SONIC AUTOMOTIVE INC (SAH) FY 2022 MD&A

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. The financial and statistical data contained in the following discussion for all periods presented reflects our December 31, 2022 classification of dealerships between continuing and discontinued operations in accordance with “Presentation of Financial Statements” in the Accounting Standards Codification (the “ASC”). For comparison and discussion of our results of operations for the year ended December 31, 2021 (“2021”) to our results of operations for the year ended December 31, 2020 (“2020”), please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for 2021.

Unless otherwise noted, we present the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis. To the extent that we believe a discussion of the differences among reportable segments will enhance a reader’s understanding of our financial condition, cash flows and other changes in financial condition and results of operations, the differences are discussed separately.

Unless otherwise noted, all discussion of increases or decreases are for the year ended December 31, 2022 (“2022”) compared to 2021. The following discussion of Franchised Dealerships Segment new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a same store basis, except where otherwise noted. All currently operating franchised dealership stores are included within the same store group as of the first full month following the first anniversary of the store’s opening or acquisition. All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market’s opening. The following discussion of Powersports Segment new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a reported basis.

Overview

We are one of the largest automotive retailers in the U.S. (as measured by reported total revenue). As a result of the way we manage our business, we had three reportable segments as of December 31, 2022: (1) the Franchised Dealerships Segment; (2) the EchoPark Segment; and (3) the Powersports Segment. For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2022, we operated 111 stores in the Franchised Dealerships Segment, 52 stores in the EchoPark Segment, and eight stores in the Powersports Segment. The Franchised Dealerships Segment consists of 142 new vehicle franchises (representing 28 different brands of cars and light trucks) and 17 collision repair centers in 18 states. The EchoPark Segment operates in 21 states, including 11 Northwest Motorsport pre-owned vehicle stores acquired in the RFJ Acquisition in December 2021 that are included in the EchoPark Segment. Under our current EchoPark growth plan, we plan to continue to increase our physical and digital footprint as we build out a nationwide EchoPark distribution network expected to reach 90% of the U.S. population by 2025.

The Franchised Dealerships Segment provides comprehensive sales and services, including: (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of third-party financing, extended warranties, service contracts, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our guests. The EchoPark Segment sells used cars and light trucks and arranges third-party F&I product sales for our guests in pre-owned vehicle specialty retail locations, and does not offer customer-facing Fixed Operations services. The Powersports Segment offers guests: (1) sales of both new and used powersports vehicles (such as motorcycles, personal watercraft and all-terrain vehicles); (2) Fixed Operations activities; and (3) F&I services. All three segments generally operate independently of one another with the exception of certain shared back-office functions and corporate overhead costs.

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Executive Summary

Retail Automotive Industry Performance

The U.S. retail automotive industry’s total new vehicle (retail and fleet combined) unit sales volume was approximately 13.7 million vehicles in 2022, a decrease of 9%, compared to approximately 15.0 million vehicles in 2021, according to the Power Information Network (“PIN”) from J.D. Power. We currently estimate the 2023 new vehicle industry volume will be between 14.0 million vehicles (an increase of 2.2% compared to 2022) and 15.0 million vehicles (an increase of 9.5% compared to 2022). The ongoing effects of supply chain disruptions as a result of the COVID-19 pandemic, availability of new and used vehicle inventory, interest rates, changes in consumer confidence, availability of consumer financing, manufacturer inventory production levels, incentive levels from automotive manufacturers or shifts in such levels, or timing of consumer demand as a result of natural disasters or other unforeseen circumstances could cause the actual 2023 new vehicle industry volume to vary from expectations. Many factors, including brand and geographic concentrations as well as the industry sales mix between retail and fleet new vehicle unit sales volume, have caused our past results to differ from the industry’s overall trend. Our new vehicle sales strategy focuses on our retail new vehicle sales (as opposed to fleet new vehicle sales) and, as a result, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle industry volume (which excludes fleet new vehicle sales). According to PIN from J.D. Power, industry retail new vehicle unit sales volume decreased 11%, to approximately 11.7 million vehicles, in 2022, from approximately 13.1 million vehicles in 2021.

Impact of COVID-19 and Supply Chain Disruptions

The global automotive supply chain has been significantly disrupted since the onset of the COVID-19 pandemic, primarily related to the production of semiconductors and other components that are used in many modern automobiles, in addition to workforce-related production delays and stoppages. As a result, automobile manufacturing has operated for multiple years at lower than usual production levels, reducing the amount of new vehicle inventory and certain parts inventory available to our dealerships. These inventory constraints have led to low new and used vehicle inventory and a high new and used vehicle pricing environment, which drove retail new vehicle unit sales volumes lower across the industry since the onset of the COVID-19 pandemic. New vehicle and certain parts production levels began to improve in late 2022; however, there is a risk that higher production levels and new vehicle inventory on hand may not result in incremental retail new vehicle sales volume, which could cause actual 2023 new vehicle industry volume to vary from our expectations.

Impairment Charges

Impairment charges were approximately $320.4 million and $0.1 million in 2022 and 2021, respectively. Impairment charges for 2022 include approximately $202.9 million of goodwill impairment charges related to the EchoPark Segment, approximately $116.4 million of franchise asset impairment charges, of which approximately $114.4 million is related to the Franchised Dealerships Segment and approximately $2.0 million is related to the EchoPark Segment, and approximately $1.1 million of charges related to the abandonment of certain construction projects in the Franchised Dealerships Segment. Impairment charges for 2021 include approximately $0.1 million of charges related to operating lease right-of-use asset impairment for a former EchoPark location.

Franchised Dealerships Segment

As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2021 and 2022, the change in consolidated reported amounts from period to period may not be indicative of the current or future operational or financial performance of our current group of operating stores. Unless otherwise noted, all discussion of increases or decreases are for 2022 compared to 2021. The following discussion is on a same store basis (which excludes results from disposed stores), except where otherwise noted. All currently operating franchised dealership stores are included within the same store group as of the first full month following the first anniversary of the store’s opening or acquisition.

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Retail new vehicle revenue decreased 2% in 2022, primarily driven by a 14% decrease in retail new vehicle unit sales volume, offset partially by a 14% increase in retail new vehicle average selling price. Retail new vehicle gross profit increased 25% in 2022, as a result of higher retail new vehicle gross profit per unit, offset partially by lower retail new vehicle unit sales volume. Retail new vehicle gross profit per unit increased $2,060 per unit, or 45%, to $6,630 per unit, due primarily to higher retail new vehicle average selling prices due in part to inventory shortages as a result of vehicle manufacturer supply chain disruptions and production delays. Many of our new vehicles are being pre-ordered and delivered to customers shortly after the vehicles arrive at our stores. On a trailing quarter cost of sales basis, our reported Franchised Dealerships Segment new vehicle inventory days’ supply was approximately 24 days as of December 31, 2022, compared to 16 days as of December 31, 2021 (11 days excluding the effect of the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation). The level of new vehicle inventory on hand continues to be below our target level as a result of the ongoing vehicle manufacturer supply chain disruptions and production delays described above, and while we anticipate that manufacturer production and new vehicle inventory levels will begin to improve in 2023, we expect that new vehicle inventory levels will remain lower than historical levels throughout 2023.

Retail used vehicle revenue increased 3% in 2022, driven by a 16% increase in retail used vehicle average selling price, offset partially by an 11% decrease in retail used vehicle unit sales volume. Retail used vehicle gross profit decreased 19% in 2022, due to a decrease in retail used vehicle gross profit per unit of $164 per unit, or 9%, to $1,605 per unit, in addition to lower retail used vehicle unit sales volume. Wholesale vehicle gross profit (loss) worsened by approximately $13.1 million, to gross loss of $5.1 million during 2022, due primarily to a $584 per unit, or 181%, decrease in wholesale vehicle gross profit per unit as a result of changes in pricing and demand for vehicles at wholesale auction. We generally focus on maintaining used vehicle inventory days’ supply in the 25- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. On a trailing quarter cost of sales basis, our reported Franchised Dealerships Segment used vehicle inventory days’ supply was approximately 26 days as of December 31, 2022, compared to 42 days as of December 31, 2021 (36 days excluding the effect of the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation).

Fixed Operations revenue increased 10% and Fixed Operations gross profit increased 9% in 2022. Fixed Operations gross margin decreased 40 basis points, to 49.8%, in 2022, driven primarily by a decrease in warranty and internal, sublet and other revenue contribution and lower customer pay gross margin.

F&I revenue decreased 1% in 2022, driven primarily by a 12% decrease in combined retail new and used vehicle unit sales volume, offset partially by higher F&I gross profit per retail unit. F&I gross profit per retail unit increased $264 per unit, or 12%, to $2,415 per unit, in 2022. We believe that our proprietary software applications, playbook processes and guest-centric selling approach enable us to optimize F&I gross profit and penetration rates (the number of F&I products sold per vehicle) across our F&I product lines.

EchoPark Segment

Unless otherwise noted, all discussion of increases or decreases are for 2022 compared to 2021. The following discussion is on a reported basis, except where otherwise noted as being on a same market basis. All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market’s opening.

Reported total revenues increased 5% in 2022, driven primarily by continued expansion of our nationwide distribution network and a 26% increase in retail used vehicle average selling price. Reported total gross profit increased 18% in 2022, primarily due to higher retail used vehicle gross profit per unit, offset partially by a decrease in retail used vehicle unit sales volume.

Reported retail used vehicle revenue increased approximately $84.2 million, or 4%, due to a 26% increase in retail used vehicle revenue per unit, partially offset by an 18% decrease in retail used vehicle unit sales volume. F&I revenue decreased 14% in 2022, driven primarily by an 18% decrease in retail used vehicle unit sales volume, offset partially by higher retail used vehicle average selling prices. Combined retail used vehicle and F&I gross profit per unit increased $884 per unit, or 50%, to $2,657 per unit in 2022. The increase in combined retail used vehicle and F&I gross profit per unit was primarily due to strategic actions taken to diversify our inventory sourcing mix and to reduce used vehicle inventory acquisition costs, benefiting retail used vehicle gross profit per unit.

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Wholesale vehicle gross profit decreased by approximately $6.0 million in 2022, due to a decrease in wholesale vehicle unit sales volume and declining wholesale auction prices. We generally focus on maintaining EchoPark Segment used vehicle inventory days’ supply in the 30- to 40-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. On a trailing quarter cost of sales basis, our reported used vehicle inventory days’ supply in our EchoPark Segment was approximately 40 days as of December 31, 2022, as compared to 70 days as of December 31, 2021 (39 days excluding the acquisition of 11 Northwest Motorsport pre-owned vehicle stores in the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation).

Same market total revenues decreased 17% in 2022, driven primarily by a 33% decrease in retail used vehicle unit sales volume as we strategically adjusted our retail used vehicle unit sales volume to manage overall segment income (loss) levels; offset partially by an increase in retail used vehicle average selling price. Same market total gross profit decreased 21% in 2022, due primarily to lower retail used vehicle unit sales volume, offset partially by a 21% increase in EchoPark Segment same market combined retail used vehicle and F&I gross profit per unit, to $2,109 per unit.

Powersports Segment

During the first quarter of 2022, we acquired one powersports store and, during the third quarter of 2022, we acquired seven additional powersports stores. During 2022, reported total revenue was $53.5 million and reported total gross profit was $16.8 million.

Reported retail new vehicle revenue was $31.8 million and reported retail new vehicle gross profit was $6.4 million, based on a retail new vehicle average selling price of approximately $20,000 and a retail new vehicle gross profit per unit of $3,974 per unit. On a trailing quarter cost of sales basis, our reported Powersports Segment new vehicle inventory days’ supply was approximately 119 days as of December 31, 2022. We believe that in a normal production environment, the level of new vehicle inventory days’ supply in our Powersports Segment should be in the 90- to 120-day range, depending on seasonality.

Reported retail used vehicle revenue was $7.1 million and reported retail used vehicle gross profit was $2.0 million, based on a retail used vehicle average selling price of $12,093 and a retail used vehicle gross profit per unit of $3,349 per unit. On a trailing quarter cost of sales basis, our reported Powersports Segment used vehicle inventory days’ supply was approximately 141 days as of December 31, 2022. Going forward, we generally expect to maintain a used vehicle inventory days’ supply in our Powersports Segment in the 75- to 100-day range, depending on seasonality.

Reported Fixed Operations revenue was $11.7 million and reported Fixed Operations gross profit was $5.8 million. Customer pay revenue was $5.5 million and customer pay gross profit was $3.3 million. Warranty revenue was $0.7 million and warranty gross profit was $0.4 million. Wholesale parts revenue was $0.3 million and there was no wholesale parts gross profit. Internal, sublet and other revenue was $5.2 million and internal, sublet and other gross profit was $2.1 million.

Reported F&I revenue was $2.6 million, based on F&I gross profit per retail unit of $1,205.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following table summarizes the percentages of total revenues represented by certain items reflected in our consolidated statements of operations:

Results of Operations - Consolidated

As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2021 and 2022, the change in consolidated reported amounts from period to period may not be indicative of the current or future operational or financial performance of our current group of operating stores.

New Vehicles - Consolidated

New vehicle revenues include the sale of new vehicles, including new powersports vehicles, to retail customers, as well as the sale of fleet vehicles to businesses for use in their operations. New vehicle revenues and gross profit can be influenced by vehicle manufacturer incentives to consumers (which vary from cash-back incentives to low interest rate financing, among other things), the availability of consumer credit and the level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventory allocations to our dealerships to meet consumer demand. The automobile manufacturing industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand, both within specific brands and in the industry as a whole. As an automotive retailer, we seek to mitigate the effects of this sales cycle by maintaining a diverse brand mix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower-priced economy vehicles to luxury vehicles and powersports vehicles.

The U.S. retail automotive industry’s new vehicle unit sales volume below reflects all brands marketed or sold in the U.S. This industry sales volume includes brands we do not sell and markets in which we do not operate, therefore changes in our new vehicle unit sales volume may not trend directly in line with changes in the industry new vehicle unit sales volume. We believe that the retail new vehicle industry sales volume is a more meaningful metric for comparing our new vehicle unit sales volume to the industry due to our minimal fleet vehicle business.

U.S. retail new vehicle industry volume, fleet new vehicle industry volume, and total new vehicle industry volume were as follows:

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(1) Source: PIN from J.D. Power

We currently estimate the 2023 new vehicle industry volume will be between 14.0 million vehicles (an increase of 2.2% compared to 2022) and 15.0 million vehicles (an increase of 9.5% compared to 2022). The ongoing effects of supply chain disruptions as a result of the COVID-19 pandemic, availability of new and used vehicle inventory, interest rates, changes in consumer confidence, availability of consumer financing, manufacturer inventory production levels, incentive levels from automotive manufacturers or shifts in such levels, or timing of consumer demand as a result of natural disasters or other unforeseen circumstances could cause the actual 2023 new vehicle industry volume to vary from expectations.

Our consolidated reported new vehicle results (combined retail and fleet data) were as follows:

NM = Not Meaningful

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For further analysis of new vehicle results, see the tables and discussion under the headings “New Vehicles - Franchised Dealerships Segment” and “New Vehicles - Powersports Segment” in the Franchised Dealerships Segment and Powersports Segment sections, respectively, below.

Used Vehicles - Consolidated

Used vehicle revenues include the sale of used vehicles, including used powersports vehicles, to retail customers and at wholesale. Used vehicle revenues are directly affected by a number of factors, including consumer demand for used vehicles, the pricing and level of manufacturer incentives on new vehicles, the number and quality of trade-ins and lease turn-ins available to our dealerships, the availability and pricing of used vehicles acquired at wholesale auction, and the availability of consumer credit.

As a result of low levels of new vehicle inventory and a heightened demand for used vehicles (both by retail consumers and dealers at wholesale auction), used vehicle prices reached an all-time high during the first half of 2022, and remained at elevated levels during the second half of 2022. Depending on the mix of inventory sourcing (trade-in versus wholesale auction), the days’ supply of used vehicle inventory, and the pricing strategy employed by the dealership, retail used vehicle gross profit per unit and retail used vehicle gross profit as a percentage of revenue may vary significantly from historical levels given the current used vehicle environment.

Our consolidated reported retail used vehicle results were as follows:

For further analysis of used vehicle results, see the tables and discussion under the headings “Used Vehicles - Franchised Dealerships Segment,” “Used Vehicles and F&I - EchoPark Segment” and “Used Vehicles - Powersports Segment” in the Franchised Dealerships Segment, EchoPark Segment and Powersports Segment sections, respectively, below.

Wholesale Vehicles - Consolidated

Wholesale vehicle revenues are affected by retail new and used vehicle unit sales volume and the associated trade-in volume, as well as short-term, temporary and seasonal fluctuations in wholesale auction pricing. Since the beginning of the COVID-19 pandemic in March 2020, wholesale vehicle prices and supply at auction have experienced periods of volatility, impacting our wholesale vehicle revenues and related gross profit (loss), as well as our retail used vehicle revenues and related gross profit. We believe that the current wholesale vehicle price environment is not sustainable in the long term and expect that average wholesale vehicle pricing and related gross profit (loss) may begin to return toward long-term normalized levels in 2023. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicle inventory and expected gross profit levels and minimize inventory carrying risks.

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Our consolidated reported wholesale vehicle results were as follows:

For further analysis of wholesale vehicle results, see the tables and discussion under the headings “Wholesale Vehicles - Franchised Dealerships Segment,” “Wholesale Vehicles - EchoPark Segment” and “Wholesale Vehicles - Powersports Segment” in the Franchised Dealerships Segment, EchoPark Segment and Powersports Segment sections, respectively, below.

Fixed Operations - Consolidated

Parts, service and collision repair revenues consist of repairs and maintenance requested and paid by customers (“customer pay”), warranty repairs (manufacturer-paid), wholesale parts (sales of parts and accessories to third-party automotive repair businesses), and internal, sublet and other. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles in inventory that are later sold to a third party and may vary based on used vehicle inventory and sales volume from period to period. When that work is performed by one of our dealerships or stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet. Parts and service revenue is driven by the volume and mix of warranty repairs versus customer pay repairs, available service capacity (a combination of service bay count and technician availability), vehicle quality, manufacturer recalls, customer loyalty, and prepaid or manufacturer-paid maintenance programs.

We believe that, over time, vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualified technicians at manufacturer-affiliated dealerships may result in market share gains that could offset any revenue lost from improvement in vehicle quality. We also believe that, over the long term, we have the ability to continue to optimize service capacity and customer retention at our dealerships and stores to further increase Fixed Operations revenues. Manufacturers continue to extend new vehicle warranty periods (in particular for BEVs) and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. These factors, over the long term, combined with the extended manufacturer warranties on CPO vehicles, should facilitate growth in our parts and service business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty repair work performed, as well as the improved quality and design of vehicles that may affect the level and frequency of future customer pay or warranty-related repair revenues.

The COVID-19 pandemic initially had a negative effect on our consolidated Fixed Operations revenues, as travel restrictions, government-imposed stay-at-home and shelter-in-place orders, and fewer workers undertaking a daily commute combined to substantially decrease the number of miles driven in the U.S., which decreased the demand for maintenance, repairs and collision services beginning in March 2020. As government-imposed restrictions were relaxed and consumers resumed normal levels of driving, we experienced a recovery in Fixed Operations revenues and are currently operating at or above pre-pandemic levels in the majority of our markets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our consolidated reported Fixed Operations results were as follows:

For further analysis of Fixed Operations results, see the tables and discussion under the headings “Fixed Operations - Franchised Dealerships Segment” and “Fixed Operations - Powersports Segment” in the Franchised Dealerships Segment and Powersports Segment sections, respectively, below.

F&I - Consolidated

Finance, insurance and other, net revenues include commissions for arranging third-party vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties and service contracts, other aftermarket products and insurance contracts, we receive commissions from the third-party providers for originating these contracts. F&I revenues are recognized net of actual and estimated future chargebacks and other costs associated with originating contracts (as a result, reported F&I revenues and F&I gross profit are the same amount, resulting in a 100% gross margin for F&I). F&I revenues are affected by the level of new and retail used vehicle unit sales volume, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives, and our F&I penetration rates for each type of F&I product. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.

Yield spread premium is another term for the commission earned by our dealerships for arranging vehicle financing for consumers. The amount of the commission could be zero, a flat fee or an actual spread between the interest rate charged to the consumer and the interest rate provided by the third-party direct financing source (e.g., a commercial bank, credit union or manufacturer captive finance company). We have established caps on the potential yield spread premium our dealerships can earn with all finance sources. We believe the yield spread premium we earn for arranging vehicle financing represents value to the consumer in numerous ways, including the following:

•lower cost, below-market financing is often available only from the manufacturers’ captives and franchised dealers;

•ease of access to multiple high-quality lending sources;

•lease-financing alternatives are largely available only from manufacturers’ captives or other indirect lenders;

•guests with substandard credit frequently do not have direct access to potential sources of sub-prime financing; and

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•guests with significant “negative equity” in their current vehicle (i.e., the guest’s current vehicle is worth less than the balance of their vehicle loan or lease obligation) frequently are unable to pay off the loan on their current vehicle and finance the purchase or lease of a replacement new or used vehicle without the assistance of a franchised dealership’s network of lending sources.

Our consolidated reported F&I results were as follows:

For further analysis of F&I results, see the tables and discussion under the headings “F&I - Franchised Dealerships Segment,” “Used Vehicles and F&I - EchoPark Segment” and “F&I - Powersports Segment” in the Franchised Dealerships Segment, EchoPark Segment and Powersports Segment sections, respectively, below.

Results of Operations - Franchised Dealerships Segment

As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2022 and 2021, the change in reported amounts from period to period may not be indicative of the current or future operational or financial performance of our current group of operating stores. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a same store basis (which excludes results from disposed stores), except where otherwise noted.

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New Vehicles - Franchised Dealerships Segment

The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for new vehicles:

NM = Not Meaningful

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Our Franchised Dealerships Segment reported new vehicle results were as follows:

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Our Franchised Dealerships Segment same store new vehicle results were as follows:

Retail new vehicle revenue decreased 2%, due primarily to a 14% decrease in retail new vehicle unit sales volume, offset partially by a 14% increase in retail new vehicle average selling price. Retail new vehicle gross profit increased approximately $112.1 million, or 25%, as a result of higher retail new vehicle gross profit per unit, offset partially by lower retail new vehicle unit sales volume. Retail new vehicle gross profit per unit increased $2,060 per unit, or 45%, to $6,630 per unit, due primarily to inventory shortages as a result of vehicle manufacturer supply chain and production delays as a result of the COVID-19 pandemic, which have generally increased the average selling prices of such vehicles.

On a trailing quarter cost of sales basis, our reported Franchised Dealerships Segment new vehicle inventory days’ supply was approximately 24 and 16 days as of December 31, 2022 and 2021, respectively (note that the December 31, 2021 days’ supply was 11 days excluding the effect of the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation). The level of new vehicle inventory on hand continues to be below our target level as a result of the ongoing vehicle manufacturer supply chain disruptions and production delays described above, and while we anticipate that manufacturer production and new vehicle inventory levels will begin to improve in 2023, we expect that new vehicle inventory levels will remain lower than historical levels throughout 2023.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Used Vehicles - Franchised Dealerships Segment

The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for retail used vehicles:

NM = Not Meaningful

Our Franchised Dealerships Segment reported retail used vehicle results were as follows:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment same store retail used vehicle results were as follows:

Retail used vehicle revenue increased approximately $94.8 million, or 3%, driven primarily by a 16% increase in retail used vehicle average selling price, offset partially by an 11% decrease in retail used vehicle unit sales volume. Retail used vehicle gross profit decreased approximately $35.1 million, or 19%, driven primarily by an 11% decrease in retail used vehicle unit sales volume. Retail used vehicle gross profit per unit decreased $164 per unit, or 9%, to $1,605 per unit.

On a trailing quarter cost of sales basis, our reported Franchised Dealerships Segment used vehicle inventory days’ supply was approximately 26 and 42 days as of December 31, 2022 and 2021, respectively (note that the December 31, 2021 days’ supply was 36 days excluding the effect of the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation).

Wholesale Vehicles - Franchised Dealerships Segment

The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for wholesale vehicles:

NM = Not Meaningful

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment reported wholesale vehicle results were as follows:

NM = Not Meaningful

Our Franchised Dealerships Segment same store wholesale vehicle results were as follows:

Same store wholesale vehicle revenue increased 3%, driven primarily by a 30% increase in wholesale vehicle revenue per unit as a result of excess demand from dealerships and rental car companies in the wholesale auction market due to the impact of new vehicle inventory shortages during 2022. Wholesale vehicle gross profit worsened by approximately $13.1 million, driven primarily by a $584 per unit decrease in wholesale vehicle gross profit per unit as a result of declining wholesale auction market prices throughout 2022.

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Fixed Operations - Franchised Dealerships Segment

The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for Fixed Operations:

NM = Not Meaningful

Our Franchised Dealerships Segment reported Fixed Operations results were as follows:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment same store Fixed Operations results were as follows:

Fixed Operations revenue increased approximately $130.8 million, or 10%, and Fixed Operations gross profit increased approximately $59.5 million, or 9%. Customer pay gross profit increased approximately $47.2 million, or 14%, warranty gross profit increased approximately $1.8 million, or 1%, wholesale parts gross profit increased approximately $5.6 million, or 20%, and internal, sublet and other gross profit increased approximately $4.9 million, or 3%. As consumer activity and vehicle miles driven have continued to improve from pandemic-induced lows in early 2020, we experienced a recovery in Fixed Operations activity (in particular, related to customer pay repairs), and are currently operating at or above pre-pandemic levels in the majority of our markets, and expect to continue to see growth in Fixed Operations revenues in 2023.

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

F&I - Franchised Dealerships Segment

The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for F&I:

NM = Not Meaningful

Our Franchised Dealerships Segment reported F&I results were as follows:

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment same store F&I results were as follows:

F&I revenues decreased approximately $6.3 million, or 1%, primarily due to a 12% decrease in retail new and used vehicle unit sales volume. F&I gross profit per retail unit increased $264 per unit, or 12%, to $2,415 per unit, primarily due to an increase in gross profit per finance contract. Finance contract revenue decreased 6%, primarily due to lower retail new and used vehicle unit sales volume and a 490-basis point decrease in the combined new and used vehicle finance contract penetration rate. Service contract revenue decreased 2%, primarily due to lower retail new and used vehicle unit sales volume, offset partially by a 290-basis point increase in the service contract penetration rate and a 4% increase in gross profit per service contract. Other aftermarket contract revenue increased 9%, driven primarily by an 11% increase in gross profit per other aftermarket contract and a 1,770-basis point increase in the other aftermarket contract penetration rate, offset partially by lower retail new and used vehicle unit sales volume.

Results of Operations - EchoPark Segment

All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market’s opening. Due to the ongoing expansion of our EchoPark Segment, same market results may vary significantly from reported results due to newly opened markets that began operations in the last 13 months.

Used Vehicles and F&I - EchoPark Segment

Our EchoPark operating strategy focuses on maximizing total used vehicle-related gross profit (based on a combination of retail used vehicle unit sales volume, front-end retail used vehicle gross profit (loss) per unit and F&I gross profit per retail unit) rather than realizing traditional levels of front-end retail used vehicle gross profit (loss) per unit. As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is a combined total gross profit per retail unit, which includes both front-end retail used vehicle gross profit (loss) and F&I gross profit per retail unit sold. See the discussion under the heading “Results of Operations - Consolidated” for additional discussion of the macro drivers of used vehicle revenues and F&I revenues.

All Fixed Operations activity at our EchoPark stores supports our used vehicle inventory reconditioning operations and EchoPark stores do not currently perform customer pay repairs or maintenance work and are not permitted to perform manufacturer-paid warranty repairs. As such, reconditioning amounts that are classified as Fixed Operations revenues and cost of sales in our Franchised Dealerships Segment are presented as used vehicle cost of sales for the EchoPark Segment.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for retail used vehicles:

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for F&I:

Our EchoPark Segment reported retail used vehicle and F&I results were as follows:

Our EchoPark Segment same market retail used vehicle and F&I results were as follows:

Reported retail used vehicle revenue increased approximately $84.2 million, or 4%, due to a 26% increase in retail used vehicle revenue per unit, partially offset by an 18% decrease in retail used vehicle unit sales volume. Reported combined retail used vehicle gross profit and F&I revenue increased approximately $32.3 million, or 23%, due to an $884, or 50%, increase in total retail used vehicle and F&I gross profit per unit, offset partially by lower retail used vehicle unit sales volume. The increase in total retail used vehicle and F&I gross profit per unit was due primarily to improvement in inventory acquisition cost as a result of sourcing a higher percentage of inventory from non-auction sources, in addition to expanding our inventory to include older vehicles, which typically earn a higher gross profit per unit.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Within F&I revenue, reported finance contract gross profit decreased approximately $3.5 million, or 6%, due to lower retail used vehicle unit sales volume and a 1,200-basis point decrease in finance contract penetration rate. Reported service contract gross profit decreased approximately $15.5 million, or 15%, due to lower retail used vehicle unit sales volume and a 780-basis point decrease in service contract penetration rate. Reported other aftermarket product contract gross profit decreased approximately $7.6 million, or 22%, due to lower retail used vehicle unit sales volume and a 940-basis point decrease in other aftermarket product contract penetration rate. We believe that the decrease in penetration rates across F&I products was driven by the rapid increase in interest rates in 2022 amid near-record high used vehicle prices, which combined to create affordability concerns for our guests and limited their ability to obtain a desirable finance rate or to purchase and finance additional F&I products. We believe this trend is transitory and expect F&I product penetration rates to normalize once the interest rate environment becomes more stable.

On a trailing quarter cost of sales basis, our reported used vehicle inventory days’ supply in our EchoPark Segment was approximately 40 and 70 days as of December 31, 2022 and 2021, respectively (note that the December 31, 2021 days’ supply was 39 days excluding the effect of the RFJ Acquisition in December 2021, which contributed less than one month of trailing cost of sales to the days’ supply calculation). We generally focus on maintaining EchoPark Segment used vehicle inventory days’ supply in the 30- to 40-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. The elevated level of used vehicle inventory days’ supply as of December 31, 2022 was due primarily to the acquisition of 11 Northwest Motorsport pre-owned vehicle stores in the RFJ Acquisition in December 2021 that have not been fully integrated into the EchoPark inventory management strategy and typically carry a higher days’ supply of inventory.

Same market retail used vehicle revenue decreased approximately $370.7 million, or 19%, due to a 33% decrease in retail used vehicle unit sales volume. Same market combined retail used vehicle gross profit and F&I revenue decreased approximately $25.3 million, or 19%, due to lower retail used vehicle unit sales volume. The increase in total retail used vehicle and F&I gross profit per unit was due primarily to improvement in inventory acquisition cost as a result of sourcing a higher percentage of inventory from non-auction sources, in addition to expanding our inventory to include older vehicles, which typically earn a higher gross profit per unit.

Wholesale Vehicles - EchoPark Segment

See the discussion under the heading “Results of Operations - Consolidated” for additional discussion of the macro drivers of wholesale vehicle revenues.

The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for wholesale vehicles:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our EchoPark Segment reported wholesale vehicle results were as follows:

Our EchoPark Segment same market wholesale vehicle results were as follows:

Reported wholesale vehicle revenue increased 55%, driven primarily by a $5,762, or 61%, increase in reported wholesale vehicle revenue per unit as a result of excess demand from dealerships and rental car companies, offset partially by a 4% decrease in reported wholesale vehicle unit sales volume. Reported wholesale vehicle gross profit decreased by approximately $6.0 million, due primarily to lower reported wholesale vehicle unit sales volume and a decrease in reported wholesale vehicle gross profit per unit of $506 per unit, due to declining wholesale auction market prices throughout 2022.

Same market wholesale vehicle revenue increased 37%, driven primarily by a $6,345, or 67%, increase in same market wholesale vehicle revenue per unit as a result of excess demand from dealerships and rental car companies, offset partially by a 18% decrease in same market wholesale vehicle unit sales volume. Same market wholesale vehicle gross profit decreased by approximately $5.7 million, due primarily to lower wholesale vehicle unit sales volume and a decrease in same market wholesale vehicle gross profit per unit of $418 per unit, due to declining wholesale auction market prices throughout 2022.

Results of Operations - Powersports Segment

Our Powersports Segment consists of eight stores acquired during 2022. As a result, there is no comparative prior period data for our 2022 Powersports Segment results of operations, and the 2022 results may not be indicative of the current or future operational or financial performance of our current group of operating stores since the reported results do not include a full year of operations. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a reported basis, except where otherwise noted.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Vehicles - Powersports Segment

Our Powersports Segment reported retail new vehicle results were as follows:

NM = Not Meaningful

Reported retail new vehicle revenue was $31.8 million and reported retail new vehicle gross profit was $6.4 million, based on a reported retail new vehicle average selling price of approximately $20,000 and reported retail new vehicle gross profit per unit of $3,974 per unit.

On a trailing quarter cost of sales basis, our reported Powersports Segment new vehicle inventory days’ supply was approximately 119 days as of December 31, 2022. We believe that in a normal production environment, the level of new vehicle inventory days’ supply in our Powersports Segment should be in the 90- to 120-day range, depending on seasonality.

Used Vehicles - Powersports Segment

Our Powersports Segment reported retail used vehicle results were as follows:

NM = Not Meaningful

Reported retail used vehicle revenue was $7.1 million and reported retail used vehicle gross profit was $2.0 million, based on a reported retail used vehicle average selling price of $12,093 and reported retail used vehicle gross profit per unit of $3,349 per unit. On a trailing quarter cost of sales basis, our reported Powersports Segment used vehicle inventory days’ supply was approximately 141 days as of December 31, 2022. Going forward, we generally expect to maintain a used vehicle inventory days’ supply in our Powersports Segment in the 75- to 100-day range, depending on seasonality.

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Wholesale Vehicles - Powersports Segment

Our Powersports Segment reported wholesale vehicle results were as follows:

NM = Not Meaningful

Reported wholesale vehicle revenue was $0.3 million based on reported wholesale vehicle revenue per unit of $7,752 per unit. Reported wholesale vehicle gross profit was $0.0 million, resulting in reported wholesale vehicle gross loss per unit of $60 per unit.

Fixed Operations - Powersports Segment

Our Powersports Segment reported Fixed Operations results were as follows:

NM = Not Meaningful

Reported Fixed Operations revenue was $11.7 million and reported Fixed Operations gross profit of $5.8 million. Customer pay revenue was $5.5 million and customer pay gross profit was $3.3 million. Warranty revenue was $0.7 million and warranty gross profit was $0.4 million. Wholesale parts revenue was $0.3 million and there was no wholesale parts gross profit. Internal, sublet and other revenue was $5.2 million and internal, sublet and other gross profit was $2.1 million.

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

F&I - Powersports Segment

Our Powersports Segment reported F&I results were as follows:

NM = Not Meaningful

Reported F&I revenue was $2.6 million and reported gross profit per retail unit was $1,205 per unit. The combined new and used vehicle finance contract penetration rate was 59%, the combined new and used vehicle service contract penetration rate was 39% and the total other aftermarket product contract penetration rate was 67%.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Segment Results Summary

In the following table of financial data, total segment income (loss) of the reportable segments is reconciled to consolidated income (loss) from continuing operations before taxes and impairment charges. See above for tables and discussion of results by reportable segment.