Sonic Automotive, Inc. (NYSE:SAH) Q4 2023 Earnings Call Transcript

Sonic Automotive, Inc. (NYSE:SAH) Q4 2023 Earnings Call Transcript February 14, 2024

Sonic Automotive, Inc. misses on earnings expectations. Reported EPS is $1.63 EPS, expectations were $1.8. Sonic Automotive, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Sonic Automotive Fourth Quarter 2023 Earnings Conference Call. This conference 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 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 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, and good morning, everyone, and welcome to the Sonic Automotive fourth quarter 2023 earnings call. Joining me today are our President, Jeff Dyke; our CFO, Heath Byrd; our EchoPark Chief Operating Officer, Tim Keen; and our VP of Investor Relations, Danny Wieland. Earlier this morning, Sonic Automotive reported fourth quarter and full-year financial results, including fourth quarter total revenues of $3.6 billion and all-time record annual revenues of $14.4 billion, up 3% from the previous year. Fourth 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.

We are very proud of our team’s performance in the fourth quarter 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. I’d like to thank them all for their continued support. Turning now to fourth quarter franchise dealership trends. We continue to see expansion of new vehicle inventory levels across our brand portfolio, ending the year with a 37 days’ supply of inventory, up from 33 days at the end of the third quarter and 24 days at the end of 2022. As a result, new vehicle gross profit per unit continued its sequential decline to $4,289 per unit in the fourth 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 three-year-old vehicles decreased nearly 9% in the fourth 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 in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in 2024. Fewer lease turn-ins at our franchise dealerships continued to limit our used vehicle volume in the fourth quarter, and used market seasonality drove a decline in used retail GPU to $1,443 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&I performance continues to be a strength with same-store franchised F&I per unit of $2,334 in the fourth quarter.

Our franchise dealership F&I penetration rates were stable quarter-to-quarter and we achieved our previously issued guidance for full-year 2023 franchised F&I GPU at or above $2,400 per unit with same-store franchised F&I GPU of $2,411 for the full-year. For comparison, for full-year 2019, our franchised F&I GPU was $1,620, which was nearly $800 lower than the current run rate and we expect to see continued stability in F&I GPU in 2024. Our parts and service or fixed operations business remains strong with record fourth 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. For the fourth quarter, we reported EchoPark revenues of $557 million, down 6% from the prior year, and record fourth quarter EchoPark gross profit of $43 million, 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 17,600 units, up 1% year-over-year. However, on a same-store basis, EchoPark retail unit sales volume was up 42% in the fourth quarter. As discussed on our previous earnings calls, reducing our store footprint in the second quarter 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 2023.

Fourth quarter EchoPark segment adjusted EBITDA was a loss of $9.1 million compared to an adjusted EBITDA loss of $25.4 million in the fourth quarter last year. In January 2024, we made the difficult decision to close the seven remaining Northwest Motorsport preowned 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. Fourth quarter adjusted EBITDA loss associated with the Northwest Motorsport Group totaled $1.3 million. That’s $1.3 million, while full-year adjusted EBITDA losses associated with the group totaled $5.1 million.

Moving forward, we remain confident in our path to achieve breakeven EchoPark segment adjusted EBITDA in the first quarter of 2024 and positive EchoPark segment adjusted EBITDA for the full-year. Sonic’s diversified cash flows and strong balance sheet allowed us to withstand the challenges in the used vehicle market over the last three 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 Powersports segment. For the fourth quarter, we generated revenues of $27 million, gross profit of $7 million, and an adjusted EBITDA loss of $2.4 million.

Given the seasonal variability in the Powersports industry and our geographic presence with the Black Hills platform, our fourth quarter results were in line with our projections. 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 third quarter with $846 million in available liquidity, including $374 million in combined cash and floor plan deposits on hand. The strength of our balance sheet allowed us to repurchase 3.3 million shares of our common stock in 2023, or 9% of shares outstanding at the beginning of the year.

At the end of the fourth quarter, our remaining share repurchase authorization was $287 million, which represents approximately 15% of today’s equity market cap. 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 a quarterly cash dividend of $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 12 and 13 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. 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.

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Q&A Session

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

Joe Enderlin: Hey, guys. This is Joe Enderlin on for Daniel. Thanks for taking the questions.

David Smith: Good morning, Joe.

Joe Enderlin: Good morning. On the franchise side, your SG&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.

Heath Byrd: Yes. Hey. This is Heath Byrd. A couple of things. Obviously, SG&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 $1,200 degradation in the frontend GPU. You just take that degradation on a flat unit basis, that’s $130 million 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 million give or take decrease in gross. If you look at the expenses, the variable expenses are leveraging as they should as gross is going down. Fixed expenses, there are some that are higher than normal, insurance coverage, trying to get coverage with property and casualty is going up across the country.

Also, loan 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&A gross. The 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 1,200 loss for the year. Our portfolio could outperform the SAR. The expectations out there are 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&I and fixed gross to offset that loss in new gross.

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.

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

Jeff Dyke: Yeah. This is Jeff. Certainly, the reduction in store count has helped us and our buying team buy cars for fewer stores, and that’s proving out in the numbers as we called out in the second quarter and the third quarter. We’re, 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. We’re buying cars now in the mid-23 range. I expect that to continue to drop, in particular, after we get out of the March or kind of April selling timeframe. And that’ll 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 again. And so we’ve just been waiting. Certainly, as we called out in the third quarter, turbulent waters for the used car business. We think there’s another 16 months, 18 months of that, but progressively getting better as we move throughout the year.

Joe Enderlin: Got it. Thank you, guys. That’s all for us.

Jeff Dyke: Thank you.

David Smith: Thank you.

Operator: Thank you. Our next question has come from the line of John Murphy with Bank of America. Please proceed with your questions.

John Murphy: Good morning, guys. I just wanted to follow up on that, that, that used question. Jeff, it seems like what we’re seeing is demand for vehicles is continuing to slowly improve. And I’m just curious, as you think of what’s going on the used side 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 one to six-year-old used fleet. So there’s a lot of moving parts that are going on here. And we’re kind of hearing cross currents in different ways about used being weak, but it doesn’t seem like it jives necessarily with the idea that vehicle demand is improving. 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, but then also in EchoPark?

Jeff Dyke: Yeah. 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 one to five-year-old cars. And that’s certainly helping both the franchised used vehicle departments and EchoPark. 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 than we were selling out of 45 stores before. So — and we expect that to continue. 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 the — and then we’ve got the electric vehicle piece that’s coming in. 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’re very confident in our first quarter 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. We’ve just been short on the one to five-year-old model for EchoPark, and that, that caused some turbulent times over the last couple of years. That’s dissipating. And as we move throughout ’24, it’s just going to get stronger and stronger. And that bodes well for the EchoPark model. It’s an offset to what goes on from a franchise perspective, for us. And so we’re expecting just a tremendous year from an EchoPark perspective.

John Murphy: Okay. That’s very helpful. Just, just one follow-up on the F&I PVR $2,400 roughly, you guys are looking at. It seems like we’re through the worst of 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 ’24. But is there a potential that there could be some real upside there, in ’24 or maybe structured over time is you get good — better penetration of some of the good product that you guys have developed there and the industry has developed?

Jeff Dyke: Yeah, 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&I. But there’s nothing but upside. Look, we are typically one or two in the category — or excuse me, two or three in the category. And I think AutoNation is out there with a much higher F&I PVR, we believe we can perform at that level or higher. Our EchoPark stores perform at that level are higher. And I think you’ll see that along with improving frontend margin at EchoPark, as we move throughout the first quarter and to the, and to the rest of the year. So that’s a good call out. I think there is opportunity for F&I improvement as we move forward.

John Murphy: Thank you very much, guys.

David Smith: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Rajat Gupta: Great. Thanks for taking the questions. I just wanted to, first reconcile, some of the comments on the used car market. I think Jeff, I think earlier in the call, you mentioned that the backdrop is likely to remain tough for 16 months to 18 months. But then to John’s question earlier, I think you mentioned that you’re seeing improvement. I’m just curious like, how should we reconcile those comments? And then would you be able to put a finer point on expectations for used car volumes, both at EchoPark and the franchise business for 2024? And I have a quick follow-up on SG&A. Thanks.

Jeff Dyke: Yeah. I think over the next 16 months to 18 months, it’s not going to return to 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, that we did last year with a lot fewer stores for six 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, look, we’re not out of the troubled waters, but 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 ’24 and into the beginning first quarter of ’25. And that’s why we’re 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 third quarter. We saw what happened in the fourth quarter with our volumes. That’s continuing in January. We’re seeing it — 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. Did we lose you?