online, we employ search engine optimization, search engine marketing, online display, re-targeting, social advertising and traditional media to reach consumers. Websites for each of our locations and Driveway, our e-commerce home solution, provide customers with simple, transparent ways to manage their vehicle ownership including: search new and used inventories, view current pricing, discounts and specials, calculate payments for purchase or lease, apply for financing, buy online, schedule service appointments and provide us feedback about their experience. During 2020, our unique visitors increased 31%.

Total advertising expense, net of manufacturer credits, was $97.4 million in 2020, $111.9 million in 2019 and $108.7 million in 2018. In 2020, we spent 87% on digital, social, listings and owner communications while 13% was spent in traditional media. In all of our communications, we seek to convey the promise of a positive customer experience,
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competitive pricing and wide selection. We expect the portion of spending in digital channels to continue to increase as traditional media evolves to online consumption models.

Our manufacturer partners influence a significant portion of our advertising expense. Certain advertising and marketing expenditures are offset by manufacturer cooperative programs, which require us to submit requests for reimbursement to manufacturers for qualifying advertising expenditures. These advertising credits are not tied to specific vehicles and are earned as qualifying expenses are incurred. These reimbursements are recognized as a reduction of advertising expense. Manufacturer cooperative advertising credits were $23.9 million in 2020, $27.9 million in 2019 and $25.5 million in 2018.

Franchise Agreements
Each of our stores operates under a separate agreement (a “Franchise Agreement”) with the manufacturer of the new vehicle brand it sells.

Typical automobile Franchise Agreements specify the locations within a designated market area at which the store may sell vehicles and related products and perform approved services. The designation of the market areas and the allocation of new vehicles among stores are at the discretion of the manufacturer. Franchise Agreements do not, however, guarantee exclusivity within a specified territory.

A Franchise Agreement may impose requirements on the store with respect to:
facilities and equipment;
inventories of vehicles and parts;
minimum working capital;
training of personnel; and
performance standards for market share and customer satisfaction.

Each manufacturer closely monitors compliance with these requirements and requires each store to submit monthly financial statements. Franchise Agreements also grant a store the right to use and display manufacturers’ trademarks, service marks and designs in the manner approved by each manufacturer.

We have determined the useful life of a Franchise Agreement is indefinite, even though certain Franchise Agreements are renewed after one to six years. In our experience, agreements are routinely renewed without substantial cost and there are legal remedies to help prevent termination. Certain Franchise Agreements have no termination date. In addition, state franchise laws protect franchised automotive retailers. Under certain laws, a manufacturer may not terminate or fail to renew a franchise without good cause or prevent any reasonable changes in the capital structure or financing of a store.

The typical Franchise Agreement provides for early termination or non-renewal by the manufacturer upon:
a change of management or ownership without manufacturer consent;
insolvency or bankruptcy of the dealer;
death or incapacity of the dealer/manager;
conviction of a dealer/manager or owner of certain crimes;
misrepresentation of certain sales or inventory information by the store, dealer/manager or owner to the manufacturer;
failure to adequately operate the store;
failure to maintain any license, permit or authorization required for the conduct of business;
poor market share; or
low customer satisfaction index scores.

Franchise Agreements generally provide for prior written notice before a franchise may be terminated under most circumstances. We also sign master framework agreements with most manufacturers that impose additional requirements. See Item 1A. Risk Factors.

Competition
The retail automotive business is highly competitive. Currently, there are approximately 16,500 new vehicle franchise dealers in the United States, many of which are independent stores managed by individuals, families or small retail groups. We compete primarily with other automotive retailers, both publicly- and privately-held and other online automotive retailers such as CarMax, Carvana, Shift and Vroom.
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Vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a vehicle brand may operate. In addition, our Franchise Agreements typically limit our ability to acquire multiple dealerships of a given brand within a particular market area. Certain state franchise laws also restrict us from relocating our dealerships, or establishing new dealerships of a particular brand, within any area that is served by another dealer with the same brand. To the extent that a market has multiple dealers of a particular brand, as certain markets we operate in do, we are subject to significant intra-brand competition.

We are larger and have more financial resources than most private automotive retailers with which we currently compete in the majority of our regional markets. We compete directly with retailers with similar or greater resources in our existing metro and non-metro markets. If we enter other new markets, we may face competitors that are larger or have access to greater financial resources. We do not have any cost advantage in purchasing new vehicles from manufacturers. We rely on advertising and merchandising, pricing, our customer guarantees and sales model, our sales expertise, service reputation and the location of our stores to sell new vehicles.

Regulation

Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our business. In every state in which we operate, we must obtain various licenses to operate our businesses, including dealer, sales and finance and insurance licenses issued by state regulatory authorities. Numerous laws and regulations govern our business, including those relating to our sales, operations, financing, insurance, advertising and employment practices. These laws and regulations include state franchise laws and regulations, consumer protection laws, privacy laws, escheatment laws, anti-money laundering laws and federal and state wage-hour, anti-discrimination and other employment practices laws.

Our financing activities with customers are subject to numerous federal, state and local laws and regulations. In recent years, there has been an increase in activity related to oversight of consumer lending by the Consumer Financial Protection Bureau (CFPB), which has broad regulatory powers. The CFPB does not have direct authority over automotive dealers; however, its regulation of larger automotive finance companies and other financial institutions could affect our financing activities. Claims arising out of actual or alleged violations of law may be asserted against us or our stores by individuals, a class of individuals, or governmental entities. These claims may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct store operations and fines.

The vehicles we sell are also subject to rules and regulations of various federal and state regulatory agencies.

Environmental, Health, and Safety Laws and Regulations
Our operations involve the use, handling, storage and contracting for recycling and/or disposal of materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is subject to a complex variety of federal, state and local requirements that regulate the environment and public health and safety.

Most of our stores use above ground storage tanks, and, to a lesser extent, underground storage tanks, primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment, upgrading and removal under the Resource Conservation and Recovery Act and its state law counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other discharges from storage tanks or other sources. In addition, water quality protection programs under the federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and local programs govern certain discharges from our operations. Similarly, certain air emissions from operations, such as auto body painting, may be subject to the federal Clean Air Act and related state and local laws. Health and safety standards promulgated by the Occupational Safety and Health Administration of the United States Department of Labor and related state agencies also apply.

Certain stores may become a party to proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to former recycling, treatment and/or disposal facilities owned and operated by independent businesses. The remediation or clean-up of facilities where the release of a regulated hazardous substance occurred is required under CERCLA and other laws.
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We incur certain costs to comply with environmental, health and safety laws and regulations in the ordinary course of our business. We do not anticipate, however, that the costs of compliance will have a material adverse effect on our business, results of operations, cash flows or financial condition, although such outcome is possible given the nature of our operations and the extensive environmental, public health and safety regulatory framework. We may become aware of minor contamination at certain of our facilities, and we conduct investigations and remediation at properties as needed. In certain cases, the current or prior property owner may conduct the investigation and/or remediation or we have been indemnified by either the current or prior property owner for such contamination. We do not currently expect to incur significant costs for remediation. However, no assurances can be given that material environmental commitments or contingencies will not arise in the future, or that they do not already exist but are unknown to us.

Human Capital
As a company driven by our mission statement, “Growth Powered by People,” we place a high degree of value in each of our team members and their individual professional success. Promoting and hiring the best talent available, defining clear expectations, providing excellent training and rewarding performance helps us build dynamic teams to serve our customers. We cultivate an entrepreneurial, high-performance culture and strive to develop leaders from within. We continue to develop tools, training and growth opportunities that accelerate the depth of our talent.

As of December 31, 2020, we employed approximately 14,538 persons on a full-time equivalent basis in our nationwide network of 209 retail locations. Our workforce was comprised of approximately 20% female employees and approximately 43% of our workforce was comprised of minorities. More than 98% of our workforce earned above minimum wage and our voluntary turnover rate was less than 8% during 2020.

Some examples of our key programs and initiatives that are focused on attracting, retaining and developing our high performing workforce include:

AMP program (Accelerate My Potential), which began in 2016, is designed to deepen the knowledge of future leaders in all aspects of our business and develop leadership skills to better position participants for a future as a general manager in one of our stores.
Lithia Women Lead, which began in 2015, provides an avenue for women in the organization to connect, learn and develop. The program includes events throughout the year that provide women in the organization the opportunity to network, act as role models and inspire one another’s growth.
Talent development. Lithia promotes employee professional development through various programs including tuition reimbursement programs covering up to 75% of an employee’s undergraduate or graduate tuition costs; Master Automotive Service Excellence (ASE) training and certification and Original Equipment Manufacturer (OEM) training for our technicians; and daily on-the-job training resources through our Learning Center.

During 2020, we also invested in and expanded the roles and capabilities of our workforce to drive the development and support of our e-commerce and digital technology capabilities. We believe there is a competitive advantage to integrate and develop individuals with these skill sets and they are an integral part of supporting our five year growth plan and launch of Driveway. As our business evolves, we will remain focused on having human capital capabilities, systems and processes in place to support and align with our strategy.

Seasonality and Quarterly Fluctuations
In a stable environment, the automotive industry has generally experienced higher volumes of vehicle unit sales in the second and third quarters of each year due to consumer buying trends and the introduction of new vehicle models and, accordingly, we expect our revenues and operating results to generally be higher during these periods. In addition, we generally experience higher volume of luxury vehicles, which have higher average selling prices and gross profit per vehicle, during the fourth quarter. The timing of our acquisition activity, which varies, and ability to integrate stores into our existing cost structure has moderated this seasonality. However, if conditions occur that weaken automotive sales, such as severe weather in the geographic areas in which our dealerships operate, war, high fuel costs, depressed economic conditions including unemployment or weakened consumer confidence or similar adverse conditions, or if our ability to acquire stores changes, our revenues for the year may be disproportionately adversely affected.

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Available Information and NYSE Compliance
We make available free of charge, on our website at www.lithiainvestorrelations.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Annual Report on Form 10-K. You may also obtain copies of these reports by contacting Investor Relations at 877-331-3084.

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, may impact consumer demand and preferences. As we operate in 21 states, 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.

Approximately 14.6 million, 17.1 million, and 17.3 million new vehicles were sold in the United States in 2020, 2019, and 2018, respectively. Certain industry analysts have predicted that new vehicle sales will be approximately 16 million for 2021. If new vehicle production exceeds the rate at which new vehicles are sold, our gross profit per vehicle could be adversely affected by this excess and any resulting changes in manufacturer incentive and marketing programs. See the risk factor “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” below. Economic conditions and the other factors described above may also materially adversely impact our sales of used vehicles, parts and repair and maintenance services, and automotive finance and insurance products.

The novel coronavirus has had and may continue to have an adverse effect our business, financial condition, results of operations and cash flows.

The novel coronavirus (COVID-19) pandemic has resulted in governmental authorities implementing measures to reduce the spread of COVID-19, which have adversely affected workforces, customers, supply chains, consumer sentiment, economies, and financial markets, including in states and regions in which we operate. We have modified certain business practices to conform to government restrictions and best practices encouraged by government and regulatory authorities, and implemented risk mitigation plans for critical items and services required to continue our operations. We are monitoring and managing our cash flows and have enacted cost saving measures to respond to the volatile environment. In addition, we continue to assess our capital deployment strategy. However, these measures may not be sufficient to prevent adverse impacts on our business and financial condition from COVID-19. Ongoing disruptions in our operations due to the COVID-19 pandemic may continue to adversely impact our business, results of operations, financial condition and cash flows. The impact of the COVID-19 pandemic on our business and financial performance will depend on future developments, including the duration, severity and any resurgences of the pandemic, which are uncertain and cannot be predicted.

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Natural disasters and adverse weather conditions can disrupt our business.

Our dealerships are in states and regions in the U.S. in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides, wind and/or hail storms) 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. A disruption in our operations may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property at dealership locations. The exposure on any single claim under our property and casualty insurance, medical insurance and workers’ compensation insurance varies based upon type of coverage. Our maximum exposure on any single claim is $5.5 million, subject to certain aggregate limit thresholds.

The automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters and adverse weather events 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.

Increasing competition among automotive retailers reduces our profit margins on vehicle sales and related businesses. Further, the use of the Internet in the car purchasing process could materially adversely affect us.

Automobile retailing is a highly competitive business. Our competitors include publicly and privately-owned dealerships, of which certain competitors are larger and have greater financial and marketing resources than we have. Many of our competitors sell the same or similar makes of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to the volume of purchases or otherwise.

Our finance and insurance 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.

The Internet has become a significant part of the sales process in our industry. Customers are using the Internet to compare pricing for vehicles and related finance and insurance services, which may further reduce margins for new and used vehicles and profits for related finance and insurance services. If Internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our business could be materially adversely affected. In addition, other franchise groups have aligned themselves with services offered on the Internet or are investing heavily in the development of their own Internet capabilities, which could materially adversely affect our business, results of operations, financial condition and cash flows.

Our Franchise Agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.

In addition, we may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where we do not have a leading position.

Changes to the automotive industry and consumer views on car ownership could materially adversely affect our business, results of operations, financial condition and cash flows.

The automotive industry is predicted to experience rapid change in the years to come, including increases in ride-sharing services, advances in electric vehicle production and driverless technology. Ride-sharing services such as Uber and Lyft provide consumers with mobility options outside of the traditional car ownership and lease alternatives. Certain manufacturers and states have declared commitments to various electric vehicle and zero emissions goals, such as the state of California’s executive order to require all new cars and passenger trucks sold in the state to be zero-emission vehicles by 2035. The overall impact of these options on the automotive industry is uncertain, and may include lower levels of new vehicle sales.

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Manufacturers continue to invest in increasing production and quality of BEVs (battery-electric vehicles), which generally require less maintenance than traditional cars and trucks. The effects of BEVs on the automotive industry are uncertain and may include reduced parts and service revenues, as well as changes in the level of sales of certain Finance and Insurance (F&I) products such as extended warranty and lifetime lube, oil and filter contracts.

Technological advances are also 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 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.

A decline of available financing in the lending market may adversely affect our vehicle sales volume.

A significant portion of buyers finance their vehicle purchases. One of the primary finance sources used by consumers in connection with the purchase of a new or used vehicle is the manufacturer captive finance company. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financing programs. In addition, the captive finance companies will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio. In addition, sub-prime lenders have historically provided financing for consumers who, for a variety of reasons, including poor credit histories and lack of down payment, do not have access to more traditional finance sources. If lenders tighten their credit standards or there is a decline in the availability of credit in the lending market, the ability of consumers to purchase vehicles could be limited, which 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 which supports expected sales levels. Any event that adversely affects a manufacturer’s ability to timely deliver 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 would otherwise occur. 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, declines in their credit ratings, port closures, labor strikes or similar disruptions (including within their major suppliers), supply shortages or rising raw material costs, rising employee benefit 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 profitably design, market, produce or distribute new vehicles, which, in turn, could materially adversely affect our business, results of operations, financial condition and cash flows.

We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. We purchase substantially all of our new vehicles from various manufacturers or distributors at the prevailing prices available to all franchised dealers. Our sales volume could be materially adversely impacted by a manufacturer’s or distributor’s inability to supply our stores with an adequate supply of vehicles.

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.

Many new manufacturers are entering the automotive industry. New companies have raised capital to produce fully electric vehicles or to license battery technology to existing manufacturers. Tesla has demonstrated the ability to successfully introduce electric vehicles to the marketplace. Foreign manufacturers from China and India are
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producing significant volumes of new vehicles and are entering the U.S. and selecting partners to distribute their products. Because the automotive market in the U.S. 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 a material adverse impact on our success in the future.

Federal regulations around fuel economy standards and “greenhouse gas” emissions have continued to increase. New requirements may adversely affect any manufacturer’s ability to profitably design, market, produce and distribute vehicles that comply with such regulations. We could be adversely impacted in our ability to market and sell these vehicles at affordable prices and in our ability to finance these inventories. These regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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 cars; 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, employee 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, 2020, approximately 25% of our service, body and parts 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 service, body and parts sales volume could be adversely affected.

The ability of our stores to make new vehicle sales depends in large part upon the 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’ brand 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
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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.

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.

Our indebtedness and lease obligations could have important consequences to us, including the following:
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; and
exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest.

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 $2.8 billion 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, 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 our representations and warranties in those agreements are not true and correct in all material respects as of the date of a proposed credit extension, or if other 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.

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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, 2020, 49% 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 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., Sid DeBoer or Bryan DeBoer, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of our voting stock on a fully diluted basis.

Technology and Cybersecurity Risks

Changes to the retail delivery model and increased digital retailer competition could adversely affect our business, results of operations, financial condition and cash flows.

The automotive industry is beginning to experience change and disruption in the retail delivery model, including growing competition in the used vehicle market from companies with a primarily online business model. Competition in this market includes companies such as Carvana, Vroom and Shift. In addition, larger traditional automotive retailers are also moving in this direction, providing consumers with vehicle purchasing experiences outside of the traditional brick and mortar automotive dealership model.

We continue to develop our own internal technology solutions to further expand the reach of our nationwide network of service and delivery points. We may face increased competition for market share with these other delivery models and digital 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.

Breaches in our data security systems or in systems used by our vendor partners, including cyber-attacks or unauthorized data distribution by employees 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.

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Aspects of our operations are subject to privacy, data use and data security regulations, which impact the way we use and handle data. In addition, regulators are proposing and adopting new laws or regulations that could require us to adopt certain cybersecurity and data handling practices. The changing privacy laws (e.g. California Consumer Privacy Act) create new individual privacy rights and impose increased obligations on companies handling personal data.

We collect, process, and retain personally identifiable information regarding customers, associates and vendors in the normal course of our business. Our internal and third-party systems are at risk from hackers or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks are growing in number and sophistication thus presenting an ongoing threat to systems, whether internal or external, used to operate the business on a day-to-day basis. We invest in reasonable commercial 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 errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, as well as other operational and financial impacts derived from investigations, litigation, imposition of penalties or other means.

Regulatory Risks

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their Franchise Agreements. Additionally, federal bankruptcy law can override protections afforded under state dealer laws.

State 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 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 where we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, it may also be more difficult to renew our Franchise Agreements upon expiration or on terms acceptable to us.

In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in the future. Manufacturer lobbying efforts and lawsuits may lead to the repeal or revision of these laws. For example, Tesla has received a favorable ruling in certain states allowing direct to consumer sales and service. If manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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.
 
Import product restrictions, currency valuations, and foreign trade risks may impair our ability to sell foreign vehicles or parts profitably.

A significant portion of the vehicles we sell are manufactured outside the U.S., and all of the vehicles we sell include parts manufactured outside the U.S. As a result, our operations are subject to customary risks of importing merchandise, including currency fluctuation, import duties, exchange rates, trade restrictions, work stoppages, transportation costs, natural or man-made disasters, and general political and socioeconomic conditions in other countries. The U.S. 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 the U.S.-Mexico-Canada Agreement or 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 some
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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 adversely affect our profitability. Any cost increase that disproportionately applies to manufacturers that sell to us could adversely affect our business compared to other automobile 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 states in which we operate, such as those relating to franchising, motor vehicle sales, retail installment sales, leasing, finance and insurance, marketing, licensing, consumer protection, consumer privacy, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety. 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 state and federal 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 violations occurred. Further, private causes of action on behalf of individuals or a class of individuals could result in significant damages or injunctive relief.

We may be involved in legal proceedings arising from the conduct of our business, including litigation with customers, employee-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.

Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states 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 U.S. have increased their scrutiny of advertising, sales, and finance and insurance 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.

If we or any of our employees 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 under federal and state statutes. These federal and state 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 federal and state 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
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obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse 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 additional stores.

General
The U.S. automobile industry is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. Accordingly, a principal component of our growth in sales is to make acquisitions in our existing markets and in new geographic markets. To complete the acquisition of additional stores, we need to successfully address at least each of the following challenges.

Manufacturers
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a franchised store. In determining whether to approve an acquisition, a manufacturer considers many factors, including our financial condition, ownership structure, the number of stores currently owned and our performance with those stores. Obtaining manufacturer approval of acquisitions also takes a significant amount of time, typically 60 to 90 days. In the past, manufacturers have not consented to our purchase of franchised stores due to the performance of existing stores. We cannot assure you that manufacturers will approve future acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.

Most major manufacturers have now established limitations or guidelines on the:
number of such manufacturers’ stores that may be acquired by a single owner;
number of stores that may be acquired in any market or region;
percentage of market share that may be controlled by one automotive retailer group;
ownership of stores in contiguous markets;
performance requirements for existing stores; and
frequency of acquisitions.

In addition, those manufacturers generally require that no other manufacturers’ brands be sold from the same store location, and many manufacturers have site control agreements in place that limit our ability to change the use of the facility without their approval.

A manufacturer also considers our past performance as measured by the Minimum Sales Responsibility (MSR) scores, CSI scores and Sales Satisfaction Index (SSI) scores at our existing stores. At any point in time, certain stores may have scores below the manufacturers’ sales zone averages or have achieved sales below the targets manufacturers have set. Our failure to maintain satisfactory scores and to achieve market share performance goals could restrict our ability to complete future store acquisitions.

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Acquisition Risks
We face risks commonly encountered with growth through acquisitions. These risks include, without limitation:
failing to assimilate the operations and personnel of acquired dealerships;
straining our existing systems, procedures, structures and personnel;
failing to achieve predicted sales levels;
incurring significantly higher capital expenditures and operating expenses, which could substantially limit our operating or financial flexibility;
entering new, unfamiliar markets;
encountering undiscovered liabilities and operational difficulties at acquired dealerships;
disrupting our ongoing business;
diverting our management resources;
failing to maintain uniform standards, controls and policies;
impairing relationships with employees, manufacturers and customers as a result of changes in management;
incurring increased expenses for accounting and computer systems, as well as integration difficulties;
failing to obtain a manufacturer’s consent to the acquisition of one or more of its dealership franchises or renew the franchise agreement on terms acceptable to us;
incorrectly valuing entities to be acquired; and
incurring additional facility renovation costs or other expenses required by the manufacturer.

In addition, we may not adequately anticipate all of the demands that growth will impose on our systems, procedures and structures.

Consummation and Competition
We may not be able to complete future acquisitions at acceptable prices and terms or identify suitable candidates. In addition, increased competition in the future for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions will depend upon various factors, including:
the availability of suitable acquisition candidates;
competition with other dealer groups for suitable acquisitions;
the negotiation of acceptable terms with sellers and with manufacturers;
our financial capabilities and ability to obtain financing on acceptable terms;
our stock price;
our ability to maintain required financial covenant levels after the acquisition; and
the availability of skilled employees to manage the acquired businesses.

Operating and Financial Condition
Although we conduct what we believe to be a prudent level of investigation, an unavoidable level of risk remains regarding the actual operating condition of acquired stores and we may not have an accurate understanding of each acquired store’s financial condition and performance. Similarly, most of the dealerships we acquire do not have financial statements audited or prepared in accordance with U.S. generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired businesses. Until we assume control of the business, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired businesses and their earnings potential. These risks may not be adequately mitigated by the indemnification obligations we negotiated with sellers.

Limitations on Our Capital Resources
We make a substantial capital investment when we acquire dealerships. Limitations on our capital resources would restrict our ability to complete new acquisitions or could limit our operating or financial flexibility.

We finance acquisitions activity with cash flows from our operations, borrowings under our credit arrangements, proceeds from our offering of senior notes, proceeds from mortgage financing and the issuance of shares of Class A common stock. 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.

If we fail to meet the covenants in our credit facility or the indentures governing our senior notes, or if some other event occurs that results in a default or an acceleration of our repayment obligations under our debt instruments, we may not be able to refinance our debt on terms acceptable to us or at all. We may not be able to obtain financing in
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the future due to the market price of our Class A common stock and overall market conditions. Additionally, a substantial amount of assets of our dealerships are pledged to secure the indebtedness under our credit facility and our other floor plan financing indebtedness. These pledges may limit our ability to borrow from other sources in order to fund our acquisitions.

We are subject to substantial risk of loss under our various self-insurance programs including property and casualty, open lot vehicle coverage, workers’ compensation and employee medical coverage. Our insurance does not fully cover all of our operational risks, and changes in the cost of insurance or the availability of insurance could materially increase our insurance costs or result in a decrease in our insurance coverage.

We have a significant concentration of our property values at each dealership location, including vehicle and parts inventories and our facilities. Natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides and wind or hail storms) or other extraordinary events subject us to property loss and business interruption. Illegal or unethical conduct by employees, customers, vendors and unaffiliated third parties can also impact our business. Other potential liabilities arising out of our operations may involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties in connection with alleged violations of regulatory requirements.

Under our self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims-handling expenses. Costs in excess of these retained risks may be insured under various contracts with third-party insurance carriers. As of December 31, 2020, we had total reserve amounts associated with these programs of $39.1 million.

The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of our insurance purchasing change. The operation of automobile dealerships is subject to a broad variety of risks. In certain instances, our insurance may not fully cover an insured loss depending on the magnitude and nature of the claim. Accordingly, we cannot assure you that we will not be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows. Additionally, changes in the cost of insurance or the availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase the portion of our risks that we self-insure.

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 employees. The market for qualified employees 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 employees 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 employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions.

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Risks related to investing in our Class A common stock

Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover, which could impair the market price of our Class A 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 Class A common stock.

Our issuance of preferred stock could adversely affect holders of Class A common stock.

Our Board of Directors is authorized to issue a series of preferred stock without any action on the part of our holders of Class A common stock. Our Board of Directors 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 Class A 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 Class A 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 Class A common stock, the rights of holders of our Class A common stock or the price of our Class A common stock could be adversely affected.

Item 2. Properties

Our stores and other facilities consist primarily of vehicle showrooms, display lots, service facilities, collision repair and paint shops, supply facilities, vehicle storage lots, parking lots and offices in 21 states in the locations shown in the map under the Overview section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe our facilities are currently adequate for our needs and are in good repair. Some of our facilities do not currently meet manufacturer image or size requirements and we are actively working to find a mutually acceptable outcome in terms of timing and overall cost. We own our corporate headquarters in Medford, Oregon, and numerous other properties used in our operations. Certain of our owned properties are mortgaged. As of December 31, 2020, we had outstanding mortgage debt of $611.5 million. We also lease certain properties, providing future flexibility to relocate our retail stores as demographics, economics, traffic patterns or sales methods change. Most leases provide us the option to renew the lease for one or more lease extension periods. We also hold certain vacant facilities and undeveloped land for future expansion.

Our corporate headquarters is LEED certified and incorporates roof-mounted solar panels to offset energy usage. Two of our stores are also LEED certified, and we have completed solar projects at four others. Our stores also integrate energy-saving practices and materials. This includes practices such as recycling used tires, used engine oil and used oil filters; the use of waste oil heaters and carwash reclaim systems; using biodegradable products in our detail services and interior and exterior LED lighting. We also provide a complimentary, nationwide electric vehicle (EV) charging network, an important aspect in increasing the number of EVs on the road and thereby reducing emissions.

Item 3. Legal Proceedings

We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Class A common stock trades on the New York Stock Exchange under the symbol LAD.

The number of shareholders of record and approximate number of beneficial holders of Class A common stock as of February 19, 2021 was 466 and 63,557, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, L.L.C. Sidney B. DeBoer Trust U.T.A.D. January 30, 1997 (the “Trust”) is the manager of Lithia Holding Company, L.L.C., and Sidney DeBoer, as the trustee of the Trust, has the authority to vote all of the issued and outstanding shares of our Class B common stock. As of December 31, 2020, Lithia Holding Company, L.L.C., held 200,000 shares of our Class B common stock.

Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.

Repurchases of Equity Securities
We made the following repurchases of our common stock during the fourth quarter of 2020:
Total number of shares purchased(2)Average price paid per shareTotal number of shares purchased as part of publicly announced plan(1)Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands)(1)
October— $— — $187,522 
November184 229.57 — 187,522 
December293 294.69 — 187,522 
Total477 269.57 — 187,522 
(1)On October 22, 2018, our Board of Directors approved a $250 million repurchase authorization. This authorization does not have an expiration date.
(2)The shares repurchased in the fourth quarter of 2020 were related to tax withholdings on vesting RSUs.
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Stock Performance Graph
The stock performance graph and table that follow compare the cumulative total stockholder return on Lithia Motors, Inc.’s Class A common stock with the cumulative total return of the Standard & Poor’s 500 Stock Index (S&P 500 Index), the Russell 2000, an auto peer group index composed of Penske Automotive Group, AutoNation, Sonic Automotive, Group 1 Automotive, and Asbury Automotive Group, and a new auto peer group index which adds CarMax to the previously utilized auto peer group index for the five years ended December 31, 2020. The peer group indexes utilize the same methods of presentation and assumptions for the total return calculation as does Lithia Motors, the S&P 500 Index, and the Russell 2000. All companies in the peer group indexes are weighted in accordance with their market capitalizations.1

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Base PeriodIndexed Returns for the Year Ended
Company/Index201520162017201820192020
Lithia Motors, Inc.$100.00 $91.82 $108.85 $74.05 $144.08 $289.31 
S&P 500 Index - Total Return100.00111.96 136.40 130.42 171.49 203.04 
Russell 2000100.00121.31 139.08 123.76 155.35 186.36 
New Auto Peer Group100.00106.83 105.69 93.69 135.19 161.25 
Old Auto Peer Group100.0098.08 96.45 77.22 115.38 151.46 
1The graph and table assume that $100 was invested on the last day of trading for the calendar year ended December 31, 2015 in Lithia Motors, Inc’s Class A common stock, the S&P 500 Index, the Russell 2000, and peer group indexes, and that all dividends were reinvested. The Russell 2000 Index was presented as a comparison in the 2019 Form 10-K stock performance graph as a broad market index. We have added the S&P 500 Index as a new broad market index, which represents large capitalization industry performance across major industrial sectors. We have also added CarMax to our peer group index, to update our peer group index moving forward.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with Item 1. Business, Item 1A. Risk Factors, and our Consolidated Financial Statements and Notes thereto.

Overview
We are one of the largest automotive franchises in the United States and were ranked #252 on the Fortune 500 in 2020. As of February 19, 2021, we offered 33 brands of new vehicles and all brands of used vehicles in 210 stores in the United States and online at over 200 websites. We offer a wide range of products and services including new and used vehicles, finance and insurance products and automotive repair and maintenance.

REGIONAL REACH & DENSITY MAP
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During the year ended December 31, 2020, we had net income of $470.3 million, or $19.53 per diluted share, compared to net income of $271.5 million, or $11.60 per diluted share, during 2019. We experienced growth of revenue and gross profit in all major business lines in 2020 compared to 2019, primarily driven by increases in volume related to acquisitions, complimented by organic growth in used vehicles, finance and insurance and service, body and parts sales. On a same store basis, new vehicle revenues and gross profits experienced headwinds with plateauing national new vehicle sales and declining manufacturer incentives. For the year ended December 31, 2020, new vehicle sales accounted for approximately 52% of our revenue and approximately 21% of our gross profit. Used vehicle retail sales accounted for approximately 31% of our revenue and approximately 20% of our gross profit. Our parts and service and finance and insurance operations accounted for approximately 15% of our revenue and contributed approximately 58% of our gross profit.

As of December 31, 2020, we had available liquidity of $1.4 billion, which was comprised of $160.2 million in cash and $1.2 billion availability on our credit facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $471 million. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.

Results of Operations
For the year ended December 31, 2020, we reported net income of $470.3 million, or $19.53 per diluted share. For the years ended December 31, 2019 and 2018, we reported net income of $271.5 million, or $11.60 per diluted share, and $265.7 million, or $10.86 per diluted share, respectively.
Year Ended December 31,
2020 vs. 20192019 vs. 2018
($ in millions, except per vehicle data)20202019Change%2018Change%
Revenues
New vehicle retail$6,773.9 $6,799.1 $(25.2)(0.4)%$6,602.8 $196.3 3.0 %
Used vehicle retail3,998.4 3,527.2 471.2 13.4 3,079.0 448.2 14.6 
Finance and insurance579.8 518.6 61.2 11.8 454.8 63.8 14.0 
Service, body and parts1,348.7 1,325.1 23.6 1.8 1,222.3 102.8 8.4 
Total revenues13,124.3 12,672.7 451.6 3.6 11,821.4 851.3 7.2 
Gross profit
New vehicle retail$461.0 $385.6 $75.4 19.6 %$385.1 $0.5 0.1 %
Used vehicle retail446.0 367.5 78.5 21.4 322.9 44.6 13.8 
Finance and insurance579.8 518.6 61.2 11.8 454.8 63.8 14.0 
Service, body and parts716.8 667.6 49.2 7.4 600.7 66.9 11.1 
Total gross profit2,225.6 1,953.8 271.8 13.9 1,777.0 176.8 9.9 
Gross profit margins
New vehicle retail6.8 %5.7 %110 bp5.8 %-10 bp
Used vehicle retail11.2 10.4 80 bp10.5 -10 bp
Finance and insurance100.0 100.0 0 bp100.0 0 bp
Service, body and parts53.1 50.4 270 bp49.1 130 bp
Total gross profit margin17.0 15.4 160 bp15.0 40 bp
Retail units sold
New vehicle retail171,168 180,532 (9,364)(5.2)%184,601 (4,069)(2.2)%
Used vehicle retail183,230 170,423 12,807 7.5 151,234 19,189 12.7 
Average selling price per retail unit
New vehicle retail$39,575 $37,661 $1,914 5.1 %$35,768 $1,893 5.3 %
Used vehicle retail21,822 20,697 1,125 5.4 20,359 338 1.7 
Average gross profit per retail unit
New vehicle retail$2,693 $2,136 $557 26.1 %$2,086 $50 2.4 %
Used vehicle retail2,434 2,156 278 12.9 2,135 21 1.0 
Finance and insurance1,636 1,478 158 10.7 1,354 124 9.2 
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Same Store Operating Data
We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow operations in our existing locations. Therefore, we have integrated same store measures into the discussion below.

Same store measures reflect results for stores that were operating in each comparison period, and only include the months when operations occurred in both periods. For example, a store acquired in November 2019 would be included in same store operating data beginning in December 2020, after its first complete comparable month of operations. The fourth quarter operating results for the same store comparisons would include results for that store in only the period of December for both comparable periods.
Year Ended December 31,
2020 vs. 20192019 vs. 2018
($ in millions, except per vehicle data)20202019Change%20192018Change%
Revenues
New vehicle retail$5,943.6 $6,548.6 $(605.0)(9.2)%$6,324.4 $6,220.5 $103.9 1.7 %
Used vehicle retail3,594.8 3,390.7 204.1 6.0 3,296.1 2,890.7 405.4 14.0 
Finance and insurance504.2 499.8 4.4 0.9 486.2 429.1 57.1 13.3 
Service, body and parts1,188.8 1,271.0 (82.2)(6.5)1,230.8 1,144.0 86.8 7.6 
Total revenues11,611.5 12,193.8 (582.3)(4.8)11,810.8 11,111.4 699.4 6.3 
Gross profit
New vehicle retail$411.8 $373.5 $38.3 10.3 %$359.7 $362.9 $(3.2)(0.9)%
Used vehicle retail405.9 357.3 48.6 13.6 348.5 308.5 40.0 13.0 
Finance and insurance504.2 499.8 4.4 0.9 486.2 429.1 57.1 13.3 
Service, body and parts626.2 640.6 (14.4)(2.2)620.6 564.2 56.4 10.0 
Total gross profit1,968.6 1,885.7 82.9 4.4 1,829.0 1,678.1 150.9 9.0 
Gross profit margins
New vehicle retail6.9 %5.7 %120 bp5.7 %5.8 %-10 bp
Used vehicle retail11.3 10.5 80 bp10.6 10.7 -10 bp
Finance and insurance100.0 100.0 — bp100.0 100.0 — bp
Service, body and parts52.7 50.4 230 bp50.4 49.3 110 bp
Total gross profit margin17.0 15.5 150 bp15.5 15.1 40 bp
Retail units sold
New vehicle retail149,203 173,561 (24,358)(14.0)%167,660 173,214 (5,554)(3.2)%
Used vehicle retail165,097 163,443 1,654 1.0 159,078 141,145 17,933 12.7 
Average selling price per retail unit
New vehicle retail$39,836 $37,731 $2,105 5.6 %$37,722 $35,912 $1,810 5.0 %
Used vehicle retail21,774 20,745 1,029 5.0 20,720 20,480 240 1.2 
Average gross profit per retail unit
New vehicle retail$2,760 $2,152 $608 28.3 %$2,145 $2,095 $50 2.4 %
Used vehicle retail2,459 2,186 273 12.5 2,191 2,186 0.2 
Finance and insurance1,604 1,483 121 8.2 1,488 1,365 123 9.0 

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New Vehicles
Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, provide used vehicle inventory through trade-ins, arranging of third party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work.

During 2020, volumes were impacted by shelter in place policies and restrictions enacted by various states, counties and local governments in response to the COVID-19 pandemic. Throughout the year, the impact of the pandemic on each of our markets varied. We experienced initial declines of approximately 50% on average in late March and early April. In our most restrictive states, such as Pennsylvania and Vermont, our locations had few or no sales during those weeks. As restrictions eased during the second quarter, new vehicle sales began to improve with period over period declines gradually decreasing.

The decrease in same store new vehicle revenues for 2020 compared to 2019 was driven by the decrease in unit volume of 14.0%, partially offset by an increase in average selling prices of 5.6%. As the national new vehicle market plateaus, our stores focus on improving gross profit per new vehicle sold. On a same store basis, gross profit per new vehicle increased 28.3% during 2020 compared to 2019. Our recently acquired stores are also focused on improving gross profit per new vehicle as total company gross profit per unit increased 26.1% during 2020 compared to 2019. Pent-up demand and reduced inventory levels related to short-term production closures combined with increased manufacturer partner incentives contributed to these improvements in gross profit per unit. We believe these increases in gross profit per unit will return to normalized levels in 2021.

The same store new vehicle sales increase in 2019 over 2018 of 1.7% included an increase of 5.0% in average selling prices, offset by a decrease in volume of 3.2%.

Used Vehicles
Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned (CPO) vehicles; core vehicles, which are late-model vehicles with lower mileage; and value autos, which are vehicles with over 80,000 miles. We have established a company-wide target of achieving a per store average of 100 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of used units, from late model CPO models to vehicles over ten years old. During 2020, our stores sold an average of 78 used vehicles per store per month. This compares to 77 used vehicles per store per month in 2019 and 69 in 2018.

Used vehicle revenues increased 13.4% during 2020 compared to 2019 and 14.6% in 2019 compared to 2018. These increases are due to a combination of increased volume from acquisitions and organic growth in our core and value auto categories at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle revenues increased 6.0% during 2020 and included a 1.0% increase in unit volume and a 5.0% increase in average selling price per retail unit compared to 2019. The revenue increase in 2020 was driven by increases in our core and value auto categories of 10.1% and 7.2%, respectively, offset by a decrease in CPO vehicle revenues of 3.0%. The increase in our core vehicle category includes a 4.6% increase in volume, complimented by a 5.3% increase in average selling price per vehicle. The increase in our value auto category is due to an increase in unit sales of 1.5% and an increase in average selling price per vehicle of 5.6%.

Used vehicle gross profits increased 21.4% during 2020 compared to 2019 and 13.8% in 2019 compared to 2018. On a same store basis, used vehicle gross profit increased 13.6% in 2020 compared to 2019, led by the performance in our core and value auto categories with increases of 15.2% and 14.5%, respectively, complimented by an increase in our CPO vehicles of 8.8%. The increase in our core vehicle category was primarily driven by an increase in gross profit per unit. Gross profit per unit in our core vehicle category, which accounted for 57.0% of our used vehicle unit sales in 2020, increased 10.1%, from $2,239 in 2019 to $2,465 in 2020. The increase in same store gross profit in our value auto category was driven by a 12.8% increase in gross profit per unit from $2,211 in 2019 to $2,494 in 2020. Our CPO category experienced a decrease in volume, with unit sales decreasing 7.9% in 2020 compared to 2019, but saw an increase in gross profit per unit of 18.1%, from $2,040 in 2019 to $2,408 in 2020.

Similar to new vehicles, volumes were impacted by the shelter in place policies and restrictions enacted. Initial declines were similar to new vehicles; however, we experienced improvements during the second quarter of 2020,
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which accelerated into the third quarter of 2020. We believe our used inventory performance will return to normalized levels in 2021.

Used vehicle revenues increased 14.0% in 2019 compared to 2018 on a same store basis due to increases in unit volume and average selling prices of 12.7% and 1.2%, respectively. Same store used vehicle gross profit also increased 13.0% in 2019 compared to 2018.

Our used vehicle operations provide an opportunity to generate sales to customers unable or unwilling to purchase a new vehicle, sell brands other than the store’s new vehicle franchise(s), access additional used vehicle inventory through trade-ins and increase sales from finance and insurance products and parts and service.

Finance and Insurance
We believe that arranging timely vehicle financing is an important part of providing personal transportation solutions, and we attempt to arrange financing for every vehicle we sell. We also offer related products such as extended warranties, insurance contracts and vehicle and theft protection.

The increases in finance and insurance revenue in 2020 compared to 2019 and in 2019 compared to 2018, were primarily due to increased volume related to acquisitions, combined with expanded product offerings and increasing penetration rates. Third party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. During 2020, finance and insurance sales accounted for 4.4% of total revenues and 26.1% of total gross profits. On a same store basis, finance and insurance sales accounted for 4.3% of total revenues and 25.6% of total gross profits in 2020. Same store finance and insurance revenues increased 0.9% during 2020 compared to 2019 and 13.3% during 2019 compared to 2018. These increases were driven by increases in finance and insurance revenues per retail unit, combined with increases in used vehicle unit volume, offset by decreases in new vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit increased $121 per unit to $1,604 in 2020 compared to 2019 and $123 per unit to $1,488 in 2019 compared to 2018. The increase in 2020 compared to 2019 was primarily due to increases in service contract and financing penetration rates of 80 basis points and 70 basis points, respectively, from 47.9% to 48.7% and from 73.7% to 74.4%, respectively.

Service, body and parts
We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.

Our service, body and parts revenue grew in customer pay and warranty work in 2020 compared to 2019 and in all areas in 2019 compared to 2018, primarily due to acquisitions. With more late-model units in operation from 2010 to 2016 and a plateauing new vehicle market, we believe the increased number of units in operation will continue to benefit our service, body and parts revenue in the coming years as more late-model vehicles age, necessitating repairs and maintenance. We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts.

On a same store basis, service, body and parts revenue declined 6.5% during 2020, primarily driven by decreases in customer pay and warranty revenues of 4.8% and 6.3%, respectively, primarily as a result of shelter in place policies in effect during the first half of 2020. Performance in parts wholesale and body shop also saw decreases of 10.6% and 11.7%, respectively, compared to the same period of 2019.

Same store service, body and parts gross profit decreased 2.2% during 2020 compared to 2019 and increased 10.0% during 2019 compared to 2018. These changes were also driven by customer pay and warranty work. Our gross margins continue to increase as our mix has shifted towards customer pay, which has higher margins than other service work.

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Segments
Certain financial information by segment is as follows:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Revenues:
Domestic$4,503.0 $4,382.4 $120.6 2.8 %$4,215.0 $167.4 4.0 %
Import5,448.8 5,267.8 181.0 3.4 5,038.1 229.7 4.6 
Luxury3,152.0 2,991.9 160.1 5.4 2,560.3 431.6 16.9 
13,103.8 12,642.1 461.7 3.7 11,813.4 828.7 7.0 
Corporate and other20.5 30.6 (10.1)NM8.0 22.6 NM
$13,124.3 $12,672.7 $451.6 3.6 %$11,821.4 $851.3 7.2 %
NM - Not meaningful
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Segment income*:
Domestic$230.0 $123.4 $106.6 86.4 %$97.6 $25.8 26.4 %
Import249.8 153.9 95.9 62.3 116.2 37.7 32.4 
Luxury98.5 57.1 41.4 72.5 43.9 13.2 30.1 
Total segment income for reportable segments$578.3 $334.4 $243.9 72.9 %$257.7 $76.7 29.8 %
*Segment income for each of the segments is a Non-GAAP measure defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other income, net.
Reconciliation of total segment income for reportable segments to our consolidated income before income taxes:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Total segment income for reportable segments$578.3 $334.4 $243.9 72.9 %$257.7 $76.7 29.8 %
Corporate and other176.7 170.2 6.5 3.8 202.3 (32.1)(15.9)
Depreciation and amortization(92.3)(82.4)9.9 12.0 (75.4)7.0 9.3 
Other interest expense(73.1)(60.6)12.5 20.6 (56.0)4.6 8.2 
Other income, net58.9 13.8 45.1 NM8.9 4.9 NM
Income before income taxes$648.5 $375.4 $273.1 72.7 %$337.5 $37.9 11.2 %
NM - Not meaningful
Year Ended December 31,
2020 vs. 20192019 vs. 2018
20202019Change%2018Change%
Retail new vehicle retail unit sales:
Domestic48,421 53,262 (4,841)(9.1)%55,653 (2,391)(4.3)%
Import93,111 98,365 (5,254)(5.3)102,454 (4,089)(4.0)
Luxury30,087 29,238 849 2.9 26,915 2,323 8.6 
171,619 180,865 (9,246)(5.1)185,022 (4,157)(2.2)
Allocated to management(451)(333)(118)(35.4)(421)88 20.9 
171,168 180,532 (9,364)(5.2)%184,601 (4,069)(2.2)%

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Domestic
A summary of financial information for our Domestic segment follows:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Revenue:
New vehicle retail$2,235.0 $2,287.5 $(52.5)(2.3)%$2,290.1 $(2.6)(0.1)%
Used vehicle retail1,461.0 1,264.7 196.3 15.5 1,107.4 157.3 14.2 
Used vehicle wholesale104.1 113.6 (9.5)(8.4)134.9 (21.3)(15.8)
Finance and insurance199.0 184.2 14.8 8.0 166.4 17.8 10.7 
Service, body and parts456.7 477.5 (20.8)(4.4)451.4 26.1 5.8 
Fleet and other47.2 54.9 (7.7)(14.0)64.8 (9.9)(15.3)
$4,503.0 $4,382.4 $120.6 2.8 $4,215.0 $167.4 4.0 
Segment income$230.0 $123.4 $106.6 86.4 $97.6 $25.8 26.4 
Retail new vehicle retail unit sales48,421 53,262 (4,841)(9.1)%55,653 (2,391)(4.3)%

Total Revenue in our Domestic segment increased 2.8% in 2020 compared to 2019. New vehicle unit sales decreased 9.1%, 10.3% on a same store basis, in 2020 compared to 2019, primarily due to decreases in Chrysler and Ford. However, Domestic segment revenues benefited from improved used vehicle retail sales due to an 8.4% increase in volume and a 14.1% increase in gross profit per vehicle in 2020 compared to 2019. Finance and Insurance revenue also contributed to the overall increase in Domestic segment revenue, driven by the increased used vehicle retail volume, combined with a 7.9% increase in finance and insurance income per retail unit sold to $1,765 per unit.

Strong performance in used vehicle retail, service, body and parts, and finance and insurance revenues in 2019 contributed to the 4.0% increase in revenue over 2018.

Our Domestic segment income increased 86.4% in 2020 compared to 2019 due to gross profit growth of 12.1% with declines in SG&A and floor plan interest expense of 0.4% and 42.3%, respectively. As a percentage of gross profit, SG&A decreased 820 basis points in 2020 compared to 2019.

Our Domestic segment income increased 26.4% in 2019 compared to 2018 due to gross profit growth of 8.7% with only minimal increases in SG&A and floor plan interest expense of 5.8% and 2.2%, respectively. As a percentage of gross profit, SG&A decreased 210 basis points in 2019 compared to 2018.

Import
A summary of financial information for our Import segment follows:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Revenue:
New vehicle retail$2,881.0 $2,920.8 $(39.8)(1.4)%$2,933.1 $(12.3)(0.4)%
Used vehicle retail1,610.4 1,448.5 161.9 11.2 1,283.4 165.1 12.9 
Used vehicle wholesale126.0 112.1 13.9 12.4 123.4 (11.3)(9.2)
Finance and insurance281.5 247.4 34.1 13.8 220.3 27.1 12.3 
Service, body and parts517.2 496.2 21.0 4.2 453.8 42.4 9.3 
Fleet and other32.7 42.8 (10.1)(23.6)24.1 18.7 77.6 
$5,448.8 $5,267.8 $181.0 3.4 $5,038.1 $229.7 4.6 
Segment income$249.8 $153.9 $95.9 62.3 $116.2 $37.7 32.4 
Retail new vehicle retail unit sales93,111 98,365 (5,254)(5.3)%102,454 (4,089)(4.0)%

Revenues in our Import segment increased in used vehicle retail, finance and insurance, and service, body and parts in 2020 compared to 2019. New vehicle unit sales in our Import segment decreased 5.3%, 15.9% on a same store basis, primarily related to decreases in Toyota and Honda. However, Import segment revenues benefited from improved used vehicle sales due to a 6.3% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 13.8% increase in finance and insurance income per retail unit sold to $1,559 per unit, and improved service, body and parts revenues.
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The increase in our Import segment revenue in 2019 compared to 2018 was driven by increases in used vehicle retail, finance and insurance, and service, body and parts. New vehicle unit sales in our Import segment decreased 4.0%. However, Import segment revenues benefited from improved used vehicle retail due to a 10.4% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 10.1% increase in finance and insurance income per retail unit sold to $1,370 per unit, and improved service, body and parts revenues.

Our Import segment income increased 62.3% in 2020 compared to 2019 due to gross profit growth of 15.2% with only a minimal increase in SG&A expense of 7.0% and a decrease in floor plan interest expense of 28.3%. As a percentage of gross profit, SG&A decreased 550 basis points in 2020 compared to 2019.

Our Import segment income increased 32.4% in 2019 compared to 2018 due to gross profit growth of 10.4% with only minimal increases in SG&A and floor plan interest expense of 6.5% and 6.1%, respectively. As a percentage of gross profit, SG&A decreased 280 basis points in 2019 compared to 2018.

Luxury
A summary of financial information for our Luxury segment follows:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Revenue:
New vehicle retail$1,659.4 $1,588.8 $70.6 4.4 %$1,397.8 $191.0 13.7 %
Used vehicle retail927.9 813.3 114.6 14.1 688.1 125.2 18.2 
Used vehicle wholesale78.2 75.3 2.9 3.9 72.9 2.4 3.3 
Finance and insurance94.7 77.1 17.6 22.8 62.0 15.1 24.4 
Service, body and parts358.7 335.3 23.4 7.0 298.9 36.4 12.2 
Fleet and other33.1 102.1 (69.0)(67.6)40.6 61.5 151.5 
$3,152.0 $2,991.9 $160.1 5.4 $2,560.3 $431.6 16.9 
Segment income$98.5 $57.1 $41.4 72.5 $43.9 $13.2 30.1 
Retail new vehicle retail unit sales30,087 29,238 849 2.9 %26,915 2,323 8.6 %

The increase in our Luxury segment revenue in 2020 compared to 2019 resulted from increases in all major business lines. New vehicle unit sales increased 2.9%, but decreased 14.3% on a same store basis, mainly related to our BMW, Acura, and Audi franchises. Our Luxury segment revenues also benefited from a 9.3% increase in used vehicle unit sales, a 15.9% increase in finance and insurance revenues per retail unit to $1,541 per unit and growth in service, body and parts during 2020 compared to 2019.

Our Luxury segment revenue increased in 2019 compared to 2018 across all major business lines. New vehicle unit sales increased 8.6% over the prior year. Our Luxury segment revenues also benefited from an 18.7% increase in used vehicle unit sales, a 9.7% increase in finance and insurance revenues per retail unit to $1,330 per unit and growth in service, body and parts during 2019 compared to 2018.

Our Luxury segment income increased 72.5% in 2020 compared to 2019. This increase was due to gross profit growth of 14.2% and decreased floor plan interest expense of 26.6%, offset by an increase in SG&A of 8.0%. As a percentage of gross profit, SG&A decreased 430 basis points in 2020 compared to 2019.

Our Luxury segment income increased 30.1% in 2019 compared to 2018. This increase was due to gross profit growth of 14.6%, offset by an increase in SG&A of 12.0% and an increase in floor plan interest expense of 17.9%. As a percentage of gross profit, SG&A decreased 180 basis points in 2019 compared to 2018.

Corporate and Other
Revenue attributable to Corporate and other includes the results of operations of our stand-alone collision centers, offset by certain unallocated reserve and elimination adjustments.
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Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Revenue, net$20.5 $30.6 $(10.1)NM$8.0 $22.6 NM
Segment income176.7 170.2 6.5 3.8 %202.4 (32.2)(15.9)%
NM - not meaningful

The decrease in Corporate and other revenues in 2020 compared to 2019 was primarily affected by our reserve for revenue reversals associated with unwound vehicle sales. Corporate and other revenues were affected in 2019 by a decrease in internal corporate vehicle purchases and leases with our stores resulting in positive revenues compared to 2018.

Internal corporate expense allocations are also used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.

The increase in Corporate and other segment income in 2020 compared to 2019 is primarily due to an increase in gains on the divestiture of stores. The decrease in Corporate and other segment income in 2019 compared to 2018 was primarily due decreased gains on the divestiture of stores and an increase in certain insurance reserves.

See Note 17 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Form 10-K for additional information.

Asset Impairments
Asset impairments recorded as a component of operations consist of the following:
Year Ended December 31,
(Dollars in millions)202020192018
Franchise value$4.4 $0.4 $— 
Goodwill3.5 1.7 — 
Long-lived assets— 0.5 1.3 
Total asset impairments$7.9 $2.6 $1.3 

Goodwill and franchise value for our reporting units are tested for impairment annually as of October 1 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We elected to perform qualitative franchise value and goodwill impairment tests as of October 1 each year. These non-cash impairment charges are included in the “Corporate and Other” category of our segment information.

During the second quarter of 2020, there were indications of a triggering event at certain reporting units. We tested the goodwill and franchise value for these locations. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded non-cash impairment charges of $4.4 million and $3.5 million, which was equal to the difference between the fair value and the carrying value for franchise value and goodwill, respectively. One of these locations was subsequently sold in the fourth quarter of 2020.

In the first quarter of 2019, we recorded an asset impairment of $0.5 million associated with certain real properties. The long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value. The impaired long-lived asset was subsequently sold in the second quarter of 2019.

As a result of our 2019 annual impairment testing, we identified certain reporting units where it was more likely than not the fair value was less than the carrying amount, and recorded non-cash impairment charges of $0.4 million and $1.7 million for franchise value and goodwill, respectively.

In 2018, we recorded an asset impairment of $1.3 million associated with certain real properties. The long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value.

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See Note 1, Note 4 and Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Selling, General and Administrative (SG&A)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Personnel$983.7 $911.2 $72.5 8.0 %$824.8 $86.4 10.5 %
Advertising97.4 111.9 (14.5)(13.0)108.7 3.2 2.9 
Rent41.4 41.3 0.1 0.2 43.3 (2.0)(4.6)
Facility costs81.1 77.4 3.7 4.8 72.0 5.4 7.5 
Gain on sale of assets(18.2)(9.7)(8.5)87.6 (14.8)5.1 (34.5)
Other242.9 241.7 1.2 0.5 219.3 22.4 10.2 
Total SG&A$1,428.3 $1,373.8 $54.5 4.0 %$1,253.3 $120.5 9.6 %
Year Ended December 31,
2020 vs. 20192019 vs. 2018
As a % of gross profit20202019Change2018Change
Personnel44.2 %46.6 %(240) bps46.4 %20  bps
Advertising4.4 5.7 (130)6.1 (40)
Rent1.9 2.1 (20)2.4 (30)
Facility costs3.6 4.0 (40)4.1 (10)
Gain on sale of assets(0.8)(0.5)(30)(0.8)30 
Other10.9 12.4 (150)12.3 10 
Total SG&A64.2 %70.3 %(610) bps70.5 %(20) bps

SG&A increased 4.0%, or $54.5 million in 2020 compared to 2019. Overall increases in SG&A were primarily due to increased personnel costs resulting from our growth through acquisitions, offset by decreases in advertising spend and gains on sales of assets. Other expenses in 2020 included acquisition expenses of $3.1 million, compared to $2.5 million in 2019 and $6.1 million of storm related insurance charges, compared to $9.5 million in 2019. Gains on the sale of stores were $16.6 million and $9.7 million in 2020 and 2019, respectively.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 64.4% in 2020 compared to 69.4% in 2019, which included decreases across all categories.

SG&A increased 9.6%, or $120.5 million, in 2019 compared to 2018. Overall increases in SG&A were primarily due to growth through acquisitions, increased losses related to storm insurance reserve charges, and a decrease in gains on disposal of stores. Other expenses in 2019 included acquisition expenses of $2.5 million, compared to $4.3 million in 2019 and $9.5 million of storm related insurance charges, compared to $3.2 million in 2018. Gains on the sale of stores were $9.7 million and $15.1 million in 2019 and 2018, respectively.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 69.8% in 2019 compared to 70.5% in 2018. Decreases were seen in advertising, rent, facility costs, and data processing, partially offset by increases in personnel costs.

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SG&A adjusted for non-core charges was as follows:
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Personnel$983.7 $911.2 $72.5 8.0 %$824.8 $86.4 10.5 %
Advertising97.4 111.9 (14.5)(13.0)108.7 3.2 2.9 
Rent41.4 41.3 0.1 0.2 43.3 (2.0)(4.6)
Facility costs81.1 77.4 3.7 4.8 72.0 5.4 7.5 
Adjusted loss (gain) on sale of assets(1.6)0.0 (1.6)NM0.5 (0.5)(100.0)
Adjusted other233.8 229.7 4.1 1.8 214.6 15.1 7.0 
Total adjusted SG&A$1,435.8 $1,371.5 $64.3 4.7 %$1,263.9 $107.6 8.5 %
Year Ended December 31,
2020 vs. 20192019 vs. 2018
As a % of gross profit20202019Change2018Change
Personnel44.2 %46.6 %(240) bps46.4 %20  bps
Advertising4.4 5.7 (130)6.1 (40)
Rent1.9 2.1 (20)2.4 (30)
Facility costs3.6 4.0 (40)4.1 (10)
Adjusted loss (gain) on sale of assets(0.1)— (10)0.0 — 
Adjusted other10.5 11.8 (130)12.1 (30)
Total adjusted SG&A64.5 %70.2 %(570) bps71.1 %(90) bps
See “Non-GAAP Reconciliations” for more details.

Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization related to tradenames.
Year Ended December 31,
2020 vs. 20192019 vs. 2018
(Dollars in millions)20202019Change%2018Change%
Depreciation and amortization$92.3 $82.4 $9.9 12.0 %$75.4