Sonic Automotive Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Sonic Automotive Third Quarter 2023 Earnings Conference Call. This conference call is being recorded today, Thursday, October 26, 2023. 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.

Operator

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. And 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 ks filed with the Securities and Exchange Commission earlier today.

Operator

I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Speaker 1

Thank you very much, and good morning, everyone, and welcome to the Sonic Automotive Third Quarter 2023 Earnings As he said, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke our CFO, Heath Byrd are EchoPark Chief Operating Officer, Tim Keane and our Vice President of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported 3rd quarter financial results, including record 3rd quarter total revenues of $3,600,000,000 a 6% increase from last year. 3rd quarter EPS was $1.92 per share, which includes the effect of certain charges related to the previously announced store closures in the 2nd quarter. Excluding these items, adjusted EPS was $2.02 per share, a decrease from 2.23 in the prior year due primarily to normalizing new vehicle margins and higher floorplan interest rates.

Speaker 1

We're very proud of our team's performance in the Q3 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, and I would like to thank them Thank you all for their continued support. Turning now to 3rd quarter trends. We continue to see improvement in new vehicle production and inventory levels across our brand portfolio despite headline risk related to the UAW strike. As expected, new vehicle gross profit per unit declined sequentially to $4,678 per unit on a same store basis, in line with our projection to exit 2023 in the low to mid $4,000 range.

Speaker 1

This steady decline in new vehicle GPUs should continue into 2024, but we continue to believe that the new normal Level of new vehicle GPU will remain structurally higher than pre pandemic levels in the $2,000 range. Furthermore, our luxury weighted portfolio generally runs a lower inventory day supply And our luxury manufacturer partners have been disciplined in inventory production to date, potentially minimizing new GPU compression relative to industry trends, which would continue to benefit the earnings power of our franchise business. In the used vehicle business, wholesale auction prices for 3 year old vehicles decreased 5% in the 3rd quarter, Following a 6% decline in the Q2, October to date, the 3 year old Manheim Index declined another 3.6 percent despite headlines indicating that blended used car Prices across all age and mileage bands have begun to rise again. While used retail prices remain elevated, contributing to affordability concerns amid the high interest rate environment, The downward trends we are seeing in used vehicles and used vehicle wholesale pricing are positive for our business and in the 4th for the Q4 and beyond. Fuel release turn ins at our franchise dealerships continued to limit our used vehicle volume in the Q3, but we were able to maintain higher than Expected used GPUs at $16.68 per unit on a same store basis to somewhat offset the effects of lower volume.

Speaker 1

Our team remains focused on driving incremental inventory acquisition and retail sales opportunities in the Q4 and into 2024, Driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Despite an elevated consumer interest rate environment, our F and I performance continues to be a strength. Our franchise dealerships F and I penetration rates were stable quarter to quarter and we reiterate our previously issued guidance for full year 2023 franchised F and I GPU at or above $2,400 per unit. Our parts and service or fixed operations business remains strong with record third quarter fixed ops gross profit at our franchise dealerships, up 8% year over year on a same store basis, driven by 10% growth in our customer pay business. We are very 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 the Q4 and into 2024.

Speaker 1

Turning now to the EchoPark segment. As discussed on our 2nd quarter earnings call, We made the difficult but necessary decision to suspend operations at 50% of our EchoPark segment Locations back in June July. We believe that the decision to suspend operations at these stores would substantially improve our near term financial performance without sacrificing our long term strategic plan for EchoPark. In the 3rd quarter, Our financial results reflect the expected initial benefits of these strategic adjustments to our EchoPark business model. We reported revenues at EchoPark of $627,000,000 up 6% from the prior year and all time record EchoPark gross profit of $53,000,000 up 22% from the prior year.

Speaker 1

EchoPark segment retail unit sales volume for the quarter was 19,050 units, up 25% year over year and up 12% from the Q2. As discussed on our July earnings call, reducing our store footprint allowed us to better allocate inventory Across our platform, driving higher unit sales volume, better GPU and significantly lower operating losses. 3rd quarter EchoPark segment adjusted EBITDA was a loss of $5,200,000 compared to an adjusted EBITDA loss of $31,800,000 in the 2nd quarter $23,300,000 in the Q3 of 2022. Based on recent market trends, we remain confident in our path to breakeven adjusted EBITDA in the Q1 of 2024 and look forward to resuming our disciplined long term growth plans for EchoPark as used vehicle Market conditions continue to improve. Turning now to our powersports segment.

Speaker 1

The Q3 is the peak seasonal sales period for our powersports portfolio, highlighted by the Sturgis Motorcycle Rally in August. Our team welcomed over 150,000 rally attendees to our Black Hills Harley Davidson locations, Selling 550 new and used motorcycles during the rally, making it one of the highest volume events in the dealership's history. Combined with our Texas Powersports stores, this drove $7,900,000 in adjusted EBITDA from our Powersports segment in the 3rd quarter. We are continuing to identify operational synergies within our growing powersports network and remain optimistic about the future growth opportunities in this adjacent retail sector. Finally, turning to our balance sheet.

Speaker 1

We ended the 3rd quarter with $797,000,000 in available liquidity, including $335,000,000 in combined cash and floor plan deposits on hand. The strength of our balance sheet allowed us to repurchase 1,700,000 shares of our Class A common stock in the 3rd quarter for nearly $87,000,000 bringing our year to date share repurchase total to 3,300,000 shares or 9% of shares outstanding at the beginning of the year. At the end of the Q3, our remaining share repurchase authorization was $287,000,000 representing over 15% of today's equity market cap. Share repurchases are an important part of our capital allocation strategy, and we remain focused on opportunistic We've approved a 3.4% increase to our quarterly cash dividend to $0.30 per share payable on January 12, 2024 to all stockholders of record on December 15, 2023. In closing, our team remains focused on our near term execution and adapting to changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns.

Speaker 1

Furthermore, we continue to believe our diversified business model provides earnings growth opportunities in our EchoPark and Powersports segments that may offset any industry driven margin headwinds we may face In our 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 culture to grow our business and create long term value for our key stakeholders. This concludes our opening remarks and we look forward to answering any questions you may have. Thank you very much.

Operator

Thank you. And at this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Speaker 2

Hey, guys. This is Joe Enderlin on for Daniel. Thanks for taking the question.

Speaker 3

Hey, Joe.

Speaker 2

Hey. So at EchoPark, you're calling for 1Q EBITDA Profitability. But seasonally, 1Q is the biggest quarter for used dealers. Is that comment just about the seasonality? Or is the message That we're flipping to positive EBITDA and that should continue for the rest of 2024?

Speaker 4

Yes. The message is that we're flipping to positive EBITDA and that should continue From here on out, if you look at the Q2 and the decisions that we made, that certainly helped bolster the bottom line, increased Volume, because our great buying team, they will buy the right mix for the smaller number of stores. You're going to see improvement From the Q3 to the Q4, volume maybe about the same, but EBITDA should continue to improve as more of the SG and A moves that we made sink in. We should be EBITDA positive in the Q1 and then from here on out as we move into the rest of 2024, 1,000,000 to 2025. And the used car market is going to continue to get better, prices are going to drop, new car inventories as we can all see your building.

Speaker 4

That's going to make a difference And used car valuations right now we're buying cars between $24,525,000 We think that that needs to sink below 23,000 before the real big volume that we're used to at EchoPark Returns. And we think that's 18 months to 24 months of kind of choppy water. And those who are outstanding at the end of all that, I think, will enjoy and reap the rewards of the hard work and the dedication, and we certainly plan on Intending to being one of those, as we move forward. So, bluer skies ahead, from an EchoPark perspective, we're very excited about that.

Speaker 2

Got it. That's helpful. Thank you for the clarification there. Looking more at EchoPark, just as a follow-up. With the increase in unit sales Despite the footprint moderation, does this kind of change your long term view of EchoPark and the build out opportunity?

Speaker 2

Do you think you might want larger selling hubs just in the biggest metros? Are you sticking to the original plan? How are you thinking about the footprint after you've made these changes and it's been such positive results?

Speaker 4

Yes, we've learned a lot there. It's Jeff again. And more than likely, we'll have the larger hubs as we move forward in markets. But we're going to be very disciplined about opening the next I think that's an incredibly important point here. We're going to open stores when the inventory is back, when the pricing is back and we can, in a disciplined way And in a profitable way, open locations in markets that will get us to the 90% coverage of the country.

Speaker 4

We still reiterate that too. We're still focused on that, but it's got to be done in a disciplined way. The used car market and the inventory is too topsy-turvy. We've learned that over the last couple of years. Who knows what happens next, But we're prepared for it.

Speaker 4

Right now, we're very comfortable with those 17 stores that are open from an EchoPark perspective. We know we can get those EBITDA positive and we'll grow in a disciplined way and approach as the market allows us to do so.

Speaker 1

And this is David. Something to highlight, just to make sure that I make the point that our team, once we when we decided to do the restructuring for EchoPark, We knew that the market would allow us to buy only a certain number of cars at the right prices that fit the EchoPark model. So it was no surprise to us That once we did the restructuring, that we could stock the remaining stores properly and that sales would go up. But the results really for our team were not Surprising. So I think that's important to we know the model and as we said, We'll roll it out in a disciplined way as the market allows us to do that.

Speaker 5

And this is Heath. I want to add one more point. I think we all believe that it's It's going to be an 18 to 24 months to get back to what we used to see pre COVID. But we all believe and I think everyone understands that That used market will come back and we see that. And as Jeff mentioned, our growth plan will be disciplined and will open When the market dictates the time to open, new stores.

Speaker 2

Got it. That is all for us. Thank you guys for the color.

Speaker 4

Thank you. Thank you.

Operator

Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Speaker 4

You may be on mute.

Speaker 3

Great. Sorry about that. Just had a follow-up on EchoPark. Can you give us a sense of how you plan to navigate Some of the shortages around the later model used vehicles. You did talk about trying to increase your mix in some of the older vehicles, but How do you navigate that challenge when it comes to just training your salespeople, changing the reconditioning So, etcetera, because it feels like you would need to meaningfully take share in that Cohort of the older vehicle like greater than 5, greater than 6 year old vehicle to meet some of these targets, including getting to profitability?

Speaker 3

And I have a follow-up. Thanks.

Speaker 1

Yes. This is Tim Keane. We made that move to Higher mileage and longer year, probably starting at the beginning of the year. That's one of the reasons we've been able to grow the volume, with the shortage in 1 to 5 and 1 to 3 year old cars. And we've perfected some of those different models.

Speaker 1

So we'll continue to take share where we can.

Speaker 4

This is Jeff. It's 15% to 20% of our overall volume right now. I think that it's going to stay in that range. It might get to 25 But I don't think it's going to be in any more than that because as the prices begin to drop, our EchoPark model is 1 to 5 year old cars under 50,000 miles And selling those cars at a great price in the marketplace, where you can buy the car and buy a warranty for basically the same price or less than you can buy it at our competitors, Which drives the real high volume in our ability to market that lower price. So, we certainly have it adds complexity.

Speaker 4

It's a good question because it does add complexity. But I think Tim and the team have done an amazing job teaching the team. We've got the on the franchise side, because it's 30% of our business on the franchise side. So we've been able to leverage our experience on the franchise side into Echo can take advantage of that and Tim Keane and team are the best in the country at it. So, that's something that we'll continue to leverage as we move forward.

Speaker 4

But I want to make sure that everybody understands that not more than 25% of the total mix. I think we'll be lucky if we get there.

Speaker 3

Got it. That's helpful. A follow-up was just on parts and services. You have a lot of California exposure, which obviously has greater electric vehicle adoption. You had some really good growth in your service business overall.

Speaker 3

I'm curious if you could share any insights on how the service activity has been on some of the earlier electric vehicles That you're servicing, like one of the rental car companies heard this morning made a comment that They're having to spend twice as much to service to repair damaged electric vehicles versus an equivalent ice vehicle. Just curious if you are seeing something like that as well. Any more insights you could share would be helpful. Thanks.

Speaker 4

Yes. Thanks. It's Jeff again. We're exactly seeing that. Our average RO dollars or gross dollars are up 30% on electric vehicle Been a nice vehicle.

Speaker 4

That's a nice surprise for us.

Speaker 1

Yes. We're

Speaker 4

all smiling. We are. And so I keep bringing that on. The fixed operations business for us Across the country is just fantastic. We expect to see it continue to grow.

Speaker 4

You see that in our numbers. We've had an amazing year and that's going to continue on into 'twenty four, More cars on the road and more customers using our service shop. So it's been a very nice surprise, more electric vehicles coming through with higher grosses In terms of our average RO count.

Speaker 3

Got it. Great. Thanks for the color. I'll jump back in queue.

Speaker 4

You got it. Thank you.

Operator

Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Speaker 6

Good morning, guys. Just a first question on sort of time and capital. Now that you're kind of Investing maybe a little bit less in EchoPark on time and capital. Do you see the opportunities for making Dealership acquisitions on the new side is maybe a higher priority and something that might be more attractive now.

Speaker 1

Yes, John, this is David Smith. Thanks for the question. Yes, we're as we mentioned, we're going to opportunistically look What's best for the overall business, that's our and for all of our shareholders. And so we're going to be open minded about that. But As I mentioned on our opening comments, we certainly believe that our shares are a great value.

Speaker 1

I think that The opportunities in the franchise business, the franchise stores out of the market are still extremely valuable. And so We've seen some great opportunities in our powersports business to grow as we've talked about. So we're going to be open minded on where we put our capital, But it's with having in mind again that it's got to be great for the overall business is the key. So we're going to look at it from a A little ROI perspective. Heath, did you Yes.

Speaker 5

As part of our capital allocation, one of the big pieces right now is investing back into our business. Yes, we talked about EV a little bit before. You'd be shocked as the requirements and the capital that we have to spend to prepare for EV and manufacturer So that's going to be part of our capital allocation. And technology, we've just started our path down AI And continuing our robotic process automation and there'll be huge efficiency gains from those two investments. And as David said, returning capital to shareholders, we increased our dividend, bought back 9% of the outstanding shares so far this year.

Speaker 5

Those are some of the main drivers, but I agree with David. We'll continue to look at the opportunities both in the franchise And in powersports for good acquisitions, I think.

Speaker 6

Okay. Maybe just a second question, Maybe more from Jeff on EchoPark long term. The ebb and flow we're seeing In new vehicles in the 1 to 5 year old category is something that is becoming more obviously a cyclical phenomenon, right? I mean, you sell less to me. Vehicles for the last 5 years, as you hit a trough, you have less vehicles to actually retail.

Speaker 6

So as you look at this, That should improve in the next 2 years or so. So hitting the accelerator again on EchoPark at that point seems like it could make sense. But at some point, and this is long term stuff, but 5 or 10 years down the line, you might be hitting another air pocket again And those vehicles, could it make more sense to have this model much more flexible to operate more in the 1 to 10 year old category And flex up and down, because you got a good operator like CarMax out there right now struggling with similar issues that you're facing that's much more established. 2. And they're just facing the same issue with the air pocket in these 1 to 5 or 1 to 6 year old vehicles that they focus on.

Speaker 6

And there's not Even with their best efforts, anything, they can really do much about it. So I mean, could you make it more flexible over time so that you're not running into these issues?

Speaker 4

It's a great question. We have the conversation here all the time. Yes, we can. Certainly, we can adjust and move our margins up. We would build stores differently going forward because our stores are built for high volume.

Speaker 4

If you remember pre pandemic, We're averaging 5 50 units of store rooftop, right? Now that number is in the 300 range and we're on our way back to the 500. But yes, we would build we're not structured for that type of lower volume. We're structured for the big heavy volume. But 100%, if we and we're hit like I said earlier, it's going to be topsy-turvy for the next 18 to 24 months.

Speaker 4

There's no question about that, but new inventory is going to grow and electric vehicles are going to come into the market, which we'll start selling. And that's going to bolster the used vehicle volume, but we're not Going to get fooled by that. And so as we move forward and build stores, we'll take into consideration the The ability that you're talking about, we've pared down the stores now to where we know we can get that EBITDA positive moving forward and making good money. Our Denver store, for example, our Thornton store is back up making $800,000 a month and it's back in the upper echelon of our profits Stores across the entire company, and we see that coming back. But it's a real good thought and it's a conversation We have around here all the time is, hey, do we need to expand the range, so that we don't get hit in case there is another trough that you're talking about.

Speaker 4

And that will Happen as we contemplate building or renovating stores in the future.

Speaker 1

And John, this is David Smith. Something to keep in mind is we have Evolve the EchoPark brand and model over the years. It's been 10 years and a lot of R and D. And one of the things as you look down the road, Jeff mentioned the Colorado market, the brand awareness in the Colorado market Because we've been there longer than anywhere else, it's far greater than anywhere else in the country. And we've got our Chief Marketing Officer, Dino Bernanke here And you may want to chime in, but I believe you look down the road, our brand awareness for EchoPark is going to be far greater.

Speaker 1

That's going to help us Get into a lot of more areas and drive our revenue if we do hit one of those air pockets you talked about.

Speaker 4

And we started Branding in Houston in March of this year, and our brand awareness there is growing like wildfire. So that's great. But we haven't been unwilling given the current economic circumstances to push that beyond the Houston market. But as we get better and stronger from a P and L You're certainly going to find us expand that throughout all of Texas and then the rest of the country. So there's a lot of levers, John, that we can still pull.

Speaker 4

But we are very focused in that 1 to 5 year old category. We will build stores in the future that will give us the flexibility to do it in different ways if we need to.

Speaker 6

I'm sorry, just one can I sneak in one last one on the inventory side? I mean, some of your brands are still pretty inventory constrained And operating in, I guess, maybe mid single to maybe mid teen day supply. I'm just curious how much of an impact do you think that's having on Your new vehicle sales here in the short run and do you see any relief on the horizon?

Speaker 4

We do. The Q4 you're going to see it. We haven't been over 10,000 units in stock since 2019, and we hit that in this timeframe. Where we're really constrained is Honda and Toyota, the imports. The luxury manufacturers are doing a fantastic job.

Speaker 4

BMW were at about 18 day supply. Electric vehicles were at 26 for BMW. So we've got inventory to sell. I think you see that in our sales. Hopefully, the strike starting to be soft last night with Forbes announcement And they're like my Ming, they'll follow each other and hopefully get this handled by the end of the year.

Speaker 4

And so I'm not too concerned. Inventory is going to continue to build. That's We're so excited about EchoPark because it's going to bring used car valuations down. We're seeing no sales at the auctions down in the Mid 40% range, which is a big deal. That means people are holding on, they're going to have to start selling those cars.

Speaker 4

That's going Pricing down. So we're excited about the new vehicle inventory coming back, but I don't think it's going to come back too far. I mean, I think when we get to the highs, Not including electric, just looking at ICE, maybe in the 30 to 35 day range versus pre pandemic in the 65 day range. So I think it will stop there. There's not a manufacturer out there saying that they're going to bring inventory day supply up to some crazy number, which I think is healthy and it's good for the used car business.

Speaker 4

That's enough for us to get our job done from a pre owned perspective, both at EchoPark and on the Sonic side. Leasing is coming back, which is great. We're starting to see incentives there. Again, we're leasing a higher percentage of the portfolio now. Of course, that's going to take 18 months to 24 months and that will make a big difference.

Speaker 4

But inventory is getting better. If we had more Hondas and Toyos on the ground, we'd sell more Hondas and Toyos. There's question about that. Those day supplies are still on the sub-ten for us, but improving every month. And I expect that To improve greatly in this quarter that we're in right now for those brands and others.

Speaker 4

We're seeing, including BMW, which is a big part of our portfolio, We're going to get more ICE vehicles, more SAVs. That's going to make a difference in terms of our new car volume for the rest of this quarter and going into 2024.

Speaker 6

Encouraging. Thank you very much, guys.

Operator

Yes, sir. And our next question comes from the line of Michael Moore with The Benchmark Company. Please proceed with your question.

Speaker 7

Thank you very much and good morning everyone. Good morning, Mark. Two things. On the inventory front, you provide any details on the used vehicle inventory at both franchise and EchoPark?

Speaker 4

In terms of day supply?

Speaker 7

Yes, where it sits?

Speaker 4

They're both in the 30 day range. We try to keep 20 day supply on the lot and 10 days in the pipeline. We're probably a little bit below that on the franchise side, maybe 27, 28 days and we're right at 30 in the EchoPark stores only, Not including Northwest Motorsports OR ECAR 1. And so we're in fantastic shape. Our inventory is young, margins are good.

Speaker 4

We're in as good a shape as probably anybody out there in terms of our used day supply and our inventory mix.

Speaker 7

And on the franchise side with the inventory, you're not forced to chase out in the outside, you're either taking money trade ins or the priority auctions, is that what you're

Speaker 4

Looking at Yes, I mean, we're buying more and more cars off the street. That percentage is growing with us every month. We're very, very focused on that. Like I said at EchoPark,

Operator

I think

Speaker 4

those cars are going to be 25% of the mix, it's a much larger percentage of mix. On the franchise side, we buy very few cars at auction, if any at all. So 90% of our cards are coming from purchase off the street or trade ins.

Speaker 7

Okay. And you kind of alluded to it about the captive subs, Finance subs getting back into the game a little bit, subsidizing leases and it sounds like they're subsidizing loans as well. Just wondering if you can comment What that does for your business, both pluses and minuses?

Speaker 4

Yes. I mean, they've really had to do it on the electric vehicle side, right? So 90% of the electric vehicles we're selling All leases, just because the MSRPs were too high and customers want just don't see the value in paying a difference between electric and a nice vehicle. But certainly, it's making a difference in the business. You can see it in our new car volume.

Speaker 4

Had a great new car volume quarter. We intend to have another one in the 4th quarter moving forward. And they are 100% back in the game. They're doing a great job, really, really good job for us. And so we expect that to continue.

Speaker 7

Okay. And so and they've stepped up leasing, correct? Yes.

Speaker 4

Is it incentives on the leasing front? 100% across.

Speaker 7

2. Yes. And what you have a higher luxury mix than most. So what is the percentage of leasing on the new vehicle set?

Speaker 4

Well, when you bring the thing that's funny now is and we should all as an industry start talking about this, the difference Between ICE and leasing combustion engine and leasing an electric vehicle, the percentage for electric vehicles, 85%, 90% Mercedes is above that. And short term, I think that's going to continue on. And it's in the 30% to as high 50% range depending on the brand on the luxury side as well.

Speaker 7

Perfect. Thank you. Thank you very much.

Speaker 2

Yes, sir.

Operator

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Speaker 8

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

Speaker 2

You bet.

Speaker 8

Taking a look at used GPUs and the strength there, was there anything specific driving that? It sounded like Sourcing has improved a bit as far as getting cars off the street, but anything else to call out there?

Speaker 4

Yes, 100%. It's disciplined day supply. We have always had that and in this kind of environment, that's going to show up for us. We have a very, very disciplined way that we manage inventory. As I said earlier, 20 day supply frontline, 10 days in the pipeline, we don't go over that.

Speaker 4

It might cost us some sales in some points in time. But in this kind of day and time, it really does help. And so that's keeping the margin strong for us on the franchise side. And on the EchoPark side, that discipline really does help and it's made a difference in our margins.

Speaker 8

Got it. That's helpful. And then we've also heard some talks of a bit of a mismatch between EV production and inventory levels in retail demand there. Are you guys seeing the Same thing. And do you guys expect to see some heavier discounting as we enter 2024?

Speaker 1

Yes. It's actually it's very interesting that this is David. Depending on what part of the country you're in, I got the chance to drive 1 of the new Mercedes electric vehicles recently and it was fantastic vehicle, But the demand for that particular vehicle is certainly higher as I'm sure you've seen out West. But in some areas of the country, as Jeff said, You've got to discount that car heavily to get it to actually get it sold.

Speaker 4

100%. This is Jeff. 100%, There's a lot of discounts going on. And depending on the manufacturer, remember, we're in its infancy right now. So everybody's learning, including the manufacturers.

Speaker 4

We've got a 26 day supply of BMW EVs on the ground. We've got a 58 day supply of Mercedes EVs on the ground. Our margins are better on BMWs right now than they On the Mercedes, they're BMW is still in the same range as a nice vehicle margin. So, I think they've done a really good job in managing that. Mercedes got out a little bit ahead of themselves in terms of inventory.

Speaker 4

Product is great, and we're selling a lot of it on the East Coast, I think Among the largest sellers in the country, maybe the world of EVs for both of those brands. But there's still challenges ahead. The prices are too high. The product is fantastic. Customers need to get used to the product.

Speaker 4

There's a lot of work to be done, to get us there and we'll get there over time. The manufacturers are going to be discounting. There's no question about that in the coming quarters. That's great for us. We'll sell more cars, drive more F and I, and drive more profitability in the company.

Speaker 5

And this is Heath. You've seen probably a lot of manufacturers talk about the market for hybrid vehicles And, pushing Toyota and that being the transition really from the combustion engine to EV and so hybrids are great for us. We love the product and it's really good for service. So we think that's going to be more of a demand, white and yellow than EV.

Speaker 8

Great. Very helpful. That's all for us. Thanks, guys.

Operator

And we have reached the end of the question and answer session. I'll now turn the call back over to the CEO, David Smith, for closing remarks.

Speaker 1

Great. Thank you very much. Thank you everyone for joining us and have a great day. Talk next quarter.

Operator

And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.

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