Sonic Automotive, Inc.

Good morning. Welcome to Sonic Automotive third quarter 2025 earnings conference call. This conference call is being recorded today, Thursday, October 23rd, 2025. Presentation materials which accompany management's discussion on the conference call can be accessed on the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities 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 are 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 Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K 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. As she said, welcome to the Sonic Automotive Third Quarter 2025 Earnings Call. Again, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke, our CFO, Heath Bird, our Echo Park Chief Operating Officer, Tim Keene, and our Vice President 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, guests, and manufacturer and lending partners are key to 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 third quarter results, Reported gap EPS was $1.33 per share, excluding the effect of certain items as detailed in our press release this morning. Adjusted EPS for the third quarter was $1.41 per share, a 12% increase year over year. Consolidated total revenues were an all-time quarterly record of $4 billion, up 14% year over year. All-time record quarterly consolidated gross profit grew 13%, and consolidated adjusted EBITDA increased 11%. Our third quarter earnings were negatively affected by a significant increase in medical expenses and a higher than expected effective income tax rate, which partially offset the strength of our operating performance. Moving now to our franchise dealership segment results, we generated all-time record quarterly franchise revenues of $3.4 billion, up 17% year over year, and up 11% on a same store basis. This revenue growth was driven by a 7% increase in same store new retail volume, a 3% increase in same store used retail volume, and a 6% increase in same store fixed operations revenues. Third quarter new vehicle volume benefited from an increase in consumer demand for electric vehicles ahead of the expiration of the federal tax credit which increased our retail sales volume and average selling price, but pressured new vehicle and F&I gross profit per unit. Our fixed operations gross profit and F&I gross profit set all time quarterly records up 8% and 13% 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, eclipsing 75% of total gross profit for the third 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 incremental vehicle related gross profit. Same store new vehicle GPU was $2,852. down 7% year-over-year and 16% sequentially due to a surge in pre-tariff consumer demand that drove an increase in GPU in the second quarter of 2025. Additionally, a higher mix of electric vehicle sales in the third quarter reduced our franchised average new vehicle GPUs by approximately $300 per unit. On the used vehicle side of the franchise business, same-store used volume increased 3% year-over-year, and same-store used GPU increased 10% year-over-year and decreased 4% sequentially from the second quarter to $1,530 per unit. Our F&I performance continues to be a strength, with third-quarter record franchised F&I GPU of $2,597 per unit, up 11% year-over-year, and down 5% sequentially due in part to the elevated electric vehicle sales mix in the third quarter, which reduced average F&I GPU by approximately $100 per unit. Absent the transitory third quarter EV headwinds, continued strength in F&I per unit supports our view that F&I 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 very strong with an 8% increase in same store fixed operations gross profit in the third quarter. Same store warranty gross profit continued to be a tailwind in the third quarter, up 13% year over year despite strong warranty performance in the prior year period. And same store customer pay gross profit grew 6% year over year. We believe this continued strength in customer pay revenue 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 the Echo Park segment, third quarter adjusted segment income was $2.7 million and adjusted EBITDA was $8.2 million, down 8% year over year. For the third quarter, we reported Echo Park revenues of $523 million, down 4% year-over-year, and gross profit of $54 million, down 1% year-over-year. Echo Park segment retail unit sales volume for the quarter decreased 8% year-over-year, and Echo Park segment total GPU was a third quarter record of $3,359 per unit, up 8% per unit year-over-year, but down 10% sequentially from the second quarter. While we expected Echo Park used GPU pressure in the third quarter, our ability to acquire quality used vehicle inventory at attractive prices was challenged by unexpected off-rental supply headwinds, contributing to approximately 2,000 fewer retail unit sales than we forecast in our July guidance. While these headwinds persisted through September, we remain focused on increasing our mix of non-auction sourced inventory going forward to benefit consumer affordability and retail sales volume. When combined with the strategic adjustments we have made to our Echo Park business model, we believe we are well positioned to resume a disciplined store opening cadence for Echo Park in 2026, assuming we use vehicle market conditions sufficiently approved. Turning now to our power sports segment, We generated all-time record quarterly revenues of $84 million, up 42% year-over-year, and all-time record quarterly gross profit of $23 million, up 32% year-over-year. PowerSports segment adjusted EBITDA was an all-time record, quarterly record of $10.1 million, up 74% year-over-year. driven by record sales volume at this year's 85th Sturgis Motorcycle Rally. We are beginning to see the benefits of our investment in modernizing the power sports business, and we remain focused on identifying operational synergies within our current network before deploying capital to further expand our power sports footprint. Finally, turning to our balance sheet, we entered the quarter with $815 million in available liquidity, including $264 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 Jaguar Land Rover Santa Monica in the third quarter, following our previously announced acquisition of four Jaguar Land Rover dealerships in California at the end of the second quarter, cementing Sonic Automotive as the largest Jaguar Land Rover retailer in the U.S., and 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 pleased to report today that our board of directors approved a quarterly cash dividend of 38 cents per share, payable on January 15th, 2026, to all stockholders of record on December 15, 2025. We continue to work closely with our manufacturer partners to understand the potential impact of tariffs on manufacturer production and pricing decisions and the resulting impact tariffs may have on vehicle affordability and consumer demand going forward. To date, we have not seen a material impact on vehicle pricing as a result of tariffs, but our team remains focused on executing our strategy and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long-term returns. 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 shareholders. This concludes our opening remarks, and we look forward to answering any questions you have. Thank you.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jeff Lick with Stevens. Please proceed.