Sonic Automotive Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 11 speakers on the call.

Operator

Greetings and welcome to the Sonic Automotive 4th Quarter 2023 Earnings Conference Call. This call is being recorded today, Wednesday, February 14, 2024. 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 and Litigation Reform Act of 1995.

Operator

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 ks filed with the Securities and Exchange Commission earlier today.

Operator

I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Speaker 1

Thank you, and good morning, everyone, and welcome to the Sonic Automotive Quarter 2023 Earnings Call. Joining me today are our President, Jeff Dyke our CFO, Heath Byrd our EchoPark Chief Operating Officer, Tim Keane and our VP of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported 4th quarter and full year financial results, including 4th quarter total revenues of $3,600,000,000 an all time record annual revenues of $14,400,000,000 up 3% from the previous year. 4th quarter GAAP EPS was $1.11 per share, which includes the effect of non cash impairment charges and tax items. Excluding these items, adjusted EPS was $1.63 per share, a decrease from $2.61 in the prior year, due primarily to continued normalization of new vehicle GPU and higher interest rates.

Speaker 1

We are very proud of our team's performance in the Q4 and we remain focused on leveraging our diversified business model to adapt to changing market dynamics in the near term, while positioning Sonic to achieve our long term strategic goals. We believe our strong relationships with our teammates, manufacturer and lending partners and guests are key to our future success. And I'd like to thank them all for their continued support. Turning now to 4th quarter franchise dealership trends. We continue to see expansion of new vehicle inventory levels across our brand portfolio, Ending the year with a 37 day supply of inventory, up from 33 days at the end of the Q3 and 24 days at the end of 2022.

Speaker 1

As a result, new vehicle gross profit per unit continued its sequential decline to $4,289 per unit in the 4th quarter, in line with our previous guidance to exit 2023 in the low to mid $4,000 range. This steady decline in new vehicle GPUs should continue throughout 2024, But we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre pandemic, historically in the $2,000 per unit range. Furthermore, our luxury weighted portfolio generally runs a lower inventory day supply And our luxury manufacturer partners have more effectively balanced supply to date, potentially minimizing new GPU compression relative to overall industry trends, which would continue to benefit the earnings power of our franchise business. In the used vehicle market, wholesale auction prices for 3 year old vehicles decreased nearly 9% in the 4th quarter, While average retail used pricing declined just 2%, elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the downward trends we are seeing and used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in 2024.

Speaker 1

Fewer lease turn ins at our franchise dealerships continue to limit our used vehicle volume in the 4th quarter and used market seasonality drove in used retail GPU to $14.43 per unit on a same store basis. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024. Driving upside in this line of business alongside the expected normalization of used car pricing and volumes over time. Despite an elevated consumer interest rate environment, our F and I performance continues to be a strength with same store franchise F and I per unit $2,334 in the 4th quarter. Our franchise dealership

Operator

F and

Speaker 1

I penetration rates were stable quarter to quarter And we achieved our previously issued guidance for full year 2023 franchise F and I GPU at or above $2,400 per unit with same store franchise F and I GPU of $2,411 for the full year. For comparison, For full year 2019, our franchise F and I GPU was $16.20 which was nearly $800 lower than the current run rate and we expect to see continued stability in F and I GPU in 2024. Our parts and service or fixed operations business remains strong with record 4th quarter fixed operations gross profit at our franchise dealerships, up 7% year over year on a same store basis, driven by 9% growth in our customer pay business. We are proud of the success our team has had in this area and we believe there are remaining opportunities to optimize our fixed ops business as we progress through 2024. Turning now to the EchoPark segment.

Speaker 1

For the Q4, we reported EchoPark revenues of $557,000,000 down 6% from the prior year and record 4th quarter EchoPark gross profit of $43,000,000 up 5% from the prior year, Despite a significant reduction in our store count year over year, EchoPark segment retail unit sales volume for the quarter was nearly 17 42% in the 4th quarter. As discussed on our previous earnings calls, reducing our store footprint in the Q2 of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume, better GPU and significantly lower operating losses in the second half of twenty twenty three. 4th quarter EchoPark segment adjusted EBITDA was a loss of $9,100,000 compared to an adjusted EBITDA loss of $25,400,000 in the Q4 last year. In January 2024, we made the difficult decision to close the 7 remaining Northwest Motorsport pre owned stores in the EchoPark segment Due to unique ongoing challenges to the Northwest Motorsport business model, this decision while not taken lightly was made in order to benefit EchoPark's near term profitability path and better align with our overall used vehicle strategy. 4th quarter adjusted EBITDA loss associated with the Northwest Motorsport Group totaled 1,300,000 That's $1,300,000 while full year adjusted EBITDA losses associated with the group totaled 5,100,000 Moving forward, we remain confident in our path to achieve breakeven EchoPark segment adjusted EBITDA in the Q1 of 2024 and positive EchoPark segment adjusted EBITDA for the full year.

Speaker 1

Sonic's diversified cash flows and strong balance sheet allowed us to withstand the challenges in the used vehicle market over the last 3 years and maintain our long term EchoPark plans. Our unwavering confidence in EchoPark's future potential has positioned us as one of the few remaining nationwide used vehicle retailers, creating a tremendous opportunity for this brand down the road. We look forward to resuming disciplined long term growth for EchoPark as used vehicle market conditions improve. Turning now to our Power Sport segment. For the Q4, we generated revenues of $27,000,000 gross profit of $7,000,000 and an adjusted EBITDA loss of $2,400,000 Given the seasonal variability in the powersports industry and our geographic presence with the Black Hills platform, our 4th quarter results were in line with our projections.

Speaker 1

Looking into 2024, we continue to focus on identifying operational synergies within our current powersports network and remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, turning to our balance sheet. We ended the 3rd quarter with $846,000,000 in available liquidity, including $374,000,000 in combined cash and floor plan deposits on hand. The strength of our balance sheet allowed us to repurchase 3,300,000 shares of our common stock in 2023 or 9% of shares outstanding at the beginning of the year. At the end of the Q4, our remaining share repurchase authorization was $287,000,000 which represents approximately 15% of today's equity market cap.

Speaker 1

Share repurchases are an important part of our capital allocation strategy and we remain focused on returning capital to shareholders via share repurchases as our liquidity and other capital needs allow. Additionally, I'm pleased to report that our Board of Directors approved quarterly cash dividend $0.30 per share payable on April 15, 2024 to all stockholders of record on March 15, 2024. As we move ahead to 2024, I'd like to call your attention to pages 1213 in the investor presentation we released this morning, where we discuss our outlook for the industry in 2024 and provide limited financial guidance for certain metrics. From a consolidated company earnings perspective, we expect lower franchise dealership segment earnings to be partially offset by significant improvement in EchoPark segment results, returning to positive adjusted EBITDA for the year as well as a moderate increase in powersports segment income year over year. While the financial outlook in the investor presentation is subject to inherent forecast risks and uncertainties, some of which are beyond our control, we believe the metrics provided may be useful in developing a financial model for Sonic's 2024 results.

Speaker 1

In closing, our team remains focused on near term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns. Furthermore, we continue to believe that our diversified business model provides significant earnings growth opportunities in our EchoPark and Powersports segments that may help to offset any industry driven margin headwinds we may face in the franchise business, minimizing the earnings downside to consolidated Sonic results over time. We remain confident that we have the right strategy, the right people and the right culture to continue to grow our business and create long term value for our stakeholders. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you very much.

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Daniel Imbro with Stephens. Please proceed with your question.

Speaker 2

Hey, guys. This is Joe Enderlin on for Daniel. Thanks for taking the questions. Good morning, Ed. Good morning.

Speaker 2

On the franchise side, your SG and A assumption of low-70s margin was a little higher than we expected. Could you maybe bucket out what drives these costs higher? And maybe is this where you expect long term margin to shake out? Or do you expect leverage after 2024 and we return to a more normal GPU guidance? Thanks.

Speaker 3

Yes. Hey, this is Heath Byrd. A couple of things. Obviously, SG and A as a percent of gross is heavily dependent on gross, right? And in our guidance of a low 70% range, we also have about a $1200 degradation in the front end GPU.

Speaker 3

You just take that degradation on a flat unit basis, that's $130,000,000 of gross that's leading the numerator in that calculation. We do have about a 1% increase in units in there that does offset some of that loss in gross. And so the biggest component is that $130,000,000 give or take decrease in growth. If you look at the expenses, the variable expenses are leveraging as they should as the gross is going down. Fixed expenses, there are some that are higher than normal.

Speaker 3

Insurance coverage to get coverage with property and casualty is going up across the country. Also loaner expense is higher because our fixed ops business is growing at such a good pace. And we have manufacturer requirements to use EVs as loaners and the depreciation of those are higher than ICE vehicles. And so that impacts our loaner expense and some IT expenses and investments for future optimization. There's definitely upside potential in that SG and A as a percent of gross.

Speaker 3

GPU degradation may be slower than we expected, but I think it's pretty standard across the peer group that in that range of about 1200 loss for the year. Our portfolio could outperform the SAAR. The expectation is out there from 1% to 4%. We have a low single digit expectation in the units that we sell. And obviously, we've got potential in the F and I and fixed growth offset that loss in new growth.

Speaker 3

We also have plans to have some structural changes in our expense structure, which could also impact that number. So we definitely see opportunity to beat that number, but looking at the math and the things that we see out there, we think a low 70% range is appropriate.

Speaker 2

Got it. That's helpful. As a follow-up, just given the weakness in the used market as a whole, you have any updated thoughts on what gives you confidence in the long term operating model of EchoPark? Do you maybe increasingly think that consolidation of assets is going a considerable role in returning to that peak profitability?

Speaker 4

Yes, this is Jeff. Certainly, the reduction in store count has helped us in our buying team buy cars for fewer stores and that's proving out in the numbers as we called out in the second and the third quarter. We're seeing excellent growth across the remaining 18 stores that we have. And with the manufacturers putting more and more inventory out on the street, It's going to just naturally common sense, it's going to drop pricing. We're seeing that average wholesale prices are dropping.

Speaker 4

We're buying cars now in the mid-twenty 3 range. I expect that to continue to drop in particular after we get out of the March kind of April selling timeframe and that will continue to improve as we move throughout the year. With that, we're going to sell more cars. We're gaining confidence with where we were with EchoPark back in 2019. And then we can start looking at strategic growth for EchoPark, being very conservative, but getting back on the bicycle and growing the brand And so we've just been waiting, certainly as we called out in the Q3, turbulent waters for the used car business.

Speaker 4

We think there's another 16 months, 18 months of that, but progressively getting better as we move throughout the year.

Speaker 2

Got it. Thank you, guys. That's all for us.

Speaker 4

Thank you. Thank you.

Operator

Thank you. Our next question comes from the line of John Murphy with Bank of America. Please proceed with your questions.

Speaker 5

Good morning, guys. I just wanted to follow-up on that used question. Jeff, it seems like What we're seeing is demand for vehicles is continuing to slowly improve. And just curious, as you think of what's going on the used side, right, versus the new, is there's this substitution where folks are just Tripping into buying new vehicles as opposed to used vehicles, but we also have this dynamic of sort of a still shrinkage of the 1 to 6 year old used fleet. So there's a lot of moving parts that are going on here and we're kind of hearing crosscurrents in different ways about used being weak, but it doesn't seem like it jives necessarily with The idea that the vehicle demand is improving.

Speaker 5

I just I don't know if you could expand on that, or tell us kind of what you're seeing generally maybe in the new stores, then also in EchoPark?

Speaker 4

Yes, sure. I mean, I don't agree with the statement that the used vehicle is getting weak. I mean, if anything, it's flattening out and starting to get better. And so, in the coming months, with the amount of new cars that the manufacturers are putting on the road, we're going to trade for more cars. We're going to trade for more 1 year old to 5 year old cars, and that's certainly helping both the franchise used vehicle apartments and EchoPark.

Speaker 4

And you can see it in EchoPark. I mean, you see the numbers. Our EchoPark volume is expanding greatly. We're selling more cars now out of 18 stores and we were selling out of 45 stores before. So, and we expect that to continue.

Speaker 4

I think the used vehicle business gets stronger as the year goes on. And that's because wholesale prices are going to drop and wholesale prices are going to drop because the manufacturers can't help themselves. They're just putting more and more cars on the road. Some are doing a better job than others. But there and then we have got the electric vehicle piece that's coming in.

Speaker 4

We don't have any To say used vehicle electric vehicles, that's going to start becoming a part of the picture as we move into the mid summer months as some of the off lease cars start coming back. So, I just see nothing but upside from a used vehicle perspective and that's why we are very confident in our Q1 breakeven EBITDA call out for EchoPark. And we ought to be in great shape for the year. The business the used car business is strong. It's always been strong.

Speaker 4

We've just been short on the 1 to 5 year old model for EchoPark and that caused some turbulent times over the last couple of years. That's dissipating. And as we move throughout 2024, it's just going to get stronger and stronger. And that bodes well for the EchoPark model. An offset to what goes on from a franchise perspective for us.

Speaker 4

And so, we're expecting just a tremendous year from an EchoPark perspective.

Speaker 5

Okay. That's very helpful. Just one follow-up on the F and I PVR 2,400 roughly you guys are looking at. It seems like we're through the worst times, knock on wood on rates rising and sort of the negative headwinds that you might have there, there might be some offset of revenue per unit or ATP is going down a bit in 2024. But is there potential that there could be some real upside there in 2024 or maybe structurally over time as you get better penetration of some of the good product that you guys have developed there and the industry has developed?

Speaker 4

Yes, absolutely. And especially as we get to the back half of the year, Rates come down a little bit. Certainly, with retail pricing dropping, there's less margin on the F part of F and I. But there's nothing but upside. Look, we are typically 1 or 2 in the category, excuse me, 2 or 3 in the category.

Speaker 4

And I think AutoNation is out there with a much higher and IPUR, we believe we can perform at that level or higher. Our EchoPark stores perform at that level or higher. And I think you'll see that along with improving front end margin at EchoPark as we move throughout the Q1 and into the rest of the year. So, that's a good call out. I think there is opportunity for F and I improvement as we move forward.

Speaker 5

Thank you very much guys.

Speaker 3

Thank you.

Speaker 6

Thank

Operator

Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Speaker 7

Great. Thanks for taking the question. Just wanted to first reconcile some of the comments on the used car market. I think, Jeff, I think earlier on the call, you had mentioned that the backdrop is likely to remain tough for 16 to 18 months. But then to John's question earlier, I think you mentioned that you're seeing improvement.

Speaker 7

I'm just curious like how should we reconcile those comments? And then Will you be able to put a finer point on expectations for used car volumes, both at EchoPark the franchise business for 2024? And I have a quick follow-up on SG and A. Thanks.

Speaker 4

Yes, I think over the next 16 months to 18 months, it's not going to return 2019 levels, but it's progressively going to get better. And the way that I would look at volume for EchoPark is in and around the same amount of volume that we did last year with a lot fewer stores for 6 months of the year. And then we are projecting Low single digit growth for used car volume increases from a used car perspective on the franchise side. So, we're not out of the troubled waters, it's not anywhere near as choppy as it was. And with the wholesale market prices dropping, it's just progressively going to get better as we move throughout 'twenty four and into the Q1 of 2025.

Speaker 4

And that's why we are just so confident about EchoPark and where we are. We told you guys this in the second quarter. We made our moves. We saw what happened in the 3rd quarter. We saw what happened in the 4th quarter with our volumes.

Speaker 4

That's continuing in January. We're seeing it continued in January. We'll see it we're seeing it again in February, and we expect the rest of the year to progressively get better as we move forward.

Speaker 7

Can you hear me? Sorry.

Speaker 6

Yes, we can hear you now.

Speaker 7

Yes. So just on SG and A to gross, the low 70% number For the full year, I mean, if you compare that to 2019, it's obviously below, you're 77% in 19, you're guiding to 72%, but that 72%, 73% for this year is still on a higher than 2019 new car GPU number on a blended basis. So is there any change in thought process around where the normalized SG and A to gross would go to because presumably 2025 is going to see another step down in the new car GPU. So Should we expect that franchise SG and A to grow to settle even higher than low 70s eventually or how should we think about that? Hopefully, the question makes sense.

Speaker 7

Thanks.

Speaker 3

Yes, this is Heath. Yes, we absolutely think that in the out periods that there is the opportunity to decrease that level of SG and A as a percent of gross. We've given some structural changes from an expense perspective as well as some changes in our F and I products that we're offering. And those things will help replace that degradation in the new gross and will actually will help the SG and A as percent of gross. So we do not think that this is going to be staying in the 70s going forward.

Speaker 3

We think there's opportunities to get back in the high But at this point, based on the data that we're seeing, we believe that, that low-seventy range is appropriate for 2024.

Speaker 4

Jeff, the other thing too is we added a 100 net gain of 108 technicians last year. Our target is to add an additional 300 net gain of technicians this year. We still have to do that, but at the end of the day, that's going to create incremental growth to help what we see from a front end gross degradation on degradation on new car. And that too will help push the margin, SG percentage of gross down below the 72% number that we are calling out. And look, at the end of the day, we will see the Street Some of our competitors are calling out 150 basis point, 200 basis point increase in expenses.

Speaker 4

We're in that 400 to 500 range. It's still early in the year, But we're all calling out basically $300 a quarter in front end margin degradation and that's a lot of gross reduction and we'll see Kind of who's right when this is all said and done with. There's a long way to go in the year. We certainly believe that we can improve upon the number that we're giving you. But like he said, based on where we are right now, that low 70s range, we feel is a good number to begin the year with and we'll work our tails off to improve from there.

Speaker 4

But there's a long way to go. And What the manufacturers do with new cars and new car day supply is going to play a big role in all of this. Along with What percentage of your overall sales is going to be electric vehicle? That's running around 10% right now. That had Almost a $400 degradation to our front end margin in the 4th quarter.

Speaker 4

Highline drove a lot of that. Mercedes Benz was $2.35 of that degradation alone primarily driven from California. That's we've got to get control of that, that's a big focus point for us with our manufacturer partners as we move forward. And I know that we are not the only ones experiencing So, there is a lot of moving pieces at play here, but safe to say, in that low 70% range for now, And hopefully, as we move through the quarters, that becomes a better number.

Speaker 3

And one technical point too on the degradation. It's not going to be linear. We're going to have for that GPU front end degradation, you're going to have a larger portion going from Q4 into Q1 And then it levels out to about 300 a quarter going forward.

Speaker 6

And to your point, Rajat, this is Danny. To your point on the sustainability structurally higher new GPUs. We still believe that that's a possibility as we go forward, move past 2024. We're already seeing where with some of the domestic manufacturers, They've got an 80 plus day supply today, but yet we're making $1200 up to $2,000 more in GPU than we did in 2019 despite day supply roughly back at that level. A lot of that has to do with the segment mix shift towards full size trucks, SUVs that are higher margin business for us.

Speaker 6

And then across the other brands, where we've got more measured inventory day supply expansion, we're still seeing dramatically elevated new GPUs that while they expect to come down as we go through this year, we still see a path to where as part of that longer term growth structure, we're not going back to a $2,000 blended new GPU and it's somewhere elevated above that. And then you factor in the fact that we're running roughly $800 higher in F and I per unit, the variable GPU associated with those retail unit sales down the road should help us leverage the expense structure more than we did in 2019.

Speaker 7

Got it. That's very clear. Thanks for taking the questions.

Speaker 1

Thank you.

Operator

Thank you. Our next questions come from the line of Glenn Ching with Seaport Research Partners. Please proceed with your questions.

Speaker 8

Good morning. Thanks, gentlemen. Good morning. Just to circle back just circling back to your comment about

Speaker 1

We lost you.

Speaker 8

Sorry, can you

Speaker 4

hear me? We can now. Sorry.

Speaker 8

Sorry about that. Just Circling back to your comment, Jeff, about GPU headwind from EVs at $400 that's a comment relative to year over year, Correct, not sequential?

Speaker 6

That's the headwind in the 4th quarter. So if you look at our blended GPU that we reported for Q4, It reflects a $400 headwind from EV GPUs running at a lower rate than the remainder of the business.

Speaker 4

And in some brands, negative margin and significant negative margin, which added to that.

Speaker 8

Okay, very good. Thank you. And then historically, 4th quarter is seasonally strongest For earnings for Sonic, can you just highlight the factor or factors that primarily drove that disruption to that trend this year?

Speaker 1

Sure. I mean, a lot of us this is David. We've talked a lot about it, right? There was sort of A window of uncertainty that we saw that really impacted our traffic and I think that the overall macroeconomic landscape that people were hesitated a little bit there to do business and then it came back in some areas at the close of the year. But I think that was, again, this is sort of a macro point of saying, hey, we'll just wait And buy car, let's see if this storm clears a little bit before we go and buy car.

Speaker 1

That's some of the feedback we've gotten.

Speaker 4

So, the

Speaker 1

other thing that I would

Speaker 4

add to that is BMW plays an enormous role in our overall performance. And our growth on BMW in the quarter was about 1.1%. You compare that to some of our other Highline Manufacturers Lexus were up 76% in the quarter, Audi up almost 23%, Luxury was up 11.4%. But when BMW doesn't have the kind of volume in the quarter that it normally would have, that and the gross erosion associated with that, that certainly did not help during the quarter. And that was really driven by inventory levels.

Speaker 4

BMW has done an amazing job, overall keeping their day supply down and did that during the Q4. We missed out on some opportunities there. And because they we have so many BMW stores and they are such a big part of our overall revenue mix that certainly played a role in the overall performance in the quarter.

Speaker 8

Okay. I apologize. I hopped on late. So thank you for clarifying. And then just on your outlook, thank you for the comprehensive look.

Speaker 8

That's very helpful. I don't suppose you guys would care to venture a range for a potential adjusted EBITDA profitability for EchoPark for 2024?

Speaker 3

No, we do have that we forecast being positive EBITDA for the year. So I go park and that's as far as we go.

Speaker 8

Okay. And can I ask just What that may be predicated upon does require any more store closures or is the footprint you guys have now

Speaker 1

That's not something we built into it, is it any additional store closures?

Speaker 4

Yes, I mean, look, the used vehicle business is getting better. The inventory supply is getting better. The average wholesale price is dropping significantly. And when you combine all of those things, That's why we just have such confidence in our EchoPark model and why we stuck it out through those last three very difficult years. It makes for a pretty picture for 'twenty four and even better as the years go on.

Speaker 4

We're coming out of those turbulent waters, as I said earlier, And it's going to make for a fun year. EchoPark is going to have a great year and we're very excited about being back on our bicycle, so to speak, and getting those stores back to selling the kind of volume that we built them for and driving the kind of growth that we built them for And that's upon us now. We've waited a long time, worked really, really hard. Our team has busted their butts to get through all of this, and we're getting ready to enjoy the rewards from the hard work that went into that.

Speaker 1

And as I this is David. As I mentioned in our In the comments, talking about our diversified business model and being able to weather the storm, we view it and jokingly here in the office talk about Like in the movie Forrest Gump, when they survived the storm, you've seen these other stores, these other competitors closing. It's not as if the used vehicle market has just disintegrated forever. It's not okay, we think it's going to be Stronger there is a much larger market than the new vehicle market historically. And we just as we said, we see a Tremendous opportunity for EchoPark in the future.

Speaker 4

Yes. And one more point

Speaker 6

to add. This is Danny. Glenn, I think you mentioned it in your note this morning that Even just going from the $83,000,000 adjusted EBITDA loss at EchoPark in 2023 to 0 is north of $1.50 of EPS benefit. And we called out that we expect to be positive for the full year next year. So there's a big opportunity to offset, maybe somewhat offset the normalization continued normalization of franchise earnings just by getting back to 0, let alone positive EBITDA on the EchoPark segment.

Speaker 8

Yes, understood. Okay, thanks. And then just last for me, if you can just comment on the spread between wholesale and retail Used pricing, has it normalized? And what you guys might see it doing for the rest of this year?

Speaker 4

No, it's not normalized. I think wholesale prices in the 4th quarter dropped like 9%, retail dropped 2%. And as you know, There's a 7, 8 week lag there. There's still a lot of high percentage of no sales in the auction lanes. I think that's running 40%, but down from 50%.

Speaker 4

And so everybody is still trying to find their way through this, the back edges of this storm. But we expect those two things to catch up with each other as we move into March April May. And again, put some wind in the sales of of EchoPark and the industry, used vehicle business should be getting better as we move forward.

Speaker 8

So, In other words, Jeff, so that spread should be widening, correct?

Speaker 6

Yes. That's exactly right.

Speaker 8

Yes. Okay. Very good. Thanks for all the comments.

Speaker 4

Thank you. I appreciate the questions.

Operator

Thank you. Our next questions come from the line of Michael Ward with Freedom Capital. Please proceed with your question.

Speaker 9

Thanks very much. Good morning, everyone.

Speaker 4

Good morning.

Speaker 9

Just to zeroed in a little bit on EchoPark on the SG and A side. So we've seen a big improvement in SG and A cost second half versus first of 2023. As we go into 2024,

Speaker 4

I assume the run rate

Speaker 9

is even lower as we go into Q1 getting rid of some of the Northwest stores. Is that correct?

Speaker 4

Yes. 100%.

Speaker 9

Okay.

Speaker 4

And I think we called out on the page David referenced somewhere in EchoPark more SG and A percentage in the 80% range, with the mature store being south of 70%. And we expect that as we mature, that's where we expect to be. And honestly, that's where we were, if not better, prior to COVID hitting. So, all these things are coming back into life for us, which is just fantastic.

Speaker 6

Yes, that's a total segment level. The store level we've seen in our more mature stores both in 2019 are getting back toward a sub-sixty. I mean they're among the best of our entire portfolio in terms of and SG and A to

Speaker 4

gross and SG and

Speaker 6

A to leverage because of the comp structure in that market.

Speaker 9

Okay. And what did you end how many locations do you have at EchoPark at year end?

Speaker 4

18. 18. We

Speaker 6

had 25 at year end, but with the 7 closures in January, today we sit at 18.

Speaker 4

Sorry, I've already forgotten about Northwest Motorsports.

Speaker 9

Thanks very much.

Operator

Thank you. Our next question has come from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Speaker 10

Hey, good morning guys.

Speaker 1

Good morning. Good morning.

Speaker 10

Could you talk about the impact of lease recovery on F and I? Obviously, it's been at a pretty low rate on Lease penetration, but it would seem that has less F and I packaged in that transaction. Is that factored into your flat F and I going forward?

Speaker 4

Meaning if leases improve and penetration improves, it's not going to make a difference. I don't think our It is factored in and we're going to be in that 2,400 range or north of that I think as the back half of the year gets here we continue to improve, especially on a total company basis, because we're seeing great improvement at EchoPark, even in the current margin current interest rate environment, as we 0 in and focus on execution there. There's a lot of top side there's a lot of opportunity from our perspective and from an F and I perspective and we should be able to hit that 2,400 number or higher as we move forward.

Speaker 10

Is there any F and I attached to leasing or is it pretty much not a thing there?

Speaker 4

No, there's F and I in it. It's just not at the level that you would with when someone's financing a car traditionally.

Speaker 10

Okay. And then on the customer pay parts and service side up 9%, Do you what was the number between price and traffic in that 9%?

Speaker 6

About a third of that this is Danny. About a third of that comes from higher repair order volume and 2 thirds is coming from passing along higher labor costs, higher parts costs, the effects of inflation as we've seen over the last several quarters.

Speaker 10

Okay, great. Thank you.

Operator

Thank you. There are no further questions at this time. I'd now like to hand the call back over to David Smith for any closing remarks.

Speaker 1

Thank you very much and thank you everyone for participating in the call and we look forward to speaking with you our next quarter. Thank you.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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Key Takeaways

  • Sonic reported Q4 total revenues of $3.6 billion and record full-year revenues of $14.4 billion, but adjusted EPS fell to $1.63 from $2.61 due to new-vehicle GPU normalization and higher interest rates.
  • New-vehicle inventory day supply rose to 37 days in Q4 (versus 24 days in 2022), driving GPU down to $4,289 per unit, with further GPU declines expected in 2024 but remaining structurally above pre-pandemic levels.
  • Wholesale auction prices for 3-year-old vehicles dropped ~9% in Q4 while average retail used prices dipped ~2%, and same-store used retail GPU was $14.43 per unit; F&I per unit remained strong at $2,334, and fixed operations gross profit rose 7% year-over-year.
  • The EchoPark segment saw Q4 revenues of $557 million (down 6%), gross profit up 5%, and adjusted EBITDA loss narrowed to $9.1 million; following a reduction to 18 stores, the company expects EchoPark to reach break-even adjusted EBITDA in Q1 2024 and deliver positive EBITDA for the full year.
  • With $846 million of available liquidity, Sonic repurchased 9% of its shares in 2023 and has $287 million remaining in buyback authorization, announced a $0.30 quarterly dividend, and expects 2024 franchise earnings headwinds to be partially offset by EchoPark and Powersports segment improvements.
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Earnings Conference Call
Sonic Automotive Q4 2023
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