Good morning and welcome to the Sonic Automotive Third Quarter 2020 Earnings Conference Call. This conference call is being recorded today, Thursday, October 29, 2020. Presentation materials, which management will be reviewing on the conference call can be accessed at the company’s website at ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company’s products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company’s current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. Jeff Dyke, President of Sonic Automotive. Mr. Dyke, you may begin your conference.

Thank you, and good morning, everyone, and welcome to Sonic Automotive’s third quarter 2020 earnings call. I am Jeff Dyke, the company’s President. Joining me on the call today is our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; and our Director of Financial Reporting and Investor Relations, Mr. Danny Wieland. This morning, we reported the highest quarterly earnings in our company’s history, with adjusted EPS of $1.29, up 95% from the third quarter of last year. These record results were driven by increasing consumer demand for new and used vehicles as well as an improving rate of recovery on our parts and service business, continued growth in our F&I per unit and a fundamental change in our expense structure. Our core franchise dealership segment performed very well during the quarter, reflecting steadily increasing consumer demand and margin improvement across all business lines. Additionally, the previously announced permanent SG&A reductions continue to drive increasing operating efficiency and unprecedented bottom-line profitability at the store level. Turning to EchoPark, revenues for the quarter were $385 million or 15% of our total revenues, an increase of 23% on a year-over-year basis. EchoPark achieved all-time record quarterly retail sales volume of 15,127 units, up nearly 15% year-over-year. As we noted on our second quarter call in July, we opened our first delivery and buy center in Greenville, South Carolina, which continues to ramp according to our plan. In addition, we opened another retail store in Houston, Texas in September, and our latest retail store in Nashville, Tennessee just last week. Before the end of the year, we expect to open two more retail stores, one in Plano, Texas; the other in Atlanta, Georgia; as well as at least one additional delivery and buy center. We remain on track with our EchoPark expansion plan, and we’ll continue to keep you updated on our path to $14 billion in EchoPark revenue by 2025. In addition to our exceptional store performance during the third quarter, we continued improving operating efficiency throughout our entire organization. Adjusted SG&A expenses as a percentage of gross profit were 69.1%, down 760 basis points from the prior year. We continue to expect to achieve permanent SG&A expense reductions of approximately $7 million per month or $84 million annually on a go-forward basis. In recent months, we have seen more car buyers open to a wider range of shopping options across the omni-channel spectrum. This includes increasingly utilizing a combination of online, phone, and in-person shopping to complete a vehicle purchase. Several recent studies support our belief that the vast majority of consumers prefer to begin the car buying process online, then visit a dealership to get access to support from knowledgeable associates, and then have the ability to shop – physically shop large inventories and, finally, test drive the vehicle before purchasing. In addition, our guests continue to tell us that price and quality are the most important factors when selecting a used vehicle. This is exactly the value proposition offered by EchoPark, and we firmly believe that our pricing strategy, coupled with our hybrid approach between online and on-site, offers consumers the car buying experience they want, as evidenced by yet another record quarter at EchoPark. As we continue to provide our guests with additional buying options, this will accelerate our EchoPark network expansion plans as well as enhance our guest online retail experience at our franchise dealership websites and echopark.com. Given that, we are pleased to announce today that we recently hired Mr. Steve Wittman, formerly of Hertz – the Hertz organization, as our new Chief Digital Retailing Officer and Mr. Stephen Conrad, formerly with Belt department stores, as our Vice President of e-commerce, to oversee the ongoing development and future evolution of our omni-channel platform. Each of these individuals brings extensive online retail experience to our company and we look forward to their contributions in further improving our overall guest experience. As we move forward, we believe Sonic and EchoPark are well positioned for future growth and success. Throughout the pandemic to date, our management team has taken the necessary steps to strengthen our operations and take care of the health and safety of our teammates and guests while also positioning the company to benefit from the economy’s eventual recovery. We believe the automotive industry is at an inflection point, and we intend to capitalize on this momentum with both EchoPark and our Sonic franchise dealerships. Now I would like to take the time to thank all of our teammates at the franchise stores and EchoPark stores for their relentless commitment to deliver our exceptional guest experience while executing our safety protocols. I also want to thank our manufacture and vendor partners for their unwavering support. This concludes our opening remarks. We look forward to answering any questions you may have.

Your first question comes from Rick Nelson with Stephens.

Good morning. I wanted to follow up on EchoPark and the profit pressures we saw in the quarter and it looks like you took down your guide for revenues and units and profits for the year, if you can discuss those changes?

Yes. So, that’s just – it’s a great question, Rick, and thanks. 2020 has been a really interesting year for us, used car geeks, right. COVID set aside, the inventory, in particular, from a pre-owned perspective, has just been all over the board. And what you might not know is going into May and sort of through April our floor plan for most of our franchise stores and all the EchoPark stores was a floating floor plan with a 30-day lookback. So, what were we all doing in April? We were selling down inventory and preserving liquidity because we didn’t know how long the COVID deal was going to last. So, we got to May 1 and we had a point on May 20 where the floor plan was going to adjust and basically drop our borrowing capability by half from a floor plan perspective. So, when you see – I think if you can refer to Page 46, Danny, is it 46 in the deck?

Correct.

You can see the great time to buy pre-owned cars was during that time and we couldn’t do it. So, we really had to maintain liquidity plus deal with the floor plan issues that we have. But Heath Byrd and the whole team went to work with the banks. And now we have moved from a floating floor plan to a more traditional specific plan, and it’s triple the size we have. So we have enough floor plan now for the foreseeable future. So we are in real good shape there. But by the time we got the floor plan handled, it was time that we could start buying. Now, all of a sudden, we have gone from a historically low rate – historically big drop in terms of wholesale pricing to now historically high increase, some 140% of the market versus pre-COVID. And so really interesting, interesting time, because we have kind of had our hands tied. Had we not, then we had obviously bought more cars during the opportunity period where the cars were a lot cheaper. Having said that, if you think about it we opened four stores during that timeframe, four EchoPark stores, we did set all-time revenue and all-time volume records and we remained profitable. And if that isn’t just an indication of how strong the brand is and how strong the model is, I don’t know what, because our hands were really tied. And so now what’s great is that as the markets drop back down, I think it’s about $200 above where we were, and we’re off to the races again. The volumes back, and the margins are coming back. It did leak over a little bit into October. So we had a little margin pressure for the first few weeks of October, but that’s coming back. And the fun thing now is that we’re basically opening an EchoPark store every 15 days for the foreseeable future on average. And it’s just one after another. And if you look at our last two openings, like I mentioned in my opening comments, the Houston Southwest store, and mind you, there was another store already in Houston, but the Houston Southwest store is going to be in the 375 to 400 car range in our first opening month. That means that we’re profitable in month #1. And then our Nashville store that just opened last week, they’re selling cars on a pace for over 400 car pace for an opening month. So we’re real excited to see what they do in November. So yes. It’s a little blip. We’re still very excited about the volume that we’re able to get out given the constraints that we have and look forward to having a great Q4. The interesting thing is that when you look at it, if you run a short-day supply, which we do, and you’re buying the cars all at the height, you actually had a point where the wholesale prices were more than someone running a long-day supply in their retail prices. So in other words, it was more costly to buy a car than some of those that had 40, 50, 60-day supply that they could retail the car for. And so what’s going to happen now is we’re going to go into the fourth quarter. And if those companies that are on long-day supplies bought a bunch of cars in August, which I suspect they did because sales were so good in July and August, then they’re going to have to deal with that situation in the fourth quarter. And that’s behind us now. So we’re excited about where we are. We’re excited about the volume we’re seeing out of EchoPark. It’s rocking and rolling again, and just a crazy time, but it’s handled, and we’re moving forward.

And Rick, this is Heath. I’ll just add. If you look back at the Manheim and you look at the trends, this has only happened – it’s never happened to this severity, where the wholesale and retail correlation was so far off. You had a little bit in 2008 and ‘09. So it really was sort of a "black swan" event. And it’s resolved. Our specific floor plan gives us plenty of room to grow. And as Jeff mentioned, this is behind us.

Great. Good to hear. If you could also comment on the ability of demand that we are seeing both new and used cars, it’s been really strong. I know supplies have been tight. Do you think this is a multiyear demand tailwind or is it more short-term?

Well, let’s address new first. Availability is coming back. I think we’ve got or 1,000 or 1,200 more cars on the ground at this point than we did last month at this time. And that just keeps improving every month. Manufacturers are doing a great job getting inventory back in our hands. The demand is there, and I think we’ll all be back and rolling as we move into the first and second quarter of next year as supplies build. From a used car perspective, I’ve said this since you’ve known me, we don’t ever have a problem buying cars. Sometimes you have to pay more for them; sometimes you pay less. We had a problem this time because we didn’t have any floor plan availability. But other than that, that’s all resolved. But if you go back and just look historically, particularly with a historically 1 to 4-year old cars under 50,000 miles, the supply is endless. We can buy cars all day long, and that’s the beauty of our model because when you mix the franchise business with EchoPark, and I have access to all that inventory, we just don’t have a problem buying inventory. It’s just – it’s never been a problem. The inventory is there. As a matter of fact, if you chart it out and you plot it out and you look at inventory supply in that supply range, it’s a flat line across the board for years and years. It’s just – you just – there are not very many blips. There’s plenty of inventory out there for those that know how to go and get it.

Great. And you’ve hired these new digital executives. Is the goal to provide an online purchase at EchoPark? And if that’s the case, what is the timeline to get that up and running?

Yes. So we have it today, right? You can go on to our websites, like Mercedes-Benz at Denver or EchoPark Greenville, and you can see examples of how a consumer can go end-to-end. But our definition of that is a little different than maybe what I’ve heard so far. Our definition is to make it really easy. And then if a consumer wants to – which is less than 2% of the population right now – they can go online and buy a car from end-to-end, no touchpoints, right? No touchpoints. The best-in-class right now has 10 to 15 touchpoints. And so we’re building out a solution that allows the consumer to go end-to-end, with no touchpoints, buy a vehicle, do it very easily, with very few clicks, and deliver on that promise. So we’re a little bit away from that. I mean, hopefully, we can deliver on that sometime towards the end of next year. But between now and then, we certainly have a robust environment where the consumer can do it. There are going to be touchpoints just like any of our competitors, and we can deliver a car. We have customers coming in today, and some customers are doing – I think about 15% to 17% of our customer base right now is completing some percentage of the transaction online before they come to the store to pick it up. And I’ve heard those numbers and ranges from some of our competitors and reporting. So I think that’s sort of the overall bucket of consumers right now that want to do that. Is that going to grow in the future? Who knows. But we’re going to be ready for it if it does. And that’s why we’ve added Steve and Stephen. They come with incredible pedigrees. Their resumes are fantastic. And they snap and fit right into what we’re trying to do, and we’ll introduce them to you on the call next time, and they can start answering the omni-channel questions as we move forward.

That sounds great. Finally, if I could ask you about the new delivery and buy center in Greenville, you mentioned how that’s performing, and the rollout plan sounds like you’re going to add one more that is prior to the end of the year?

Yes. We’re probably going to add Knoxville. We’re working on that right now. We’ve got a couple of opportunities; we’ll see which one fits the best. But the national store, we’re trying to get it up and running, and it’s up and running pretty quickly here. Greenville is doing great. We sold 80 cars last month out of the store. And if you think about it, being the average new car dealer and used car stores, sell 69 cars a month. We sold 80 in just our first month out of the chute here. And so we’re really excited about it. We think that, that market can bring 200 to 300 cars a month as we get better in our execution there. And then sort of the hub-and-spoke model will come to life. If you can picture Nashville and look at Memphis and Knoxville and some Kentucky markets, Lexington, we’re going to be able to deliver into those markets a lot cheaper. Remember, in Greenville, we’re actually using an office at one of our stores there, and we delivered 80 cars there. We have no overhead, no nothing. And so it’s such a great model, and we look forward to opening up a bunch of those next year as we move forward. And it just puts us right on track, if not ahead, a little bit of pace, to hit our 140 stores and that $14 billion revenue number, if not better, by ‘25.

Great. Thanks, Heath Byrd. Good luck guys.

Thank you so much, Rick.

Your next question comes from Rajat Gupta with JPMorgan.

Hi, good morning. Thanks for taking my questions. I just had a question on just what you’re seeing in terms of your near-term demand trends? How did October look for you, both new/used and also parts and services? How have those volumes improved from third quarter levels? And then on parts and services, how do you see the recovery shaping up here, particularly with lower miles driven, potentially likely to be lower here for the remainder of the quarter as more shutdowns come into place? Just curious as to your thoughts there as you go into 2021. Also, I mean, how much of a function is miles driven? How much of that goes into the equation for the growth in that business? And how much is likely independent of miles driven and more around just company-specific actions or vehicle complexity, etcetera?

Yes. So thanks for the question. So let’s address fixed operations first. We were actually up year-over-year by 3.6%, I think, in September, which is great. We have a days difference in October. So I think we’re going to be maybe down 1% or 2% for the month. We’ll see when it all finishes up. But fixed operations are coming back slowly but surely. And if you’ll remember back when we started projecting kind of what was going to happen with volume and fixed, we said fixed a while back, it was going to take a little bit longer because of the things that you just mentioned. The other thing too is our exposure in California is quite high, and we’ve had more shutdowns out there than anywhere, but that market is a little topsy-turvy when it comes to that, a lot less driving. So that issue is certainly going on. From a used and new perspective, the business keeps just getting better. And I’ll comment on both EchoPark and Sonic Automotive, in particular, at EchoPark in October. Now that we’ve got that floor plan issue resolved, and our inventory levels are back up where they are supposed to be, the engine is really rolling again, and I think 5,200 to 5,500 cars for EchoPark out of October is a pretty decent range and certainly pushing for north of 16,000 cars in the quarter. So we’re excited about that. Sort of where we should have been last quarter had we not had the slowdown there from the floor plan. The new car business is a function – the demand is there; it’s just a function of inventory. The more inventory we get, we’re selling it. And the margins, which is great, because I think we all would have said, "Hey, the margins are going to get a little tighter and a little tighter, and the margins are still really good." We’re a little over 2,600 a copy, I think, for the quarter, and it’s going to be strong again in the fourth quarter. And look, 2020 was a crazy year, right? But we’ve cut so much cost, and we’ve got our revenue engine going, in particular with EchoPark, that ‘21 is going to be a great year. The shutdowns, if they happen again, we’re a lot more educated on how to deal with them. We’ve got a whole different cost structure. We’re just – the economy’s better prepared to deal with it. And so if it happens, it happens. We’ll – as we’ve always done, we’ll stay strong as we move through this. But we think ‘21 is going to be a fantastic year. 2020 is by far and away going to be a record-breaking year for us from an EPS perspective, and we expect to do that again even better in ‘21, with great volume growth and a fantastic growth out of EchoPark.

Got it. That’s helpful. On EchoPark EBITDA, I mean, you explained about the issues that happened in the third quarter. Should the fourth quarter EBITDA – is that expected to get back to the prior run rate of like, say, $5 million, $6 million in EBITDA or should we consider any offsets even to that with the new stores opening up? And just looking into 2021, not – I’m pretty sure you cannot guide, but is that exit rate of EchoPark like a good starting point to assume when you look at – look into 2021 EBITDA potential for EchoPark? Just any color on the puts and takes there would be helpful.

Yes. So here’s how I look at – here’s how I kind of guide you there. We had still a little bleed over from inventories from September into October. So the first few weeks of October, still difficult margins, but that’s finishing now. It’s not done right now. And so November and December should be back on our normal EBITDA pace. However, you need to remember that we’re accelerating our openings, right? So the model that we got used to in 2019 and throughout 2020, where you got that $5 million in EBITDA, we’re accelerating our openings. And what that means is I’m carrying people, I’m carrying managers on my employee list now, then I’m going to deploy in the next 6 to 8 to 9 months. So we’ve got a little bit of a carrying cost as we expand the revenue. And that’s just natural. That’s just common sense that that’s going to happen. So I would expect a better Q4 from an EBITDA perspective than what we saw in Q3. And then I would expect – because the ramp-ups are so much faster or the last couple have been really fast in Houston and in Nashville, in terms of getting to profitability, I don’t expect to lag these 3 and 4 or 5 months lags to get profitable as we move forward. And of course, the delivery centers are profitable most immediately as well. So I mean I’m not afraid of that $5 million, $6 million EBITDA quarter, and still – and growing like we’re going to grow. But keep in mind that the growth is going to include having us hire people ahead of time and ramp up to get ready for these store openings.

And Jeff, this is Danny. Just to add to that. In the third quarter, we had $1.8 million of EBITDA drag from those new openings as well. And we had about $5 million of gross because of the margin pressure that we talked about at EchoPark that we lost in that quarter. So that $3.1 million of actual EBITDA you see is reflective of both of those. So as we go forward, you are still going to have to drag from new openings, but if those margins normalize here coming out of October, that should give us some upside.

Yes. And the new openings, the delivery and buy centers are real cheap to open. Let’s take – it is either – we either own the property or it is a lease, and we are talking about maybe $2 million to get a store opening, $3 million at the most versus a traditional EchoPark store that’s anywhere from 10 to 20 depending on the size of the store.

Got it. Got it. Just last one for me. On the SG&A side, I mean, because you did not have like a similar kind of like gross margin tailwind as some of your competitors, is this kind of like the – I mean, start on the new side probably, but how should we think about the SG&A-to-gross progression there? I mean, you have talked about 72% to 73% in the past on a normalized basis. Has that thinking changed at all? Or are we still on track to hit that kind of number here on an organized basis?

Yes, this is Heath. If you look at the fourth quarter, it’s going to be very similar to Q3 from a percentage of – SG&A percentage gross. And then as you go into 2021, I think if you look at the total year this year, it’s going to be around 73% for the whole full year. Probably 69% in the fourth quarter is what we’re projecting. And as you go into 2021, you got to factor in that first quarter where we did not have those annual savings that we got after COVID. And if you think of that, you are going to be looking at low-70s as a percent of gross for 2021.

Got it. Got it. That’s super helpful color. Thank you so much.

Your next question comes from John Murphy with Bank of America.

Good morning guys. First quick question on EchoPark, I mean, opening one store every 15 days is pretty impressive. It’s kind of – you are sticking to your plan, and it seems like accelerating a little bit. But when you think about human capital that needs to go into that store, I mean, that’s kind of a challenge at that pace. I know you are saying you are carrying a backlog of folks, but I’m just curious how you’re sourcing them? I’m not sure you’re calling people GMs in that store, but your equivalent GM in that store, where are they coming from? Where is that backlog being built? And how do you get comfortable with that human capital that needs to go in, which is obviously very important in any store?

Yes, John, good question. So part of that $1.8 million is that drag of human capital, right, that Heath mentioned earlier or Danny mentioned earlier. And then what you have to remember is the delivery and buy centers, the headcount in those is about 10 people. So it’s not real top-heavy when it comes to headcount, right? It’s very few people. So we’re growing those internally. And we haven’t had a problem yet. I mean, we’re opening – obviously, we’ve opened a lot of stores here recently and we’re opening a lot more before the year is over. And we’re ready. We already have those managers picked out. And we’ve got the managers picked out for the next 10 stores that are all working in our environment today. But it’s part of the drag that you’ll see on the EBITDA carrying that headcount well ahead of time to make sure that when they go into a store, they can provide that culture. You look at our Reputation.com scores at EchoPark, and they’re off the charts. And we’ve got to have the culture and what we train our people to do. We’ve got to be able to move that from store to store to store. So we’ve been very thoughtful about the pace of opening and making sure that we carry that culture from store to store to store. But I think it’s really important to remember there’s a part of that opening store every 15 days or so here that their delivery and buy centers are a lot easier to open and a lot less intensive when it comes to personnel.

And I am sorry, so all of those folks are coming from internal Sonic stores at the moment. Is that a correct statement?

That is correct.

Okay. Then second, I mean, there is a great debate going on right now on what kind of footprint you need, either both in used or new whether a robust local geography coverage is good enough where you need to be in a national footprint that you’re reaching everybody. I’m just curious what your thought is there on your core dealer franchises as well as for EchoPark?

Yes. I mean, on the new car franchise, the franchise laws and the rules between the manufacturers are going to keep you from really selling cars all over everywhere – and advertising cars all over everywhere. That’s a battle that I have seen coming. I have mentioned in previous quarters before. It’s going to be really interesting as e-commerce grows, and our reach grows, quite honestly, makes the idea of having fewer dealers even greater, right. Then from a new car perspective – or from a used car perspective, in particular, EchoPark, it’s just the distribution network. We need a distribution network that covers the entire United States. We believe that every mid-major market in the country deserves this brand and deserves the experience that this brand provides, and we’re going to do that. And that’s what our plan is by the time we get to 2025, is to be serving a majority of this country with the brand. So I don’t think you can just do that with 10 sort of reconnaissance centers all over the country. If you read the data and you look at what the consumers are saying, the consumers are telling us that they want to be able to search our inventory online, but they want to come to a store, sit with an associate that’s got experience dealing with the car that they’re looking at. They want to test drive from a big inventory before they buy a car and make that decision. Our goal in our hybrid approach from A to Z is to allow them, if they want to go A to J or they want to go A to Z, our system is going to allow that to happen. And so they can do it now in our stores and buy EchoPark by the end of the quarter. But it’s wonky, right? There are still touchpoints all over everywhere, just like there is in any auto retailer I might add in the country today. Nobody, not one auto retailer delivers a car A to Z with no touchpoints. That’s what we’re trying to build as an option. Now it’s a very small percentage of the buying base, but it’s still incredibly important to provide that experience and to provide that hybrid approach with a distribution network that allows us to touch every mid and major market in the country.

Just a follow-up to what you just said, when you think about getting deals done, right, a lot of people, as they’re thinking about things being done truly online, I think the F&I process is sort of the last hurdle where you – the last thing you want to do is say no to somebody and then just lose them. But when you’re interacting with them either on the phone or in person, you have the opportunity to maybe shift them if they can’t get financed for the vehicle they want, you can kind of work them into another vehicle that may be good for them that they get financed for. Is that really just a major hurdle to getting this done completely A to Z online? And how often does the financing discussion include, hey, maybe go down a trim level or, hey, maybe you will consider this other vehicle, and you do that in a polite way not to alienate the consumer that would be very difficult to do in A to Z online?

Yes, that’s another good question. It’s far too complex to do A to Z purely with no touchpoints. And that’s why it’s going to always stay a very small percentage of the consumer base for the foreseeable future. You do end up getting on the phone. In our Greenville store, for example, our F&I department and our sales department is here in Charlotte, and we’re delivering cars into Greenville and doing a good job with it. And our F&I numbers haven’t changed, right? There is still – that is one thing I think we’ve all learned is, the more the business becomes online, we can still sell F&I products. And as you know, that’s a real big part of EchoPark’s profitability statement. It’s all of it. And so that was a big question mark in our head, and we’ve overcome that. We are not worried about that as being a stumbling block for us any longer. But it’s going to be – it’s very difficult for me to believe that you are going to complete automotive transactions with the appraisal, with the financing that you have to go through with something that gets turned down and you need to flip them like you were talking about and not have a touchpoint and do all that electronically A to Z. But I do believe that you need to be able to offer an experience, whether it’s A to Z or A to Q. The experience needs to be easy like Amazon, right? It needs to have very few clicks to get the consumer to a point, and then when they arrive at the store to take off from that point and have the exact same or better experience online as you have at the store level. And those are the things. That’s why we’re making the investments in Steve and Steven and why we brought them in. Because we feel like, long term, we need that expertise that you would find at an Amazon or you find at a Google or wherever that can help us look at it just a little bit differently versus looking at it through the lenses of an auto retailer. In all our retailers, I don’t care if you’re the best-in-class or not, we’re all experiencing the same thing. And we’re going to work very hard to make it a lot simpler for the consumer to have a great experience online.

And John, this is Heath. I will just add. We’ve talked about these expense reductions and the majority of that has been through productivity, and we all truly believe, regardless of the percent that wants to go from A to Z, the more you can get from A to J or further down the line, it makes us that much more productive. And so not – forget about the consumer experience, which we absolutely want to provide. From a productivity standpoint, the more you can do online, the better it is for us. And so it’s a very integral part in the SG&A as well. And I do believe, I completely agree with Jeff, it’s a very complex algorithm to solve. But there are technologies coming out with AI, et cetera, where you can start getting them further down the line, even when there are questions about financing. So it’s going to be an evolution, and we are committed to it.

Got you. And then just – that’s very helpful. And then just lastly, on the used vehicle sort of heartburn you had in the quarter with being a little bit short of the floor plan financing. Now that that’s worked out, it’s very likely that used vehicle pricing will be somewhat volatile going forward. I mean there are just some factors that are sort of likely to drive that. I am just curious, if you think about – now that you got through that heartburn on the floor plan side, has anything changed in a way that you would manage your used vehicle inventory? Or is it still, hey, I’m going to stay in a 30- to 45-day window, not get beyond that, keep it tight, and that’s the best way to do it? Because you’re kind of saying that some folks who had 50-, 60-day inventory were doing better because they had cheaper inventory to sell out of. I’m just curious if anything has changed there or should we think about it in the same way?

No. I mean, look, at the end of the day, if we had the floor plan and the prices dropped like that to historically low levels, we knew it wouldn’t stay that way. We’d bought the hell out of it and a much higher day supply. That wouldn’t have been a problem. And most of our competition did. Look at all their day supply numbers that they’ve announced. They are much higher than where we are. We had a point when we got to the end of April that we had some regions within Sonic and EchoPark sitting in a 15-day on-lot inventory. I mean our Dallas store, as you saw in our charts, that store got down to 500 cars, and we were just managing that floor plan as best we could, and we just had to fight with one hand tied behind our back. But to be able to do that and still come out with an all-time record was just amazing. And again – and did stay profitable during all that because the margins really took a hit when you had to buy all that inventory when the market was 120%, 130%, 140% above. So yes, we would buy inventory during a downturn like that, and we’d adjust our base supply accordingly and have more inventory on the ground, no problem. We just couldn’t.

And this is Heath, I will add that. If this was a one-time black swan event, so yes, we’d have the foresight in the floor plan. We would have changed our model at that point. But 99.9% of the time for the last four years, that short-day supply is the best way to run your inventory and be profitable.

Got it. Yes, that makes sense. Okay. Thank you so much guys.

You bet.

Your next question comes from Bret Jordan with Jefferies.

This is Mark Jordan on for Bret.

Hey Mark.

Most of my questions have been asked here, so I guess, let’s do two quick ones. So thinking about new inventories, I guess, where did you end the quarter for days supply? And where should we think about inventories getting back to more normalized levels? Is that kind of early next year? And I guess I will piggyback on that with new GPUs where we are pretty strong in the quarter. Do we expect those to moderate sequentially? Or do they kind of stay elevated again in Q4?

Our new car day supply was 43 days to end the quarter. That’s going to continue to get better as we move forward. But we’re going to do our best not to bring inventories back as high as they were. And I think everybody is going to be doing that, including most of the manufacturers. The margins are going to be good this quarter for new. I mean, they may not be quite as robust as they were in the third quarter, but they’re still tracking to be really nice. And I expect that to last through the first quarter too. And if the manufacturers behave appropriately, and they don’t oversupply, we can all have higher margins and they can have higher margins. We can all make more money. The problem is when they get into oversupplying cars and all of a sudden, here come all the gains with the incentives and all the bonuses; it makes it a lot more difficult. So I think we’ve got a good couple of quarters ahead of us with much better margins, better inventory management, and hopefully, the world learns from that, and we continue forward like that.

Okay, great. Then just one more, thinking about F&I per unit on the franchise side. I guess it was up nicely year-over-year, down a bit sequentially. But thinking longer term, how should we think about the opportunity there to continue expanding the F&I per unit?

I mean, it’s – look, we’ve got some of our competitors up over $2,000 a copy, and that’s where we are headed as well. I think there’s tons of upside. We continue to improve every month. We get it a little better and a little better as an organization. And October is no different. It’s getting a little better, and we expect that to continue. So I think there’s a lot of upside and when you place that upside, a couple of hundred dollars a car on the kind of volume that we do, that’s a big number.

Okay, great. Thank you very much.

You bet.

There are no further questions at this time. Do you have further remarks?

No, just want to thank everybody for listening in, and we will talk to you on the next call.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.