Q3 2024 Sonic Automotive Inc Earnings Call
Good morning, and welcome to the Sonic automotive third quarter 2024 earnings Conference call.
This conference call is being recorded today Thursday October 24th 2024.
Presentation materials, which accompany management's decision discussion on the conference call can be accessed at the company's website at IR Dot Sonic automotive dotcom.
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.
Speaker Change: I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic automotive Mr.
Speaker Change: Mr. Smith, you May begin your conference.
David Smith: Thank you very much and good morning, everyone.
David Smith: As he said welcome to Sonic Automotive's third quarter 2024 earnings call again, I'm, David Smith, the company's chairman and CEO.
David Smith: Joining me on the call today is our president Jeff Dyke, our CFO Heath Byrd.
David Smith: Our Echo Park, Chief operating Officer, Jim King.
David Smith: Vice President of Investor Relations, Danny why don't you.
David Smith: We would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world class guest experience for our customers.
David Smith: Our Echo Park automotive teammates have once again earned the top spot as the number one pre owned automotive dealer and guest satisfaction rank by reputation dotcom.
David Smith: Our Sonic automotive franchise teammates continue to achieve among the highest customer satisfaction scores in our company's history.
David Smith: Our teammates are truly living our sonic purpose to deliver an experience for our guests and our team mates that fulfills dreams enriches lives and delivers happiness.
David Smith: We believe our strong relationships with our teammates.
David Smith: Manufacturer and lending partners and guests are key to our future success and as always I would like to thank them all for their support and loyalty and Sonic automotive team.
Okay.
David Smith: Our company remains focused on our ability to adapt to changing market dynamics in the near term, while positioning side to achieve our long term strategic goals.
David Smith: I'm pleased to report that we continued to make great progress in our Echo Park segment performance in the third quarter reporting all time record quarterly gross profit segment income and adjusted EBITDA.
David Smith: Overall, the Sonic automotive team continued to execute at a high level. Despite operational disruptions related to the functionality of certain CDK customer lead and inventory management applications as well as manufacturer stop sale orders in certain key brands.
David Smith: Amid the continuing normalization of new vehicle margins and increased vehicle production.
David Smith: Third quarter, GAAP EPS was $2 13 per share and excluding the effect of certain items as detailed in our press release. This morning.
David Smith: Our adjusted EPS was $1 26 per share a 38% decrease year over year due primarily to the continued normalization of new vehicle GPU and the carryover effects of the CDK outage in July.
David Smith: Our reported results for the quarter included a $31 million tax benefit benefit associated with an out what's an out of period adjustment correcting an error recorded in connection with the impairment of the franchise assets in a prior period.
David Smith: In addition, as a result of the business disruption caused by the CDK outage, we estimate that our third quarter GAAP income before taxes was negatively impacted by approximately $17 $2 million or <unk> 36.
David Smith: And diluted earnings per share.
David Smith: Which includes approximately $1.8 million or <unk> and EPS related to excess compensation paid to our teammates who had reduced income potential due to the CDK outage.
David Smith: Turning now to third quarter franchise dealership trends, we saw stability in average new vehicle inventory levels ending the third quarter was 57 days supply of inventory in line with the day supply at the end of the second quarter after accounting for the CDK related sales disruption at the end of Q2.
David Smith: Third quarter same store, new vehicle GPU was $3049 per unit.
David Smith: Down $540 per unit from the second quarter.
The rate of new vehicle GPU decline accelerated somewhat in the third quarter due primarily to larger GPU headwinds from electric vehicle sales compared to the second quarter and the effects of stop sale orders on certain high margin models.
However, we are affirming our guidance to exit the fourth quarter in the low $3000 range due to the seasonal benefit of our luxury weighted portfolio in the fourth quarter.
David Smith: Looking beyond 2024, we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre pandemic.
Normalizing in the $2500 to $3000 per unit range in 2025.
David Smith: Additionally, our teams continue to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving consumer demand.
David Smith: Which should benefit inventory day supply floor plan interest costs and new vehicle Gpus.
David Smith: In the used vehicle market wholesale auction prices for three year old vehicles increased nearly 1%.
David Smith: The third quarter.
David Smith: While our franchise dealerships average retail used pricing decreased 1% compared to the second quarter driving a sequential decrease in use GPO Gpus to $30 86 per unit on a same store basis.
David Smith: Elevated used retail prices remain a challenge for consumers.
David Smith: Attributing to affordability concerns amid the current interest rate environment. However, the returned to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook and when combined with potential further interest rate cuts should begin to benefit affordability in used vehicle sales.
David Smith: In 2025.
David Smith: In the meantime, our team remains focused on driving incremental used inventory acquisition and retail sales opportunities driving upside in this line of the business alongside the expected normalization of used car pricing and volume over time.
David Smith: Our F&I performance continues to be a strength despite elevated consumer interest rates with same store franchise F&I GPU of 'twenty $339 in the third quarter down 3% year over year, but well above historical levels.
David Smith: The continued stability of F&I and these levels supports our view that F&I per unit will.
David Smith: We will remain structurally higher than pre pandemic levels, even in a challenging consumer affordability environment.
David Smith: Our parts and service or fixed operations business remains very strong with an 8% increase in same store fixed ops gross profit in the third quarter. We're very proud of the success. Our team has had in this area and we believe there are remaining opportunities to grow our fixed ops business. As we finished 2024 and look ahead.
David Smith: Ads in 2025.
David Smith: As we have previously discussed in March we launched an initiative to increase our technician headcount by a net 300 techs in 2024, which we expect would contribute an additional $100 million in annual annualized fixed ops gross profit.
David Smith: To date, we have increased our technician headcount by a net 216 tests and paste, adding 15 net texts per week in the last few weeks positioning us to achieve this goal as we approach the end of 2024.
David Smith: Turning now to the Echo Park segment, we're very excited to report all time record quarterly Echo Park segment, adjusted EBITDA of $8 $9 million consistent with our previous guidance for a seasonally strong third quarter.
David Smith: For the third quarter, we reported Echo park revenues of $545 million down 13% from the prior year.
David Smith: And all time record quarterly Echo Park gross profit of $55 million up 5% from the prior year.
David Smith: Echo Park segment retail unit sales volume for the quarter was approximately 17800 units down 7% year over year.
David Smith: <unk> up 7% sequentially from the second quarter outpacing the industry growth rate of 2% sequentially from the second quarter.
David Smith: On a same market basis, which excludes closed stores.
David Smith: Park retail unit sales volume was up 2% year over year revenue was down 3% and gross profit was up 21%.
David Smith: Echo Park segment total gross profit per unit was $3111 per unit up $344 per unit year over year and up $33 per unit from the second quarter. Despite marginal increases in used wholesale market pricing.
David Smith: As a result of improving inventory sales velocity.
David Smith: And higher F&I gross profit per unit.
Echo Park used vehicle day supply finished the third quarter at 33 days compared to 38 days at the end of the quarter of the second quarter, which.
David Smith: With faster inventory turns benefiting GPU.
David Smith: As discussed on our previous earnings calls the reductions to our store footprint since the first quarter of.
David Smith: 2023 allowed us to better allocate inventory across the platform driving higher unit sales volume per rooftop better total variable GPU and improve overall profitability.
David Smith: Our unwavering confidence and echo park's long term potential that's allowed us to weather the challenges and the used vehicle market in recent years and we believe our performance in the third quarter demonstrates the tremendous opportunity for this brand.
David Smith: Third consecutive quarter of positive segment adjusted EBITDA for Echo Park validates the strategic adjustments, we've made over the past few quarters and we look forward to resuming disciplined long term growth record park as used vehicle market conditions continue to improve over the next several quarters.
David Smith: Turning now to our power sports segment.
David Smith: For the third quarter, we generated revenues of $59 $4 million gross profit of $17 $7 million and segment adjusted EBITDA of $5 $8 million.
David Smith: As expected the power sports selling season accelerated in the third quarter and this year's Sturgis rally was an overwhelming success benefiting from the new processes and technology. We recently began to integrate into this segment.
David Smith: We continue to focus on identifying operational synergies with it within our current power sports network, while fine tuning our operating Playbooks.
David Smith: In the near term, we look forward to finalizing the implementation of a refined F&I sales strategy centralized marketing and inventory management and the recent rollout of southern power sports Dot com.
David Smith: While we are taking a disciplined approach to expansion in this segment, we remain optimistic about the future growth opportunities in this adjacent retail sector. When the time is right.
David Smith: Finally, turning to our balance sheet.
David Smith: We ended the third the third quarter was $834 million in available liquidity, excluding unencumbered real estate.
David Smith: And $418 million in combined cash and floorplan deposits on hand.
David Smith: We continue to maintain maintain a conservative balance sheet approach with the ability to deploy capital strategically as the market evolves.
David Smith: Additionally, I'm pleased to report today that our board of directors approved a 17% increase to the quarterly cash dividend to <unk> 35 per share payable on January 15th 2025 to all stockholders of record on December 13 2024.
David Smith: As you can see in the Investor presentation. We released this morning, we have updated certain limited financial guidance for 2024, following our third quarter results. We continue to believe that our lower franchise dealership segment earnings can be at least partially offset by significant improvements in Echo Park segment results.
David Smith: Returning to positive Echo Park segment, adjusted EBITDA for the year and setting the stage for continued growth in 2025 and beyond.
David Smith: In closing our team remains focused on near term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop.
David Smith: Making strategic decisions to maximize long term returns.
David Smith: Furthermore, we continue to believe our diversified business model provides significant earnings growth opportunities in our Echo Park and power sports segments that may help to offset any in any industry driven margin headwinds, we may face in the franchised business.
David Smith: Minimizing the earnings downside to our consolidated Sonic results overtime.
David Smith: 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.
David Smith: This concludes our opening remarks, and we look forward to answering any questions. You may have thank you.
David Smith: Thank you.
Speaker Change: And at this time, we will conduct a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate that your line isn't a question too.
Speaker Change: Depressed start to if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
And our first question comes from John Murphy with Bank of America. Please state your question.
John Murphy: Hey, good morning, guys I just have a couple but just a very simple one and I apologize there is theres a lot of earnings and noise. Today. So I'm just trying to understand when you think about the adjusted EPS on an operating basis.
You want folks to focus on X CDK storms and stop sale. What do you think is the is the correct number because I think there's some questions about comparability to what the consensus number was and we may have had this off so I just want to get clear on this.
Yeah. This is heath.
Heath Byrd: Real quickly on the CDK impact we are estimating is around $17 million. So 33 cent impact by the CDK and BMW is $2 6 million.
Heath Byrd: For this quarter and that's five cents of EPS. So a total between the two is 38.
Speaker Change: Okay. That's that's credit that's incredibly helpful and I mean, and I think youre being a little I mean was there any storm impact I mean, what was sort of the the net of the storms I know thats always hard to tease out but is there something you can give us on storm sheath or do you think.
Big enough.
Speaker Change: First of all I can say that we were very very fortunate.
None of our teammates for her and we did have some some damage, but I think Jeff Dyke has some color on that point, yes, John we were prepared Unfortunately, David says that we're getting really good at this unfortunately, and so were really prepared.
Jeff Dyke: We didn't lose any inventory, we had one air conditioning unit on topical store, but not an issue, but overall it did not really slow us down.
Speaker Change: Hi, there I just Wanna.
Speaker Change: That's good to hear from our people and property perspective.
Speaker Change: Just quickly on the Gpus I mean, you highlighted the T V's stop sale of its weight, but evs or certainly a weight can you give us a breakdown of EV versus ice new GPU.
Speaker Change: You can I mean, I'm sure you wanted disclose quite that level of detail, but we'd love to hear it.
Speaker Change: I've got a couple of numbers of the headwinds related to Evs.
Speaker Change: In Q1, it was 400 dollar headwind to the funding GPU Q2 is 170.
Speaker Change: Edwin too new.
Speaker Change: New GPU in Q3 was 440.
Speaker Change: And that difference in the second quarter of the incentives were much higher in particular on the west coast with certain luxury brands.
Speaker Change: That helped the GPU and the headwinds there.
Speaker Change: Incentives lessened in the third quarter and therefore, you saw kind of a return to normal that we saw in the first quarter.
Speaker Change: Look you can look at the different sequentially I think it's around 30.
Speaker Change: $540 about half of that is related to the EV. The incremental so $2 70 was E. B. The other $2 70 was from normal ice and John This is Danny if you look if you look at slide eight.
Speaker Change: Deck, we've got the relative GPU broken out between EV hybrid and ice are by our luxury important domestic and you can see that hybrid is equal to or better than ice.
Speaker Change: Off that platform and EV is still significantly underperforming and there is no structural reason why isn't the same price point in a hybrid or an ice vehicles should make a different GPU. It's all about the imbalance of supply and demand and so while we've seen some improvement in base supply of <unk> relative to demand are we still had a 15 days, 15% of our inventory with E D.
Speaker Change: While only 10% of ourselves so we're still relatively oversupplied and I think the Oems are moving in the right direction. We've got some work to do.
Speaker Change: Or you think they're going to step back in with those kind of effects. We had in the second quarter or is it still head in the sand kind of stuff.
Speaker Change: There are some aggressive incentives out there.
Speaker Change: BMW is really aggressive right now that's a lot to do with the inventory buildup because of the stock sale in the third quarter, a Mercedes continues to be decently aggressive on on Evs.
Speaker Change: So I expect the fourth quarter in particular with the stuff that BMW I mean, you look at October for Us our BMW business.
Speaker Change: Plus 20%.
Speaker Change: And I expect that to continue on into the November.
Speaker Change: November and December timeframe as well so it should be a great fourth quarter, great and then just one last one the 300 tax I mean, the run rate sounds like it's pretty awesome and 15 a week in.
Speaker Change: That's pure gravy I guess I mean, it's not pure rate, but it's a lot of gravy there.
Speaker Change: As you think about the potential beyond those those 300 tax.
Speaker Change:
Speaker Change: Could you keep going do you think there's any reason that you couldnt keep going into that 15 per week are some pretty hot pace and is there any issue with actual stall capacity and adding folks at this point, yes. It does become an issue.
Speaker Change: Time, but we'll add more stock capacity, it's the best.
Speaker Change: So the best thing, we can do at a dealership to add small capacity right.
Speaker Change: So yes, once we change the culture in the stores and got everybody, believing that we needed more text. That's one of the big things is not so much that you can't go out and get a technician, it's you've got to get the culture and the sort of want more technicians, because the technicians are working the stores don't want you to hire more technicians right theres more food to the feast on and once we got that changed in the stores. That's made a big difference for us.
Speaker Change: Now, we're beginning to see the really the doors open and things unlock for so.
Speaker Change: Sure that could continue on in the first quarter, we'll probably get the 300 <unk> hired in this calendar year take a little breather do a much better job of retaining our technicians than we've done in the past and really kind of shifted our focus there.
Speaker Change: And then we can grow from from there, but the fixed operations business is just fantastic.
Speaker Change: And of course warranty you know quite a big role in all of that would be M. W. But customer pays there too.
Speaker Change: And so it all 25 should be fantastic for Ford is going to be great from a fixed ops perspective and.
Speaker Change: We'll see how things go from there.
Speaker Change: Very helpful. Thank you guys.
Speaker Change: You bet.
Speaker Change: Our next question comes from Rajat Gupta with Jpmorgan. Please state your question.
Speaker Change: Rajat Gupta. Your line is open go ahead with your question.
Speaker Change: You may be muted.
Rajat Gupta: Oh, sorry, sorry about that.
Rajat Gupta: Alright with muted so I just wanted to follow up on Johns question there.
Rajat Gupta: W. I think you mentioned.
Rajat Gupta: Just two and a half million impact I mean that seems so much lower than what we would've thought given given the stop sales.
Rajat Gupta: That net off like any recovery you might've seen on the recon side or.
Rajat Gupta: Or are you just able to get more out the door and I'm just curious like what happened.
Rajat Gupta: Could dissect that a little more.
Speaker Change: And then just on CDK are you able to give us what kind of units in fact it had.
Speaker Change: On both new and used for.
Speaker Change: For the quarter or maybe just in July that would be helpful.
Speaker Change: One two quick follow ups.
Speaker Change: Yes, the BMW impact it's at 500 550 car somewhere in there during the quarter.
Speaker Change: From a new car perspective, and you know, obviously hurt our pre owned business as well.
Speaker Change: Team did an outstanding job selling what we could sell them.
Speaker Change: Getting the vehicles that we were on stop sale sold but waiting for the part to come in.
That's why we're seeing the huge increases that we're seeing and we will see for October and November also tip my hat to BMW mini they were faced with a very difficult situation. They.
Speaker Change: They did an amazing job communicating with us.
Speaker Change: And really we're on top of this so all the way around we just executed at a really high level, we're getting good at this kind of stuff.
Speaker Change: We've got great tenured BMW team and those 15 stores really done just an amazing job getting us through that time. So we expect it to be a little bit tougher to to be honest with you but.
Speaker Change: Our team.
Speaker Change: Raised up and did their job and we got a lot of cars sold during the period again, it really cost us about 500 550 units that's not the end of the world and we're certainly going to make all that up in the month of October.
Speaker Change: This is jeet on new units, we calculated that the impact was 482 on new units a GPU is down about 370.
Speaker Change: Ms.
Speaker Change: And used units was 920.
Speaker Change: Would that impact <unk>.
Speaker Change: Do you view, a 153 bucks.
Speaker Change: We also on it.
Speaker Change: Obviously, our F&I as well.
Speaker Change: Because we're trying to do deals very quickly and that was around.
Speaker Change: $24 on the front end or on the F&I for.
Speaker Change: GPU.
Speaker Change: Yeah.
Understood and then just on BMW for the fourth quarter Youre, Obviously, you talked about the October sales look good.
Speaker Change: Is there going to be like a big pick up on the service side as well.
Speaker Change: Oh, yes.
Speaker Change: Forward, yes.
Speaker Change: Yes, we still have about 25% or so of the inventory that needs to be corrected.
Speaker Change: He has a warranty business will continue.
Speaker Change: To grow and then we'll make up what we couldnt get dumped in the CP perspective, so it's going to be a really good BMW quarter.
Speaker Change: And it should be a great quarter overall.
Speaker Change: Businesses, there and now with no recalls really going on in the CDK and whatever else was thrown at us during during the last couple of quarters, we're able to operate without any of those distractions and so we'll see what we can do in the fourth quarter.
Speaker Change: Understood.
Speaker Change: On SG&A to gross.
Speaker Change: For the fourth quarter, you, obviously have a full year guidance.
Speaker Change: That's been pretty consistent through the course of the year year to date numbers look a little better than expected.
Speaker Change: Typically see a seasonal drop in the fourth quarter always you know just given how the comp structure works.
Speaker Change: Curious anything to keep in mind, you're specifically you know given like all the changes are on BMW that are happening how should we think about the fourth.
Speaker Change: Fourth quarter stuff.
Speaker Change: I think we always have like a better SG&A to gross in the fourth quarter, because you know what.
Speaker Change: Barry.
Speaker Change: 50% of luxury and the fourth quarter is always big for US. So you should continue to see that kind of dropped but our guidance would be the same in the low seventies.
Speaker Change: Franchise.
Speaker Change: Of course, they go park.
Speaker Change: You May note that we changed our guidance there we were getting in the <unk> and now we're getting in the high Seventy's.
Speaker Change: So the performance you've seen.
Speaker Change: So yeah, the normal seasonality that you'll see some of that like you always have in the fourth quarter.
Speaker Change: Okay.
Speaker Change: Understood great. Thanks for all the color I'll get back in queue.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Jeff <unk> with Stephens. Please state your question.
Speaker Change: Good afternoon, guys. Thanks for taking my question.
Speaker Change: With respect to the new units in Q3, given your brand mix and the fact that you are operating pretty dark and you see CRM because of CDK.
Speaker Change: Good surprise you.
Speaker Change: Plus too.
Speaker Change: Same store units could you talk about why it was as good as it was.
Speaker Change: Because it is quite an outlier based on.
Speaker Change: Your.
Speaker Change: Your brand mix said it should have been.
Speaker Change: This is David I would like to.
David Smith: Take that opportunity.
David Smith: I'm kind of a lay out because it's our teammates the way.
David Smith: Our organization is structured our teammates really did a fantastic job.
David Smith: Talked about our guest experience a lot.
David Smith: Our tenure, we've got a lot of veteran leaders.
David Smith: And that has a huge amount to do with it we actually knew and we talked about it on our operations calls that when the CDK issue hit we talked about our teammates are going to step up and.
David Smith: And deliver and they did.
Jeff Dyke: Yeah, and I would add to it this is Jeff Jeff.
Jeff Dyke: I would add to it.
Jeff: Honda, we did a great job with Honda the import brands did very well I mean, a little tight on inventory with Toyota the luxury brands were strong even BMW I mean on a year over year basis. I think we were down 100, some 3% or something like that so we really did a great job there and then luxury I mean then.
Jeff Dyke: Domestic business.
Jeff: Ford and GM flat Atlantis.
Jeff: Atlanta continues to be a case study for the universities in this country and how to screw up the number of brands.
Jeff: The brands that they have it's just amazing.
Jeff: We're selling a lot of cars and they played a big role I mean, we're selling we're now starting to sell a bunch of a bunch of vehicles Fortunately in us, but at the end of the day the margins are absolutely horrible.
Jeff: Our day supply, we woke up in July and August at a 1000 more cars than we did the prior year on the ground.
Jeff: And they're really paying you your couponing you to buy cars instead of really giving the incentives to the consumers and doing things the way we're supposed to do it today so.
Jeff: Ultimately a good good volume pretty much across the board in luxury imported and domestic.
Jeff: And we look forward to that really continuing on in particular with our luxury mix in the fourth quarter and this is even that much I don't think you mentioned it. It was we had a lot of good volume with Mercedes So think Mercedes took that opportunity to have some conquest you get some of that market share from BMW, but we had a really good quarter with Mercedes up 700, plus you get.
Jeff: So for the quarter.
Speaker Change: And then just a follow up on the service and parts and the technicians you know given your service and parts same store sales up 7% implies.
Speaker Change: Youre getting good growth how much incremental business do you think you are losing because of the technician I don't know if you want to refer to it as a shortage but.
Speaker Change: What how much business do you think you're leaving on the table.
Speaker Change: You know it's 20.
Speaker Change: 20% to $23000 in gross per technician per month first all and.
Speaker Change: You just do you can do the math right. There on the 300 that tells you what's out there in terms of our ability that's $800 million number we've been we've been talking about and so you would annualize that for next year it ought to be a fantastic fixed operations here for us along with our focus on growing market share by job code.
Speaker Change: That's something we've been working on now for over a year and a half and those two things are.
Speaker Change: Are really driving the business and we've got great customer satisfaction scores to go along with them.
Speaker Change: Pretty much green Kpis with all of our manufacturer partners has also been a huge focus for us.
Speaker Change: And so I expect that to continue on into into 'twenty five huge huge upside there for us.
Speaker Change: Well, great congrats on the quarter and I'll get back into the queue. Thank.
Speaker Change: Thank you very much.
Speaker Change: Our next question comes from Chris Pierce with Needham <unk> Company. Please state your question.
Chris Pierce: Hey, good morning, everyone I just had two quick ones on Echo Park.
Chris Pierce: What's the right way to think about retail gross profit per unit Echo Park, I think you'd get around 300 recorded in the first two quarters to 50 this quarter.
Chris Pierce: Is that just because there's better days to stay home because of better demand and inventory with tight and that will kind of normalize to.
Chris Pierce: Closer to zero based on the model or should we model in modest retail gross profit per unit are you talking about front end gross.
Speaker Change: Yeah, that's right yeah.
Speaker Change: Yeah. So.
Speaker Change: The thing that we saw in the third quarter and a lot because of the storms as valuations we were buying cars in the low 23000 range at the auctions valuations moved up in the last few weeks anyway over the last month into the upper 23000 range.
Speaker Change: Not sure that's going to provide some gross compression as we move into the fourth quarter and I think you'll you'll see that but then I think as we move into the first quarter as traditional seasonal.
Speaker Change: Numbers slow for pre owned were gonna see we'll see increases in our in our <unk> and that'll flow very similar to what it did for 'twenty four and 'twenty five.
Speaker Change: It is important to note that if we look at just look at the Denver market, we see the value of brand equity in that market. They they average over $200 higher than our other locations of Gpus, and they're actually performing higher than they were pre COVID-19 numbers as well and so.
Speaker Change: We definitely believe as you know I think mentioned that trumped hitting in 2025 of inventory we use once that starts.
Speaker Change: Heading back up we think it's going to be a perfect opportunity for support and this is David and simply to keep in mind as you know in the in the third quarter we did.
Speaker Change: And around about 325 to 330 cars per store with right.
Speaker Change: With our existing Echo Park stores and you look at what we were doing and the potential for additional capacity to do you know around 550 cars per store.
Speaker Change: With the existing source are you you're talking about a technician.
Speaker Change: Mission capacity will look at that and where we could go and where we expect to go with our Echo part volume. In addition to that the GPU is you all were talking about yeah. It's Jeff one of the great things to look at it is just that average selling price, we really want to get down to the 20% to $21000 range for selling more in the 'twenty.
Speaker Change: Three to 24 range now when we get down there and we get that average payment down below 400 Bucks and interest rates continue to fall the numbers of David spoke of where we had north of 500 units on average per store per month, our big stores now in Denver, They're doing eight 900 to 1000 a month.
Speaker Change: And a lot of that is the brand equity that we have in the market for being open as long as we've been.
Speaker Change: But it's just nothing but upside it's gonna be it'll be a great 25, and as the lease returns come back and prices continue to fall a little bit in the back half of 'twenty five.
Speaker Change: Yes, we see room for margin improvement on the front end a lot of volume improvement.
Speaker Change: And then we can begin talking about rooftop growth.
Speaker Change: And this is Danny one more point on that from a margin perspective on the vehicles, where we're tracking 350 $375 better year over year on a full year basis. Despite the fact that used car pricing is coming down obviously wholesale result spreads have widened and that's good for the business, but we'd see it reported where used car price declines expected through the remainder of this year.
Speaker Change: We're into 25 could be a headwind for the used vehicle business and to Jeff's point. It improves affordability, we've improved margin in the face of that decline in used retail price environment.
Speaker Change: It's positive for us on both fronts, yes in auto retail you can't get fooled by revenue because average retail selling price is dropping but margin stay the same or things that improve we sell more cars. We we grow overall gross.
So sometimes when people look at revenue revenue can move around a lot youre selling a $30000 car versus a 20000 dollar car, but if you make more money on the $20000 car you'd rather sell the $20000 car that's something that we focused on very hard that we do very well and we've obviously done great with that where that can park in this calendar year.
Speaker Change: Alright that was a lot of detail, but could you actually go a little bit deeper just on Denver, I guess, I guess I wanted to make sure I understand when I think about the model I think about buying a car at auction and selling it for minimal gross profit and gross unit gross profit on the financing.
Speaker Change: A nice side of the world but.
Speaker Change: I think maybe I've been underestimating how much do you actually can do on the front end gross and one Denver better from a franchise perspective and will other stores. It looks like that its just because car stay on a lot less there because you've been there longer or you can still priced below your competitors, but make 200, all the front end gross and still be well below competitors I, just kind of I'm trying to think about.
Speaker Change: The model correctly, yes, we've just been more mature in Denver, We've got a great brand awareness a lot of repeat customers.
Speaker Change: We've been open since 2000 November of 2014, there and Thats. The whole idea is to take is to take what we've done in Denver and grow that we've not done the brand marketing.
Speaker Change: In the other markets because of affordability issues over the last three or four years with Covid that will all change as we move you know sort of out of 25 and into 'twenty six.
Speaker Change: And that affords us the ability to sell vehicles and the positive Q3 400 dollar range on the front, which is still.
Speaker Change: Way below the market.
Speaker Change: And still drives a lot of traffic for us along with having nearly $3000 of caught between $900 a copy and backend margin you put those things together you have a $500.
Speaker Change: 500 unit average volume on a rooftop basis or in the big stores a thousand.
Speaker Change: It's just it's a printing machine.
Speaker Change: It's fun to watch and that's that's what we're seeing and that's what we said all along.
Speaker Change: Last few years, it's been really tough because we've had huge losses, but we hung in there were a lot of others.
Speaker Change: About out and understandably, so, but we know our model we know that it works very very well and the environment. That's ahead of US Echo Park was built for that environment.
Speaker Change: And we look forward to those days that the lower prices are coming.
Speaker Change: Okay, and then perfect. Thank you for that and just lastly on Echo Park, where are you as far as inventory, where you are now and kind of where you want to be into tax refund season, and just kind of broadly on a normalized Baker.
Speaker Change: In terms of day supply.
Speaker Change: Yes, yes, we're right, where we want to be or you know 20 days on what a 10 to 12 days in the pipeline and will increase.
Speaker Change: As volume increases the 20 days, obviously generates more units on what.
Speaker Change: As volume decreases we bring our inventory level down, but we say you know 20 days online 10 to 12 in the pipeline and that's where you'll see a stack.
Speaker Change: Is there any metrics that you have that you could share that shows that 20 days, it's actually X number of units because I imagine as you take share in a market that you know that 20 days, it's more units, but he's turning the motor factory.
Speaker Change: Yeah, that's correct I mean, we are the more cars, we're selling more units are on them a lot.
Speaker Change: So if you just take our stores selling a thousand.
Speaker Change: You can do the math pretty easily.
Speaker Change: Youre going to have that that 20 day supply on a lot to turn after that 30 day period.
Speaker Change: Okay. Thanks for all the detail.
Speaker Change: Thank you you bet.
Speaker Change: Thank you and it just sort of minus the audience to ask a question at this time press star one on your telephone keypad now once again to ask a question press star one on your telephone keypad now.
Speaker Change: Our next question comes from Bret Jordan with Jefferies. Please state your question.
Speaker Change: Hey, Good morning, guys. This is Patrick Buckley on for Brent Thanks for taking our questions Hi, Patrick.
Speaker Change: And you just touched on this a bit but looking ahead for the Echo park eventual expansion in ramping up the footprint again, it sounds like Thats in early 2026, and $1 25, and then I guess, what sort of market conditions or are you looking for and how quickly can that ramp back up.
Speaker Change: Yeah. This is Jim Keane.
We believe over the next 12 to 18 months it will get a what we would call normalized pre COVID-19 conditions supply will be where we want it and we will be able to supply.
Speaker Change: Additional growth with the levels of inventory that we're experiencing now.
Speaker Change: So sometime in 'twenty early 'twenty six we believe the conditions will be perfect for birth.
Speaker Change: Yes, and I'll add to that then.
Speaker Change: Very disciplined growth from our perspective so.
You know another our goal is still to have 90% coverage of the country and but we'll do that in a very disciplined way and really it's just a matter of getting that average payment down to 400 and below 400, that's where we really see the volume.
Speaker Change: To start to fly off the shelves so.
Speaker Change: We're thinking in the back half of 'twenty five is when we'll start seeing the prices get down into that range.
Speaker Change: We'll put plans together, we have plans we've got properties that we own already that we've sort of hibernating if you will.
Speaker Change: And we're just waiting for the right time to pull the trigger.
Speaker Change: Great. That's helpful. And then could you guys talk a bit more on where you see F&I trending in the 25 I know on your side you called out 2400, GPU and Youre talking about stability there, but I guess are you seeing any signs of headwinds from increased leasing or just general pushback on add ons or I guess on the flip side as the macro.
Speaker Change: Proves and you see rate cuts is there upside there.
Speaker Change: What I would sort of model in the range that we're in now and I think as rate cuts. Yeah. There is some upside there I mean, we're not there are other big consolidators that have higher <unk> than we do.
Speaker Change: And while we're at the top of the top of the group.
Speaker Change: We're chasing those and think that we can perform at those levels as well and we think theres opportunities with warranty and product sales and obviously as margins drop in rates dropped when we have an opportunity to grow more there. So average retail selling price drops we can carry more cost so from a lender perspective so.
Speaker Change: Yeah, we think there is upside, but if I'm modeling out model in and around kind of where we are today.
Speaker Change: Great that's all for us thanks, guys.
Speaker Change: Thank you.
Speaker Change: Thank you and there are no further questions at this time, so I'll hand, the floor back over to David Smith for closing remarks.
David Smith: Great. Thank you very much. Thank you everyone for.
David Smith: Logging him joining us and we look forward to speaking with you next quarter.
Speaker Change: Thank you and that concludes today's call. All parties may disconnect have a good day.
Speaker Change: Okay.