Sonic Automotive, Inc. (SAH) Earnings Call Transcript

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 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 8-K filed with 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.

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 EchoPark Chief Operating Officer, Tim Keen; our VP of Investor Relations, Danny Wieland. I would 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 remains 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 and all-time record quarterly gross profit of $616.2 million, up 2% year-over-year. Second quarter reported GAAP 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 franchise 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 in 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 EchoPark. Second quarter revenues increased 15% to $582.9 million and segment gross profit increased 4% to a second quarter record of $64.3 million. EchoPark 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. EchoPark 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 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 carried 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. EchoPark segment income was $7.2 million, and adjusted EBITDA was $13.9 million, tracking within our full year guidance of $35 million to $40 million in adjusted EBITDA. Included in this guidance is $8 million 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 EchoPark markets. We expect to open 1 new EchoPark location in the Orlando market in the fourth quarter and 2 to 4 new EchoPark locations in 2027. Turning now to our Powersports 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, Powersports 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 a 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%. Powersports segment income increased to $2.3 million from breakeven in the prior year period, and adjusted EBITDA increased 145% to $4.9 million. Our recently acquired 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 Powersports 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 Powersports growth strategy. We are also gearing up for the 86th Annual Sturgis Motorcycle rally starting August 7, 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 $0.41 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 3 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.

[Operator Instructions] Our first question is from Jeff Lick with Stephens.

I wanted to ask about your new business. I mean, you did outperform now that we've seen everyone report, you're really the only one that kind of match the market. I'm curious just to get your thoughts on why you think that is? And then maybe if you could build on it, not only did you match the market and outperform your peers in new, but you did so in used and that your used comp is actually better than your new comp and used units was better than new units. So if you could maybe speak to what -- why you're able to do that and what you're seeing and what might be different for you?

Yes. I mean, I don't know based on brand mix, what the differences might be. I think we're a little more aggressive on our margins. We've been saying that, there's going to be a margin stretch coming into the second half of the year. We pay real close attention to our day supply and making sure that we're turning inventory. So I think we were pretty darn aggressive from a margin perspective, and that helped grow the volume and really support our big F&I numbers. We strategically have higher F&I PURs, I think, than most of the rest of the group. And so when you combine that with the front end, it's a little lower in our higher F&I margins. The total gross dollars were in line with our expectations, and we really drove a great quarter, both from a new and a pre-owned perspective with that strategy.

And then just follow-up or a shift gears to EchoPark. You made some tweaks, took the units up, GPU -- total GPU down. It's a combination of the vehicle and the finance F&I. Just any details there? And then on advertising, you took that down by $8 million, which I guess effectively means you took your EchoPark guidance down by $8 million. My question there is, if you were a private company, would you still take the advertising down?

That's interesting. Yes, we're not -- this is David. We don't make decisions like that. We're doing what's best for our business long term. I guess, that's the easy answer, but...

Yes. And it would have to do private or public. It has to do more with scheduling, getting it right before we take it out. It's a scheduling issue as well from a timing perspective.

And then the margin mix was driven basically by inventory mix. Tim can comment more, but we sold more EVs and CCARs. We're working on back-end products for that, but drove great volume, up 17% for the quarter. And if you take a look at July, we're running north of 20% growth, north of 25% growth for July, which is fantastic. So all of this is kind of what we said, we'd do as we began the year and work towards opening -- beginning to open stores again. The volume is coming back. We've got really strong back-end numbers even at the numbers that we're doing now with the mix change. And we'll have some new F&I products for BEV and for CCARs that will help that. But we'll stabilize in that $3,100 to $3,300 range, but that we're going to sell more cars, and we're proving that now. So all speed ahead from an EchoPark perspective. We're super excited about the business. And with affordability issues that we see on new, I mean, we've crested $60,000, $61,000 close to from a new car price perspective. The industry is at $50,000. Our used car pricing is less than half of what a new car price is from an EchoPark perspective. That really bodes well for EchoPark over the next 12 to 18 months. It's going to be a lot of fun to watch this brand grow.

So I guess to sum it up then, if you look at the advertising guidance or the budget coming down, it maybe looks like what you're saying is, look, volume really isn't our issue given what you're observing. So maybe we don't need to spend $20 million in advertising and maybe we just need to spend a little more time kind of fine-tuning the GPU.

Two separate things. We would expect the advertising that we're going to -- it's a timing issue. That's it. And we expect that advertising when we get to the fourth quarter to even add more to what we're doing now. So that opportunity was there all along. We were being very conservative, making sure that our EBITDA was where it needed to be and just being conservative with EchoPark. The volume, if you remember, pre-COVID, we were selling 500-plus cars of rooftop a month. So -- and now we're doing in the 350 range. We've got a lot of upside opportunity in the current stores that we have. And it's just turn a little lever here and there or pull a lever here and there, and we can push our volume up drastically. So -- that's going to happen. You see some of our competitors doing that. And we look forward to a great second half of the year with EchoPark. We're going to see nice growth. And we're seeing it in July. And as we launch our new advertising campaign, which is really going to be special, the world is going to have a lot of fun with that. We expect to see even higher growth and build on margin from that point forward.

And Jeff, this is Heath. Just to be clear, we still have our initial branding budget is $20 million. To Jeff's point, it's just timing.

Did you put Danny in some of those EchoPark ads?

You just never know. You never know what we are going to do.

It would be fantastic. Yes, this is David. I would just add that it is part of our plan. We'll have more to announce hopefully in the near future about our marketing branding plan for EchoPark. But we can tell you, anecdotally, like our naming rights deal at EchoPark Speedway, when the customers -- the awareness that, that has generated, once customers hear about EchoPark and they see our view again, we've got the #1 guest experience in the industry. And when they see that, see the volume in our land store, for example, double a huge impact. So we know that, again, we'll have further things to announce soon, but we're excited about it.

And maybe one more final point. This is Danny. One final point on that is with the timing, we had our marketing team very much taking a data-driven approach to how we deploy this incremental brand spend. And with the shift in the way consumers are shopping, we had some back-end work to do related to our websites in terms of being answer engine optimized for the portion of buyers that are searching via AI tools. We don't want to go out with that significant amount of brand spend, at least to our segment results without being prepared to capitalize on it in the way that the consumers are currently shopping. So there was some front-end work, and that's what shifted the timing further back in the year from what we told you $10 million to $20 million back in February.

Our next question is from Alex Perry with Bank of America.

I guess just a follow-up on EchoPark. You spoke a bit about the share gains, and it's been great to see. I guess, how are you gaining market share there versus some of your used-only peers? Is something changed around the pricing strategy? You mentioned some shifts in the advertising strategy. And should we expect those share gains to continue?

Yes. This is Tim Keen. Really, the only shift was carrying more inventory and being conscious of us being in a value position with cheaper inventory, which is what drove our mix change. And allowed us to drive the volume.

And this is Jeff. As we set up against the new car pricing that's out there right now and this affordability issue continues, you're going to see used car growth really, really go. And we're getting back now to used car pricing being 1/2 that of the new car price that's out there. That's when the used car business really fires. And that's what's happening. It's happening naturally, and we're forcing it even more from an EchoPark perspective. When you combine all that, it's just amazing the energy you get from a volume perspective. And -- we're seeing that. I think you saw it at a couple of other competitors and then some others had made some comments about going for gross. I don't understand that a little bit right now from a PR perspective because inventory is coming back off-lease cars are coming. You got a lot of off-lease BEV cars in the market where the manufacturers kind of absorb some of the depreciation. We're taking advantage of that. Just missed out a little bit on back-end products with that. I think, BEV was 15% or almost 15% of our overall volume in the second quarter at EchoPark. That's way up from what it normally was running. And so we took advantage of that, had a bigger reach for our customer base, expanded our customer base. And now we said, we need to add some products for BEV. We'll do that. But very, very focused on our pricing and the level of inventory we're carrying. And when you combine all that, it just -- it's amazing what's happening. And it's going to continue to happen through the rest of the year. Like I said, if you look at July, we're having a blast and we're plus 25% to last year or something like that right now.

And one more point on that auction sourcing mix. In the first quarter, we were 32% non-auction sourced. We were up 10 full points to 42% of our sales were non-auction sourced during the second quarter. So significant gains there. And to Jeff's point, the way that we're attacking that with the non-auction mix is going to what consumers are looking for from higher mileage, more affordable vehicles, EVs, off-lease and used EVs are very hot right now. Both of those were growing 40% to 60% quarter-over-quarter in terms of their share of EchoPark's mix. So it's -- we've got to fine-tune a little bit the F&I component and the relative GPUs, but it's supporting the volume and it's supporting growth of the awareness of EchoPark brand and the reach that we have.

That's all really, really helpful. I guess, just a follow-up on parts and service. So the same-store comps, I guess, moderated a bit against fairly difficult compares, pretty consistent with what we've seen across the peer group. Is there anything structural driving that moderation? What supports a return to sort of mid-single-digit growth? And then do you think there's an affordability challenge out there in parts and service where pricing sort of needs to come down at all? Or do you think it was more of a one-off thing?

No, I think that there 100% is a pricing issue. I mean when you think about it, customers who buy new cars as an industry average, only half of them are coming back to new car dealers to service their cars. The opportunity in fixed operations is huge. And that's why we're focused on value pricing. We've got 5 op codes right now per store that we're really focused on from a value pricing perspective. That's going to grow. We need to get our pricing in line as an industry from a fixed operations perspective, and we're working really hard on that. But we -- there is an affordability issue there. And there's an affordability issue on the price of a new car. And when you add all that together, that's why I think you see some wobblness in fixed operations growth and growing only 2%. There's way more there, way more meat on the bone, and that's a huge focus for us as we move forward. And if customers are going to stay in cars longer, I mean, the average customer is financing their car, 70% of our customers are financing their car for 72 months or longer. So if that's going to be the case and customers are going to drive new cars longer, there's going to be a huge upside to -- from a fixed operations perspective. We've got to get our costs and our pricing in line for our customers to bring more customers into the service driver. We are absolutely focused on doing that. We've increased the number of days that we have. We've increased the number of technicians we have. And quite honestly, the numbers that we're seeing out there is not good enough. There's a wobble in the second quarter. I'm not sure, if it's the war, what's causing it. But just across the board, low single-digit numbers in fixed operations is not acceptable. We need to be mid- to upper single digit and maybe even double-digit growth as we go forward, and it's something we're very, very focused on. It's a great question.

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

At EchoPark, can you carry this much inventory? I guess days of sale was up, I think, 15% year-over-year. Is the pricing environment, does that help you carry this inventory? Or is it more your updated sourcing? Like is this sort of a new normal? Or does the environment play a role in kind of what we saw in 2Q from inventory and unit growth?

Yes. It's really both, and it's sustainable going forward for sure.

Yes. Your day supply is high, a little higher than normal right now, but we saw an opportunity to buy more cars off the street. We're selling more cars. As you can see, we're having a big old July. We expect that to carry on for the rest of the year. Day supply is going to drop as we move into September and October. That's just normal seasonality. But we told you earlier, we pushed inventory up because we know there's some opportunities from a volume perspective, and we've done that and just great opportunity for us to grow.

Yes. This is David. I think it's important to note that, our existing footprint of EchoPark stores, we have a lot more capacity that we can sell out of those existing stores. I mean, there's -- it's close to double what we're selling now. So the room that we have and how we're built, and we have some salespeople that are selling 50 cars a month individually.

Okay. And then there's more BEVs coming off lease for the next multiple years. Should we think about -- and I think Danny said this stat that only 16% of EchoPark is EV. I mean, should this sort of be a new sort of normal for F&I? I know you kind of guided where you guided, but the figure we saw in 2Q, could it -- is it possible it could move lower as more EV comes online? Like what's the right way to think about that?

From a margin perspective?

Yes, from F&I retail dollars per vehicle.

Yes. No. I mean, we're kind of in the ballpark where we'll be. I don't think it goes any lower. It could go higher because we're working on products to add that we can sell on that particular type of vehicle. So I don't expect it to go any lower. No, no, no. Go ahead.

I think, you're not as familiar with selling so many EVs, so attach might be artificially low in like this beginning period. Is that sort of a realistic expectation?

Yes. I think the industry is that way. We've got a lot of off-lease bets coming back now. Manufacturers have done a great job absorbing some of that depreciation. We're going to see that, until I think the end of next year when it kind of maybe levels off or the middle of the following, when you won't have -- we don't have as many bets being sold now, obviously. So there's going to be an up and then a down. But then we have more off-lease cars coming back from a combustion perspective. So that -- and a hybrid perspective. So that will be a big help and a big boost. It's going to be good for the used car business over the next couple of years, I think from a lease return perspective. And we'll work out the margin with products on the back end. It just -- we sold more this quarter, and we'll sell more in the coming quarters, and we'll add some F&I products to support that.

And some of it on the F&I on the warrants attached with BEVs is a little bit of a disconnect in our sales approach historically with more hybrid and ICE-based unit volume at EchoPark as well as consumer perception that EVs have less repair risk or less repair cost. And in fact, we're actually seeing that EVs are the highest dollars per repair on average in the industry. Some of that's because it's new technology, some of it because you've got more wholesale replacement of parts as opposed to individual components. But there's a bit of an opportunity to just educate the consumer too when you look at some of the data on EV maintenance and repair costs relative to hybrid and ICE that it's not quite as low cost as it seems at least for the interim.

Okay. And then just lastly, does get a reaction to Jeff's question, you kind of kind of stop at this one, too. But I'm just kind of curious, you're growing 17%, 25% in July with no advertising. You've got easy comps in the second half. Like why push that button now? Why not push the store opening button or why not just kind of let it run through until you need to hit the gas on that?

We're going to do both because we can grow even more and we can grow margin. The more our guests know who we are, EchoPark are unknown. in the markets that we do business in. And so we think there's a margin play there for us, a front-end margin play. And we've got a lot more volume to get. It's there for us to go get. And we can back off if we need to, if we see -- we've made the investment and it's not coming. But we're -- we've worked really hard to get this brand ready to roll. As David said earlier, our guest experience is unmatched. And we're very excited about that opportunity. We're going to start growing and grow the brand. We've made that commitment. We've been telling you all that this is coming for a better part of a year now. And we're ready. We're healthy. We're ready to go. We're in shape, and we'll see -- I'm not stopping at it, but I'm very excited about it.