Jeff Dyke: He might be muted.
Rajat Gupta: Can you hear me, sorry?
Jeff Dyke: Yeah. We can hear you now.
David Smith: We can hear you.
Rajat Gupta: Yeah. So just on SG&A to gross, the low 70% number for the full year, I mean if — I mean if you compare that to 2019, it’s obviously, below your 77% in 2019, you’re guiding to 72%. But that, that, that 72%, 73% for this year is still on a higher than 2019 in new car GPU number, on a blended basis. So, is there any change in thought process around, where the normalized SG&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&A to grow to settle even higher than low-70s, eventually or, how should we think about that? And hopefully the question makes sense. Thanks.
Heath Byrd: Yeah. This is Heath. Yeah, we absolutely think that in the out period that there’s the opportunity to decrease that level of SG&A as a percent of gross. We’re doing some structural changes from an expense perspective, as well as some changes in our F&I products that we’re offering, and those things will help replace that degradation in the new gross and/or actually will help the SG&A as a percent of gross. So we do not think that this is going to be staying in the 70s going forward. We think there’s opportunities to get back in the high-60s. But at this point, based on the data that we’re seeing, we believe that that low-70% range is appropriate for 2024.
Jeff Dyke: This is 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 gross to help offset what we see from a frontend gross degradation on new car. And that, too, will help push the margin, SG&A percentage gross down below the 72% number that we’re calling out. And look, at the end of the day, we’ll see the street — some of our competitors are calling out 150 basis point, 200 basis point increase in expenses, we’re in that 400 basis point to 500 basis point range. It’s still early in the year, but we’re all calling out basically $300 a quarter in frontend margin degradation.
And that’s a lot of gross reduction. And we’ll see, kind of who is 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 Heath said, based on where we are right now, that, 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. But there’s a long way to go. And, and, 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 frontend margin in the fourth quarter.
High Line drove a lot of that. Mercedes Benz was $235 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’re not the only ones experiencing that. So there’s 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.
Heath Byrd: And one technical point, too, on the degradation, it’s not going to be linear. We’re going to have — for that GPU frontend 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.
Danny Wieland: And to your point, Rajat — this is Danny. To your point on the sustainability of 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 days’ supply today, but yet we’re making $1,200, up to $2,000 more in GPU than we did in 2019, despite day supply being 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. 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 SG&A 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&I per unit, the variable GPU associated with those retail unit sales down the road should help us leverage the expense structure more efficiently than we did in 2019.
Rajat Gupta: Got it. That’s very clear. Thanks for taking the questions.
Jeff Dyke: Thank you.
Operator: Thank you. Our next question is come from the line of Glenn Chin with Seaport Research Partners. Please proceed with your questions.
Glenn Chin: Good morning. Thanks, gentlemen.
Jeff Dyke: Good morning.
Glenn Chin: Just circling back to your comments about GPU headwind from EVUs. Is that a…
Jeff Dyke: We lost you.
Glenn Chin: Sorry, can you hear me?
Jeff Dyke: We can. Ask that again.
Glenn Chin: Sorry about that. Just circling out to your comment, Jeff, about GPU headwind from EVs at $400. That’s a comment relative to year-over-year, correct, not sequential?
Danny Wieland: That’s the headwind in the fourth 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.
Jeff Dyke: And, and in some brands, negative margin and significant negative margin, which added, which added to that.
Glenn Chin: Okay. Very good. And then, historically, fourth 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?
David Smith: 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, in, 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 back, let’s see, let’s see if this storm clears a little bit before we, we going back or that’s some of the feedback we’ve gotten.
Glenn Chin: Okay.
Jeff Dyke: So the other thing that I would 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 High Line 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. BMW has done an amazing job overall, keeping their days’ supply down, and did that during the fourth quarter. We missed out on some opportunities there. And because the — we have so many BMW stores, and they’re such a big part of our overall revenue mix, that certainly played a role in the overall performance in the quarter.
Glenn Chin: Okay. I apologize. I hopped on late, so thank you for clarifying.
Jeff Dyke: Okay.
Glenn Chin: And then just on your outlook. Thank you for the comprehensive look. 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?
Heath Byrd: No. We do have that we forecast being positive EBITDA for the year, but I go far and that’s as far as we go.
Glenn Chin: Okay. And can I ask just what that, what that may be predicated upon? Does it require any more store closures? Or is the footprint you guys have now set?
David Smith: That’s, that’s not something we built into it. Is it an additional store closures?
Jeff Dyke: Yeah. 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 ’24 and even better as the years go on. 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, getting those stores back to selling the kind of volume that, 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, from the hard work that went into that.
