Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive Second Quarter 2026 Earnings Conference Call. This conference call is being recorded today, Thursday, July 30, 2026. Presentation materials which accompany management's discussion on the conference call can be accessed at 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 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 Security and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Security and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on form 8K filed with Securities and Exchange Commissions earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin.

Thank you very much and good morning, everyone. Welcome to Sonic Automotive's second quarter 2026 earnings call. As she said, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke, our CFO Heath Byrd, our Echo Park Chief Operating Officer Tim Keen, our VP of Investor Relations Danny Wieland. I'd like to begin by thanking our outstanding teammates for their continued commitment to delivering a world-class guest experience. The strength of our relationships with our teammates, our guests, our manufacturer partners, and lending partners remain central to our long-term success and we appreciate their continued support of the Sonic Automotive team. Earlier this morning, Sonic Automotive reported second quarter financial results, including record second quarter total revenues of $3.9 billion, an increase of 8% from the prior year period, an all-time record quarterly gross profit of $616.2 million, up 2% year over year. Second quarter reported gap EPS was $1.79 per diluted share, Excluding the effect of certain adjustments detailed in our press release this morning, non-GAAP adjusted EPS for the second quarter was $1.82 per diluted share. Beginning with our franchised dealership segment, our stores performed well despite difficult year-over-year comparisons as a result of pre-tariff consumer demand pull forward during the second quarter of 2025. Reported revenues increased 6% to $3.3 billion, while same-store revenues increased 2% year-over-year. Reported franchised dealership segment gross profit increased 1%, while same-store gross profit decreased 3%. Halfway through the year, new vehicle gross profit per unit is tracking above the high end of our full year guidance range of $2,700 to $3,000 per unit. As a result, we have increased our full year new GPU guidance to $2,850 to $3,000 per unit, implying lower downside risk despite potential GPU compression in the third and fourth quarters as a result of ongoing tariff-driven affordability challenges. Second quarter reported new vehicle GPU was $3,024, down 11% year-over-year, and same store new vehicle GPU was $2,872, down 16% year-over-year, driven primarily by higher GPUs in the prior year period as a result of pre-tariff consumer demand. Same store new vehicle unit volume was flat year-over-year, in line with industry trends. Year to date, used vehicle gross profit per unit is also tracking at the high end of our previously communicated full year guidance range of $1,350 to $1,450. Second quarter reported used vehicle GPU was $1,399, down 12%, and same store used vehicle GPU was $1,401. down 13%. Same-store retail used vehicle volume increased 7%, driven by improving used vehicle supply and our strategic focus on increasing used vehicle volume throughput as we progress toward our long-term objective of retailing an average of 100 used retail units per dealership per month, representing approximately 25% organic volume growth potential from current levels. We believe second half used GPU may be lower than the first half of 2026 as we focus on volume throughput and total gross profit generation. Fixed operations remains a source of stable and recurring earnings, with reported gross profit increasing 6% to an all-time quarterly record of $263.8 million. On a same-store basis, Fixed operations gross profit increased 2%, driven by a 1% increase in customer pay gross profit and a 3% increase in warranty gross profit. We believe that continued affordability challenges may lead consumers to repair their current vehicles rather than replace them with newer ones. To capitalize on this potential tailwind, we are continuing to implement value pricing service offerings and service-based marketing strategies to drive share gains and support our guidance for mid-single-digit percentage growth and same-store fixed operations gross profit for the full year. F&I continued to make a very meaningful contribution to our results with reported franchise dealerships F&I gross profit increasing 2% to a second-quarter record of $147.9 million, while same-store F&I gross profit decreased 1%, driven by a 4% decrease in same store F&I per unit. Fixed operations and F&I continue to provide a stable foundation for our business, representing more than 75% of total gross profit during the second quarter. The strength of these higher margin businesses helped offset declines in new vehicle GPU and supported the overall profitability of our franchise dealership segment. Turning now to Echo Park, Second quarter revenues increased 15% to $582.9 million, and segment gross profit increased 4% to a second quarter record of $64.3 million. Echo Park retail used volume well outpaced the broader industry, increasing 17% to 19,601 units, reflecting continued consumer demand for our strategic value proposition, Improvement in non-auction sourcing mix and strong execution by our teammates to continue to deliver an outstanding guest experience. Echo Park total gross profit per unit was $3,292, down 12% year-over-year, driven by a 21% decrease in used vehicle front GPU to $328, and an 11% decrease in F&I gross profit per unit to $2,965. Used vehicle GPU was stable sequentially, benefiting from our increased mix of non-auction source inventory. The sequential reduction in F&I gross profit per unit reflected lower service contract penetration and lower gross profit per service contract due in part to a greater mix of battery electric and higher mileage vehicles, which carry lower warranty penetration rates and profit per contract. As we have improved our mix of non-auction sourced inventory and shifted our inventory mix to provide more affordable, higher mileage vehicles to consumers, it has put some pressure on our F&I GPU while benefiting volume, consumer reach, and overall gross profit levels. Going forward, we remain focused on optimizing vehicle sourcing and inventory mix, vehicle pricing, and F&I product offerings to drive targeted levels of total GPU in the $3,100 to $3,300 per unit range for full year 2026, along with 12% to 15% used retail unit volume growth. Echo Park's segment income was $7.2 million, and adjusted EBITDA was $13.9 million, tracking within our full year guidance of $35 to $40 million in adjusted EBITDA. Included in this guidance is $8 to $12 million in incremental brand marketing expense in the fourth quarter, which we believe will support new market expansion and organic volume growth in our existing Echo Park markets. We expect to open one new Echo Park location in the Orlando market in the fourth quarter and two to four new Echo Park locations in 2027. Turning now to our power sports segment. Revenues increased 53% to a second quarter record $73.5 million, and gross profit increased 57% to a second quarter record $19.7 million. On a same-store basis, power sports revenues and gross profit each increased 13% year-over-year. Reported new retail unit volume increased 27%, while reported used retail unit volume increased 61%. On the same store basis, Powersports new retail unit volume increased 3% and used retail unit volume increased 19%. Powersports reported F&I revenue increased 75% year over year to $3.5 million with total F&I per unit up 27% to $1,125. Same store F&I revenue increased 20%, while same store F&I per unit increased 12%. Power Sports segment income increased to $2.3 million from break-even in the prior year period, and adjusted EBITDA increased 145% to $4.9 million. Our recently required Harley-Davidson dealerships in California, Florida, Georgia, and North Carolina contributed to the segment's growth and expanded our presence in several important riding markets. These locations also improve the geographic and seasonal diversification of our power sports portfolio, as evidenced by the increase in second quarter adjusted EBITDA year over year. Despite limited Sonic Playbook integration to date, these stores are already seeing returns above our expectations. This gives credence to our commitment to growing and sustaining our power sports growth strategy. We are also gearing up for the 86th annual Sturgis Motorcycle Rally starting August 7th, where we expect another strong opportunity to showcase the benefits of our expanded footprint and capitalize on one of the industry's largest retail events. Finally, turning to our balance sheet, We ended the quarter with approximately $676 million of total available liquidity resources, including approximately $294 million of cash and floor plan deposits. Our liquidity position and balance sheet capacity provide us with the flexibility to support our existing businesses, make targeted organic investments, pursue strategic acquisition opportunities, and return capital to stockholders. As we continue to execute our balanced capital allocation strategy, I'm pleased to announce that our Board of Directors approved a cash dividend of 41 cents per share, payable on October 15, 2026, for current shareholders as of September 15, 2026. We will continue to evaluate potential uses of capital based on available acquisition opportunities, relative financial returns, strategic fit, and prevailing market conditions. Our team remains focused on delivering an exceptional guest experience while executing our long-term strategy across all three operating segments and making disciplined decisions designed to enhance long-term shareholder value. This concludes our opening remarks and we look forward to answering any questions you 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. One moment while we pull for questions. Thank you. Our first question is from Jeff Lick with Stevens. Please proceed with your question.