Sonic Automotive (SAH) Q3 2025 Earnings Call Transcript

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DATE

Thursday, Oct. 23, 2025, at 11 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — David Smith
• President — Jeff Dyke
• Chief Financial Officer — Heath Byrd
• EchoPark Chief Operating Officer — Tim Keane
• Vice President of Investor Relations — Danny Wieland

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RISKS

• President Dyke said, "Right now, we're seeing some double-digit decreases in those brands' volumes year over year. And we're not alone in that category. And so I do think you're gonna start seeing some super aggressive pricing. It needs to come. Those brands need to step up and bring more incentives in order to engage the fourth quarter or it's going to be a more difficult fourth quarter from a luxury perspective than many are projecting."
• Third quarter earnings were "negatively affected by a significant increase in medical expenses and a higher than expected effective income tax rate, which partially offset the strength of our operating performance."
• EchoPark segment faced an "unexpected off-rental supply headwind," according to management, resulting in approximately 2,000 fewer retail unit sales than forecast in July guidance, with revenues down 4% and unit sales down 8% year-over-year.
• Elevated inventories in luxury vehicles raise the risk that "margins are gonna start coming down" according to Jeff Dyke if manufacturer incentives do not increase.

TAKEAWAYS

• GAAP EPS -- EPS was $1.33 per share for the third quarter.
• Adjusted EPS -- Adjusted EPS was $1.41 per share, up 12% year-over-year, as stated by CEO Smith.
• Total Revenue -- $4 billion, marking an all-time quarterly record with 14% year-over-year growth.
• Consolidated Gross Profit -- Achieved an all-time record, increasing 13% year-over-year.
• Consolidated Adjusted EBITDA -- Consolidated adjusted EBITDA increased 11% year-over-year.
• Franchise Dealership Segment Revenue -- $3.4 billion, up 17% year-over-year and 11% on a same-store basis.
• Same-Store New Retail Volume -- Grew 7% year-over-year.
• Same-Store Used Retail Volume -- Increased 3% year-over-year in same-store used retail volume.
• Same-Store Fixed Operations Revenue -- Up 6% year-over-year in same-store fixed operations revenues.
• Fixed Operations Gross Profit and F&I Gross Profit -- Both reached all-time quarterly records on a same-store basis.
• Share of Fixed Operations and F&I in Gross Profit -- Combined to over 75% of total gross profit.
• Franchise Same-Store New Vehicle Gross Profit per Unit (GPU) -- $2,852, down 7% year-over-year and 16% sequentially for the third quarter.
• Average New Vehicle GPU EV Impact -- A higher mix of electric vehicle (EV) sales reduced average new vehicle GPU by approximately $300 per unit.
• Franchise Same-Store Used Vehicle GPU -- $1,530, up 10% year-over-year, down 4% from Q2, for the third quarter.
• Franchise F&I GPU -- $2,597 per unit, setting a quarterly record, up 11% year-over-year and down 5% sequentially due to EV mix.
• Same-Store Warranty Gross Profit -- Up 13% year-over-year.
• EchoPark Segment Adjusted Income -- $2.7 million, with adjusted EBITDA of $8.2 million, down 8% year over year.
• EchoPark Revenues -- $523 million, a 4% decline year-over-year for the third quarter.
• EchoPark Gross Profit -- $54 million, down 1% year over year.
• EchoPark Retail Unit Sales Volume -- Decreased 8% year-over-year in EchoPark segment retail unit sales volume.
• EchoPark Segment Total GPU -- $3,359 per unit, a record for any Q3, up 8% year-over-year, and down 10% from Q2.
• Powersports Segment Revenue -- $84 million in revenue, a quarterly record, up 42% year-over-year.
• Powersports Segment Gross Profit -- $23 million, up 32% year over year.
• Powersports Segment Adjusted EBITDA -- $10.1 million in adjusted EBITDA, representing a 74% year-over-year gain.
• Available Liquidity -- $815 million at quarter close, including $264 million in cash and floor plan deposits.
• Acquisitions -- Completed the purchase of Jaguar Land Rover Santa Monica, following prior acquisition of four other Jaguar Land Rover dealerships, making the company the largest JLR retailer in the U.S.
• Dividend Declaration -- Board approved a $0.38 per share quarterly cash dividend, payable January 15, 2026, to shareholders of record as of December 15, 2025.
• SG&A Guidance -- Total SG&A expected to be $72.8 million for Q4, with medical costs remaining flat compared to Q3.

SUMMARY

Sonic Automotive (NYSE:SAH) set new quarterly records in consolidated revenue, gross profit, and multiple segment metrics. Management cited increased medical costs and a higher effective tax rate as notable headwinds. The franchise dealership segment saw elevated electric vehicle sales compressing front-end and F&I margins. Management is forecasting margin recovery due to significantly reduced EV exposure going forward. EchoPark performance was constrained by unexpected declines in off-rental vehicle supply, leading to substantial volume shortfalls relative to guidance. Management is targeting more aggressive off-street sourcing and positioning EchoPark for renewed store growth as market conditions improve.

• President Dyke stated luxury inventories are at peak levels for the year and are facing 15%-20% volume declines in brands such as BMW and Mercedes for October, highlighting the need for increased manufacturer incentives.
• Executives confirmed that approximately 2,000 fewer retail unit sales at EchoPark versus forecast directly resulted from the off-rental shortfall, and their response involves shifting to non-auction vehicle sourcing below $24,000 per unit.
• Technician headcount additions since March 2024 are driving ongoing gains in fixed operations, with leadership emphasizing this as a primary factor behind prolonged growth in high-margin segments.
• Chairman Smith highlighted that the Powersports business achieved record quarterly profit and is slated for further operational scale expansion, with the company fielding frequent acquisition opportunities amid industry fragmentation.

INDUSTRY GLOSSARY

• EchoPark: Sonic Automotive’s standalone used vehicle business segment focused on retailing pre-owned cars and light trucks, distinct from its franchised dealership operations.
• GPU (Gross Profit per Unit): The average gross profit earned for each vehicle sold, a key dealership efficiency metric cited for both new and used vehicles.
• F&I: Finance and Insurance; represents gross profit from vehicle-related financing and insurance product sales.
• Fixed Operations: Sales and profitability from parts, service, and collision repair, as distinct from vehicle sales.
• SG&A: Selling, General, and Administrative expenses; operating costs apart from direct cost of goods sold.
• OEM: Original Equipment Manufacturer; vehicle-producing brands whose margin policies affect dealership profitability.
• JLR: Jaguar Land Rover; luxury auto brand and now the largest portfolio by dealership count within Sonic Automotive following recent acquisitions.
• BEV: Battery Electric Vehicle; electric cars impacted by federal tax credit expirations and directly influencing gross profit mix.
• MMR: Manheim Market Report; industry wholesale price index referenced for used car cost trends and competitive positioning.

Full Conference Call Transcript

David Smith: Thank you very much, and good morning, everyone. As she said, welcome to the Sonic Automotive third quarter 2025 earnings call. Again, 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 Keane, and our Vice President of Investor Relations, Danny Wieland. I would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. We believe our strong relationships with our teammates, guests, and manufacturer and lending partners are key to our success.

And as always, I would like to thank them all for their continued support and loyalty to the Sonic Automotive team. Turning now to our third quarter results. Reported GAAP EPS was $1.33 per share. Excluding the effect of certain items as detailed in our press release this morning, adjusted EPS for the third quarter was $1.41 per share, a 12% increase year over year. Consolidated total revenues were an all-time quarterly record of $4 billion, up 14% year over year. All-time record quarterly consolidated gross profit grew 13%, and consolidated adjusted EBITDA increased 11%.

Our third quarter earnings were negatively affected by a significant increase in medical expenses and a higher than expected effective income tax rate, which partially offset the strength of our operating performance. Moving now to our Franchise Dealership segment results. We generated all-time record quarterly franchise revenues of $3.4 billion, up 17% year over year and up 11% on a same-store basis. This revenue growth was driven by a 7% increase in same-store new retail volume, a 3% increase in same-store used retail volume, and a 6% increase in same-store fixed operations revenues.

Third quarter new vehicle volume benefited from an increase in consumer demand for electric vehicles ahead of the expiration of the federal tax credit, which increased our retail sales volume and average selling price but pressured new vehicle and F&I gross profit per unit. Our fixed operations gross profit and F&I gross profit set all-time quarterly records, up 813% year over year respectively on a same-store basis. These two high-margin business lines continue to increase their share of our total gross profit pool, eclipsing 75% of total gross profit for the third quarter. Mitigating the potential tariff impact on vehicle pricing and margin to our overall profitability. While also leveraging our SG&A expenses more efficiently than incremental vehicle-related gross profit.

Same-store new vehicle GPU was $2,852, down 7% year over year and 16% sequentially due to a surge in pre-tariff consumer demand that drove an increase in GPU in 2025. Additionally, a higher mix of electric vehicle sales in the third quarter reduced our franchise average new vehicle GPUs by approximately $300 per unit. On the vehicle side of the franchise business, same-store used volume increased 3% year over year. And same-store used GPU increased 10% year over year and decreased 4% sequentially from the second quarter to $1,530 per unit.

Our F&I performance continues to be a strength with third quarter record franchise F&I GPU of $2,597 per unit, up 11% year over year and down 5% sequentially due in part to the elevated electric vehicle sales mix in the third quarter, which reduced average F&I GPU by approximately $100 per unit. Absent the transitory third quarter EV headwinds, continued strength in F&I per unit supports our view that F&I will remain structurally higher than pre-pandemic levels even in a challenging consumer affordability environment as we continue to fine-tune our F&I product offerings and cost structure.

Our parts and service or fixed operations business remains very strong with an 8% increase in same-store fixed operations gross profit in the third quarter. Same-store warranty gross profit continued to be a tailwind in the third quarter, up 13% year over year despite strong warranty performance in the prior year period. And same-store customer pay gross profit grew 6% year over year. We believe this continued strength in customer pay revenue is attributable to the increase in technician headcount we achieved in 2024 and our efforts to not only retain these technicians but to continue to grow our technician capacity in 2025. Turning now to the EchoPark segment.

Third quarter adjusted segment income was $2.7 million and adjusted EBITDA was $8.2 million, down 8% year over year. For the third quarter, we reported EchoPark revenues of $523 million, down 4% year over year. And gross profit of $54 million, down 1% year over year. EchoPark segment retail unit sales volume for the quarter decreased 8% year over year. And EchoPark segment total GPU was a third quarter record of $3,359 per unit, up 8% per unit year over year but down 10% sequentially from the second quarter.

While we expected EchoPark used GPU pressure in the third quarter, our ability to acquire quality used vehicle inventory at attractive prices was challenged by unexpected off-rental supply headwinds, contributing to approximately 2,000 fewer retail unit sales than we forecast in our July guidance. While these headwinds persisted through September, we remain focused on increasing our mix of non-auction sourced inventory going forward to benefit more affordability and retail sales volume. When combined with the strategic adjustments we have made to our EchoPark business model, we believe we are well-positioned to resume a disciplined store opening cadence for EchoPark in 2026, assuming used vehicle market conditions sufficiently improve. Turning now to our Power Sports segment.

We generated all-time record quarterly revenues of $84 million, up 42% year over year. And all-time record quarterly gross profit of $23 million, up 32% year over year. Powersports segment adjusted EBITDA was an all-time record quarterly record of $10.1 million, up 74% year over year. Driven by record sales volume at this year's 85th Sturgis Motorcycle Rally. We are beginning to see the benefits of our investment in modernizing the powersports business. We remain focused on identifying operational synergies within our current network before deploying capital to further expand our powersports footprint. Finally, turning to our balance sheet.

We ended the quarter with $815 million in available liquidity, including $264 million in combined cash and floor plan deposits on hand. Our focus on maintaining a strong balance sheet and liquidity position allowed us to complete the acquisition of Jaguar Land Rover Santa Monica in the third quarter. Following our previously announced acquisition of four Jaguar Land Rover dealerships in California at the end of the second quarter, cementing Sonic Automotive as the largest Jaguar Land Rover retailer in the U.S. and further enhancing our luxury brand portfolio. Going forward, we remain focused on deploying capital via a diversified growth strategy across our franchise dealerships, EchoPark, and Powersports segments to grow our revenue base and enhance shareholder returns.

In addition, I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.38 per share payable on January 15, 2026, to all stockholders of record on December 15, 2025. We continue to work closely with our manufacturer partners to understand the potential impact of tariffs on manufacturer production and pricing decisions and the resulting impact tariffs may have on vehicle affordability and consumer demand going forward. To date, we have not seen a material impact on vehicle pricing as a result of tariffs. Our team remains focused on executing our strategy and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop while making strategic decisions to maximize long-term returns.

Furthermore, 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 shareholders. This concludes our opening remarks, and we look forward to answering any questions you have. Thank you.

Operator: Thank you. Our first question is from Jeff Licht with Stephens. Please proceed.

Jeff Licht: Good morning. Thanks for taking my question. Morning. Guys, was curious. You guys have an interesting little used car market test tube with your business model given the franchise business.

Jeff Dyke: And the echo in EchoPark. It looks like you kind of outperformed your peers and did pretty well on the franchise and then EchoPark. You know, had some issues. Obviously, you mentioned the rental supply headwinds. I was just wondering if you could elaborate even more just kind of you know, what's what's the saying about where the used car market is in general any specifics you could give? This is Jeff. From a franchise perspective, obviously, we trade for a lot more cars on the franchise side, because of the new car business. And so we have really focused on dropping our average cost of sales. So we're trading, we're being more aggressive on our trades.

I think our average cost of sales moved from $37,000 over the last four or five months down into the $33,000 range, $34,000. That makes a big difference. We're focused on bringing the even down further. We'd like to get below $30,000. A little harder to do on the EchoPark side, because we're acquiring most of those vehicles out of the auctions. Although we've been focused on buying more cars off the street. And as you said, the rental car company issue that David talked about in his opening comments that dried up for us. That cost us about 2,000 units during the quarter. A little bit of a surprise to us. We're offsetting that.

Working with our new car franchises and our buying team buying getting more aggressive on buying vehicles really for EchoPark under the $24,000 price target and you'll see us improve that as we move through the fourth quarter. And this is Heath. I have one more thing. We started an initiative with the franchise.

Heath Byrd: Of really focusing on a good process and putting in technology for buying off service lane. So that's really helped that side of the business as well.

Jeff Licht: Got it. And then just a quick follow-up. On the $31 million in incremental comp, which I think a good chunk of that was medical expenses. Could you just elaborate and where does that stand going forward?

Heath Byrd: Yes, sure. This is Heath. First of all, we're guiding, as you know, for the full year in the low 70s. If you look at medical, which was driving that, it was $0.5 worse sequentially from Q2 to Q3. 0.1 worse year over year. We expect medical to be flat from Q3 to Q4. So total SG&A for Q4 is expected to be the seventy-two point eight. But it is driven by the medical and that is utilization as well as increased cost. We are self-insured. And so obviously, is getting an increase in medical premiums going forward.

And so we're addressing it as every other company will be increasing the premiums collected which should handle that issue that we saw in the in Q3 and expect it to be similar in Q4.

Jeff Licht: Great. Thanks very much and best of luck in the fourth quarter.

David Smith: Thanks, Jeff. Thank you.

Operator: Our next question is from Michael Ward with Citi Research. Please proceed.

Michael Ward: Thanks very much. Morning, everyone. Good morning. I wonder if you can.

Operator: Morning. I wonder if you can provide any color.

Michael Ward: On a walk in the franchise gross from Q3 to Q4 and then into 2026? Because it sounds like.

Jeff Dyke: You have $100 impact from BEVs and it sounds like there were some other unusual events. So how do we look out? It sounds like 4Q is higher and then maybe even relatively flat on a variable gross basis for over a year. Is that what we're looking at, like kind of more consistency ups and downs, but kind of moving to the same range? I think this is Jeff. I think with the increase in the bed volume at the end of the quarter, that really drove, I think it was $100 down in front PUR and 50 in back end PUR. Sequentially.

But I expect return to normal margins and maybe even improving margins as we move into the fourth quarter. We're seeing that already because of the lack of that. We really pressed hard to move all our bevs out. We're about 4% of our total inventory today. Are bed units. I think that's about 800 units on the ground. We have significantly reduced our exposure to that product. Which has been obviously a drag for everybody from a POR perspective. So I would expect fourth quarter margins to improve sequentially. And I would expect them to continue to improve as we move into 2026 or at least be flat with where we are in Q4.

So a little hit at the end of the third quarter, but smart because we reduced our exposure to all those bev units that we had on the ground. That was just the right thing to do from our perspective.

Heath Byrd: And this is Heath. Just a little bit color. If you look at a in total the an EV, we make less gross by $3,275. And the mix in Q3 went from 8,300,000.0 in Q2 to $11,900,000 in Q3. So that's what created the $100 headwind in front and a $50 headwind in F&I.

Danny Wieland: Just rounding that out, this is Danny. I mean, that's a 54 volume increase from Q2 to Q3, which is in line with what the industry saw from an EV penetration. As you think about that, we sold 3,600 EVs in the third quarter. And we would expect that volume to be much lower in the fourth quarter now that the federal tax credit is not available. So the normal seasonality we would expect from a volume perspective may not hold where we typically see a 10% uptick from three q to April. In new vehicle volume.

You know, last year was even more of an anomaly closer to 20% because the BMW stop sale issue we saw in the third quarter of last year where we pushed sales into April. But as we think about it, it could be more of a mid-single-digit volume growth sequentially from 3Q to 4Q because of the lack of EV. That should obviously benefit GPU given what he said about the relatively lower margins. But from a total volume perspective, it's something to be mindful of.

Michael Ward: And as you look at the JLR business, is it fair to say that had a bigger impact on parts and service than it did on the new vehicle side?

Jeff Dyke: Yeah. This is Jeff. We have plenty of new vehicle inventory supply. That wasn't an issue at all. And it is a drag on the parts and service business. But that's slowly gonna get corrected and come back and but definitely the drags in parts and service not on the volume side. But I will say this is David. I will say that.

David Smith: We've benefited from scale in our being the largest dealer now for JLR. Has been really fantastic. We've had inventory when others haven't, And I think going forward, I think that those acquisitions are going to prove to be some of our best because those are you mentioned that your previous question with GPU, those are some of our greatest highest GPU stores in the company.

Michael Ward: Excellent. Frank, sneak in one more, just on the powersports side. You've had great performance there. And do you have any data that on how big this industry is? And is there a better consolidation opportunity in powersports than you would see in the new vehicle used vehicle side?

Jeff Dyke: I don't know if there's a better, but there's certainly a big opportunity. And we're learning how to operate the powersports business. You can see we sold eleven oh five new and used motorcycles or Harleys during the rally. That beat the all-time record of 718. That was set years ago. And that's just training, technology, pricing, inventory management, and bringing things in our skill sets that we have on the franchise side of the business and EchoPark side of the business into power sports. And as David said in his opening comments, we've great opportunity to continue to grow the footprint that we have.

But there are certainly consult we're getting deals every day coming across our desk with great opportunities to buy. And as we get better and better at operating, I think you'll see us expand that footprint. Great money, and a great opportunity great customer base. So bringing our technology and our processes make a big difference.

David Smith: And this is David. I just add that it's a real compliment to our team that we're now you know, the manufacturers are coming to us wanting us to buy more and coming to us with some opportunities. So that's and that's how we bought Sturgis actually those deals. And so it's great to see. We're really proud of the progress our team has made. And just to see a little bit color, we view it, it looks like 1990 retail automotive very fragmented. Not a lot of technology, not a lot of sophistication in marketing, understanding how do you make money and use the service.

So we think there's a huge opportunity to create the same kind of formality in that industry as many have done in the automotive retail.

Michael Ward: And as you pointed out, lower multiple, right? So Exactly. Way lower. Yeah. Yeah. Yep. We hear where you're going with that. Yeah. You're right. We.

David Smith: There's a great opportunity, which is why we got into it. And you gotta remember the people who a lot of our customers, they're they're super passionate about the products that we sell. They'd rather have that than a car in many in many cases. So it's a it's a great business to be in. There were over there were over 800,000 guests at the at the rally this year.

Jeff Dyke: So if you think about it, we sold 1,105. Just think about the upside opportunity just at the rally alone. That closing ratio is not where we want it to be. We can do a lot more. We need more motorcycles and more process and more technology, but we're slowly bringing that on. And it's starting to make a difference. And we've really increased the used vehicle the used side of the business too. That business is 70% or so for the year. And that's gonna continue to grow as that's not something that industry is has been focused on.

Michael Ward: Sounds like a similar playbook. So thank you very much. Really appreciate it.

David Smith: Thank you, sir.

Operator: Our next question is from Rajat Gupta with JPMorgan Chase. Please proceed.

Rajat Gupta: Great. Thanks for taking the question.

Jeff Dyke: Just had a couple of follow-ups on the GPU comments. I'm curious that in the third quarter outside of the electric vehicle headwind to GPUs, Was there anything that surprised you the performance there? You know, perhaps, you know, with respect to, like, how the OEMs are managing the dealer margin or the invoice margin. You know, automation talked about you know, some different ways in which the OEM might tackle this, you know, like maybe the form of lower back end incentives or volume incentives, etcetera. I'm just curious if there was any change there that you observed And if anything, was it one time, or would you expect that to continue?

Relatively, I was a little surprised by your comment that you would expect 2026 new vehicle GPUs to be similar to the fourth quarter? I mean, understanding is always that fourth quarter is seasonally higher due to the luxury mix. So are you taking into account, like, even a lower electric vehicle mix in 2026 versus the fourth quarter that's maybe driving that assumption? Just curious if you could tie those comments.

Operator: Thanks.

Jeff Dyke: Yeah. That's exactly right. You know, Bev is gonna be, you know, way, way lower as a percentage of our overall volume it has been over the last couple of years, which has driven the margin down. And then no real surprises, I don't think from ex Bev for the first nine months of the year or for the quarter. In terms of margin. I think that there are going to be some surprises as we move into the fourth quarter because there's been there's an inherent you look at October, October is slowing. Particular, from a luxury perspective. And I think that the manufacturers are going to have to get super aggressive, with incentives in order to move inventory.

Our inventory is at the highest level from a new car perspective that it's been all year. And our competitors are the same as we watch it. And I and I think you're gonna find that BMW and Mercedes they're gonna have to be super aggressive. Right now, we're seeing some double-digit decreases in those brands volumes. Year over year. And we're not alone in that category. And so I do think you're gonna start seeing some super aggressive pricing. It needs to come. Those brands need to step up and bring more incentives in order to engage the fourth quarter or it's going to be a more difficult fourth quarter from a luxury perspective than many are projecting.

Rajat Gupta: Got it. Got it. Okay. That's helpful.

Jeff Dyke: That's something that I would encourage you to watch. Real closely. Right. Is what's going on the luxury new vehicle side of the business. You know, exchanging a BMW for a Ford exchanges a lot of margin one way versus the other. And I think that's something that we all need to watch as the industry a luxury perspective slows down in the fourth quarter. Usually, it speeds up. And so I'm we're hopeful that the manufacturer will see that and bring start to get really aggressive on incentives.

Rajat Gupta: Understood. Understood. And we'll keep an eye on that. And a follow-up was on just the warranty penetration. Looks like it dropped you know, from the second quarter by a couple 100 basis points. I'm curious, was that just again, like, mixed driven because of, you know, electric vehicles and the those are leads And your guide implies, like, a further step down fourth quarter. I'm just curious what's driving that. And what's like a normalized number we should assume when we head into '26?

Jeff Dyke: Yeah. It's it's it's Bev. And if the x that out, it would have been normal numbers on. And to that point, that's with the sequential headwinds we saw in F&I, it's primarily the warranty penetration. You got a higher lease mix on Bev. And then again, as we go into the fourth quarter, typically our fourth quarter F&I is actually a bit lower because of that higher luxury lease mix that we see in 4Q. In normal years.

But as we go forward, we talked about I think it was the last call that, you know, 2,700 or so is an achievable consistent run rate in a normalized powertrain mix and brand mix for us particularly when you think about the benefits of the new JLR stores. That we've added in their F&I performance.

Rajat Gupta: Got it. Got it. Understood. Okay. I know. That's helpful. I'll get back in queue. Thanks.

David Smith: Thank you.

Operator: Our next question is from Bret Jordan with Jefferies. Please proceed.

Patrick Buckley: Hey, good morning guys. This is Patrick Buckley on for Bret. Thanks for taking our questions.

David Smith: Hey, Patrick. Hello.

Patrick Buckley: Circling back on EchoPark, you know, it sounds like there were some unique.

Jeff Dyke: Headwinds this quarter, the off rental slowdown. Should we expect any of that to persist into next year? And I guess we still be thinking about an acceleration in EchoPark next year as well?

Jeff Dyke: You know, I think it'll it I don't think it'll persist in the next year. And I think we'll find ways to overcome that by buying more cars off the street. And, you know, we're excited, as David talked about in his opening comments, we're gonna start to grow EchoPark again next year. So how many stores we open? It's probably more tailored towards the end of the third and the and the fourth quarter. Next year. But with more off lease vehicles coming back, inventory getting right, prices are gonna continue to drop. That's gonna be a big help. And so '26 should be a good year for EchoPark and then and then beyond.

And we'll we'll we'll open a few stores next year toward like I said, in the last six months, and then really start growing in '27.

David Smith: And this is David. I think it's really important to mention that we're building the EchoPark business just as we've built our core business, not quarter to quarter, but we are building it building it for the long haul. And so we are keeping that in mind. We're going to grow the EchoPark business just soon as we can and grow it efficiently and smartly. Our team has gotten a lot better about where we build and how much we spend on building. And our training processes and all of that. We'd I'm just very excited about the future of EchoPark and what we can do once we really do, you know, step on the gas of growth.

So there's more to come in the future.

Patrick Buckley: Got it. That's helpful. And then looking at the Q4 outlook for 10% to 11% growth in fixed operation gross profit. I guess, you talk about the drivers moving forward there, price versus volume? Is there any tariff inflation going on there? And maybe the warranty pipeline, you know, how does that look from today?

Jeff Dyke: Warranty pipeline looks good. Lots going on. Look. The what's driving this for us is our additional headcount. And tech count from March '24. We really started focusing on growing our techs, training our techs, maturing our techs. That's making a big difference. We've got the stall count. We've got the headcount, and that's that's making a huge difference for us in delivering. And the thing is that the pipeline's long. There's just we see growth year after year after year. I don't see it slowing down. I see it speeding up. And so we're very, very excited about the efforts we're putting in there to grow our share from a fixed operations perspective across all of our markets.

David Smith: Yes, I'll tell you this is David. I'll tell you that our team has just done an outstanding job retaining, as I mentioned in my comments, retaining and growing those techs that we've, you know, we've really changed the game and changed the attitude of how we hire techs and retain them.

Patrick Buckley: Great. That's all for us. Thanks guys.

David Smith: Thank you. Yes, sir.

Operator: Our next question is from Chris Pierce with Needham and Company. Please proceed.

Chris Pierce: Hey, good morning everyone.

Jeff Dyke: Good morning. Good morning.

Chris Pierce: On the franchise side of the business, just wanna make sure I'm following. Was there a demand pull forward in power like, a very people switching powertrain choices in the third quarter and that's leading to inventories being elevated in luxury in the fourth quarter.

Jeff Dyke: Or are those not related? And are we still expecting typical seasonality and we're expecting the OEMs to step up? Like, how does that all sort of fit together if it fits together at all? It was definitely a pull forward from a BEP perspective because the incentives ended and at least most brands and that definitely happened. And inventory is growing. From a luxury perspective. We're at our highest inventory levels of the year. Incentives are going to have to grow in order to speed up the volume. And we are not seeing that in October.

Like I said, BMW, Mercedes, those brands for us, and I, you know, was doing industry checks yesterday, and we're talking 15, 20% reduction so far in this in this calendar month. And I've seen that, you know, in some of our competitors as well. That's that's tough. The manufacturers need to step up. Or inventory is going to grow. I think you're going see the same seasonality, but our growth is usually October to fourth quarter. This year, we're expecting that to be in the 5% range. And like Danny said earlier, last year, was 20%. So you can do the math.

The manufacturers are gonna have to step up or inventories are gonna grow and margins are gonna start coming down. Well, the not having bev is going to help margin, but inventory growth can pull margin back if they don't step up and put some incentives out there. And that's a real serious situation. I said it earlier, you gotta watch that. Watch what happens in luxury during October, and then we'll see if that spills over into November and December.

Chris Pierce: And have we seen a situation like this where the OEMs wait and wait to pull the trigger on this, or is it just the market is so kinda weird because of all the incentives that this is uncharted territory?

Jeff Dyke: Yeah. I think the market is weird with the shutdown and the of the government shutdown. There's some strange things going on here. Some tariffs. The tariffs certainly are playing a role. But we you know, that it's a big pretty big drop off in luxury volume in October year over year in particular around BMW and Mercedes. Land Rover is a little bit the same too. Now our business is growing because we've got stores that we didn't have last year. But in our numbers. But, you know, the luxury business has slowed down in October, and the first nine months of the year were weird. Pull aheads, tariffs, all kinds of crazy news.

This is just sort of you know, a normal month, October and November, and we'll see we'll see what happens. But like I encouraged Rajat earlier, you need to watch that and watch what happens from a new car. Luxury perspective. That's an important mixed changes, you know, bottom lines. Right? And that's important to watch as we move through this quarter.

Chris Pierce: Okay. And then just one on EchoPark. Can you just sort of help me understand, is it typical industry seasonality that rental car companies bring cars auction at a higher rate in the third quarter? After summer travel and that sort of didn't happen this year? Or like is there something going back to industry weirdness, is it something that unexpected that happened? Or I just kinda wanna like, flesh that out a little bit?

Jeff Dyke: Yeah. Typically, they defleet, and so we pick up inventory. They did not do that this year and I think it's just the unknown of the tariff and whether they were gonna be able to buy new cars or not. And so we're seeing a little more inventory come in. But not at the levels that they normally do. We typically have 1,500, 1,000 vehicles in our mix from them. And I think I looked at it the other day, we were down to a 133. Units on the ground. And so that's just not normal. And so we're having to replenish that. It did catch us a little off guard in the third quarter, but still nicely EBITDA positive.

And we're very excited about the year for EchoPark. I mean, it's just going be a great year in comparison to the last few, as you know, and then really excited about '26 and '27 and moving forward with our growth plans.

David Smith: Yeah. I think to add to that, I think it is interesting that we can handle those kind of bumps now.

Jeff Dyke: We're built to be more efficient. Have something that comes like this, we've we've got the scale and we can handle it when in the past it was more.

David Smith: It didn't blow up the P and L.

Chris Pierce: Thank you very much. Appreciate it. And good luck. Bye, Dan. Thank you.

Operator: Our next question is from Mike Albanese with Benchmark Company. Please proceed.

Mike Albanese: Yes. Hey, guys. Good morning. Thanks for taking my question.

Jeff Dyke: Good morning. Yes, sir. Good morning.

Mike Albanese: I'm just going to squeeze in a quick one here as you think about I guess, EchoPark. Right? And this was built to kind of compete with.

Jeff Dyke: You know, the CarMax model. And coming out of the quarter, you know, CarMax had hit a situation where, depreciation, essentially had picked up pretty significantly. I think kind of a follow to the.

David Smith: Pull forward in demand seen kind of in the first half of the year. And I'm just wondering if that you know, heightened depreciation that I think hit over the course of, like, six to eight weeks. It was, two thirds of the typical annual depreciation curve. Is that had an impact on your business, how you think about that, and kinda what that impact was. Yeah. I think we felt the same thing.

Jeff Dyke: You know, MMR increases in the second quarter 106% to 107% drove our average cost of sale up.

David Smith: We tried to pivot to the rental sector.

Jeff Dyke: It wasn't available.

Mike Albanese: And so we made the decision to.

David Smith: Cost us the 2,000 units in volume.

Mike Albanese: So yes, we saw the same thing.

David Smith: Yeah. Right. I guess the take takeaway there being that, you know, generally, your sourcing mix being a little bit different kinda protects you against that situation a little bit. Does that make sense?

Jeff Dyke: Yes. Yeah. If you remember me, Mike, we if you recall, we guided to in back in July, we expected a little bit of front end GPU compression. Know, a couple $100 from two q to three q as a result this kind of what we were seeing in the wholesale market and wholesale retail pricing spreads. Know, what really was the headwind for us and that was unanticipated was the volume impact. You know, we didn't have alternate sources, and that's what put pressure on the know, the performance. If you think about this 2,000 units at our normal GPU, know, really that's the shortfall in March that caused us to pull down our full year EchoPark EBITDA guide.

But smart not to go out and try to replenish that volume buying a bunch of cars at all. They're gonna bring the margin even down further. So good decisions made. We need to be more aggressive in buying cheaper cars off the street. And that's something we're focused on for the fourth quarter and moving forward.

Mike Albanese: Yes. Got it. Thanks, guys.

David Smith: Thank you. Thank you.

Operator: With no further questions, I would like to turn the conference back over to Mr. David Smith for some closing remarks.

David Smith: Well, thank you very much. Thank you everyone. We will speak to you next quarter. Have a great day.

Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you again for your participation.

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