LKQ reported second-quarter earnings that missed estimates by $0.04 per share, with revenue also falling short of expectations. Following the miss and setbacks in Europe, the company cut its 2026 financial outlook.
A large-scale enterprise resource planning (ERP) conversion in Germany significantly impacted European results, disrupting service levels and fill rates for customers accustomed to high reliability. Management attributed the disruption to a 'scaling event' as the company moved from a $300 million legacy platform to a $2 billion integrated system, revealing data and process bugs under high transaction volumes. The disruption resulted in an estimated $140 million revenue headwind and a $50 million reduction in EBITDA during the second quarter.
Outside of Germany, European productivity initiatives delivered over $40 million in year-over-year improvements, offsetting softer demand in the U.K. and Benelux regions. Private label penetration in Europe reached 26.6%, moving toward a 30% target as cost-sensitive consumers increasingly adopt alternative brands. No further ERP conversions are slated for the remainder of 2026 to allow for stabilization in the German market, with management noting that future migrations will involve smaller legacy systems moving onto the now-established platform.
North America and Specialty Performance
North America achieved its first positive organic growth in nine quarters, despite repairable claims declining by 1% to 3%. Alternative Part Utilization (APU) reached a record high of over 40%, driven by insurance carriers seeking to reduce repair costs amid negative insurance Consumer Price Index trends. However, a $10 million legal reserve recorded in the segment negatively impacted EBITDA margins by approximately 70 basis points.
Management noted that Multi-Shop Operators (MSOs) are gaining share in the current market. While MSOs receive better pricing, the lower selling, general and administrative expenses required to service these large-scale accounts result in favorable margins for LKQ. In the U.K., heightened competition from a competitor expanding to 230 locations has created persistent volume and margin pressure.
The Specialty segment demonstrated revenue resilience with 4.5% organic growth, though margins were pressured by a one-time credit loss reserve related to a vendor acquisition. The segment is focused on converting its resilient revenue profile into stronger earnings performance.
Strategic Review and Financial Guidance
An ongoing strategic review, supported by external advisors, continues to evaluate all business segments, including the potential sale of the Specialty business. Management confirmed that while the asset is performing well, they are still evaluating if LKQ is the 'right owner' for the business long-term. The sale process has been integrated into a broader company-wide strategic review involving multiple parties.
The revised full-year outlook assumes a measured recovery in Germany, targeting a return to 100% of normal revenue run rates by the end of 2026. Guidance for the remainder of the year assumes no significant market recovery in North American collision volumes, maintaining a conservative stance despite recent sequential improvements. Management expects to use free cash flow generated in the second half of the year to reduce the outstanding balance on the revolving credit facility, following a $500 million term loan prepayment.
Regarding trade policy, Taiwan tariffs were reduced from 25% to 15%, with management assuming the savings will be passed to customers to remain competitive. New Section 301 tariffs have a minimal impact, as the majority of the company's imports fall under the existing Section 232 framework.