Sonic Automotive, Inc. (NYSE:SAH) Q1 2024 Earnings Call Transcript

Sonic Automotive, Inc. (NYSE:SAH) Q1 2024 Earnings Call Transcript April 25, 2024

Sonic Automotive, Inc. beats earnings expectations. Reported EPS is $1.36, expectations were $1.3. SAH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Sonic Automotive First Quarter 2024 Earnings Conference Call. This conference call is being recorded today, Thursday, April 25, 2024. The 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 markets 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 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 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.

David Smith: Thank you very much, and good morning, everyone. And as you said, welcome to the Sonic Automotive first quarter 2024 earnings call. 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; and our VP of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported first quarter financial results, including first quarter total revenues of $3.4 billion, which was down 3% from previous year. First quarter GAAP EPS was $1.20 per share, which includes the effect of certain charges as detailed in our press release this morning. Excluding these items, adjusted EPS was $1.36 per share, a 2% increase year-over-year due primarily to our commitment to returning capital to stockholders via share repurchases along with significant operating improvement at our EchoPark segment, which offset lower profit in our franchise dealership segment, demonstrating the value of our diversified business model.

We are very proud of our team’s performance in the first quarter, and we remain focused on adapting to the 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, our manufacturer and lending partners, and our guests are keys to our success. I would like to thank them all for their continued support. Turning now to first quarter franchise dealership trends. We continue to see expansion of new vehicle inventory levels across our brand portfolio, ending the quarter with a 50-day supply of inventory, which was up 37 days at the end of the fourth quarter. As a result, same-store new vehicle gross profit per unit continued its sequential decline to $3,716 per unit in the first quarter.

We expect this decline in new vehicle GPUs to continue throughout 2024, exiting the fourth quarter in the low $3,000 range. But we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic. Additionally, our team continues to work closely with our manufacturer partners to align inventory levels and powertrain options with evolving consumer demand. In recent months, we’ve seen increasing consumer demand for hybrid electric vehicles as a more cost-effective and convenient alternative to fully electric vehicles and we are turning our hybrid inventory faster and at more traditional gross profit levels than fully electric vehicles. In the first quarter of 2024, fully electric vehicle sales reduced our reported new vehicle GPU by approximately $400, consistent with the fourth quarter headwind due primarily to price discounts to push sales volume and manage EV inventory day supply.

At the end of the first quarter, EV day supply averaged 70 days, increasing our overall reported day supply by two days, while hybrid vehicles averaged just 26 days supply. In the used vehicle market, wholesale auction prices for three-year-old vehicles increased 2% during the first quarter, which is consistent with historical seasonal trends, while our franchise dealerships average retail used pricing declined 5% sequentially from the fourth quarter. Elevated used retail prices remain a challenge for consumers contributing to affordability concerns amid the current interest rate environment. However, the return to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in the remainder of 2024.

Fewer lease turn-ins at our franchise dealerships continued to restrict supply and limit our used vehicle volume in the first quarter and lower used retail selling prices drove a 3% year-over-year decline in same-store used retail GPU to $1,585 per unit. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024, driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Our F&I performance continues to be a strength despite elevated consumer interest rates with same-store franchise F&I GPU of $2,350 in the first quarter, down 1% year-over-year, but up 1% sequentially from the fourth quarter. Furthermore, our franchise dealerships F&I penetration rates increased sequentially from the fourth quarter, demonstrating our teammate’s ability to navigate the high-interest rate market with our best-in-class F&I playbook processes.

The continued strength in F&I performance supports our view that F&I per unit will remain structurally higher than pre-pandemic levels even in a challenging consumer affordability environment. Our parts and service or fixed operations business remained strong with all-time record quarterly fixed operations gross profit at our franchise dealerships, up 6% year-over-year on a same-store basis, driven by 6% growth in our customer pay business and 13% growth in our warranty 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. As we mentioned on our fourth quarter earnings call, we launched a net 300 initiative with the goal of adding 300 incremental technicians in 2024, which we expect to contribute an additional $100 million in annualized Fixed Ops gross profit.

Turning now to the EchoPark segment. We are very excited to report that EchoPark returned to positive segment adjusted EBITDA in the first quarter. We reported all-time record EchoPark segment quarterly adjusted EBITDA of $7.3 million exceeding our previously stated target of breakeven adjusted EBITDA. Excluding closed stores, EchoPark segment adjusted EBITDA was $9.4 million in the first quarter, significantly improved from a loss of $22.2 million last year on a same-market basis. For the first quarter, we reported EchoPark revenues of $559 million, down 14% from the prior year, and first quarter EchoPark gross profit of $52.6 million, which was up 34% 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 18,000 units, down 10% year-over-year.

However, on a same-market basis, which excludes closed stores, EchoPark retail unit sales volume was up 13% in the first quarter. Revenue was up 11% and gross profit was up 79%. EchoPark’s same-market total gross profit per unit was $3,018 per unit, which is up 65% year-over-year, driven by marginal improvements in used vehicle market pricing, improving inventory sales velocity, and a 10% increase in F&I gross profit per unit. As discussed on our previous earnings calls, the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume per rooftop, better variable GPU, and a return to positive adjusted EBITDA. Our unwavering confidence in EchoPark’s future potential has positioned us as one of the few remaining nationwide used vehicle retailers, creating a tremendous long-term opportunity for this brand.

A return to positive segment adjusted EBITDA for EchoPark validates the strategic adjustments we made over the past few quarters, and we look forward to resuming disciplined long-term growth for EchoPark as used vehicle market conditions continue to improve in the coming years. Turning now to our Powersports segment. For the first quarter, we generated revenues of $27.7 million, gross profit of $7.8 million, and a segment adjusted loss of about $800,000. Given the seasonal variability in the Powersports industry and our geographic presence with the Black Hills platform in the Sturgis, South Dakota area, our first quarter results were in line with our projections. As we begin the Powersports selling season in April, 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 now to our balance sheet. We ended the first quarter with $847 million in available liquidity, which includes $335 million in combined cash and floor plan deposits on hand. During the first quarter, we repurchased approximately 0.5 million shares of our common stock for $27 million. And I’m pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.30 per share payable on July 15, 2024, to all stockholders of record on June 14, 2024. As you can see in the investor presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following the first quarter results. We continue to believe that lower franchise dealership segment earnings can be partially offset by significant improvement in our EchoPark Segment results, returning to positive EchoPark Segment adjusted EBITDA for the year as well as a moderate increase in Powersports Segment income year-over-year.

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 our diversified business model provides significant earnings growth opportunities in our EchoPark and Powersports segments that may help to offset an industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to our consolidated Sonic results over time. 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 stockholders. This concludes our opening remarks, and we look forward to answering any questions you may have.

Thank you very much.

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Q&A Session

Operator: [Operator Instructions] Our first question is from John Murphy with Bank of America. Please proceed with your question.

John Murphy: Good morning, everybody. Just a quick question on the statement you said about optimizing Fixed Ops. I understand the focus on hiring these 300 techs this year. I was wondering if you can give us an idea of the cadence and where you are on those, but if there’s any other opportunities to optimize Fixed Ops? And ultimately, what do you think that drives besides those 300 techs and that incremental profit you talked about? Are there other opportunities above and beyond that?

Jeff Dyke: Hi, John. It’s Jeff. Yes. I mean, look, we’re 35 to 40 incremental tax so far for the year. We expect to hit our 300 number, each of those taxes generating 21,000 or so in gross a month per stall per day. So that’s a huge opportunity for us. We have approximately 1,000 open base across the organization. And you really run into a culture effect because technicians like to operate two bays. And we’re breaking that culture down. That’s something that the industry deals with. We’re breaking that culture down, and we’ve got stores out there that are – you know, every day has a technician in them. And it’s something that we’ve really been focused on and we’ll continue to focus throughout the rest of this year. So great opportunities to continue to grow in the mid to, you know, upper mid growth rate for the rest of this year.

And I think into ’25 and ’26, the business is there, the customers are there. With the advent of EV and the opportunities that we have there, we see electric vehicles coming back more often than we do ICE. So I think there’s plenty of opportunity. The thing is, is that we’ve got to break some culture down. We’ve got to work on that within the stores and our leadership team and add those 300 techs, and then we’ll focus next year on adding even more techs on top of that. So it’s a big push for us. I think you’re beginning to see some of those returns. Our Fixed Operations business is strong, and we expect that to continue.

John Murphy: Super helpful. Then just on EchoPark and used business in general. I mean, we’re girding to continued shrinkage of sort of zero to six or zero to seven or even zero to four year old vehicles as we kind of grind through the pressed year from COVID new vehicle sales. I’m just curious, you know, how you are managing that, how much that constrains your ability to get EchoPark turned even more than you already have? And how you’re going to deal with that? What does that mean for EchoPark?

Jeff Dyke: Yes. I mean, look, we think that ’24 is going to be a great year. I’m sure there are less lease returns with their calls and puts. There’s cars coming in from rental car companies. There’s delinquencies out there, and we’re getting vehicles back that way. So there’s plenty of inventory out there for us to buy. And remember, we’re only buying for 18 stores right now. So we can very easily handle the amount of inventory we need for those 18 stores. We’re going to be very smart about how we grow EchoPark. We will not open any more stores this year, and we’ll look to that as we move into ’25. We are not concerned at all about inventory in the one to five year old category, throughout this year to support our EchoPark stores.

That’s something that we’re going to be able to easily do. And we’ll continue to see the kind of returns that we got in the first quarter. I think in terms of cadence, the second quarter, the margins will be down a little bit. Third quarter should be a gangbuster and fourth quarter might look a little bit like the second quarter. So it’s going to be a great ’24 and EchoPark is off to the races. We said that last year, we said, look, this is what it’s going to take. There’s new car inventories growing like crazy. You saw we went from a mid-30s-day supply to a 50-day supply. I expect that to continue to grow. Manufacturers are building new cars left and right. That’s just common sense. It’s going to put pressure – downward pressure on used vehicle pricing.

It’s going to allow us to buy more cars in the lanes, it’s going to allow us to buy more cars from rental car companies. And so we – this is tailor-made for us. This is what we’ve been talking about. It’s what we’ve been waiting for. It’s what we’ve been saying is going to happen. And sure as that did happen in the first quarter, and it’s going to happen again throughout the rest of this year. It’s going to be bumpy waters between now and probably the end of next year, but it’s going to marginally get better as we go forward than ’26 is off to the races as lease maturities begin to come back, and we were able to take advantage of those. The bad times for used vehicle inventory behind us. That was the end of ’22, beginning in ’23, it’s just not going to go back to that, not with the way manufacturers are building new cars.

John Murphy: And if I could sneak one more in. You just mentioned that consumers are coming in asking for hybrids. Is that across all brands? Or is that essentially code for Toyota’s inventories coming back, the Camry is all hybrid this year? There’s more – they’re putting more hybrids back in the market. So really, this is more Toyota-specific? Or are you actually getting this in all the brands that you guys wrap?

David Smith: It’s an industry wide, if you see some of our other peer groups, they’re saying the same thing. It’s the consumer demand for hybrids is greater at the moment than EVs.