Sonic Automotive, Inc. (SAH) Earnings

Management highlights

- Overall Company Performance * Sonic Automotive reported record Q2 2026 total revenue of $3.9 billion, up 8% YoY, and record quarterly gross profit of $616.2 million, up 2% YoY. * Reported GAAP diluted EPS was $1.79; non-GAAP adjusted diluted EPS was $1.82. * The company ended Q2 with $676 million in total available liquidity, including $294 million in cash and floor plan deposits. The Board of Directors approved a $0.41 per share cash dividend, payable October 15, 2026 to shareholders of record as of September 15, 2026. * Management follows a balanced capital allocation strategy, prioritizing existing business support, targeted organic investments, strategic acquisitions, and capital return to shareholders. - Franchised Dealership Strategic Initiatives * Management notes ongoing tariff-driven new vehicle affordability challenges that pulled forward consumer demand into Q2 2025, creating difficult YoY comparisons for 2026 Q2 results. * The company is prioritizing inventory turnover management, with intentional margin optimization to support volume growth. * To capitalize on the expected tailwind of consumers repairing existing vehicles rather than buying new amid affordability challenges, the company is rolling out value-priced service offerings and service-focused marketing to gain market share. * Higher-margin fixed operations and F&I provide a stable profit foundation, offsetting new vehicle GPU declines. - Echo Park Strategic Initiatives * The segment shifted its inventory mix to prioritize more affordable, higher-mileage vehicles and increased non-auction sourcing to expand consumer reach, driving strong volume growth at the expense of near-term GPU. * The share of battery electric vehicles (BEVs) in Echo Park's sales mix reached nearly 15% in Q2, up from prior levels, as the company capitalizes on increased off-lease BEV supply with manufacturer-absorbed depreciation. * The company is developing new F&I products tailored to BEVs and higher-mileage vehicles to restore GPU levels while retaining volume growth. Existing locations have capacity to nearly double current sales volume, creating significant organic upside. * A delayed full brand marketing rollout to Q4 2026 is tied to completing website updates for AI search optimization to maximize conversion from the incremental spend. - Power Sports Strategic Initiatives * Recent acquisitions of Harley-Davidson dealerships in California, Florida, Georgia, and North Carolina drove segment growth, expanded geographic reach, and improved seasonal diversification, with early returns exceeding expectations despite limited operational integration to date. * Management sees significant upside opportunity to improve used vehicle operations, fixed operations, and F&I performance in acquired power sports locations, consistent with the segment's growth strategy.

Guidance

- New vehicle GPU full year guidance was raised to $2,850 to $3,000 per unit, up from the prior range of $2,700 to $3,000 per unit, as year-to-date performance tracks above the prior high end of the range. - Full year same-store fixed operations gross profit growth guidance remains at mid-single-digit percentage. - Echo Park full year 2026 guidance maintains total GPU target of $3,100 to $3,300 per unit, 12% to 15% used retail unit volume growth, and adjusted EBITDA of $35 to $40 million, including $8 to $12 million in incremental Q4 brand marketing expense. - One new Echo Park location is scheduled to open in Orlando in Q4 2026, with 2 to 4 new locations planned for 2027. New store opening delays are only due to construction timing, with no other headwinds. - Power sports growth is expected to continue, with a strong pipeline of high-quality acquisition opportunities.

Segment performance

1. Franchised Dealership Segment: Total revenue: $3.3 billion, up 6% year-over-year (YoY), accounting for 84.6% of Sonic Automotive's total Q2 2026 revenue. Same-store revenue increased 2% YoY. Reported segment gross profit increased 1% YoY, while same-store gross profit decreased 3% YoY. Within the segment: - New vehicles: Q2 reported new vehicle gross profit per unit (GPU) was $3,024, down 11% YoY; same-store new vehicle GPU was $2,872, down 16% YoY. Same-store new vehicle unit volume was flat YoY. - Used vehicles: Q2 reported used vehicle GPU was $1,399, down 12% YoY; same-store used vehicle GPU was $1,401, down 13% YoY. Same-store retail used vehicle volume increased 7% YoY. - Fixed operations: Reported gross profit increased 6% YoY to a quarterly record of $263.8 million; same-store gross profit increased 2% YoY, driven by 1% customer pay gross profit growth and 3% warranty gross profit growth. - F&I: Reported gross profit increased 2% YoY to a Q2 record of $147.9 million; same-store F&I gross profit decreased 1% YoY, driven by a 4% drop in same-store F&I per unit. Fixed operations and F&I combined contributed over 75% of the segment's total gross profit. 2. Echo Park Segment: Total revenue: $582.9 million, up 15% YoY, accounting for 14.9% of total Q2 2026 revenue. Segment gross profit increased 4% YoY to a Q2 record of $64.3 million. Retail used volume increased 17% YoY to 19,601 units, outpacing industry growth. Total gross profit per unit was $3,292, down 12% YoY: used vehicle front GPU fell 21% to $328, and F&I gross profit per unit fell 11% to $2,965. Segment income was $7.2 million, and adjusted EBITDA was $13.9 million. Non-auction sourced inventory represented 42% of sales in Q2, up 10 percentage points from Q1. 3. Power Sports Segment: Total revenue: $73.5 million, up 53% YoY, accounting for 1.9% of total Q2 2026 revenue. Gross profit increased 57% YoY to a Q2 record of $19.7 million. Same-store revenue and gross profit each increased 13% YoY. Reported new retail unit volume increased 27% YoY, and reported used retail unit volume increased 61% YoY; same-store new retail unit volume increased 3% YoY, and same-store used retail unit volume increased 19% YoY. Reported F&I revenue increased 75% YoY to $3.5 million, with total F&I per unit up 27% to $1,125; same-store F&I revenue increased 20% YoY, and same-store F&I per unit increased 12% YoY. Segment income increased to $2.3 million from break-even in the prior year period, and adjusted EBITDA increased 145% to $4.9 million.

Risks & headwinds

- Ongoing U.S. tariffs have driven new vehicle prices to record levels, pushing average monthly new vehicle payments above $1,000 for 1 in 5 customers and approaching $800 on average industry-wide, creating significant affordability pressures that may suppress new vehicle demand. - Fixed operations growth moderated to 2% same-store in Q2, below management's target, driven by consumer affordability concerns and long-standing industry pricing misperception that keeps 50% of post-purchase service business with independent shops instead of franchised dealers. - BEVs have lower F&I profit per unit due to lower service contract penetration and consumer misperception that EVs have lower repair costs, creating GPU headwinds as the share of BEVs in the used vehicle mix increases. - Non-compliance with new FTC pricing guidelines by some competing independent dealers creates uneven competitive conditions, as non-compliant dealers can advertise lower prices than they actually charge, putting compliant players like Sonic Automotive at a temporary disadvantage. - Forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from projections, as detailed in Sonic Automotive's SEC filings.

Analyst Q&A

• Q: Sonic outperformed peers on new vehicle volume and posted stronger used vehicle unit growth than new growth. What factors explain this outperformance, and what is the reasoning behind the Echo Park advertising spend timing shift?

  A: Management credits aggressive inventory management and intentional margin optimization to maintain inventory turnover, which supported volume growth. Higher F&I per unit relative to peers offsets lower front-end margins, keeping total gross profit on target. The advertising spend delay is purely a timing issue, driven by the need to complete website updates for AI search optimization to capture full value from the large $20 million brand marketing budget, not a pullback in planned spend or growth expectations. Volume growth is already strong (over 25% YoY in July) without the full campaign, so the delay is to maximize long-term returns.

• Q: How is Echo Park gaining market share against used-only peers, and will these share gains continue? Also, what is driving fixed operations growth moderation, and is there a need for price cuts to address affordability?

  A: Echo Park's market share gains come from shifting to more affordable, higher-mileage inventory and significantly increasing the share of non-auction sourced inventory (up 10 points to 42% in Q2) to support the value proposition. Management expects share gains to continue, as new vehicle average prices now exceed $60,000, making Echo Park's used pricing less than half of new car prices, creating strong structural tailwinds for affordable used vehicles. For fixed operations, management confirms there is an affordability and pricing perception issue: half of customers do not return to franchised dealers for service due to perceived high pricing. The company is rolling out value pricing for common services and marketing these changes to win back market share, and sees significant long-term upside as consumers keep vehicles longer amid new vehicle affordability challenges.

• Q: Is Echo Park's higher inventory level (higher day supply) sustainable, and will F&I per unit decline further as BEV mix grows? Why launch brand marketing now when growth is already strong without it?

  A: Higher day supply is intentional, driven by the opportunity to acquire more off-lease vehicles (including BEVs) and is expected to decline seasonally in Q4. Existing Echo Park locations have capacity to nearly double current sales volume, so carrying more inventory to drive volume growth is sustainable. F&I per unit is not expected to decline further: the company is developing new F&I products tailored to BEVs, and current low F&I GPU partially reflects consumer misperception that BEVs have lower repair costs, which can be corrected with consumer education. The brand marketing launch is a long-term strategic move: Echo Park has low brand awareness in most of its markets, and increasing awareness will drive higher volume and margin long-term. The business is already built and ready for growth, so the time to invest in the brand is now.

• Q: Where does management see the best acquisition and investment opportunities today, across franchises, Echo Park, and power sports?

  A: Management notes a high volume of high-quality acquisition opportunities in both franchised dealerships and power sports, the most in leadership's career. Power sports is particularly attractive because valuations (trading multiples) are lower than franchised dealerships, and there is significant room to improve performance by applying Sonic's playbook for used vehicle operations, fixed operations, and F&I (current competitor F&I GPUs are double Sonic's current level, creating large upside). Sonic's diversified business model allows for growth across all three segments, with unlimited organic growth potential for Echo Park as well.