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.

Good morning. Thanks for taking my question.

Morning.

Guys, I was curious. You guys have an interesting little used car market test tube in your business model, given the franchised business and Echo Park. It looks like you kind of outperformed your peers and did pretty well in the franchise, and then Echo Park had some issues. Obviously, you mentioned the rental supply headwinds. I was just wondering if you could elaborate even more on what's the saying about where the used car market is in general and any specifics you could give.

This is Jeff. From a franchise perspective, obviously we trade for a lot more cars on the franchise side because of the new car business. And so we have really focused on dropping our average cost of sale. So we're trading or being more aggressive on our trades. I think our average cost of sales moved from $37,000 over the last four or five months down into the $33,000 range, $34,000. That makes a big difference. We're focused on bringing it even down further. We'd like to get below $30,000. A little harder to do on the Echo Park side because we're acquiring most of those vehicles out of the auctions, although we've been focused on buying more cars off the street. And as you said, the rental car company issue that David talked about in his opening comments, it dried up for us. That cost us about 2,000 units during the quarter. A little bit of a surprise to us. We're offsetting that, working with our new car franchises and our buying team, getting more aggressive on buying vehicles. really for Echo Park under the $24,000 price target. And you'll see us improve that as we move through the fourth quarter.

And this is Heath. I have one more thing. We started an initiative with the franchise of really focusing on a good process and putting in technology for buying off the service lane. So that's really helped that side of the business as well.

Just a quick follow-up. On the $31 million in incremental comp, which I think a good chunk of that was medical expenses, could you just elaborate where does that stand going forward?

Yeah, sure. This is Heath. First of all, we're guiding, as you know, for the full year in the low 70s. If you look at medical, which was driving that, it was five pennies worse sequentially from Q2 to Q3. 10 pennies worse year over year. We expect medical to be flat from Q3 to Q4, so total SG&A for Q4 is expected to be the 72.8, but it is driven by the medical, and that is utilization as well as increased cost. We are self-insured, and so obviously everyone is getting an increase in medical premiums going forward, and so we're addressing it as every other company. We'll be increasing the premiums collected, which should handle that issue that we saw in Q3 and expect it to be similar in Q4.

Great. Thanks very much, and best of luck in the fourth quarter.

Thank you. Our next question is from Michael Ward with Citi Research. Please proceed.

Thanks very much. Good morning, everyone. Morning. Good morning. I wonder if you can provide any color on a walk in the franchise gross from Q3 to Q4 and then into 2026, because it sounds like you have a $100 impact from BEVs, and it sounds like there are some other unusual events. So how do we look out? It sounds like four Qs higher and then maybe even relatively flat. on a variable growth basis for over a year. Is that what we're looking at, like kind of more consistency, ups and downs, but kind of moving to the same range?

This is Jeff. I think with the increase in the bed volume at the end of the quarter, that really drove, I think it was $100 down in front PUR and $50 in back end PUR. Sequentially. Sequentially. but I expect return to normal margins and maybe even improving margins as we move into the fourth quarter. We're seeing that already because of the lack of BEVs. We really pressed hard to move all our BEVs out. We're about 4% of our total inventory today are BEV units. I think that's about 800 units on the ground. We have significantly reduced our exposure to that product, which has been obviously a drag for everybody from a front PUR perspective. So I would expect fourth quarter margins to improve sequentially, and I would expect them to continue to improve as we move into 2026, or at least be flat with where we are in Q4. So a little hit at the end of the third quarter, but smart because we reduced our exposure to all those BEV units that we had on the ground, and that was just the right thing to do from our perspective.

And this is Heath, just a little bit on color. If you look at a In total, you know, an EV, we make less gross by $3,275. And the mix in Q3 went from 8.3 in Q2 to 11.9 in Q3. So that's what created the $100 headwind in front and a $50 headwind in F&I.

And just rounding that out, this is Danny. I mean, that's a 54% volume increase from Q2 to Q3, which is in line with what the industry saw from an EV penetration. But as you think about that, you know, we sold 3,600 EVs in the third quarter, and we would expect that volume to be much lower in the fourth quarter now that the federal tax credit is not available. So the normal seasonality we would expect from a volume perspective may not hold, where we typically see a 10% uptick from 3Q to 4Q in new vehicle volume. You know, last year was even more of an anomaly, closer to 20% because of the BMW stop sale issue we saw in the third quarter of last year where we pushed sales into 4Q. But as we think about it, it could be more of a mid-single-digit volume growth sequentially from 3Q to 4Q because of the lack of EV. That should obviously benefit GPU, given what Heath said about the relatively lower margins. But from a total volume perspective, it's something to be mindful of.

And as you look at the JLR business, is it fair to say that that had a bigger impact on parts and service than it did on the new vehicle side?

Yeah, this is Jeff. We had plenty of new vehicle inventory supply. That wasn't an issue at all. And it is a drag on the parts and service business. But that's slowly going to get corrected and come back. But definitely the drags in parts and service, not on the volume side.

But I will say this, David, I will say that, you know, we've benefited from, you know, scale in our, you know, being the largest dealer now for JLR has been really fantastic. We've had inventory when others haven't. And I think going forward, I think that those acquisitions are going to prove to be some of our best, you know, because those are, you mentioned, you know, your previous question with GPU. Those are some of our greatest, you know, highest GPU stores in the company.

Makes sense. I can sneak in one more just on the power sports side. You've got great performance there. And do you have any data on how big this industry is? And is there a better consolidation opportunity in power sports than you would see in the new vehicle slash used vehicle side?

I don't know if there's a better, but there's certainly a big opportunity. And we're learning how to operate the power sports business. You can see we sold 1,105 new and used motorcycles or Harleys. during the rally, that beat the all-time record of 718 that was set years ago. And that's just training, technology, pricing, inventory management, and bringing things in our skill sets that we have on the franchise side of the business and Echo Park side of the business into power sports. And as David said in his opening comments, we have great opportunity to continue to grow the footprint that we have, but we're getting deals every day coming across our desks. with great opportunities to buy. And as we get better and better at operating, I think you'll see us expand that footprint. Great money in it, great opportunity, great customer base. So bringing our technology and our processes is making a big difference.

And this is David. I'd just add that it's a real compliment to our team that we're now, the manufacturers are coming to us you know, wanting us to buy more and, you know, coming to us with some opportunities. And that's how we bought, you know, Sturgis, actually, those deals. And so it's great to see. We're really proud of the progress our team's made.

And just to see the little bit of color, we view it, it looks like 1990 retail automotive. Very fragmented, not a lot of technology, not a lot of sophistication in marketing, understanding how to make money and use the service. So, We think there's a huge opportunity to create the same kind of formality in that industry as many have done in the automotive retail.

And as you pointed out, a lower multiple, right? Exactly.

Way, way lower. Yeah. We hear where you're going with that. Yeah, you're right. There's great opportunity, which is why we got into it. And you got to remember the people who, a lot of our customers, they're super passionate about about the products that we sell. They'd rather have that than a car in many cases. So it's a great business to be in.

There were over 800,000 guests at the rally this year. So if you think about it, we sold 1,105. Just think about the upside opportunity just at the rally alone. That closing ratio is not where we want it to be. We can do a lot more. We need more motorcycles and more process and more technology, but we're slowly bringing that on, and it's starting to make a difference. And we've really increased the used vehicle, the used side of the business, too. That business is up 70% or so for the year, and that's going to continue to grow. That's not something that that industry has been focused on.

Sounds like a similar playbook. So thank you very much. I really appreciate it. Yes, sir.

Thank you.

Yes, sir. Our next question is from Rajat Gupta with JPMorgan Chase. Please proceed.

Great. Thanks for taking the question. Just had a couple follow-ups on the GPU comments. I'm curious that in the third quarter, outside of, you know, the electric Waco headwind to GPUs, Was there anything that surprised you in the performance there? You know, perhaps, you know, with respect to like how the OEMs are managing the dealer margin or the invoice margin, you know, automation talked about, you know, some different ways in which the OEM might tackle this, you know, like maybe in the form of lower backend incentives or volume incentives, et cetera. I'm just curious. if there was any change there that you observed and if anything was at one time or would you expect that to continue? Relatedly, I was a little surprised by your comment that you would expect 2026 new vehicle GPUs to be similar to the fourth quarter. I mean, our understanding is always that fourth quarter is seasonally higher due to the luxury mix. So are you taking into account like even a lower electric vehicle mix in 2026 versus the fourth quarter that's maybe driving that assumption. Just curious if you could tie those comments.

Thanks. Yeah, that's exactly right. You know, BEV is going to be, you know, way, way lower as a percentage of our overall volume than it has been over the last couple of years, which has driven the margin down. And then no real surprises, I don't think, from ex-BEV for the first nine months of the year for the quarter. in terms of margin. I think that there are going to be some surprises as we move into the fourth quarter because there's been, there's an inherent, you look at October, October slowing in particular from a luxury perspective. And I think that the manufacturers are going to have to get super aggressive with incentives in order to move inventory. Our inventory is at the highest level from a new car perspective that it's been all year. And our competitors are the same as we watch it. And I think you're going to find that BMW and Mercedes, they're going to have to be super aggressive. Right now, we're seeing some double-digit decreases in those brands' volumes year over year. And we're not alone in that category. And so I do think you're going to start seeing some super aggressive pricing. It needs to come. Those brands need to step up and bring more incentives in order to engage the fourth quarter. or it's going to be a more difficult fourth quarter from a luxury perspective than many are projecting.

Got it. Got it. Okay. That's helpful.

That's something that I would encourage you to watch real closely is what's going on on the luxury new vehicle side of the business. You know, exchanging a BMW for a Ford exchanges a lot of margin one way versus the other. And I think that's something that we all need to watch as the industry, from a luxury perspective, slows down in the fourth quarter. Usually it speeds up. And so we're hopeful that the manufacturers will see that and start to get really aggressive on incentives.

Understood. Understood. We'll keep an eye on that. And a follow-up was on just the warranty penetration. Looks like it dropped from the second quarter by a couple hundred basis points. I'm curious, was that just, again, like mixed driven because of, you know, electric vehicles and those are leads? And your guide implies like a further step down fourth quarter. I'm just curious what's driving that and what's like a normalized number we should assume when we head into 26?

Yeah, it's Beth. And to X that out, it would have been normal numbers.

And to that point, you know, that's with the, Sequential headwinds we saw in F&I, primarily the warranty penetration, you've got a higher lease mix on BEV. And then again, as we go into the fourth quarter, typically our fourth quarter F&I is actually a bit lower because of that higher luxury lease mix that we see in 4Q in normal years. But as we go forward, we talked about, I think it was the last call, that $2,700 or so is an achievable consistent run rate in a normalized range. powertrain mix and brand mix for us, particularly when you think about the benefits of the new JLR stores that we've added in their F&I performance.

Got it.

Got it.

Understood. Okay. That's helpful. I'll get back into Q. Thank you.

Thank you. Our next question is from Brett Jordan with Jefferies. Please proceed.

Hey, good morning, guys. This is Patrick Buckley on for Brett. Thanks for taking our questions.

Hi, Patrick. Hello.

Circling back on Echo Park, you know, it sounds like there were some unique headwinds this quarter with the off-rental slowdown. Should we expect any of that to persist into next year? And I guess, should we still be thinking about an acceleration in Echo Park next year as well?

You know, I think it'll – no, I don't think it'll persist into next year. And I think we'll find ways to overcome that by buying more cars off the street. And, you know, we're excited, as David talked about in his opening comments, we're going to start to grow Echo Park again. next year. So how many stores we open, probably more tailored towards the end of the third and the fourth quarter next year. But with more off-lease vehicles coming back, inventory getting right, prices are going to continue to drop. That's going to be a big help. And so 26 should be a good year for Echo Park and then beyond. We'll open a few stores next year, like I said, in the last six months. and then really start growing in 27.

And this is David. I think it's really important to mention that we're building the Echo Park business just as we built our core business, not quarter to quarter, but we're building it for the long haul. And so we're keeping that in mind. We're going to grow the Echo Park business just as soon as we can and grow it efficiently and smartly. Our team has gotten a lot better about where we build and how much we spend on building and our training processes and all of that. I'm just very excited about the future of Echo Park and what we can do once we really step on the gas of growth. So there's more to come in the future.

Got it. That's helpful. And then looking at the Q4 outlook for 10% to 11%, growth and fixed operation growth, gross profit. I guess, could you talk about the drivers moving forward there, price versus volume? Is there any tariff inflation going on there? And maybe the warranty pipeline, how does that look from today?

The warranty pipeline looks good. Lots going on. Look, what's driving this for us is our additional headcount and tech count from March of 24, when we really started focusing on growing our techs. training our techs, maturing our techs. That's making a big difference. We've got the stall count. We've got the head count. And that's making a huge difference for us in delivering. And the thing is, is that the pipeline's long. There's just, we see growth year after year after year. And I don't see it slowing down. I see it speeding up. And so we're very, very excited about the efforts we're putting in there to grow our share from a fixed operations perspective across all of our markets.

Yeah, I tell you, this is David. I tell you that our team has just done an outstanding job retaining, as I mentioned in my comments, retaining and growing those techs that we've, you know, we've really changed the game and changed the attitude of how we hire techs and retain them.

Great. That's all for us. Thanks, guys. Yes, sir.

Our next question is from Chris Pierce with Needham & Company. Please proceed.

Hey, good morning, everyone.

Morning.

On the franchise side of the business, I just want to make sure I'm following. Was there a demand pull forward in power, like maybe people switching powertrain choices in the third quarter and that's leading to inventories being elevated in luxury in the fourth quarter? Or are those not related? Are we still expecting typical seasonality and we're expecting the OEMs to step up? Like how does that all sort of fit together if it fits together at all?

Well, it's definitely a pull forward from a BEV perspective because the incentives ended, at least for most brands, and that definitely happened. And inventory is growing from a luxury perspective. We're at our highest inventory levels of the year. Incentives are going to have to grow in order to speed up the volume. And we are not seeing that in October. Like I said, BMW, Mercedes, those brands for us, and I was doing industry checks yesterday, And we're talking 15, 20% reduction so far in this calendar month. And I've seen that, you know, in some of our competitors as well. That's tough. The manufacturers need to step up or inventory is going to grow. I think you're going to see the same seasonality, but our growth is usually 10% third quarter to fourth quarter. This year we're expecting that to be in the 5% range. And like Danny said earlier, last year it was 20%. So, You can do the math. The manufacturers are going to have to step up, or inventories are going to grow, and margins are going to start coming down. Not having BEVs is going to help margin, but inventory growth can pull margin back if they don't step up and put some incentives out there. And that's a real serious situation. I said it earlier. You've got to watch that. Watch what happens in luxury during October, and then we'll see if that spills over into November and December.

And have we seen a situation like this where the OEMs wait and wait to pull the trigger on this? Or is it just the market is so kind of weird because of all the incentives that this is uncharted territory?

Yeah, I think the market is weird with the shutdown and the government shutdown. There's some strange things going on here. The tariffs certainly are playing a role. But, you know, that's a pretty big drop off in luxury volume in October year over year. in particular around BMW and Mercedes. Land Rover is a little bit the same, too. Now our business is growing because we've got stores that we didn't have last year in our numbers. But the luxury business has slowed down in October, and the first nine months of the year were weird. Pillowheads, tariffs, all kinds of crazy news. This is just sort of a normal month, October and November, and we'll see what happens. Like I encouraged Rajat earlier, You need to watch that and watch what happens from a new car luxury perspective. That's an important mixed changes, you know, bottom lines, right? And that's important to watch as we move through this quarter.

Okay. And then just one on Echo Park. Can you just sort of help me understand, is it typical industry seasonality that rental car companies bring cars to auction at a higher rate in the third quarter? after summer travel and that sort of didn't happen this year? Or like, is there something going back to industry weirdness? Is it something that unexpected that happened? Or I just kind of want to like flesh that out a little bit.

Yeah, typically they defleet. And so we pick up inventory. They did not do that this year. And I think it's just the unknown of the tariff and whether they were going to be able to buy new cars or not. And so we're seeing a little more inventory come in, but not at the levels that they normally do. We typically have 1,500, 1,000 vehicles in our mix from them. And I think I looked at it the other day, we were down to 133 units on the ground. And so that's just not normal. And so we're having to replenish that. It did catch us a little off guard in the third quarter, but still nicely EBITDA positive. And we're very excited about the year for Echo Park. I mean, this will be a great year in comparison to the last few, as you know. and then really excited about 26 and 27 and moving forward with our growth plans.

Yeah, I think to add to that, I think it is interesting that we can handle those kind of bumps now. We're built to be more efficient.

That's a great point.

So when you have something that comes like this, we've got the scale and we can handle it when in the past it was more difficult.

It didn't blow up the P&L.

Thank you very much. Appreciate it. Good luck.

Thank you.

As a reminder to start one on your telephone keypad if you would like to ask a question, we will pause for a brief moment see if there's any final questions. Our next question is from Mike Albany is with the benchmark company, please proceed.

yeah hey guys good morning, thanks for taking my question. Good morning, sir good morning. I'm just going to squeeze in a quick one here as I think about, I guess, Echo Park, right? And this was built to kind of compete with, you know, the CarMax model. And coming out of the quarter, you know, CarMax had hit a situation where depreciation essentially had picked up pretty significantly. I think kind of a fallout of the pull forward in demand scene kind of in the first half of the year. And I'm just wondering if that – you know, heightened depreciation that I think hit over the course of like six to eight weeks. It was like two thirds of the typical annual depreciation curve that had an impact on your business, how you think about that and and kind of what that impact was.

Yeah, I think we felt the same thing. You know, MMR increases in the second quarter, 106 to 107% drove our average cost of sale up. We tried to pivot to the rental sector it wasn't available. And so we made the decision to, you know, cost us the 2,000 units in volume. So, yeah, we saw the same thing.

Yeah, right. I guess the takeaway there being that, you know, generally your sourcing mix being a little bit different kind of protects you against that situation a little bit. Does that make sense? Yes.

And if you remember, Mike, we If you recall, we guided to, back in July, we expected a little bit of front-end GPU compression, a couple hundred dollars, from 2Q to 3Q as a result of what we were seeing in the wholesale markets and wholesale retail pricing spreads. What really was the headwind for us that was unanticipated was the volume impact. We didn't have alternate sources, and that's what put pressure on the performance. If you think about those 2,000 units that are normal GPU, really that's the shortfall in 3Q that caused us to pull down our full year Echo Park, keep it out guide.

But smart not to go out and try to replenish that volume buying a bunch of cars at auction. They're going to bring the margin even down further. So good decisions made. We need to be more aggressive in buying cheaper cars off the street, and that's something we're focused on for the fourth quarter and moving forward. Yeah, got it. Thanks, guys. Thank you. Thank you.

With no further questions, I would like to turn the conference back over to Mr. Davis-Smith for some closing remarks.

Well, thank you very much. Thank you, everyone. We will speak to you next quarter. Have a great day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you again for your participation.