Sonic Automotive, Inc. 2026 Q3 Earnings Call

Thank you very much, and good morning, everyone. Welcome to the Sonic Automotive third quarter 2026 earnings call. As he said, this is David Smith, the company's Chairman and CEO. Joining me on today's call are our President, Jeff Dyke, our CFO, Heath Byrd, our EchoPark Chief Operating Officer, Tim Keen, and our VP of Investor Relations, Danny Wieland. I would like to begin by thanking our exceptional teammates for their unwavering dedication to providing a world-class guest experience. Our relationships with our teammates, our guests, our manufacturer partners, and lending partners are fundamental to our long-term success, and we are grateful for their ongoing trust and support of Sonic Automotive. Earlier this morning, Sonic Automotive reported third-quarter financial results, including all-time record quarterly total revenues of $4 billion and all-time record quarterly gross profit of $617.5 million. Reported GAAP EPS for the third quarter was $1.28 per diluted share.

Excluding the effect of certain adjustments detailed in our press release this morning, non-GAAP adjusted EPS for the third quarter was $1.30 per diluted share. Beginning now with our franchised dealership segment, our stores performed well despite difficult year-over-year comparisons as a result of the pull forward in EV consumer demand during the third quarter of 2025. Reported franchise revenues decreased 3% to $3.3 billion, while same-store revenues decreased 2% year-over-year. Reported franchise dealership segment gross profit decreased 2%, while same-store gross profit decreased 1%. During the quarter, our team focused on optimizing new vehicle GPU while maintaining market share. Third quarter reported new vehicle GPU was $3,048, up 2% year-over-year, and same-store new vehicle GPU was $3,000, flat year-over-year. Same-store new vehicle unit volume was down 7%, largely due to higher EV exposure within our luxury brands and California stores.

We estimate the impact of last year's EV pull forward to have been approximately 2,200 additional new retail units sold in the prior year quarter, which combined with F&I on these vehicles, drove a $5 million year-over-year decline in gross profit. Excluding the impact of these EV units, our new retail sales volume would have been flat year-over-year. Third quarter reported used vehicle GPU was $1,500, down 2%, and same-store used vehicle GPU was $1,506, down 3%. Same-store retail used vehicle volume increased 3%, driven by improving used vehicle supply and 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 a 20% organic volume growth potential from current levels.

In the face of industry-wide headwinds, we are proud of our fixed operations performance, with reported gross profit increasing 2% to an all-time quarterly record of $265.4 million. On a same-store basis, fixed operations gross profit increased 1%, driven by a 1% increase in warranty gross profit and flat customer pay gross profit year-over-year. To combat ongoing consumer affordability challenges, last quarter, we launched a value-priced service offering and expanded our service-based marketing strategy. As a result of these efforts, same-store customer pay repair order volume was up 1% year-over-year and up 3% sequentially, and same-store warranty repair order volume was up 4% year-over-year and 4% sequentially.

The increased customer traffic provides our stores with key customer touchpoints and opportunities to sell additional products and services at current or future visits while indicating that our guests are not trading down out of the franchise dealer service lane to visit independent repair shops. In the third quarter, F&I gross profit decreased 3% to $142.6 million on a reported basis, while same-store F&I gross profit was flat year-over-year. Our team remains focused on maintaining high levels of F&I GPU and ended the quarter at $2,630 on a same-store basis, an increase of 2% year-over-year. Turning now to our EchoPark segment. Third quarter revenues increased 14% to $596 million, and segment gross profit increased 8% to a third quarter record of $58.9 million.

EchoPark retail used vehicle volume growth well outpaced the broader industry, increasing 22% to 19,923 units, reflecting continued consumer demand for our strategic value proposition, improvement in our non-auction sourcing mix, and our teammates' strong execution in delivering an outstanding guest experience. EchoPark total gross profit per unit was $2,972, down 12% year-over-year, driven by a 15% decrease in F&I gross profit per unit to $2,754, offset partially by a $96 per unit increase in used vehicle front GPU to $218. As discussed on our second quarter earnings call, the reduction in EchoPark F&I gross profit per unit is due in part to a greater mix of battery, electric, and higher mileage vehicles, resulting in lower warranty penetration rates and F&I profit per contract.

We are currently working with our F&I partners and store leaders to enhance our warranty and insurance product offerings for EVs and higher mileage vehicles. While our changes to inventory mix have impacted F&I GPU in the near term, we believe our inventory shift to meet consumer demand is a benefit to sales volume, consumer reach, and future EchoPark growth potential. EchoPark adjusted segment income was $2.6 million, and adjusted EBITDA was $7.9 million, bringing year-to-date adjusted EBITDA to $40.4 million. For the fourth quarter, we expect adjusted EBITDA to be between $2 million and $4 million, including $5 million to $7 million in incremental brand marketing expense as we kick off our largest investment ever in building the EchoPark brand. Our team is excited to share this brand campaign publicly in the coming weeks.

We are also excited to announce that our new EchoPark location in the Orlando, Florida market will open in December. In addition to this new store, we currently plan to open 2 to 4 new EchoPark locations in 2027. Turning now to our Powersports segment. Revenues increased 35%, an all-time quarterly record of $113.7 million, and gross profit increased 26% to an all-time quarterly record of $29.3 million. On a same-store basis, Powersports revenues grew 8%, while gross profit decreased 1% year over year. Reported new retail unit volume increased 32%, while reported used retail unit volume increased 35%. On a same-store basis, Powersports new retail unit volume increased 6%, and used retail unit volume increased 1%. Powersports reported F&I revenue increased 42% year over year to $4.7 million, with total F&I per unit up 8% to $1,148. Same-store F&I revenue increased 6%, while same-store F&I per unit increased 2%.

Powersports adjusted segment income was $7.9 million, down 1% from the prior year period, and adjusted EBITDA increased 4% to $10.5 million. We want to thank our teammates for their hard work in making this year's Sturgis Motorcycle Rally another record success. During the 86th annual rally, our team set a new sales record, selling 1,135 motorcycles, including over 500 new Harley-Davidson motorcycles during the 10-day event. This achievement is a testament to Sonic's strategy of further diversifying our business by a nationwide network of Powersports dealerships. As we turn to our consolidated results, our strong operating performance this quarter was partially offset by higher SG&A as a percentage of gross profit, which pressured our bottom-line results. Our team is consciously making strategic long-term investments that we expect to drive future profitability and operational efficiency but are not yet leveraging the investment.

This includes applying AI across back-office functions, inventory management, and fixed operations optimization, where we are already seeing benefits. By acting now, we are positioning the company to sustain its momentum, expand long-term profitability, and remain agile in the face of changes in the industry. With that said, we remain within our full-year guidance range for SG&A as a percentage of gross profit, despite lower-than-projected fixed operations growth in the second and third quarters. To support this outlook, we remain focused on implementing certain targeted SG&A initiatives in the near term while continuing to invest in our long-term strategic priorities. Finally, turning to our balance sheet. We ended the quarter with approximately $585 million of total available liquidity resources, including approximately $201 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.

Given our current trading levels and the $528 million remaining under our share repurchase authorization, we believe share repurchases represent an attractive use of capital, and we are weighing share buybacks against several acquisition opportunities. As we continue to execute our balanced capital allocation strategy, I am pleased to announce that our board of directors approved a cash dividend of $0.41 per share, payable on January 15th, 2027, to shareholders of record as of December 15th, 2026. This concludes our opening remarks, and we look forward to answering any questions you have.