Jeff Lick

Jeffrey Lick asked for a breakdown of 2025's extraordinary items and their impact on 2026 comparisons, seeking insights into challenging or easier periods. He also inquired about the anticipated impact of increased lease returns in H2 2026, particularly for underwater EV leases, on the dealership business and OEM strategies.

Answer

CEO Michael Manley highlighted tariff announcements and the end of EV incentives in March/April 2025 as key comparison points, expressing confidence in AutoNation's robust model to navigate turbulence and focus on affordability in 2026. Manley believes OEMs have already provisioned for increased lease returns, especially for models with incorrect residual value estimates, and expects dealers to benefit if OEMs ensure stable market pricing.

Jeffrey Lick asked for a breakdown of 2025, an 'extraordinary year,' to identify any particularly challenging or easier comparative periods for 2026. He also questioned the impact of a sizable year-over-year increase in lease returns expected in the second half of 2026, especially for deeply underwater EV leases, and how OEMs might handle this, affecting the franchise business.

Answer

CEO Mike Manley highlighted that 2025 was impacted by tariff announcements in March/April and the end of incentives for electrified powertrains. He expressed confidence in AutoNation's robust business model to navigate turbulence and maximize opportunities, expecting 2026 to be more stable with a continued focus on affordability. Regarding lease returns, Mike Manley believes OEMs have already provided for the known issue of incorrect residual value estimates for certain models and powertrains. He sees increased lease returns as beneficial for dealers, provided they return to the market at correct prices, with OEMs working to ensure market stability.

Jeff Lick asked for more detail on the impressive 100 basis points of gross margin expansion in service and parts, inquiring about its drivers and sustainability. He also followed up on the SG&A ratio of 67.4% of gross profit, asking about its future trajectory and key drivers.

Answer

CFO Tom Szlosek attributed the aftersales gross margin expansion to equally balanced volume and price increases, including higher parts volume, repair orders, labor hours, and price adjustments to offset inflation, along with mixed favorability. He highlighted the success of technician hiring and training initiatives. Regarding SG&A, Tom Szlosek noted the company's target range of 66%-67% and mentioned ongoing productivity initiatives in variable costs (sales, service), thoughtful advertising ROI, and daily management of other SG&A costs, while also pointing out that AutoNation includes service loaner expenses in SG&A, which might penalize its reported rate compared to some peers.

Jeff Lick of Stephens Inc. asked for a breakdown of the drivers behind the strong SG&A performance and inquired about the operational relationship between AutoNation Finance and the core dealership business.

Answer

CFO Thomas Szlosek attributed the SG&A improvement to disciplined marketing spend, variable compensation, and specific cost-saving initiatives like standardized HVAC systems and LED lighting. He also described AutoNation Finance as highly integrated, helping to drive superior outcomes in areas like CFS product attachment. CEO Michael Manley added that the finance arm operates with a competitive mindset, earning its business through superior service levels to the dealerships, which is a cornerstone of its culture.

Jeffrey Lick from Stephens Inc. inquired about the capital allocation strategy, specifically the trade-off between share repurchases and M&A, and what conditions would prompt a large acquisition. He also sought clarification on the outlook for SG&A as a percentage of gross profit for 2025.

Answer

CEO Mike Manley stated that capital allocation decisions are driven strictly by the highest potential return for shareholders. A large acquisition would require high confidence in its return on invested capital compared to other options like buybacks. He also noted that the M&A pricing environment is improving. CFO Tom Szlosek clarified that after a seasonal Q1 rise, SG&A as a percent of gross is expected to improve and finish 2025 below the full-year 2024 level.

Jeffrey Lick from Stephens Inc. posed a detailed question on industry dynamics, asking for Mike Manley's OEM perspective on new vehicle GPU paths, affordability, and the implications for the used market. He also asked if a shortage of late-model used cars could drive a significant increase in leasing.

Answer

CEO Mike Manley provided an extensive outlook, stating that improving affordability from moderating MSRPs, falling rates, and rising incentives will boost retail sales. He believes this will benefit the used market without dramatically affecting used margins. He also noted the BEV/HEV inventory imbalance is impacting new margins. On leasing, he expects a natural increase back toward historical levels of 30% but does not foresee it causing a spike in late-model used car values due to shorter lease terms.

Jeff Lick with Stephens Inc. inquired about Asbury Automotive Group's outlook for 2026, considering factors like tariffs, EV credit changes, lease returns, and potential GPU normalization, seeking a qualitative roadmap for the first and second halves of the year. He also asked about the drivers behind the anticipated decline in new vehicle gross profit per unit (GPU) towards the $2,500-$3,000 stabilization range.

Answer

President and CEO David Hult projected a slightly backward trend in SAR for 2026, with the first half likely more challenging due to weather and ongoing transitions, and the second half freeing up. He noted the impact of Stellantis stores and the benefits of increased luxury brand mix post-divestitures. COO Dan Clara added that the second half of 2026 is expected to benefit from lease returns, improving used car inventory and execution. David Hult further explained that GPU normalization depends on inventory balance and brand mix, with high cost of sale for new vehicles putting pressure on margins.

Jeff Lick with Stephens Inc. inquired about Asbury Automotive Group's 2026 outlook, specifically how factors like tariffs, EV credits, lease returns, and GPU normalization might impact performance, requesting a qualitative roadmap for the first and second halves of the year. He also asked about the drivers behind the anticipated decline in new vehicle gross profit per unit (GPU) towards the $2,500-$3,000 range.

Answer

President and CEO David Hult outlined expectations for a slight SAR contraction, potential Stellantis tailwinds, and a challenging first half due to weather and Tekion rollout distractions, with improvements in the second half. He noted that balanced inventory and an increasing luxury brand mix support their GPU estimates, while high sales costs and potential inventory growth could pressure margins. COO Dan Clara added that the renewed used car strategy, combined with anticipated lease returns in the second half, positions them to maximize gross profit per unit.

Jeff Lick inquired about the trajectory of new vehicle Gross Profit Per Unit (GPU) in Q4, considering the impact of the Chambers acquisition and the Q3 EV market dynamics. He also asked about Chambers' specific accretive effect on new GPUs.

Answer

David Hult, President and CEO, stated that Q4 is traditionally strong for luxury, and he anticipates margins will hold up well despite increased EV volume in Q3. He confirmed that the Chambers acquisition is expected to have an accretive effect on new GPUs, noting their strong performance in generating gross profits on both new and used vehicles.

Jeff Lick asked about the expected trajectory of new vehicle Gross Profit Per Unit (GPU) in Q4, particularly for the luxury segment, and the anticipated accretive impact of the Herb Chambers acquisition on new GPUs.

Answer

David Hult (President and CEO) stated that Q4 is traditionally strong for luxury, especially December, and he expects margins to hold up well. He confirmed that the Herb Chambers acquisition is already leading the organization in gross profit generation for both new and used vehicles, pulling up PVRs.

Jeff Lick of Stephens Inc. inquired about the cadence of new vehicle gross profit per unit (GPU) and sales volumes during Q2, the outlook for Q3, and whether the GPU guidance accounts for potential OEM invoice adjustments related to tariffs, particularly around the 2026 model year changeover.

Answer

Chief Operating Officer Daniel Clara explained that new vehicle GPUs were strong early in the quarter but moderated as the SAAR leveled off. He confirmed the company's belief that GPUs will normalize in the $2,500 to $3,000 range, a forecast that attempts to account for potential pricing adjustments, though the situation remains fluid. He also agreed that major OEM adjustments are most likely to coincide with the 2026 model year.

Jeffrey Lick inquired about the financial impact of Total Care Auto (TCA) deferrals for the remainder of the year, the potential effect of tariffs on the TCA business, and the progress and long-term SG&A savings from the Tekion DMS implementation.

Answer

SVP & CFO Michael Welch explained that potential tariff-related volume decreases would slow the TCA deferral impact in 2025, pushing it into future years. President & CEO David Hult added that the Tekion rollout is progressing well and is expected to generate material savings by eliminating numerous software application and integration fees, while also boosting employee productivity to lower personnel costs.

Jeffrey Lick of Stephens Inc. asked about the relationship between rising new vehicle inventory and potential pressure on GPUs as the SAAR environment improves. He also asked what key factor the investment community might be under-appreciating about Asbury's outlook for 2025.

Answer

President and CEO David Hult acknowledged the direct correlation between higher inventory and lower margins but noted that OEMs are currently showing more discipline than in the past. Regarding the 2025 outlook, Hult suggested investors may under-appreciate the sustained strong demand, the high average age of vehicles driving the high-margin service business, the future tailwind from an eventual Stellantis recovery, and the large cash flow benefit from TCA that will materialize in a few years.

Jeff Lick asked for an outlook on 2026, using 2025 as a baseline, considering factors like tariffs, the EV tax credit expiration, and U.K. market dynamics, to understand the progression of the year and identify easier versus harder periods. He also inquired about the anticipated impact of a significant increase in lease returns in the latter half of 2026 on the used car business, seeking historical context.

Answer

Daryl Kenningham, CEO, noted that the EV impact is small for Group 1, with EV mix at 1.3% and improved margins. He emphasized focusing on controllable factors and building on 2025's organic growth opportunities in both the U.K. and U.S. Regarding lease returns, Daryl Kenningham expects them to be a positive, controlled source of premium used cars later in the year, potentially buoyed by tax refunds in Q1/Q2. Pete DeLongchamps, SVP of Manufacturer Relations and Financial Services, expressed bullishness on the used car market, highlighting disciplined acquisition strategies, including AI-driven auction buying.

Jeff Lick sought management's outlook for 2026, using 2025 as a baseline, specifically regarding GPU progression, the impact of lapping the EV tax credit, and the expected cadence of the year.

Answer

Daryl Kenningham, CEO, noted that Group 1's EV mix was 1.3% (down from ~3%), minimizing the EV tax credit's impact, and EV margins have improved. He emphasized focusing on controllable factors and building on 2025's performance through organic growth, particularly in the U.K., and optimizing U.S. after-sales, F&I, used cars, and cost structure. Kenningham also discussed the potential positive impact of increased lease returns and tax refunds on the used car business in 2026. Pete DeLongchamps, SVP, expressed bullishness on the used car market, highlighting disciplined acquisition and AI-driven purchasing strategies.

Jeff Lick from Stephens Inc. requested details on the U.S. parts and service dynamics, specifically regarding customer pay and warranty growth, and any factors that might influence gross margin percentage going forward. He also asked for insights into Group 1 Automotive's vehicle retention rates by model year, which are notably higher than typical industry averages.

Answer

President and CEO Daryl Kenningham and CFO Daniel McHenry detailed strong customer count growth (U.S. up 3%, U.K. up 6%) and healthy customer pay (CP) business. They noted that a weakening collision business, with wholesale parts sales declining, could positively impact overall after-sales margin percentage. Both CP and warranty margins were up year-over-year, with Daniel McHenry specifying U.S. CP up 8% and warranty up 16%, contributing to an overall margin mix increase from 54% to 55.2%. SVP Pete DeLongchamps attributed high retention to a focus on service contracts, maintenance, consistent follow-up, competitive pricing, and flexible scheduling. Kenningham added that their retention is measured by two visits per year, and they are actively using data management and propensity modeling to target higher-mileage, older vehicles.

Jeff Lick from Stephens Inc. requested details on the U.S. parts and service dynamics, specifically regarding customer pay and warranty growth, and any factors that might influence gross margin percentage going forward. He also asked for insights into Group 1 Automotive's vehicle retention rates by model year, which are notably higher than typical industry averages.

Answer

President and CEO Daryl Kenningham and CFO Daniel McHenry detailed strong customer count growth (U.S. up 3%, U.K. up 6%) and healthy customer pay (CP) business. They noted that a weakening collision business, with wholesale parts sales declining, could positively impact overall after-sales margin percentage. Both CP and warranty margins were up year-over-year, with Daniel McHenry specifying U.S. CP up 8% and warranty up 16%, contributing to an overall margin mix increase from 54% to 55.2%. SVP Pete DeLongchamps attributed high retention to a focus on service contracts, maintenance, consistent follow-up, competitive pricing, and flexible scheduling. Kenningham added that their retention is measured by two visits per year, and they are actively using data management and propensity modeling to target higher-mileage, older vehicles.

Jeff Lick of Stephens Inc. asked which Q2 performance metrics were most surprising, which trends are sustainable, and for an outlook on the impact of lease returns in 2026.

Answer

CEO Daryl Kenningham highlighted the strong aftersales performance but cautioned that the 13% customer-pay and 31% warranty growth rates are not sustainable long-term, though he sees resilience in new car margins. SVP Pete DeLongchamps added that forecasting the 2026 lease return impact is difficult due to uncertainty around future vehicle equity, especially for BEVs. CFO Daniel McHenry noted UK SG&A should improve in Q3.

Jeffrey Lick requested more detail on the operational challenges in the U.K., such as the DMS changeover and decentralizing decision-making, and the potential for improvement. He also asked how conversations with OEMs are evolving regarding inventory and EV mandates.

Answer

CEO Daryl Kenningham explained there is significant opportunity in the U.K. by empowering store-level general managers, a shift from Inchcape's centralized model. He noted this transition is ongoing but showing progress. Executive Peter Delongchamps added that OEMs are generally bullish for the year and that Group 1's strong performance metrics ensure continued growth opportunities.

Jeffrey Lick asked for a comparison of the acquired Inchcape stores to Group 1's existing U.K. portfolio in terms of size and metrics. He also inquired about consumer reactions to ongoing vehicle stop sales and the outlook for GPUs.

Answer

CEO Daryl Kenningham and CFO Daniel McHenry explained that while Inchcape stores are slightly more luxury-focused, they are not materially different in overall size. Kenningham emphasized a significant opportunity to improve aftersales performance at the acquired stores. On stop sales, he noted that new car customers tend to wait, while used car buyers are less sticky. He remains optimistic about the business despite macro noise.

Jeff Lick asked David McCreight about the challenges CarMax faces as a hybrid business, specifically the tension between physical and digital operations. He also inquired if CarMax might have lost its appeal to the 'young professional, likely female' demographic to competitors.

Answer

David McCreight (Interim President and CEO) acknowledged the challenges of omnichannel but expressed optimism due to the team's talent, focusing on customer-centric decisions over operational biases. He and Tom Folliard (Interim Executive Chair) emphasized the need to improve across the board, simplify processes, and leverage existing customer flow, rather than focusing on a specific demographic shift or competitor impact.

Jeff Lick asked David McCreight about the challenges CarMax faces as a hybrid retail business, specifically the tension between physical and digital operations that can hinder an ideal digital experience. He also asked Tom Folliard if a primary competitor has become more effective in attracting the young professional/female demographic by offering an easier experience.

Answer

David McCreight, Interim President and CEO, acknowledged the challenges of omnichannel complexity but expressed optimism that the team is ready to streamline and optimize by focusing on customer needs. Tom Folliard, Interim Executive Chair of the Board, stated that CarMax needs to improve across the board, simplifying processes for all consumers, not just specific demographics, to better leverage its investments in digital capabilities.

Jeff Lick questioned the impact of CarMax's reserved inventory policy (up to seven days, potentially 40% of online inventory) on sales, as it makes attractive units unavailable to other potential buyers. He also asked about the conversion rate of reserved inventory into actual sales.

Answer

President and CEO Bill Nash explained that reserved inventory typically has an interested customer, and the ability to transfer cars across locations is a significant benefit. He noted that CarMax actively manages the duration of reservations and that vehicles not available for transfer are usually due to title issues. Nash confirmed that CarMax continuously evaluates the economics of reserved inventory and allows other customers to express interest in reserved vehicles.

Jeff Lick from Stephens Inc. asked about the drivers of the record retail GPU, including logistics and reconditioning improvements, and whether older, 'value' vehicles carry higher gross profits.

Answer

President & CEO Bill Nash explained that the record GPU was a result of flowing through savings from logistics and reconditioning efficiencies in a strong demand environment. He confirmed that older cars, when brought to CarMax standards, are unique and typically generate higher margins. CFO Enrique Mayor-Mora added that sales of cars under $20,000 were a key driver of the comp.

Jeffrey Lick asked about the drivers behind the record number of vehicles sourced from dealers via the Max offer program and inquired about any recent changes in wholesale auction dynamics.

Answer

CEO William Nash attributed the record sourcing to a 40% year-over-year increase in active dealers using the Max offer platform. He cited enhancements that made the tool easier to use, including a seamless transition between desktop and mobile and integration into dealer inventory management systems. He also noted that wholesale auction lanes have seen a recent pickup in bidding activity.

Jeff Lick asked about the growth potential and sustainability of the wholesale business, highlighting the impressive growth in dealer-sourced buys and strong gross profit margins.

Answer

CEO William Nash stated a clear intention to grow the wholesale business as much as possible, driven by a strong internal focus on buying more cars. He noted that while the 'Max Offer' product has good reach, there remains a large opportunity to sign up more dealers, offering them a valuable alternative to traditional disposition channels.

Jeff Lick asked if the Q4 guidance implies that consumer challenges are a bigger factor than the company's improvements. He also inquired about the potential dollar amount of benefit if Indian tariffs were to decrease to levels comparable to other countries.

Answer

CEO J.K. Symancyk explained that the Q4 guide has been guarded from day one due to consumer uncertainty and cost curveballs like tariffs, and that incentive compensation significantly impacts the EBIT comparison. COO and CFO Joan Hilson added that the business has momentum with slight conversion rate increases and improved merchandise margins. CEO J.K. Symancyk noted that quantifying the exact dollar benefit of reduced Indian tariffs is difficult due to strategic sourcing changes, but it would allow for more offensive plays and greater predictability in the supply chain.

Jeff Lick asked about the Q4 guidance, noting that comparing this year's high-end EBITDA to last year's implies the consumer element is a larger factor than Signet's improvements. He also inquired about the potential dollar amount of 'get-back' if Indian tariffs were reduced to a more moderate level.

Answer

CEO J.K. Symancyk explained that the guarded Q4 guide reflects consumer uncertainty, competitive landscape, and cost curveballs like tariffs, with incentive compensation reload being a significant factor in the EBITDA comparison. COO and CFO Joan Hilson added that Q3 momentum and improved conversion rates speak to the assortment's strength, with tariff impacts being offset. Symancyk clarified that quantifying the dollar 'give-back' from reduced Indian tariffs is difficult due to strategic sourcing and design changes, but such a reduction would enhance product range, supply chain predictability, and the ability to play offense. He emphasized that the nimbleness developed in the supply chain due to tariff challenges will be a future competitive advantage.

Jeff Lick asked for management's perspective on how current market factors—including vehicle depreciation, parts inflation, and potentially softening insurance rates—might influence total loss frequency and the trend of uninsured motorists, potentially creating tailwinds for Copart's business. He also followed up on Copart's strategy for addressing the whole car (non-damaged, dealer-to-dealer) market, specifically regarding organic growth versus acquisitions.

Answer

CEO Jeff Liaw explained that a soft used car market could support volume but potentially lead to softer selling prices. He noted that parts inflation and vehicle complexity continue to drive cars to total loss, especially for international markets. Softening insurance rates would likely reverse the underinsurance trend, benefiting Copart. Regarding the whole car market, Mr. Liaw stated Copart's default is organic growth, leveraging existing liquidity and infrastructure, but confirmed that strategic acquisitions are also considered if compelling enough.

Jeff Lick asked about the combined impact of vehicle depreciation, parts inflation, and potentially softening insurance rates on total loss frequency, and later inquired about Copart's strategy for addressing the non-damaged whole car business (dealer-to-dealer), whether organically or through acquisition.

Answer

CEO Jeff Liaw explained that vehicle depreciation could support volume but might soften selling prices. He noted that parts inflation and vehicle complexity continue to drive total loss frequency. Softening insurance rates would reverse underinsurance trends, increasing covered cars. Regarding the whole car business, he stated Copart's default is organic growth, leveraging existing liquidity and technology, but strategic acquisitions are always considered, citing past examples like National Powersports Auctions and Purple Wave.

Jeff Lick asked about the potential impact of a less robust hurricane season on Copart's units and profitability, and how the current insurance situation, with combined ratios below pre-COVID levels, might lead to increased price competition and normalized insurance rates.

Answer

CEO Jeff Liaw noted the difficulty in predicting storm season, emphasizing that catastrophic events are not inherently profitable for Copart over the long term, despite being a crucial service. He explained that storm-related revenue tends to lag. Regarding insurance, he observed that improved combined ratios have led to more aggressive behavior from some carriers and anticipated competitive responses in the dynamic industry.

Jeff Lick asked about the evolution of Carvana's sourcing environment, including changes with commercial rental providers and scaling direct-from-customer acquisitions. He also inquired if the proportion of sourcing channels would change significantly when Carvana reaches 2-3 million retail units.

Answer

Ernie Garcia, Chief Executive Officer, explained that Carvana is structured to be a structurally better buyer of cars, leveraging its ADESA partnership for wholesale and unlocking both wholesale and retail capabilities at the same locations to reduce expenses. He noted that 27 of Carvana's 74 sites are now capable of handling both retail and wholesale efficiently. He stated it's early to predict the exact sourcing mix at 2-3 million units, but emphasized the importance of being an advantaged buyer from both customers and business disposers, as both segments have historically grown in lockstep.

Jeff Lick inquired about the evolution of Carvana's sourcing environment, including commercial rental providers and direct customer purchases, and whether the proportion of sourcing methods would change when retailing 2-3 million cars.

Answer

Ernie Garcia, Chief Executive Officer, emphasized Carvana's structural advantage as a buyer of both retail and wholesale cars, enhanced by the ADESA partnership and integrated sites that reduce expenses and time. He detailed the current site breakdown (wholesale only, retail only, both) and noted that buying from customers and business disposers are both centrally important. He observed that Carvana's buying and selling brands have grown in lockstep, reflecting the market's nature of customers swapping cars.

Jeff Lick from Stephens Inc. asked about any experimentation with APRs and pricing during the quarter and questioned how Carvana manages to achieve a higher APR while maintaining relatively low delinquency rates.

Answer

CEO Ernie Garcia emphasized focusing on overall results rather than short-term lever adjustments. CFO Mark Jenkins attributed their financing success to the vertically integrated platform, which provides deep knowledge of both the vehicle and the customer, enhanced by sophisticated data modeling to manage risk effectively.

Jeff Lick from Stephens Inc. asked about any recent experimentation with APRs and pricing, and questioned how Carvana achieves a higher APR while maintaining relatively low delinquency rates.

Answer

CEO Ernie Garcia noted that the company focuses on optimizing its vertically integrated machine for overall results rather than specific quarterly lever adjustments. CFO Mark Jenkins attributed the strong finance performance to the advantages of their vertically integrated model, which includes intimately knowing both the vehicle and the customer, and leveraging growing data sets to continuously improve their underwriting models.

Jeffrey Lick asked CFO Mark Jenkins what surprised him in the quarterly data and asked CEO Ernie Garcia for his perspective on Carvana's brand adoption curve, suggesting it is still in the early stages.

Answer

CFO Mark Jenkins humorously noted the initial negative stock reaction was his biggest surprise given the record results. CEO Ernie Garcia agreed that Carvana is early in its adoption curve, distinguishing between brand "awareness" (high) and deeper "understanding" and "trust" (large opportunity for growth). He supported this by noting that even Carvana's most mature markets continue to grow at exciting rates, indicating a long runway ahead.

Jeffrey Lick of Stephens Inc. asked for the reasons behind the acceleration in unit growth from Q3 to Q4, questioning the role of the retail marketplace and if inventory remains the primary gating factor. He also noted a sequential decline in ancillary product GPU.

Answer

CEO Ernie Garcia attributed the growth acceleration primarily to the successful build-up of inventory, which fuels the model's positive feedback loop of selection driving conversion. He positioned the retail marketplace as a substitute inventory source, not yet a primary growth driver. CFO Mark Jenkins acknowledged the fluctuation in ancillary GPU, stating it's an area with continued opportunity for fundamental gains.

Jeffrey Lick questioned if the behavior of incremental customers is changing as inventory levels rise and asked for an explanation of the sequential increase in operations expense per unit.

Answer

CEO Ernie Garcia stated that customer demographics remain very similar even as the company scales, emphasizing the large untapped market. CFO Mark Jenkins addressed the operations expense, noting that while it saw a minor sequential increase, it was down over $200 year-over-year, and the company sees further opportunities for reduction.

Jeff Lick from Stephens asked for an outlook on the luxury automotive market performance in October and the crucial Q4 2025 period, specifically inquiring about gross profit per unit (GPU) trends given a $300 year-over-year decline. He also sought clarification from the CFO on the timing and P&L impact of the $150 million tax benefit from accelerated depreciation related to the 'One Big Beautiful Bill.'

Answer

Richard Shearing, COO of North American Operations, noted Q3 premium luxury was up 9%. He detailed brand-specific dynamics, including Jaguar Land Rover's reduced supply post-cyber incident allowing price holding, Lexus's strong performance with new models, and challenging BMW Q4 comparisons due to last year's recall resolution. Roger Penske, Chair and CEO, highlighted a significant drop in BMW EV sales in October, necessitating a pivot to ICE units. Richard Shearing clarified that Q3 GPU, adjusted for BEV mix and JLR impacts, was comparable to Q1. Shelley Hulgrave, EVP and CFO, explained the $150 million tax benefit is a cash flow deferral, impacting cash flow from operations positively, retroactive to January 19th, 2025, with cash impact primarily in the second half of the year, and does not affect income or tax rate.

Jeff Lick from Stephens Inc. asked for a deeper analysis of the service and parts business, specifically regarding the impact of lapping major warranty events and any changes in how OEMs handle warranty claims.

Answer

COO of North American Operations Richard Shearing confirmed that while some large recalls are being lapped, new ones, like for the Toyota Tundra, are emerging. He stressed that the segment's strength is driven by an aging vehicle fleet and internal efficiency gains. Chairman & CEO Roger Penske highlighted that increasing vehicle complexity drives customers to dealerships. EVP of IR & Corporate Development Anthony Pordon also noted that the use of AI and technology is improving service department efficiency and utilization.

Jeffrey Lick inquired about the benefit from luxury OEMs shifting focus away from BEVs and asked for context on the delay of the 2027 commercial truck emissions standards.

Answer

EVP Rich Shearing detailed how Mercedes' BEV inventory reduction from over 40% to under 5% significantly boosted profitability. He also explained that a potential pre-buy of commercial trucks is contingent on a legislative review; if current emissions waivers are rescinded, the cost increases driving a pre-buy would be averted, which would be a positive outcome for the industry.

Jeff Lick asked for additional clarity on the trajectory of light-duty sales growth, noting the 9.3% increase in Q3 compared to higher percentages in the previous two quarters. He also inquired about the dynamics of price increases, specifically how Dorman's customers typically react and pass on these increases to end-users.

Answer

Kevin Olsen, President and CEO, Dorman Products, characterized Q3 light-duty performance as a very solid quarter, driven by strong POS and new products, supported by favorable macroeconomic trends. David Hession, SVP and CFO, Dorman Products, added that the 9.3% growth was consistent with Q2 and Q1, accounting for an easier Q1 comparison. Regarding price increases, Kevin Olsen explained Dorman's multifaceted approach, including supply chain diversification, supplier negotiations, and productivity initiatives, but declined to comment on specific customer reactions to price adjustments.

Jeff Lick asked for additional color on the trajectory of light-duty sales growth, noting Q3's 9.3% increase relative to higher growth rates in the previous two quarters. He also questioned the dynamics of price increases, specifically how Dorman's customers typically pass on these increases to the end user.

Answer

Kevin Olsen, President and CEO, described Q3 light-duty performance as very solid, driven by new products and favorable macroeconomic conditions. David Hession, SVP and CFO, added that Q3's growth was consistent with Q2 and Q1 when accounting for Q1's easier comparison. Mr. Olsen explained Dorman's multifaceted approach to price increases, involving supply chain diversification, supplier negotiations, and productivity initiatives, but declined to comment on customer-specific pricing strategies.

Jeffrey Lick asked for an outlook on new vehicle Gross Profit Per Unit (GPUs) for Q4 and 2026, considering factors like the tougher Q4 comps from last year's election bump and OEM incentives, as well as the potential impact of tariffs. He also inquired about the drivers and sustainability of the 300 basis point improvement in service and parts gross margin percentage.

Answer

Bryan DeBoer, President and CEO, acknowledged tougher Q4 comps but noted that creeping OEM incentives, such as 0% APR on high-moving products, could offset this. He believes the North American market won't behave like Europe regarding Chinese tariffs, and that better gas mileage and electrification can overcome affordability concerns. For service and parts, DeBoer explained that the margin improvement is largely due to a mix shift towards higher-margin labor business, which saw increased volume. Tina Miller, SVP and CFO, added that strong performance in both customer pay and warranty, which are heavily labor-based, contributed to the margin expansion.

Jeff Lick of Stephens Inc. asked for a big-picture view on how a potential 15% vehicle tariff would play out between OEMs and dealers. He also inquired about competitive pressures from Chinese OEMs in the UK and their potential arrival in the U.S.

Answer

President & CEO Bryan DeBoer explained that the company is diversified, with less than 20% of net profit from new vehicle sales, making it adaptable to tariffs through levers like vehicle de-contenting and financing. Regarding Chinese OEMs, he noted Lithia has five such franchises in the UK, providing firsthand insight, but stated their U.S. entry remains uncertain given high tariffs and past failed attempts.

Jeffrey Lick drilled down on the used vehicle segment, particularly value autos, asking about the GPU performance and how Lithia's heritage in this area could be an advantage in a tariff-heavy environment. He also sought clarification on which stores were taking time to adopt the value auto strategy.

Answer

President and CEO Bryan DeBoer explained that the value auto segment is a key strength, noting these vehicles turn 2-4x faster than certified used cars, yielding a significantly better return on capital. He clarified that it primarily takes newly acquired stores about six months to fully adopt the practice of retailing these vehicles instead of wholesaling them, and this initiative is now gaining strong traction across the network.

Jeffrey Lick inquired about the reasons for the decline in store count, the puts and takes for the Aftersales margin guidance, and sought clarification on used vehicle sourcing and SG&A savings realization.

Answer

President and CEO Bryan DeBoer clarified the store count reduction was due to the previously announced divestiture of small U.K. stores. He reiterated that Aftersales margin variance depends on the parts vs. labor mix. COO Adam Chamberlain confirmed that 55% of used cars are sourced from trade-ins and that while quarterly SG&A benefits were realized, further savings from inventory and revenue growth are expected.

Jeffrey Lick asked about business conditions at the end of Q3 and into Q4, considering factors like stop sales, and sought an outlook on where new vehicle GPUs might stabilize.

Answer

CEO Bryan DeBoer framed stop sales as a net positive, as they defer revenue but create a massive backlog of high-margin aftersales work, citing major engine replacement programs. On new GPUs, he expressed pleasure that they are stabilizing above historical norms and noted a potential for a "soft landing" over the next few quarters as manufacturer incentives gradually return.

Jeff Lick from Stephens Inc. asked for an update on the onboarding of the previously announced 'win back' commercial customer and inquired about the company's strategy for addressing its Series A preferred stock.

Answer

CEO Peter Kelly confirmed that the 'win back' customer onboarding is on track for a launch around the end of the year, which would be a positive factor for 2026 commercial volumes. CFO Brad Herring addressed the preferred stock, noting it is on the company's radar as it comes due in June 2026. While not providing a specific plan, he emphasized that the company's clean balance sheet and strong cash generation provide multiple options for addressing it.

Jeffrey Lick of Stephens Inc. requested a breakdown of the strong increase in auction fees per vehicle and asked for clarification on the decline in service revenue, suggesting it might be tied to lower commercial volumes.

Answer

CEO Peter Kelly explained that the 14% growth in auction fee revenue was driven by a successful, modest price increase in Canada and the flow-through effect of a U.S. price increase from Q4 2024. He clarified that the primary driver of the service revenue decline was the divestiture of the Automotive Keys business. The secondary factor was indeed lower commercial volumes reducing inspection and delivery services, which was partially offset by growth in dealer-related services.

Jeffrey Lick of Stephens Inc. requested a deeper analysis of the strong increase in auction fees per vehicle and the overall pricing environment. He also asked about the factors contributing to the decline in service revenue.

Answer

CEO Peter Kelly positioned OPENLANE as a high-quality, reasonably priced provider, noting a successful price increase in Canada contributed to the 14% growth in auction fee revenue. He clarified that the primary driver of the service revenue decline was the divestiture of the Automotive Keys business, with the secondary factor being lower service needs tied to reduced commercial off-lease volumes.

Jeff Lick asked about the typical margin spread between exclusive and third-party brands, how much that spread might widen temporarily, and what data suggests about price driving exclusive brand adoption. He also questioned if any third-party vendors offered to hold prices to avoid losing share.

Answer

CEO John Hazen confirmed the historical margin spread is about 1,000 basis points. He explained that the company is running a large-scale elasticity test precisely because they don't know how customers will react to the widening price gap. He also stated that no third-party vendors have rescinded their announced price increases.

Jeffrey Lick from Stephens Inc. asked for an update on the comp performance of year-two and year-three vintage stores. He also inquired about any notable headwinds or tailwinds from the summer event calendar and new celebrity partnerships.

Answer

CFO Jim Watkins confirmed that the new store waterfall continues to perform well, with stores opened in fiscal '21 showing higher average sales than those from '22, and so on, indicating strong maturation. CEO John Hazen described the summer concert season as decent, with more festivals than stadium tours. He highlighted a major sponsorship of the 'Sand In My Boots' festival with Morgan Wallen and noted the continued partnership with Riley Green and sponsorship of nearly 1,000 rodeos.

Jeff Lick of Stephens Inc. inquired about the most significant surprises in Q2 results, the key performance indicators for the second half of 2025, and the anticipated impact of improving lease return volumes on the franchise and EchoPark segments.

Answer

President Jeff Dyke highlighted the unexpected strength in July sales, record F&I performance, and EchoPark's profitability as key positives. He noted the F&I per unit of $2,700 is sustainable. Dyke also emphasized that the upcoming increase in lease returns starting in 2026 will be a 'game changer' for used vehicle inventory acquisition, particularly for EchoPark. CEO David Smith added that EchoPark stores have significant performance runway and noted the seasonal strength expected from the Powersports segment in Q3.

Jeffrey Lick of Stephens Inc. requested a breakdown of fixed operations growth between warranty and customer pay work. He also asked whether a potential tariff-induced slowdown in new car sales would be a net positive or negative for the EchoPark segment.

Answer

President Jeff Dyke disclosed that Q1 warranty work grew 40% while customer pay grew only 2-3%, a mix the company is actively working to rebalance. Regarding EchoPark, Dyke expressed confidence, stating the company is much better prepared for market shifts than during the COVID era, citing a higher mix of cars bought from the street. CEO David Smith added that EchoPark's strong brand reputation provides a competitive advantage.

Jeffrey Lick asked about the sustainability of strong Q4 new vehicle demand and its potential substitution effect on EchoPark, and also questioned why Sonic's stock trades at a valuation discount to its peers despite strong results.

Answer

President Jeff Dyke attributed some Q4 new vehicle strength to pent-up BMW demand but saw no direct negative substitution effect on EchoPark. Regarding valuation, Dyke shared the analyst's sentiment, expressing confidence that the market will eventually recognize Sonic's high-level execution and strong performance. CEO David Smith added that the stock's limited float is a technical factor that also likely impacts its trading multiple.

An analyst from Stephens Inc. asked why same-store new unit sales were surprisingly strong given the CDK outage and brand mix, and questioned how much incremental business is being lost due to the technician shortage.

Answer

CEO David Smith attributed the strong sales to experienced teammates and company culture. President Jeff Dyke provided color on strong performance from Honda and luxury brands, which offset weakness in domestic brands like Stellantis. On the technician topic, Jeff Dyke quantified the opportunity at $20,000-$23,000 in gross profit per tech per month, aligning with the company's $100 million annualized gross profit goal.