Sonic Automotive, Inc. (SAH) Q3 2026 Earnings Call Transcript

Operator: Good morning, and welcome to the Sonic Automotive third quarter 2026 earnings conference call. This conference call is being recorded today, Thursday, October 29th, 2026. 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 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 very much, and good morning, everyone. Welcome to the Sonic Automotive third quarter 2026 earnings call. As he said, this is David Smith, the company's Chairman and CEO. Joining me on today's call are our President, Jeff Dyke, our CFO, Heath Byrd, our EchoPark Chief Operating Officer, Tim Keen, and our VP of Investor Relations, Danny Wieland. I would like to begin by thanking our exceptional teammates for their unwavering dedication to providing a world-class guest experience. Our relationships with our teammates, our guests, our manufacturer partners, and lending partners are fundamental to our long-term success, and we are grateful for their ongoing trust and support of Sonic Automotive. Earlier this morning, Sonic Automotive reported third-quarter financial results, including all-time record quarterly total revenues of $4 billion and all-time record quarterly gross profit of $617.5 million. Reported GAAP EPS for the third quarter was $1.28 per diluted share. Excluding the effect of certain adjustments detailed in our press release this morning, non-GAAP adjusted EPS for the third quarter was $1.30 per diluted share. Beginning now with our franchised dealership segment, our stores performed well despite difficult year-over-year comparisons as a result of the pull forward in EV consumer demand during the third quarter of 2025. Reported franchise revenues decreased 3% to $3.3 billion, while same-store revenues decreased 2% year-over-year. Reported franchise dealership segment gross profit decreased 2%, while same-store gross profit decreased 1%. During the quarter, our team focused on optimizing new vehicle GPU while maintaining market share. Third quarter reported new vehicle GPU was $3,048, up 2% year-over-year, and same-store new vehicle GPU was $3,000, flat year-over-year. Same-store new vehicle unit volume was down 7%, largely due to higher EV exposure within our luxury brands and California stores. We estimate the impact of last year's EV pull forward to have been approximately 2,200 additional new retail units sold in the prior year quarter, which combined with F&I on these vehicles, drove a $5 million year-over-year decline in gross profit. Excluding the impact of these EV units, our new retail sales volume would have been flat year-over-year. Third quarter reported used vehicle GPU was $1,500, down 2%, and same-store used vehicle GPU was $1,506, down 3%. Same-store retail used vehicle volume increased 3%, driven by improving used vehicle supply and strategic focus on increasing used vehicle volume throughput as we progress toward our long-term objective of retailing an average of 100 used retail units per dealership per month, representing approximately a 20% organic volume growth potential from current levels. In the face of industry-wide headwinds, we are proud of our fixed operations performance, with reported gross profit increasing 2% to an all-time quarterly record of $265.4 million. On a same-store basis, fixed operations gross profit increased 1%, driven by a 1% increase in warranty gross profit and flat customer pay gross profit year-over-year. To combat ongoing consumer affordability challenges, last quarter, we launched a value-priced service offering and expanded our service-based marketing strategy. As a result of these efforts, same-store customer pay repair order volume was up 1% year-over-year and up 3% sequentially, and same-store warranty repair order volume was up 4% year-over-year and 4% sequentially. The increased customer traffic provides our stores with key customer touchpoints and opportunities to sell additional products and services at current or future visits while indicating that our guests are not trading down out of the franchise dealer service lane to visit independent repair shops. In the third quarter, F&I gross profit decreased 3% to $142.6 million on a reported basis, while same-store F&I gross profit was flat year-over-year. Our team remains focused on maintaining high levels of F&I GPU and ended the quarter at $2,630 on a same-store basis, an increase of 2% year-over-year. Turning now to our EchoPark segment. Third quarter revenues increased 14% to $596 million, and segment gross profit increased 8% to a third quarter record of $58.9 million. EchoPark retail used vehicle volume growth well outpaced the broader industry, increasing 22% to 19,923 units, reflecting continued consumer demand for our strategic value proposition, improvement in our non-auction sourcing mix, and our teammates' strong execution in delivering an outstanding guest experience. EchoPark total gross profit per unit was $2,972, down 12% year-over-year, driven by a 15% decrease in F&I gross profit per unit to $2,754, offset partially by a $96 per unit increase in used vehicle front GPU to $218. As discussed on our second quarter earnings call, the reduction in EchoPark F&I gross profit per unit is due in part to a greater mix of battery, electric, and higher mileage vehicles, resulting in lower warranty penetration rates and F&I profit per contract. We are currently working with our F&I partners and store leaders to enhance our warranty and insurance product offerings for EVs and higher mileage vehicles. While our changes to inventory mix have impacted F&I GPU in the near term, we believe our inventory shift to meet consumer demand is a benefit to sales volume, consumer reach, and future EchoPark growth potential. EchoPark adjusted segment income was $2.6 million, and adjusted EBITDA was $7.9 million, bringing year-to-date adjusted EBITDA to $40.4 million. For the fourth quarter, we expect adjusted EBITDA to be between $2 million and $4 million, including $5 million-$7 million in incremental brand marketing expense as we kick off our largest investment ever in building the EchoPark brand. Our team is excited to share this brand campaign publicly in the coming weeks. We are also excited to announce that our new EchoPark location in the Orlando, Florida market will open in December. In addition to this new store, we currently plan to open two to four new EchoPark locations in 2027. Turning now to our Powersports segment. Revenues increased 35%, an all-time quarterly record of $113.7 million, and gross profit increased 26% to an all-time quarterly record of $29.3 million. On a same-store basis, Powersports revenues grew 8%, while gross profit decreased 1% year-over-year. Reported new retail unit volume increased 32%, while reported used retail unit volume increased 35%. On a same-store basis, Powersports new retail unit volume increased 6%, and used retail unit volume increased 1%. Powersports reported F&I revenue increased 42% year-over-year to $4.7 million, with total F&I per unit up 8% to $1,148. Same-store F&I revenue increased 6%, while same-store F&I per unit increased 2%. Powersports adjusted segment income was $7.9 million, down 1% from the prior year period, and adjusted EBITDA increased 4% to $10.5 million. We want to thank our teammates for their hard work in making this year's Sturgis Motorcycle Rally another record success. During the 86th annual rally, our team set a new sales record, selling 1,135 motorcycles, including over 500 new Harley-Davidson motorcycles during the 10-day event. This achievement is a testament to Sonic's strategy of further diversifying our business by a nationwide network of Powersports dealerships. As we turn to our consolidated results, our strong operating performance this quarter was partially offset by higher SG&A as a percentage of gross profit, which pressured our bottom-line results. Our team is consciously making strategic long-term investments that we expect to drive future profitability and operational efficiency but are not yet leveraging the investment. This includes applying AI across back-office functions, inventory management, and fixed operations optimization, where we are already seeing benefits. By acting now, we are positioning the company to sustain its momentum, expand long-term profitability, and remain agile in the face of changes in the industry. With that said, we remain within our full-year guidance range for SG&A as a percentage of gross profit, despite lower-than-projected fixed operations growth in the second and third quarters. To support this outlook, we remain focused on implementing certain targeted SG&A initiatives in the near term while continuing to invest in our long-term strategic priorities. Finally, turning to our balance sheet. We ended the quarter with approximately $585 million of total available liquidity resources, including approximately $201 million of cash and floor plan deposits. Our liquidity position and balance sheet capacity provide us with the flexibility to support our existing businesses, make targeted organic investments Pursue strategic acquisition opportunities and return capital to stockholders. Given our current trading levels and the $528 million remaining under our share repurchase authorization, we believe share repurchases represent an attractive use of capital, and we are weighing share buybacks against several acquisition opportunities. As we continue to execute our balanced capital allocation strategy, I am pleased to announce that our board of directors approved a cash dividend of $0.41 per share, payable on January 15th, 2027, to shareholders of record as of December 15th, 2026. This concludes our opening remarks, and we look forward to answering any questions you have. Thank you.

Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Alex Perry with Bank of America. Your line is now live.

Alex Perry: Hi. Thanks for taking our questions here. I just wanted to dig in a little bit on the fixed ops business. So I think that the guide implies that maybe the fourth quarter, you see a slight acceleration on same-store gross profit comps. What is driving that, and what gets the fixed ops business back to that sort of mid-single digit percent run rate? And when would you expect that to happen? Thanks.

Jeff Dyke: Hey, Alex, it's Jeff Dyke. I wish I had a crystal ball, could answer the when we expect it to happen. I think the Fixed Operations business over the last couple of quarters caught all of us a little bit off guard, as we had projected sort of mid to upper single digit growth. That number's in the 3% range. I probably expect it to be around there, maybe a little better in the fourth quarter as we're focused on our value pricing and the things that we're doing in our service lane to drive up our ASR penetration numbers, which range somewhere between 20% and 25%. But our best brands are running in the 30%-35% range, so we've got some upside there, in terms of execution. I think we'll do a better job of that in the fourth quarter and in the coming year. To project that we're going to be back into that upper single digit range in the first quarter, I think would be a little bit off. But maybe as we get into the midsummer months and into the back half of next year. We're all scrambling to do a better job with our ASRs and our closing ratios there. Traditionally, we've been in that 20%-25% range, which is a lot of opportunities, almost 1 million in the quarter for us. We'll see how things go. But definitely it's a big focus for the company. It's a big focus for the industry. Would expect a little improvement as we move into the fourth quarter and then certainly continuing that improvement as we move into next year.

Alex Perry: Really helpful. Then maybe just to dig in on one part of that. The affordability concerns in the parts and service business, are you taking down price in some of the maintenance level work, or even some of the complex work? I guess, what initiatives are in place to drive the RO count? Do you think there is share loss going on to some of the independents, or what are you doing to maybe prevent share loss there?

Jeff Dyke: Yeah, there's no question we got too expensive in our service drive, and that's our value pricing program, and that's what we're doing across all of our stores. We're up 1% in RO count year-over-year, 3% sequentially. I expect that to continue to grow as we drive more and more customers back into our stores. I think about 50% of the car park is coming back to a dealer. That's traditional over the last few years. We've got the other 50% going to independents, and we need to bring those back to our dealerships. We've got the best facilities, we've got the best technicians, we've got the training, the tools, the equipment, OEM certified parts, certified technicians. There's no reason for them not to come back to us, but we're fighting that image of high price service drives and-

Alex Perry: Yeah

Jeff Dyke: It's something we're all working on. You'll see our advertising geared towards that. If you look at Sonic Automotive websites right now, you can see our value pricing on certain items that are driving customers back into our stores, driving our RO count up. That's a big opportunity for us, and we know it, the industry knows it, and we need to work on it. It's also driving warranty rates up, and that's something we all need to keep a close eye on, as that makes life more expensive for our OEM partners. Parts rates are high and costs are high, and our OEM partners need to do a good job of bringing down cost and expense from a parts perspective. We all need to get that back in line. As we do, we'll drive more customers back into our service drive, take share from the independents. It's just not something that we're going to allow to happen. We'll battle that, and we've got all the assets to battle it.

Alex Perry: Perfect. That's very helpful. Best of luck going forward.

Jeff Dyke: Thank you so much.

Operator: Our next question comes from Jeff Lick with Stephens. Your line is now live.

Jeff Lick: Good morning. Thanks very much for taking my question.

Jeff Dyke: Good morning.

Jeff Lick: First question. I am just curious, your new GPU definitely bucked the trend, sequential improvement. Just curious if you could kind of elaborate on why you think you guys are producing such a better result than your peers, in Q3?

Jeff Dyke: Because we had a call coming out of Q2 with-

Heath Byrd: The mindset

Jeff Dyke: some of the FTC stuff that is going on and had a mindset change for our sales managers and sometimes gross is a state of mind.

Heath Byrd: It was a motivational call.

Jeff Dyke: Yeah, it was a motivational call, and we got our margins where I think they need to be. We sell a great product with great services and amazing CSI for our customers, and we are not going to give cars away. The great news is, we held our market share. We were able to contain market share and hold onto our margin, grow our margin a little bit. I expect that to continue, which is why we are narrowing our range there in terms of our front-end margin number for the year.

Jeff Lick: You mentioned the FTC. How did that manifest itself into maybe helping or driving the strategy with the new grosses?

Jeff Dyke: Yeah, I think that it is making everybody play from the same sheet music. I do not think everybody is doing it yet. I think third-party lead providers need to get involved and do the right thing, and not allow people who are playing games to be on their websites. It is making everybody play by the same rules, so you do not have all these games. It is going to take some hand slapping going on. I do not think the punishments have been strong enough yet. It is going to take some hand slapping going on to get everybody's attention that the FTC means business. As that happens, I think margins will level out and things will get there. We just were not going to let that play a role in our world. It did not. We are going to let some of the games going on that were going on out there change the mindset of our team, and the margins that we know we deserve to make. We made that a conscious effort, and it certainly helped in the quarter.

Jeff Lick: Then a quick follow-up on SG&A franchise. SG&A 75.6% of gross. Just curious, obviously, you guys are smaller, so if there's an extraordinary item that hits you, sometimes it hits you guys a little more, given that you're advertising that over a smaller gross base. Could you elaborate a little bit on what's going on there and what would be the fixed?

Heath Byrd: Yeah. This is Heath. I'll answer that. You're right. It actually is sort of the law of smaller numbers. So basically, $5.5 million, $6 million equals 100 basis points. If you look at the year-over-year for Q3, the real drivers were service loaners, gas inflation, so a lot of the things that are related to the customer. So that is something that we are focusing on, but again, we don't want to sacrifice the customer experience. That alone was driving almost 100 basis points. Then we've got some incremental spend in the IT world of about $2 million that happened in the quarter that is related to our AI initiative, and we're already seeing dividends from that. We're about eight months into our journey and really amazed at what we can do with that from a standpoint of efficiency. So we think that's a good investment, it's going to end up in what we think can be a material reduction in SG&A going forward.

Jeff Lick: Maybe in spare time you can get Danny out there washing cars. That'll take some SG&A down.

Jeff Dyke: We already did that. That's an AI-proof job though.

Heath Byrd: Another interesting thing about this quarter that was a little bit higher than expected is travel, and is back to Jeff and David's point earlier. We're getting our leaders out there in the stores that are not performing at the level we want. So travel was up a little bit. That drove some of that SG&A for this quarter as well.

Jeff Lick: Well, impressive results nonetheless. Thanks very much for taking my questions, and best of luck in Q4.

Jeff Dyke: Thanks.

Heath Byrd: Thank you.

Operator: Our next question comes from Rajat Gupta with JPMorgan. Your line is now live.

Rajat Gupta: Great. Thanks for taking the questions. I wanted to ask on F&I. Are you seeing any kind of pullback or I would say a little more caution from consumers when it comes to just product attach rate? I am just curious, with just more proliferation and use of AI tools, are consumers just looking to optimize their spend a bit more, like what kind of warranty they want to attach, et cetera? And the same thing on the service side. Are they optimizing the kind of service work they want to do a little more than they used to? Just curious if there is any feedback around that, and have a quick follow-up.

Jeff Dyke: Rajat, it is Jeff. We had a little bit of drop off in our penetration rates coming out of the second quarter and the first part of the third quarter, but it is back up now, 1.8 to 2.0 products per car sold. No, we had a very good F&I month on the franchise side, I think up just a little bit, and a record third quarter in F&I. So I am not seeing that. We would be crazy not to think that that is not going on in our fixed operation service drives. That is definitely part of all of this. There is a lot more information available right at your fingertips and very specific information. We have got to do a better job of communicating, like I was talking about earlier, the great values that we provide in our service drive. We are beginning to see that. We are driving some more customer pay RO count, which is incredibly important. I expect that to continue as we move forward. We are going to be just as good or better in using our AI tools that Heath was talking about and some of the investments that we are making. As a matter of fact, we are launching some pricing stuff for fixed operations this next week or the week after, that we think are going to help drive more RO count for the store. All that is AI-driven. So more to come. I think we will have a lot more story to tell from a pricing perspective, value service, and those things as we move sort of out of this year and into the first and second quarters of next year.

David Smith: This is David. We understand the perception versus reality problem that we have. That is an industry-wide thing, and we have to communicate that, as JD was saying, to our customers so that they feel confident and feel good about coming back to our stores for service versus how many of them feel like they are making a smart decision to go maybe elsewhere to an independent dealer. When a lot of times the reality is, no, they would actually be making a smarter decision to come to our stores.

Heath Byrd: Rajat, this is Heath. Just to add, overall in the franchise, we were actually up in warranty penetration. That still shows the demand there. If you look at EchoPark, we have a mix issue there. There is more EV mix and there is more older age vehicle mix there. Getting the right products to market for them is really the key, and we just implemented some new products so that we can actually help that penetration degradation that we have seen at EchoPark because of the mix we are selling now.

Jeff Dyke: Yes, we have an EV warranty that we have launched and a high mileage warranty that we have launched for EchoPark. Those products are launched this month, and we are already seeing nice penetration on the vehicles. We expect that to be able to curb some of that and grow our front-end margin. We are buying cars better, and I think all that plays well for EchoPark. As new car pricing keeps going up and up, and the gap widens, which it is historically high now between pre-owned and new, that is a grand slam home run for EchoPark. It is just really going to be a lot of fun to watch the growth. I think you are seeing that, 22% growth in the third quarter. That growth mix is a lot of fun to watch. You saw it in the industry. We are seeing it in many brands and in different pockets across the country. I think that is going to continue to happen as we move into next year.

Rajat Gupta: Understood. That's all very helpful color. Just wanted to follow up on capital allocation. Clearly, the backdrop looks a little choppy. There is some uncertainty in parts and service, the recovery trajectory there, some choppiness in F&I, and just like a pretty flattish, I would say, backdrop. I'm curious, how you're weighing any capital allocation, be it even buyback or M&A, against that backdrop. Would you prefer to wait for a few more quarters of visibility before deploying capital? Or are you just finding attractive opportunities, at least on the M&A side, that might warrant you to just deploy that sooner? Thanks.

David Smith: Yeah. Thank you. This is David. Well, as you know, the acquisition opportunities as we evaluate those, and you look at the growth of Sonic over the last nearly 30 years, those opportunities to acquire some fantastic stores are not, they just don't come around every quarter. We've got to make long-term investment decisions, not quarter to quarter. I think that's the biggest thing. As we look at potential acquisition opportunities, that's the mindset that we're going to have. As we said, opportunistically, we bought back, I think, around 11 million or so shares over the last several years. So we'll look at all of it, but I think that as an investor in our company, you got to think long term. I think that's the main focus that we have.

Rajat Gupta: Understood. Great. Thanks for all the color, and good luck.

Jeff Dyke: Thank you.

David Smith: Thank you.

Heath Byrd: Thank you.

Operator: Our next question comes from Bret Jordan with Jefferies. Your line is now live.

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

Jeff Dyke: Hi, Patrick.

David Smith: Yes, sir.

Patrick Buckley: On parts and service, you called out increased technician headcount in the slides. Are there any metrics you can share on that front? Or I guess, how much do you think is left to close the gap to full capacity levels?

Jeff Dyke: Oh, gosh, we could hire a couple of hundred technicians. We've got the capacity in the stores. That's something that we're focused on. You don't want to hire them too fast because bringing in, getting into our culture, our process, the way we do things. We've got a lot of our stores now exploring Sunday service, which many of our shops over the years have been closed on Sunday. Our Toyota brand has really been exploring that. So we've got capacity. We could bring another 100, 150 techs on tomorrow. No question. So there's plenty of room there. We're going to need them as we drive our value service proposition and bring more and more customers in the car park back into our service drives. And again, there's 50% of the customer. It depends on the brand. Some brands higher than others, but on average, about 50% of the car park does not come back to a dealership post two or three years to service their vehicle. We are working on bringing those customers back in and providing them the experience that they are only going to get in a franchised dealership.

Patrick Buckley: Great. Got it. On the Powersports side, how has demand there held up compared to light vehicles? Any pullback or signs of trade-downs due to affordability issues, or has that more lifestyle type of purchase held up a little better?

Jeff Dyke: It has held up great. That group is on fire. It is so much fun watching them grow that business and put our technology, our processes, and disciplines into the business. It is just great. We gobbled up a lot of stores, and we are running and operating them, getting them up to speed. Then, once we get that breath and that handle, we will go and gobble up some more. It is fun to watch them. We brag on them every day around here how well that leadership team is doing, and those stores are performing, and there has been no sign of slowdown there.

David Smith: There is so much opportunity in the Powersports industry. We are learning more and more about it. If you look at our Powersports gross profit and our front gross, if you applied that across the board to our entire company, the numbers would be really outstanding.

Jeff Dyke: If you applied it to the industry.

David Smith: Yeah, it would be really outstanding. There is a lot of opportunity.

Patrick Buckley: Great. That is all for us. Thanks, guys.

David Smith: Thank you, sir.

Jeff Dyke: Thank you.

Operator: Our next question comes from Daniela Haigian with Morgan Stanley. Your line is now live.

Daniela Haigian: Great. Thank you for taking the question here. My first one's on EchoPark. You mentioned you're planning to enter Orlando, launching a new brand campaign. How should we be thinking about the economics of this next phase of expansion? Are these new markets achieving the same volume and profitability as your established locations? And what milestones should we be tracking to assess returns on incremental investment?

David Smith: One of the things, this is David, that I would say is that I think our team is getting a lot better about the investment that we're making in additional stores, and we're being creative on getting the cost down. I think that's a big part of it. I think there's a lot of capacity in our existing EchoPark stores for growth. And we've found that in markets where the consumers are aware of EchoPark, we have tremendous volume. We wish we could tell you about it today, but we'll be announcing some things coming soon, but that I think will dramatically increase the awareness even in our existing markets and in the new markets we're coming to, of the EchoPark brand, that should have a huge impact on the business.

Jeff Dyke: This is Jeff. That capacity is not another 50 cars a store a month. It is more like 200, 300 cars a store a month that we have the capacity to do in our existing footprint. We expect Orlando to get started. We used an old Cadillac property that we had there. So we got into that facility nice. Absolutely, we expect it to get up to speed really quick. Orlando is a fantastic pre-owned market. We have got a lot of experience in that market. So we will get in there and do a great job and sell a bunch of cars. Then we are going to have some really exciting stuff, not only from a spokesperson perspective, but we have got some new things coming for EchoPark that we are very excited about, that hopefully we will be able to talk about in the first quarter, that will hopefully enhance and expand the speed and efficiency in which we grow EchoPark. So, we have got a lot of neat things coming. We feel like we have got our arms around the brand. We have got it headed in the right direction. So we have called out, we are going to have some more spend this quarter. You expect that, and you can put that into your models, and that is not going to go away in the first quarter. We are going to continue to really invest in this brand. We have made it through the difficult times, and we have got our arms around it, and we are getting ready to push on the accelerator. Let us see what EchoPark can do in this fun used car economy.

Heath Byrd: This is Heath. I will add on that brand spend. As Jeff mentioned, you are going to see that spend continuing. The benefit of that in getting that to show through our financials is looking at the end of the next year. You got to give the brand time to where everyone is aware of it. We have said over and over, we are objectively the lowest price of anyone in the market. We are objectively the best customer experience for as good or better product of car. The one missing part is awareness, and so we are excited about what this brand can do for us.

Jeff Dyke: We guarantee you will know the spokesperson.

David Smith: Yeah. Just taking the opportunity to thank and congratulate our team again on achieving the number one guest experience in our industry. Just recently, it was announced by reputation.com for our EchoPark Automotive team. It is just outstanding. They are repeatedly ranking number one in the industry.

Daniela Haigian: That is great. Appreciate the answer and looking forward to that update in the first quarter. My second question was on SG&A. You talked about how you are implementing some initiatives, even with some of the slower fixed up outlook for the fourth quarter. Can you speak a little more? What are some examples of things you have implemented here, whether it is AI or otherwise, to improve the operating leverage in the business?

Jeff Dyke: Yeah. One is we are going to reduce the level of loaner cars that we have in this organization, and that started last month. It takes a little bit of time for that to all flow through. It is a big expense in the company. If you look in detail, it is $3.5 million-$4 million a month in the company. So we are going to take a big chunk there, while still keeping up our great guest experience, just being more efficient and effective with our loaner car process. It is going to take time, like I said, for that to flow through, maybe through the fourth quarter, and then you will see those reductions showing up in Q1, as we get some of that inventory sold. Then we are making other adjustments, whether it is personnel from an AI perspective, compensation plans to be a little more variable than maybe some are. All the things that you would typically focus on as you move through an environment like this, where a few million dollars makes a huge difference, especially from the size of our company. We will continue to focus on that, and we will bring our SG&A down in line. It is not going to be material in the fourth quarter. More along the lines of the changes that we are making and the adjustments that we are making today are going to show up in Q1. We will let that happen and hopefully continue the great record-setting gross and volume that we are having, along with maintaining our margin. You are working on both sides of the table, and we will bring those two things together and bring our SG&A as a percentage gross down.

Heath Byrd: Yeah. From an AI perspective, as Jeff mentioned earlier, we are rolling out those initiatives starting in the fourth quarter. A lot of them are related to increased gross. We are looking at the fixed pricing, we are looking at inventory pricing as some of the big things we are rolling out in the field. Currently, we have multiple automations in the back office, and the savings to date on the bots and the AI that we are implementing in the back office is about $2.6 million year to date, and we have just begun that rollout. We expect incremental savings from that as well.

Daniela Haigian: Great. Thank you, team.

Jeff Dyke: Thank you.

Operator: Our next question comes from Rob Saltzman with UBS. Your line is now live.

Rob Saltzman: Hey, team. Thanks for taking the time. Firstly, I know it's a little early, and you gave some helpful thoughts on the fixed op side for 2027, but I was hoping you could maybe provide some additional high-level thoughts on the puts and takes for the franchise segment as we head into next year, and just how you're thinking about the business overall there.

Jeff Dyke: Well, we're not going to come out and say 1%-3% growth. I just can't do it. That's not going to happen. Unfortunately, that 3% number, that's where we're going to probably be around, maybe hopefully a little better as we move through the quarter. But somewhere in that mid-single digit range probably is where we'll be. Maybe we push our stores from a budgeting perspective into the 5%-7% range, maybe eight, depending on how far I can push them. But certainly, our expectation is not to be growing in the 1%-3% range.

Heath Byrd: I'll add, again, back on the AI thing, from my perspective, the fixed ops is the biggest opportunity for AI to help with throughput efficiency, which obviously is going to have an impact on growth and SG&A.

Jeff Dyke: Our ASR process, if we can increase our closing percentage and drive more customers and pricing, we know we can do that, and we're going to drive more customers through. We're going to focus our ad dollars in and around the value for the customer in our service drives. That's something that we here at Sonic Automotive and the industry needs to work on. I'm suspecting you'll hear it from the industry. You're certainly going to hear it from us and our marketing efforts as we move through 2027.

Rob Saltzman: Thanks, team. Just one follow-up. You have that goal in the franchise dealerships to get 100 retail used vehicles per store per month. Can you just walk us through the path to getting into that 20% improvement in retail used vehicle volume throughput per store, particularly in what remains a difficult used vehicle sourcing environment?

Jeff Dyke: Yeah, we walk through it every week. It wasn't that long ago, we were at 110, 107 used vehicles per store per month. The gap between new car pricing and pre-owned pricing, and as leasing comes back and more availability of product comes back, to walk to 100 for us is easy. We've just got to fill a couple of holes, and we're going to get that number. We should be beyond that. I feel like I'm talking on our weekly huddle call to all of our general managers. We've got plenty of brands that are well beyond that, Honda, Toyota, Mercedes, BMW, all of them well above the century mark. We'll get the other ones there too, and accomplish that goal as we come up into this calendar year.

Rob Saltzman: Thanks, team. Appreciate the time.

Jeff Dyke: Let me draw a line. Thank you.

Operator: Our next question comes from John Babcock with Barclays Bank. Your line is now live.

Aaron Acquah: Hey, guys. This is Aaron on for John. Just a quick question on the EchoPark performance. I know that competition has intensified a bit on the used side. Just kind of curious, especially with the tightness in the market, how you're positioning there, and then how you're enhancing the digital experience.

Jeff Dyke: We've got such a huge upside, obviously. There's two or three of us sitting out there that are single, only used car dealers, and we're growing. We grew 22% last quarter. Plenty of opportunity in front of us. It doesn't mean we're not going to have some quarters lower, some quarters higher, but the overall trend. You see what we're doing. We're getting ready to make a huge all-time investment in EchoPark to bring awareness about us. Our awareness is really low as a percentage, maybe 13% in the markets that we do business in. That's been one of the big boat anchors for us. We're fixing that. We're getting ready to tell the world who we are, and we want people to come into our stores and experience what EchoPark's all about. We are working on a digital retail solution for EchoPark, among other things, within our business segment on the franchise side. That digital retail solution is something that we hope to begin to launch pieces of it as we move into next year, probably in the summertime. That is a sneak peek. We will give you a lot more data on that, and launch dates for our digital retail solution as we move into the second quarter. We will get you guys a lot more up to speed on where, but we have been making an investment in digital retail for the last year. Hopefully we will have something to launch as we move into the back half of next year.

Heath Byrd: This is Heath. Just to add, from an operational perspective, the keys to our profitability are that mix, where we are acquiring vehicles, and we continue to increase the non-auction vehicles, and that is a huge impact on our profitability. So we are going to continue to find ways to increase that. Secondly, finding the F&I products that fit the mix. Those are the two.

Jeff Dyke: That will kind of give you a path on where everything is headed.

Aaron Acquah: Got it. Super helpful. Then just curious what you are seeing on the brand side. I know there is some concern for some of the domestics heading into the quarter. So just anything you are seeing there, especially as we head into luxury sales season.

Jeff Dyke: No, quite to the contrary, I am very excited about it. I have probably spent as much time as anybody with our manufacturers and going around and looking at the new products that are being developed, how excited they are about the future and what is going to happen over the next few years. The products that are coming are amazing. I do not care which, BMW, Ford, Lexus. We have seen it all. Land Rover is just going to be amazing.

Heath Byrd: Audi's announcement.

Jeff Dyke: Yeah. Audi's announcement was just huge. Congratulations to them on manufacturing cars in the U.S., and just drove the all-new Q9. It is amazing vehicle. I could not be more excited about what the manufacturers are doing, the products that they are developing, the technology that is in the products. It is like now we are starting to drive our iPhones, right? A lot of fun, lots of horsepower. Then the power plants are great too, whether it is ICE vehicle or battery electric or hybrid. They are coming with just amazing product, amazing technology, and it is pushing the prices up, which is fine. Let it do that because it drives the used car business, which is also great for us. So it is kind of playing into our hand, and I think we are going to have a great holiday selling season. December is always just amazing around this company, and there is no reason for me to believe, over 20 some odd years here, there is no reason to believe that this December would be any different. Looking forward to getting there next week and rocking and rolling, getting October done. It is going to be a great fourth quarter.

Aaron Acquah: Got it. Thank you so much.

Jeff Dyke: Thank you.

Operator: Our next question comes from Chris Pierce with Needham & Company. Your line is now live.

Chris Pierce: Good morning.

Jeff Dyke: Good morning.

Chris Pierce: Can you just kind of walk me through, I think the midpoint of the original EchoPark guide was $30 million in February. I just want to kind of understand what's kind of surprised you. How we've kind of landed where we landed now. Because I think units maybe are ahead, but F&I is worse on the EV mix. How do we think about it into next year as there's more EVs coming off lease? I know you've got new products, but what if you have more EVs but lower attach? How do you kind of put those pieces together?

Heath Byrd: Well, I think like we said earlier, finding the right products for the EV and the higher age vehicles is a key, and we're working with our partners to do that. That's going to be a key going into the next year.

Jeff Dyke: Yeah, I also think while there's still upside on the F&I, especially with the EVs, there's even more upside on the front-end side as we continue to procure cars non-auction. So we're looking at it more round package than just one or the other.

Heath Byrd: We also think that the branding is going to help us on the front-end side. There's going to be brand equity that we can get with that brand.

Jeff Dyke: The other thing that you need to think about is all those third-party service departments out there. Don't think that EchoPark might not jump into the water and have some fixed operations opportunities, as well, with the great experience that we have and that we can provide. I'm telling you, there are a lot of things coming with this brand because of the experience that we provide and as we launch this brand. A lot of fun things that we're going to do with it, and more news on that as we move into next year.

Heath Byrd: A good example is in the Atlanta market, since we did the naming rights deal at EchoPark Speedway and have seen the impact that's made on, even if you just look at our Atlanta store-

David Smith: Right. The impact has been incredible.

Jeff Dyke: The volume's more than doubled in Atlanta from that single event. It just shows the lack of awareness that we had prior.

David Smith: As customers find out about us, that will absolutely help our grosses and volume. It is going to be exciting to see. We are all sitting here smiling because we want to tell you some more of the things we are working on, but we will have some announcements coming soon.

Jeff Dyke: They just put a muzzle on me.

Chris Pierce: Like you said- That is perfect.

Heath Byrd: The increase of inventory coming back just plays into our hands for EchoPark. Each year that inventory availability increases, it is just going to help us grow.

Chris Pierce: Okay, perfect. Then one on the new side, is it correct that Porsche has been sort of an under-penetrated OEM for you guys, and the Walnut Creek acquisition sort of is there, and as the brand sort of maybe goes through some challenges, that is something we should think about as an opportunity, whereas some other luxury OEMs, you maybe do not have as much acquisition opportunities on the table?

David Smith: I am not sure if I Could you say the question again, please?

Chris Pierce: Oh, sure. Is Porsche sort of an underrepresented brand within the Sonic umbrella versus BMW and Mercedes, where it's harder to sort of find stores to acquire given their already larger geographic footprint? Or is that sort of not the right way to think about it?

Jeff Dyke: The right way to think about it is Porsche is an underserved brand in every retailer out there. We take as many Porsche points as we can get.

Chris Pierce: Sure.

Jeff Dyke: The acquisition that we were fortunate enough to make in Northern California is the first one we've made in, gosh, 15 years or something.

David Smith: Yeah, it's been near 20 years.

Jeff Dyke: We would buy more. You have to be green to buy. We are, and we would buy more tomorrow as they come up. It is an amazing brand. As we build out our luxury footprint across this country, it is a desire to grow with all of our luxury brands. The way I look at it is we are underserved in all of them, and there is plenty of opportunity.

David Smith: As I mentioned earlier, long-term investments. We know that our Porsche manufacturer partners, that the Porsche brand is a fantastic long-term investment. We are very excited about it. As J.D. said, if we get some more opportunities for it, just add more Porsche stores. There are many other manufacturers that we are very eager to receive those calls. We were excited when we were able to do that deal in Walnut Creek.

Jeff Dyke: When you think of-

David Smith: So far it has been fantastic. The performance has been amazing so far.

Jeff Dyke: When you think about Audi, they've had a rough run here. But we haven't blinked on that brand. We know they're going to be strong. And now look, they're coming with a huge investment in Georgia, and that's going to help with the tariff situation. So you can't take a short-term look on these great luxury brands. They've been around forever, and they're going to be around forever, and we're just excited to be a part of their growth plan.

David Smith: Yep.

Chris Pierce: Okay. Thank you and good luck.

Jeff Dyke: Thank you.

David Smith: Thank you.

Operator: As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. Our next question comes from Michael Ward with Citigroup. Your line is now live.

Michael Ward: Thanks very much. Good morning, everyone. I appreciate it.

David Smith: Good morning.

Michael Ward: These motivational discussions you had with your managers, did that result in lost sales, or was it brand specific? Were there people discounting too much? What was the reasoning behind that? Was it a conscious effort?

David Smith: I think we mentioned earlier, market share is something that our team, we really focus on as much as our guest experience. I think it's a fantastic metric that we still hit our market share numbers while also increasing our gross profit.

Jeff Dyke: Yeah, and if you notice, coming out of the second quarter, Michael, everybody's margins were dropping off $150, $200, $300 a car, and we just weren't going to allow it. It was happening across the board. If you keep letting that happen, you're going to keep giving. Margin, it's going to keep going down further and further. We drew a line in the sand and made some adjustments to compensation plans across multiple positions. We've all been together for a long time. We have very little turnover in this company. We called upon our team to step up and to hold their margin, and they did. They're doing it in October. That's not change. It wasn't a two-month whim. We just saw a trend and one that really bothered me, Jeff Dyke personally. I just couldn't understand why we would allow that to happen, because that's what's going on in the rest of the world. We have such a great experience in our stores, and we just made it up in our mind that that wasn't going to happen, and it's not going to happen. Our team understands that.

Michael Ward: It was not brand specific.

Jeff Dyke: Absolutely not. It was across the board. I will tell you there were some brands that did a better job than others. Our Honda brand just really did an amazing job. I think our brand structure and the way we are structured as an organization versus a regional structure really helped because we can call on those brand leaders to get in there and get that job done. Motivation is a good way to say it. It was a good motivational moment in our company, and we got the message across, and it is paying off for us.

Danny Wieland: Mike, this is Danny. On the trade-off of volume versus GPU, we were essentially flat in new volume from 2Q to 3Q. If you take out the 2,200 incremental EVs we sold last year, we were actually up year-over-year on a same store basis ex EV. We have done a really good job of maintaining the market share and the volume piece of it, but just really looking at optimizing how do we price relevant market, how quickly do we turn inventory, and what can that do to drive both the volume and the GPU support?

Michael Ward: Yeah. It sounds like it could be the new world order, just because if we are dealing with tighter inventories, and particularly when you are getting to the end of a model year, and you do not have that excess fluff to get rid of.

Jeff Dyke: No.

Michael Ward: It sounds like it is a new world order. You-

Jeff Dyke: It is a new world order. We have the right day supply. The FTC deal really kind of was a disruption in the world and made everybody, a lot of the competitive set, start doing the right thing. Not everybody's doing the right thing. I want to be clear on that. But we're not going to let our stores compete against that and drop margins just because. We're going to do a great job and hold ourselves accountable and make the margin that we deserve to make. And we're going to count on the FTC to do their job and hold people who aren't doing the right thing accountable. That's an important piece of this puzzle so that we put that behind us and we once and for all get rid of the transparent pricing discussion with our industry and just move on. It's time for that to happen. Couldn't be more supportive of it. The whole world needs to play ball the same way. But we're not giving our margin up because of that. That's just not happening.

Michael Ward: Thank you very much. Really appreciate it.

Jeff Dyke: Got it.

Operator: We have reached the end of the question and answer session. I would now like to turn the call back over to David Smith for closing comments.

David Smith: Thank you, sir. Thank you, everyone. We will speak to you next quarter.

Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.