Inside Automotive with Jim Fitzpatrick, powered by CBT News

How Sonic Grew Revenue While Navigating Taxes, Tariffs, And EV Whiplash

• Jim Fitzpatrick • Season 1 • Episode 30

Share episode

Jeff Dyke and Jim Fitzpatrick unpack record revenue and gross at Sonic Automotive while explaining the net income dip and the operational levers we control. We get real about used sourcing, JLR expansion, Power Sports momentum, fixed ops pricing, and how incentives could make or break Q4.

• Record revenue and gross with EPS pressure from tax true-up and medical costs
• EchoPark steady margins and measured store reopenings in 2026–2027
• JLR acquisitions building the largest U.S. footprint and luxury strategy
• Power Sports surge with Sturgis record and supply focus
• Tariffs limited impact so far but incentives now critical
• Luxury inventories rising and Lexus standing out on discipline
• Fixed ops growth from tech hiring and smarter pricing
• Mobile service rollout where economics work
• EV inventory reduction, mix below 4 percent, natural demand approach
• Q4 outlook tied to incentives and inventory health


Inside Automotive with Jim Fitzpatrick is powered by CBT News, your go-to source for the latest news, trends, and insights in retail automotive. Subscribe for more interviews with top industry leaders, dealership innovators, and experts shaping the future of automotive.

For more content, visit CBTNews.com and follow us on your favorite podcast platform.

Jim Fitzpatrick:

Hey everyone, Jim Fitzpatrick. Welcome back to another edition of Inside Automotive right here at CBT News. Sonic Automotive has released its third quarter results, and despite some headwinds, the company is still setting records. Joining us now to break down the numbers and share his outlook on what's next is Jeff Dyke. You've seen him here before on CBT News. He's the president of Sonic Automotive. So Jeff, thanks so much for joining us on the show.

Jeff Dyke:

As always, Jim, thanks for having us.

Jim Fitzpatrick:

Great. So, you know, all-time records again. So all-time record quarterly total revenues of $4 billion, up 14% year over year, an all-time quarterly gross uh profit of uh $615 million, up 13% year over year. That's the good news. On the flip side, it was reported that net income uh in the third quarter was $46 million, down 37% year over year. What would say you about that?

Jeff Dyke:

Yeah, hey, look, you know, uh top line and from a gross perspective, we had just an amazing record-breaking quarter. Um two things uh hit us during the third quarter. Uh one being uh our effective tax rate um uh was just uh not where it needed to be on a year-to-day basis from some actions that were taken uh in the first and second quarter. Uh so that had to get trued up. Uh and then our medical uh experience ratio uh changed on us during the quarter. We can't you know help when people are are are um you know using their benefits.

Jim Fitzpatrick:

Yeah.

Jeff Dyke:

Um and we'll make adjustments as we move into next year. Um, but that certainly uh you know caught us by surprise. That was about a six million dollar hit uh during the quarter. And those things add up to us um you know missing from an EPS perspective. But uh other than that, the things that could are really controllable and um you know the the business fundamentals, uh we are in great shape. We had a fantastic quarter, record-breaking quarter, as you said. And uh, we looked to back that up with a with a fantastic fourth quarter.

Jim Fitzpatrick:

That's fantastic. So let's uh switch gears a little bit and talk about Echo Park uh revenues uh $522 million, down four percent year over year. Echo Park uh segment total gross profit was 54 million, down just 1% year over year. Everybody's talking about used cars, obviously, and every dealer's challenge in resourcing in sourcing used cars. So talk to us about your used car business.

Jeff Dyke:

Yeah, I mean the used car business is good. If you break it down, our franchise business uh used car business was really good during the quarter, and Echo Park was solid. You know, we've had an amazing year with Echo Park uh given uh what's happened sequentially over the last three or four uh years. Um, but inventory sourcing has been a problem within the industry for a while now. Um we think that's gonna get better as we move into 26. More lease cars are coming off. Uh at least we're kind of at the very bottom of the of the trough, if you will, now. Um and we had an opportunity, uh, I think we could have done a little better job in sourcing inventory from off the street uh in the third quarter. Um we lost uh some rental car inventory that cost us about 2,000 units uh during the quarter. But I'm glad our team didn't go out and try to replenish those units through the auction lanes because it would have just cost us more money. Yeah. Um and the the quarter from a financial perspective was still really respectable for Echo Park uh as the year will be. Uh and as we said on the call, we look forward to uh getting into 26. We're gonna start opening Echo Park stores again. Uh so the growth machine will start uh once again. We're very excited about that. And we'll open a couple of stores uh next year in the back half of the year, more lean towards the end of the third quarter and the fourth quarter. Okay. Uh and then 27, you'll see us get back on the expansion uh wagon on a quarterly basis as we move forward.

Jim Fitzpatrick:

Okay. Well, that's great. That's great. Um, the acquisition of uh uh Jaguar Land Rover, Santa Monica is expected to add about 125 million in annualized revenues to Sonic's franchise dealership segment. What does this mean uh moving uh forward strategically? Will we see more acquisitions like this coming out of Sonic?

Jeff Dyke:

Yes, I mean look, we've said it. Uh we've we've been on the acquisition trail. Um the brand in the market has to fit. Uh and Jag Land Rover, as you know, is an amazing brand, fantastic brand product. Um, and you know, we bought uh at the end of June uh four JLR stores in the California market, and then Santa Monica uh in July, uh or maybe it was the beginning of August. And so um five JLR stores added to our portfolio mix now makes us the largest Jag Land Rover dealer in the country. Wow. Um so very exciting times for us, fantastic brand, great leadership. Um, and uh so we're very excited about adding that to our portfolio. Uh and then, yeah, for sure, um, you know, we're out looking, but we're looking to grow Echo Park. We're looking to add to our franchise business, and we're looking to uh grow our Power Sports business. As you saw, we had an amazing our best quarter ever uh in Power Sports. Um and so we're where the deals are, uh, we're gonna be. Yeah and uh so we're out looking, looking for the right deal uh to fit our mix and our portfolio.

Jim Fitzpatrick:

Yeah, since you went there on the Power Sports, talk to us about that because that uh I know that that was something that was near and dear to your heart, and it looks like it's panning out. And uh, I'm assuming we'll see more more acquisitions in that area as well.

Jeff Dyke:

Yeah, you bet we will. Um, we've been working really hard to learn how to manage uh those stores and to learn the industry. Um, it's different than automotive. Um, but the technology that we have in automotive transitions well into Power Sports, and our our pre-owned playbook uh trans transitions well. We're up 70% in pre-owned somethings in Power Sport- sports for the year. Um, and we had an amazing rally uh at Sturgis. We did 1,105 new and pre-owned Harley Davidson during the rally that broke the all-time record of 718, which was a decade ago. Um -

Jim Fitzpatrick:

That is incredible. How long is that rally? Is it 10 days?

Jeff Dyke:

10 days, 1105 motorcycles in 10 days. It was incredible. 800,000, some odd people. Uh, I mean, it's we're Mecca for Harley Davidson. Yeah. And um we actually opened a store in Sturgis, in the city of Sturgis, which was great. So we're selling Harley's there. Uh, and just uh a you know, fantastic, iconic brand, uh fantastic week uh uh for the rally or the 10-day period. And um, our technology and our processes shine through. Um that made the difference. Had we had more bikes to sell, we sold all the bikes we were given. Um, had we had more bikes to sell, we we could have sold 2,000 uh uh bikes. So um that's our focus for next year is to take it up another notch, work with Harley Davidson to get more inventory, have more pre-owned inventory. Yeah, we'll do that and add our technology, and uh it'll be even better uh as we move forward.

Jim Fitzpatrick:

And how many Harley stores do you guys currently have?

Jeff Dyke:

So we have the two that are there's five, there's six stores um or locations in that area, of which two are selling Harleys. Then we have the two in Houston. Um, so that would be and then and then one more in Texas, so a total of five.

Jim Fitzpatrick:

Yeah. Some of your uh counterparts have spoken about the tariffs costing them um uh you know profit and such um uh and their bottom line. Talk to us about that. Are tariffs still a thorn in your side?

Jeff Dyke:

Uh I I think they're going to be a thorn in our side. I don't think that that uh you know it's caused much of a problem other than the pull ahead that we saw, you know, sort of in the May, June, July time frame.

Jim Fitzpatrick:

Right.

Jeff Dyke:

Um, but I don't think um, I mean, most of the manufacturers have been amazing. They've been paying for the tariffs, right? Yeah um so very little effect. But I think now, um, as we get into October, and all the craziness over the last nine months on the new car side of the business is made the volume go up and down and all over the board. Sure. But now we're getting ready to see in the fourth quarter what's really going to happen and how tariffs really are going to play a role. Inventories are increasing, in particular uh in luxury um uh margins, should be better because of BEV. But if inventory starts getting stale, they're gonna come down, you know, and maybe that happens in the towards the end of the fourth quarter or the beginning of the first quarter.

Jim Fitzpatrick:

Right.

Jeff Dyke:

But luxury is usually a blast in the fourth quarter. We sell tons and tons of vehicles uh in the holidays. I'm curious this year as to what's going to happen. If the manufacturers don't bring incentives at the level that they need to bring them, with the current level of inventory that we have in the industry, um, it's gonna be a problem. And I said that on the call today. We're looking in October, we're got we have brands, BMW, Mercedes, that are all 15 to 20 percent. And then my channel checks with other dealers, uh, same kind of noise. Um, and so that's a problem. Yeah. If that comes over into November and December, it's gonna be a challenge for the luxury side of the business um uh for the fourth quarter. Now, one brand out there in Lexus, they've managed to really control uh their inventory levels, and we're having an incredible October with them. Um, and that product is just as hot as it can be. Yeah, uh, but the other competitors are gonna have to step up and do something, um, or it's gonna be a tough fourth quarter.

Jim Fitzpatrick:

Of course, they'll probably say, well, we can't do both absorb the tariffs and also be aggressive on the incentives, right?

Jeff Dyke:

Well, it it at the end of the day, their prices are going up. Um, they are uh beginning to take margin.

Jim Fitzpatrick:

Yeah.

Jeff Dyke:

Um, and so they're there, but it doesn't matter. Um, if you're not selling cars, it creates an even bigger problem. Yeah. Uh so there's no question uh that they're gonna have to come uh with with uh stronger incentives or slow inventory to a crawl. Um we've got the highest inventory count level uh that we've had the entire year uh at Sonic Automotive, and we're not alone, Jim, in this in this arena. Um this is happening at at a lot of other dealers, uh, and so it's something that's gonna have to be addressed.

Jim Fitzpatrick:

Yeah, yeah, for sure. Hey, fixed operations continues to be strong and and drive profits, and uh obviously it's no different uh than at Sonic. Talk to us about that.

Jeff Dyke:

Yeah, our fixed uh growth is just amazing. Um, and it's not just warranty, customer pay is really uh driving uh the number as well. Um, and it stems from us uh a year ago, March. Uh we we went on a rampage hiring technicians. As I've always been told you can't hire technicians, there's no technicians out there. That's not true. Um, there's plenty of technicians to be hired. Yeah, uh, it's the mindset of the dealership, uh, the general managers, uh, the service managers and the technicians. They don't want you to hire more technicians. They they so we changed that culture and and went out and hired technicians. And now this year with the acquisitions, we're up about 75 technicians over last year, which were up over 400. Wow. Um, and that's driving uh you know great growth. And we see huge growth uh in the future. One of the things that happens in fixed operations is pricing, I think, has kind of gotten way out of whack. Um, more than 50% of the auto car park out there doesn't use a dealership uh to service their vehicles. And a lot of that has to do with pricing.

Jim Fitzpatrick:

That's right.

Jeff Dyke:

Uh so we're very, very focused on on bringing our pricing in line um and taking market share from a job code perspective on different job codes at different brands.

Jim Fitzpatrick:

Sure.

Jeff Dyke:

And uh in different marketplaces. And that's making a big difference for us. And it's just an endless opportunity. Um, I think there's a ton more growth there for us, uh, and we'll take advantage of that in the coming years.

Jim Fitzpatrick:

Yeah, that's fantastic. Um, mobile service. Are you providing uh mobile service at your stores or some of the stores anyway?

Jeff Dyke:

I know for with Highline and Luxury. Um we are uh BMW, Audi, Mercedes. Um uh in it's something that we're getting into. It's expensive. Um so it there's got to be the need, um, and we've got to manage the margins, but absolutely uh it's a business that we're gonna have to provide, a service that we're gonna have to provide uh because the consumer wants it.

Jim Fitzpatrick:

Yeah, yeah, for sure. What is your uh outlook for uh closing the year strong? Is it is it I mean, are you gonna hit the kind of numbers that you want to hit by the end of the year?

Jeff Dyke:

I I think we will. Um I think we'll have great fixed operations business. F and I is gonna be magnificent. Our pre-owned business is really on fire. So I think that's gonna, uh in particular on the franchise side, so I think that's gonna all play out well. Uh a large portion of our business is luxury. Um, and so let's wait and see what happens uh with these manufacturers and some of the moves uh that they need to make uh from an incentive perspective. Um without that, I think it's gonna be a little tougher fourth quarter. If you look from Q3 to Q4 for us, typically we see sequentially a 10% increase in volume. Last year was 20% because of the BMW stop sales um in the third quarter. So huge inventory and huge volume last year. Um this year, I think that number's not gonna be 10%. I think it's gonna be 5%, um, which would put us close to being flat with last year, which I think would be a big win given how large uh last year's fourth quarter was. Um that's on a same store basis, too.

Jim Fitzpatrick:

Yeah, yeah.

Jeff Dyke:

The new stores are gonna help out uh on a year-over-year comparative basis.

Jim Fitzpatrick:

Sure, sure.

Jeff Dyke:

Um but but I I think it's gonna be a good fourth quarter. It really is gonna rest in the hands of those manufacturers and the incentives that they're able to bring uh to help um bring some relief to the growing inventory levels that are in there.

Jim Fitzpatrick:

Now that we're beyond a couple of months here uh in terms of the money going away, the tax benefits going away for EVs, what's your take on the EV market moving forward?

Jeff Dyke:

Yes, so uh we worked really hard. That cost us about $150 a car and margin in the third quarter. Um we had, oh gosh, over four or five thousand BEVs on the ground. We have less than 800 today. And we sold through. We we we we really pushed hard to to get the BEV inventory out of there. It's gonna be less than 4% of our sales, uh, and it's less than 4% of our inventory today, uh, in the quarter. I think that's some of the volume slowdown, in particular in the luxury stores on the West Coast. Um, we're we're missing out on some volume there because we don't have the the BEV units to sell. Okay. Um, but I I think now the manufacturers recognize it they're gonna let the BEV units play out. Right. Uh and if it's five percent of total sales, fine. If it's seven percent of total sales or three percent, and then let it grow naturally and quit trying to shove it down everybody's throat. Um that was a mistake. It was a mistake from day one. Yeah, everybody knew that. Um, and now we get to see it grow naturally, and we'll see what happens uh as a as a percentage of the mix as we go forward.

Jim Fitzpatrick:

Right, right, exactly. And and uh it was interesting though to see that there were that many buyers came out, uh, even though they you know it was tied into the incentive going away, but they wanted an EV, you know, would never get it. They got cheap though.

Jeff Dyke:

I mean, we were we were selling those cars cheap. We were incentivizing our sales associates to get rid of them. And it better that than than them sitting on your floor plan. Yeah, they're expensive, and if they're not gonna, if you're not gonna have the incentive, they're not gonna sell. Right. They needed to go. Right. Uh and a lot of manufacturers out there, tip of the hat to them, they've they've kept some of the the incentives the going. Yeah. Uh um, because they need to, or otherwise their inventory is gonna get stale, and that's gonna be a problem as well.

Jim Fitzpatrick:

That's exactly right. Jeff Dyke, president of Sonic Automotive. It's always great catching up with you, and congratulations on all your success. And uh just keep doing what you're doing, man. It's it's it's awesome. Really is.

Jeff Dyke:

We'll do it, Jim. We appreciate as always being on the show, and we'll we'll see you next quarter.

Jim Fitzpatrick:

Great. Thanks so much.

Jeff Dyke:

Thank you.

Announcer:

Thanks for watching Inside Automotive with Jim Fitzpatrick.