Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive Second Quarter 2025 earnings conference call. This conference call is being recorded today, Thursday, July 24, 2025. Presentation materials which accompany management's discussion on the conference call can be accessed at the company's website at .SonicAutomotive.com. At this time, I would like to refer to the Safe Harbor Statement under the Private and Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much and good morning, everyone. Welcome to the Sonic Automotive Second Quarter 2025 earnings call. I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dike, our CFO Heath Byrd, our Echo Park Chief Operating Officer, Mr. Tim Keen, and our VP of Investor Relations, Danny Weiland. I would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. We believe our strong relationships with our teammates, our guests, and manufacturer and lending partners are key to our future success. And as always, I would like to thank them all for their continued support and loyalty to the Sonic Automotive team. Turning now to our Second Quarter results, primarily as a result of a non-cash charge, a non-cash charge relating to our annual franchise asset impairment testing, reported GAAP EPS was a loss of $1.34 per share. Excluding these non-cash impairment charges and the effect of certain other items as detailed in our press release this morning, adjusted EPS for the Second Quarter was $2.19 per share, which was a 49% increase year over year. Consolidated total revenues were a Second Quarter record, up 6% year over year, while consolidated gross profit grew 12%, and consolidated adjusted EBITDA increased 22%. Moving now to our franchise dealership segment results, we generated Second Quarter record franchise revenues of $3.1 billion, up 6% year over year on a same store basis, this revenue growth was driven by a 5% increase in same store new retail volume, and a 10% increase in same store fixed operations revenues. Second Quarter results benefited from an increase in consumer demand and new vehicle sales in April and early May, which we expect was the result of customers buying in advance of anticipated tariff driven price increases. Our fixed operations gross profit and F&I gross profit also set all-time quarterly records, up 12% and 15% year over year, respectively, on a same store basis. These two high margin business lines continue to increase their share of our total gross profit pool, approaching 75% of total gross profit for the Second Quarter, mitigating the potential tariff impact on vehicle pricing and margin to our overall profitability, while also leveraging our SG&A expenses more efficiently than vehicle-related gross profit. Our same store new vehicle GPU was $3,391, down 6% year over year, but up 10% sequentially from the first quarter due to a surge in pre-tariff consumer demand. On the used side of the franchise business, same store used volume decreased 4% year over year, driven by lower supply of late-model used vehicles and ongoing consumer affordability challenges. Same store used GPU increased 2% sequentially to $1,590 per unit. Our F&I performance continues to be a strength with all-time record quarterly franchised F&I GPU of $2,721 per unit in the Second Quarter, up 12% sequentially and 14% year over year. The continued growth in our F&I per unit supports our view that F&I per unit will remain structurally higher than pre-pandemic levels, even in a challenging consumer affordability environment as we continue to fine-tune our F&I product offerings and cost structure. Our parts and service, or fixed operations business, remains strong with a 12% increase in same store fixed operations gross profit in the Second Quarter. Same store warranty gross profit continued to be a tailwind in the Second Quarter, up 34% year over year, and same store customer pay gross profit grew 9% year over year and 7% sequentially. We believe this continued strength in customer pay revenues is attributable to the increase in technician headcount we achieved in 2024 and our efforts to not only retain these technicians, but to continue to grow our technician capacity in 2025. Turning now to our Echo Park segment, Second Quarter segment income was an all-time quarterly record $11.7 million and adjusted EBITDA was an all-time quarterly record of $16.4 million, up 128% year over year. For the Second Quarter, we reported Echo Park revenues of $509 million down 2% year over year and Second Quarter record Echo Park gross profit of $62 million, which was up 22% year over year. Echo Park segment retail unit sales volume for the quarter increased 1% year over year and Echo Park segment total GPU was an all-time quarterly record of $3,747 per unit, up $669 per unit year over year and $336 sequentially from the first quarter. We continue to believe that our data-driven centralized inventory management strategy is a key differentiator for Echo Park, which should help to minimize disruptions from market volatility in the short term while maximizing Echo Park's long-term growth potential. When combined with the strategic adjustments we made to our Echo Park business model, we believe we are well positioned to resume disciplined long-term growth for Echo Park in 2026, assuming used vehicle market conditions sufficiently improve. Turning now to our Power Sport segment, we generated record Second Quarter revenues of $48.1 million, up 21% year over year and Second Quarter gross profit of $12.5 million, up 17% year over year. Power Sport segment adjusted EBITDA was $2 million, down 13% year over year, but beginning to ramp up ahead of what is typically a seasonally strong third quarter. We are beginning to see the benefits of our investment in modernizing the Power Sport business and we remain focused on identifying operational synergies within our current network before deploying capital to expand our Power Sports footprint. Finally, turning to our balance sheet, we entered the quarter with $775 million in available liquidity, including $210 million in combined cash and floor plan deposits on hand. Our focus on maintaining a strong balance sheet and liquidity position allowed us to complete the acquisition of four Jaguar Land Rover dealerships in California using cash and floor plan deposits on hand. I'd like to take this opportunity to welcome these teammates to the Sonic Automotive family. This acquisition closed on June 30th, so there was no impact to our Second Quarter results, but we do anticipate these stores will contribute approximately $500 million in annualized revenues to our franchise dealership segment and make Sonic Automotive the largest Jaguar Land Rover retailer in the U.S., further enhancing our luxury brand portfolio. Going forward, we remain focused on deploying capital via diversified growth strategy across our franchise dealerships, Echo Park and Power Sports segments to grow our revenue base and enhance shareholder returns. In addition, I'm very pleased to report today that our board of directors approved a 9% increase to our quarterly cash dividend to $0.38 per share, payable on October 15th, 2025, to all stockholders of record on September 15th, 2025. As we told you back in April, we continue to work closely with our manufacturer partners to understand the impact of tariffs on manufacturer production and pricing decisions and the resulting impact tariffs may have on vehicle affordability and consumer demand later this year. To date, we have not seen a material impact on vehicle pricing as a result of tariffs, but that could change as the Model Year 2026 vehicles begin to arrive at our dealerships late in the Third Quarter. Despite this uncertainty, our team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop while making strategic decisions to maximize long-term results. Furthermore, we remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today comes from Jeff Lick of Stevens. Please proceed with your question.