Sonic Automotive, Inc. (NYSE:SAH) Q4 2023 Earnings Call Transcript
Sonic Automotive, Inc. (NYSE:SAH) Q4 2023 Earnings Call Transcript February 14, 2024
Sonic Automotive, Inc. misses on earnings expectations. Reported EPS is $1.63 EPS, expectations were $1.8. Sonic Automotive, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Sonic Automotive Fourth Quarter 2023 Earnings Conference Call. This conference call is being recorded today, Wednesday, February 14, 2024. Presentation materials which accompany management's discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor Statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or market, or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.
These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.
David Smith: Thank you, and good morning, everyone, and welcome to the Sonic Automotive fourth quarter 2023 earnings call. Joining me today are our President, Jeff Dyke; our CFO, Heath Byrd; our EchoPark Chief Operating Officer, Tim Keen; and our VP of Investor Relations, Danny Wieland. Earlier this morning, Sonic Automotive reported fourth quarter and full-year financial results, including fourth quarter total revenues of $3.6 billion and all-time record annual revenues of $14.4 billion, up 3% from the previous year. Fourth quarter GAAP EPS was $1.11 per share, which includes the effect of non-cash impairment charges and tax items. Excluding these items, adjusted EPS was $1.63 per share, a decrease from $2.61 in the prior year due primarily to continued normalization of new vehicle GPU and higher interest rates.
We are very proud of our team's performance in the fourth quarter and we remain focused on leveraging our diversified business model to adapt to changing market dynamics in the near term while positioning Sonic to achieve our long-term strategic goals. We believe our strong relationships with our teammates, manufacturer and lending partners and guests are key to our future success. I'd like to thank them all for their continued support. Turning now to fourth quarter franchise dealership trends. We continue to see expansion of new vehicle inventory levels across our brand portfolio, ending the year with a 37 days’ supply of inventory, up from 33 days at the end of the third quarter and 24 days at the end of 2022. As a result, new vehicle gross profit per unit continued its sequential decline to $4,289 per unit in the fourth quarter, in line with our previous guidance to exit 2023 in the low to mid $4,000 range.
This steady decline in new vehicle GPUs should continue throughout 2024, but we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic historically in the $2,000 per unit range. Furthermore, our luxury-weighted portfolio generally runs a lower inventory day supply and our luxury manufacturer partners have more effectively balanced supply to date, potentially minimizing new GPU compression relative to overall industry trends, which would continue to benefit the earnings power of our franchise business. In the used vehicle market, wholesale auction prices for three-year-old vehicles decreased nearly 9% in the fourth quarter, while average retail used pricing declined just 2%. Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment.
However, the downward trends we are seeing in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in 2024. Fewer lease turn-ins at our franchise dealerships continued to limit our used vehicle volume in the fourth quarter, and used market seasonality drove a decline in used retail GPU to $1,443 per unit on a same-store basis. Our team remains focused on driving incremental used inventory acquisition and retail sales opportunities in 2024, driving upside in this line of business alongside the expected normalization of used car pricing and volumes over time. Despite an elevated consumer interest rate environment, our F&I performance continues to be a strength with same-store franchised F&I per unit of $2,334 in the fourth quarter.
Our franchise dealership F&I penetration rates were stable quarter-to-quarter and we achieved our previously issued guidance for full-year 2023 franchised F&I GPU at or above $2,400 per unit with same-store franchised F&I GPU of $2,411 for the full-year. For comparison, for full-year 2019, our franchised F&I GPU was $1,620, which was nearly $800 lower than the current run rate and we expect to see continued stability in F&I GPU in 2024. Our parts and service or fixed operations business remains strong with record fourth quarter fixed operations gross profit at our franchise dealerships up 7% year-over-year on a same-store basis, driven by 9% growth in our customer pay business. We are proud of the success our team has had in this area and we believe there are remaining opportunities to optimize our Fixed Ops business as we progress through 2024.
Turning now to the EchoPark segment. For the fourth quarter, we reported EchoPark revenues of $557 million, down 6% from the prior year, and record fourth quarter EchoPark gross profit of $43 million, up 5% from the prior year, despite a significant reduction in our store count year-over-year. EchoPark segment retail unit sales volume for the quarter was nearly 17,600 units, up 1% year-over-year. However, on a same-store basis, EchoPark retail unit sales volume was up 42% in the fourth quarter. As discussed on our previous earnings calls, reducing our store footprint in the second quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume, better GPU, and significantly lower operating losses in the second half of 2023.
Fourth quarter EchoPark segment adjusted EBITDA was a loss of $9.1 million compared to an adjusted EBITDA loss of $25.4 million in the fourth quarter last year. In January 2024, we made the difficult decision to close the seven remaining Northwest Motorsport preowned stores in the EchoPark segment due to unique ongoing challenges to the Northwest Motorsport business model. This decision, while not taken lightly, was made in order to benefit EchoPark's near-term profitability path and better align with our overall used vehicle strategy. Fourth quarter adjusted EBITDA loss associated with the Northwest Motorsport Group totaled $1.3 million. That's $1.3 million, while full-year adjusted EBITDA losses associated with the group totaled $5.1 million.
Moving forward, we remain confident in our path to achieve breakeven EchoPark segment adjusted EBITDA in the first quarter of 2024 and positive EchoPark segment adjusted EBITDA for the full-year. Sonic's diversified cash flows and strong balance sheet allowed us to withstand the challenges in the used vehicle market over the last three years and maintain our long-term EchoPark plans. Our unwavering confidence in EchoPark's future potential has positioned us as one of the few remaining nationwide used vehicle retailers, creating a tremendous opportunity for this brand down the road. We look forward to resuming disciplined long-term growth for EchoPark as used vehicle market conditions improve. Turning now to our Powersports segment. For the fourth quarter, we generated revenues of $27 million, gross profit of $7 million, and an adjusted EBITDA loss of $2.4 million.
Given the seasonal variability in the Powersports industry and our geographic presence with the Black Hills platform, our fourth quarter results were in line with our projections. Looking into 2024, we continue to focus on identifying operational synergies within our current powersports network and remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, turning to our balance sheet. We ended the third quarter with $846 million in available liquidity, including $374 million in combined cash and floor plan deposits on hand. The strength of our balance sheet allowed us to repurchase 3.3 million shares of our common stock in 2023, or 9% of shares outstanding at the beginning of the year.
At the end of the fourth quarter, our remaining share repurchase authorization was $287 million, which represents approximately 15% of today's equity market cap. Share repurchases are an important part of our capital allocation strategy, and we remain focused on returning capital to shareholders via share repurchases as our liquidity and other capital needs allow. Additionally, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.30 per share, payable on April 15, 2024, to all stockholders of record on March 15, 2024. As we move ahead to 2024, I'd like to call your attention to Pages 12 and 13 in the investor presentation we released this morning, where we discuss our outlook for the industry in 2024 and provide limited financial guidance for certain metrics.
From a consolidated company earnings perspective, we expect lower franchise dealership segment earnings to be partially offset by significant improvement in EchoPark segment results, returning to positive adjusted EBITDA for the year, as well as a moderate increase in Powersports segment income year-over-year. While the financial outlook in the investor presentation is subject to inherent forecast risks and uncertainties, some of which are beyond our control, we believe the metrics provided may be useful in developing a financial model for Sonic's 2024 results. In closing, our team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long-term returns.
Furthermore, we continue to believe that our diversified business model provides significant earnings growth opportunities in our EchoPark and Powersports segments that may help to offset any industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to consolidated Sonic results over time. We remain confident that we have the right strategy, the right people, and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you very much.
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