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New and used car retailer Sonic Automotive (SAH) is driving sharply higher after reporting mixed Q2 results that included a few extraordinary items, such as a $0.64/share hit to its GAAP earnings resulting from the CDK software outage in June. Charges related to storm and hail damage and a real estate impairment charge further impaired the results, but on an adjusted basis, SAH generated adjusted EPS of $1.47, beating expectations, with record adjusted EBITDA of $7.2 mln in its EchoPark segment.

• The EchoPark segment, which operates through an eCommerce channel and focuses on the 1-4 year old pre-owned vehicle market, reported a 14% decrease in revenue to $517.3 mln. However, on a same store basis, EchoPark retail unit sales volumes jumped by 23% in Q2, while revenue and gross profit increased by 10% and 81%, respectively.
• In 1Q23, the company began reducing its store footprint, allowing it to spread out inventory more effectively across the platform. This, in turn, drove higher unit sales volume, better variable gross profit per unit (GPU), and the second consecutive quarter of positive adjusted EBITDA for EchoPark.

In the Franchised Dealership segment, the news isn't quite as upbeat. 

• Same store revenue dipped by 3% and same store gross profit fell by 9%. During the earnings call, SAH stated that new vehicle inventory levels are continuing to rise due to a slower sales rate in the last twelve days of the quarter. The company ended Q2 with a 59-day supply of inventory compared to 50 days of inventory at the end of Q1.
• Furthermore, as new vehicle prices continue to slide amid a high-interest rate environment that's creating affordability issues, SAH expects GPU to continue to decline in 2024, exiting Q4 in the low $3,000 range. For some context, GPU dove by 29% in Q2 to $3,590.
• Despite these headwinds, SAH still reaffirmed its limited guidance for FY24. Specifically, the company expects improved results in the EchoPark segment, including returning to positive adjusted EBITDA for the full year, to partially offset lower franchise dealership segment earnings.
• It's also worth noting that the CDK outage negatively impacted the company's adjusted results due to the limited functionality of CDK's lead generation platform and inventory management applications, but SAH's access to these systems has been restored.

The main takeaway is that while the business is far from firing on all cylinders, SAH delivered better-than-feared results, bolstered by accelerating momentum for its EchoPark segment.