Group 1 Automotive, Inc. (GPI) Earnings

Management highlights

### Strategic Cluster Portfolio Optimization - Management is repositioning the portfolio to focus on high-revenue rooftop locations, premium brands, growing markets, and consolidated clusters, divesting underperforming stores that do not fit this profile. - Announced the acquisition of Hennessey Automobile Companies, adding 10 dealerships in Atlanta, expanding Group 1's presence there from 3 to 15 locations, making Atlanta the company's second-largest revenue market and ninth U.S. cluster. The acquisition includes a strong premium brand portfolio (2 Lexus, 3 Land Rover, 2 Porsche, plus Honda, Ford, Cadillac) with 500 service bays, 280 technicians, expected annualized revenue of $1.7 billion, and EBITDA margins above 7%. Hennessey's average store revenue of $170 million is double the national U.S. average, with above-average fixed operations gross margins. - Year-to-date 2026, the company has acquired dealerships with $340 million in expected annual revenue, and has divested non-strategic stores generating $900 million in annual revenue year-to-date. U.S. Rebranding Initiative - The initiative consolidates over 40 legacy store brand names to a unified local brand to improve marketing efficiency, enable cross-selling to multi-vehicle households, and capture greater "share of garage" in cluster markets. Over 60 stores (more than half of the eligible U.S. footprint, including almost all Texas and Maryland locations) have been rebranded to date, with rollout continuing through 2026. - Short-term transitory traffic and volume impacts have occurred due to delayed organic search indexing of website changes and shifts to large language model (LLM) driven search. The company has mitigated this with supplemental paid search and adjusted search positioning strategies. Management remains fully committed to completing the rebranding, noting long-term benefits from unified marketing leverage and better LLM search reputation benefits. Cost Reduction Execution - The company met and exceeded its target to cut 700 U.S. headcount positions and eliminate $50 million in annual U.S. expenses by the end of Q2 2026. The cost cuts improved SG&A leverage significantly: Q2 2026 saw higher gross profit compared to Q1 2026 with a $17 million reduction in personnel costs, resulting in a 66.4% U.S. non-GAAP SG&A leverage that management viewed as favorable. After-Sales Strategy Adjustment - The after-sales market is experiencing a transitory shift: lower vehicle sales volumes from 2020-2022 have resulted in fewer high-value in-warranty customers entering service lanes today, and more out-of-warranty customers are defecting to the aftermarket amid affordability pressures. - Management is adjusting strategy to capture and retain out-of-warranty customers, including: upgrading service advisor sales skills to leverage existing increased technician capacity, adding affordability-focused marketing promotions (e.g., the $17.76 oil change promotion that drove strong Q2 traffic, conversion, and recaptured at-risk customers), rolling out the discounted OneCare maintenance plan to all U.S. stores, and targeting lower-retention used vehicle customers. The proprietary customer data platform enabled effective targeting and design of these initiatives. The underlying business remains resilient, with over half of Q2 customer pay growth coming from increased customer count. Technology and Digital Innovation - Virtual F&I is rolled out to 66 U.S. stores, with full national rollout planned by the end of 2026, delivering operational and financial benefits. - Artificial intelligence is being leveraged to improve customer acquisition and retention, enhance used vehicle inventory sourcing, and reduce G&A expenses, remaining a core strategic priority. UK Operations Progress - The UK business has delivered resilient performance, with 4% same-store new vehicle volume growth above market, completed divestment of four underperforming Jaguar Land Rover stores for ~50 million pounds, and remains focused on portfolio optimization, after-sales growth, and used vehicle inventory management. The company opened its first Chinese OEM (Geely) franchise in June 2026, with additional locations planned, with low entry cost and expected early accretion.

Guidance

- The Hennessey acquisition is expected to be immediately accretive to earnings after closing, which is expected in late 2026 pending standard closing conditions. - The $50 million annual U.S. cost reduction is expected to deliver $12.5 million in quarterly savings for the remaining two quarters of 2026, with the full annual savings running into 2027. - Management expects the transitory volume impacts from U.S. rebranding to fade, with a return to positive same-store sales growth later in 2026. - Leverage is expected to hit ~4x rent-adjusted leverage at closing of the Hennessey acquisition (still well below credit facility covenants), and management targets a return to its 3x target leverage by mid to late 2027 via organic cash generation and planned dispositions of underperforming non-strategic stores. - Stock buybacks are expected to be paused until the Hennessey acquisition closes, after which buybacks will be re-evaluated based on market conditions and leverage levels. - Management expects long-term margin improvement from the Hennessey acquisition and planned dispositions of smaller underperforming stores, driven by the premium profile and higher operating leverage of larger Hennessey stores.

Segment performance

Total company Q2 2026 revenues were $5.4 billion, with gross profit of $861 million, adjusted net income of $115 million, and adjusted diluted EPS of $9.61 from continuing operations. U.S. Operations (revenue contribution: ~85% of total based on segment results): - New vehicles: Unit sales declined year-over-year, reflecting affordability pressures, inventory constraints, and tough year-over-year comparisons. Gross profit per unit (GPU) decreased sequentially to $3,313. - Used vehicles: Lower retail volumes were partially offset by higher average selling prices, up $1,400 year-over-year. Gross profit per unit remained under pressure due to high acquisition costs and sourcing competition. Holding year-over-year margin was a key achievement via prioritized per unit retail profitability (PRU). - F&I: GPU was essentially flat year-over-year, demonstrating resilient profitability. 20% of F&I volume at 66 already deployed virtual F&I locations is completed virtually, with strong PRU, faster transactions, lower compensation costs, and positive customer feedback. - After-sales: Same-store customer pay revenue grew 4% (10% before CDK transition impacts), with 3% gross profit growth. Same-store warranty revenue grew 1% (gross profit up 4%) after lapping a 32% growth quarter driven by 2025 one-time recall activity. Same-store technician headcount increased 2% year-over-year. Collision same-store revenue declined 15% as the company reallocated capacity to higher-return traditional service work and closed underperforming collision centers. U.S. non-GAAP SG&A leverage hit 66.4% after completed cost cutting. UK Operations (revenue contribution: ~15% of total based on segment results): - New vehicles: Same-store volumes increased nearly 4% year-over-year, with stable GPU. Legacy brands delivered this growth, with new Chinese OEM franchises just launching. - Used vehicles: Volumes remained under pressure, with modest same-store revenue declines as the company balances volume and profitability amid evolving EV market dynamics. - After-sales and F&I: Both delivered year-over-year same-store revenue and gross profit growth. Same-store technician headcount increased 2% to support future growth. Same-store SG&A as a percentage of gross profit year-to-date hit 80%, in line with management targets.

Risks & headwinds

- Persistent consumer affordability challenges continue to pressure new and used vehicle volumes, particularly for higher-priced late-model used vehicles, and increase defection of out-of-warranty customers to independent aftermarket service providers. - Used vehicle sourcing remains challenging: low inventory supply, increased competition, and higher consumer negative equity are making organic trade-in sourcing more difficult, pressuring used vehicle gross profit margins. - Short-term transitory volume and traffic impacts from the U.S. rebranding initiative have weighed on Q2 2026 results, with indexing and search positioning still being adjusted. - Changing consumer search behavior, driven by the shift to large language model-driven search results, creates ongoing uncertainty around digital customer acquisition that requires continued strategy adjustments. - The U.K. used vehicle market is experiencing ongoing disruption from the growing volume of EVs returning to the market after first ownership, requiring active inventory management to limit valuation risk. - The Hennessey acquisition requires temporary elevated leverage, with execution risk on planned dispositions to bring leverage back to target levels by the 2027 target date.

Analyst Q&A

• Q: How will the $1.3 billion Hennessey acquisition be funded, and what role will store dispositions play in covering the cost? /

  A: The purchase price will initially be funded via a 364-day bridge loan, with a planned permanent long-term bond issuance in Q3 2026. Roughly half of the purchase price is expected to be covered by proceeds from upcoming dispositions of underperforming non-strategic stores, which are already identified and largely at the APA/LOI stage. The acquired Hennessey stores have strong 7%+ EBITDA margins, and management is pleased with the overall valuation of the transaction relative to recent comparable deals.

• Q: How much of the Q2 2026 5% same-store new vehicle decline was driven by rebranding, and will the company pause rebranding after the Texas issues? /

  A: Management estimates ~two-thirds of the 5% decline came from transitory rebranding-related search traffic impacts, with the remainder from market factors (e.g., lower full-size truck/SUV demand from higher gas prices, which disproportionately impacted Group 1 due to its large Texas domestic brand footprint). Management remains fully committed to completing national rebranding, noting the issues are transitory, and will add supplemental paid search in future rollouts to mitigate search impacts. Hennessey's well-known Atlanta brand will be retired as part of the unified rebranding, per the company's customer research that found local store legacy names rank very low in customer decision-making, behind OEM brand, location, and reputation.

• Q: Given the current market shifts in after-sales, can we expect a near-term step back in after-sales gross profit and margin growth before the new strategy takes hold? /

  A: Margin impact has been minimal to date: U.S. after-sales customer pay margin was 55.2% in Q2 2025 versus 54.8% in Q2 2026, a negligible year-over-year drop. Management is focused on capturing out-of-warranty customers via affordable entry promotions (e.g., the $17.76 oil change), which drive traffic that converts to higher-margin repair work, as the average vehicle entering Group 1 service lanes is now 68,000 miles (one year older than a year ago), creating significant latent repair demand. Management expects sustained low-to-mid single-digit customer pay growth going forward, and views after-sales as a long-term high-value opportunity for the business.

• Q: What is the strategic rationale for the Hennessey acquisition versus continuing aggressive share repurchases, and what is the leverage outlook? /

  A: Management views Hennessey as a unique generational opportunity to build out a critical new cluster in one of the fastest-growing U.S. metro markets, which aligns perfectly with the company's long-term portfolio strategy. Over the past five years, the company has bought back 38% of outstanding shares, returning significant capital to shareholders, and management views this acquisition as the best long-term use of capital today. Stock buybacks will be paused until the deal closes, after which they will be re-evaluated. Leverage will rise to ~4x at closing, well below covenant limits, and will return to the 3x target by mid-to-late 2027 via dispositions and organic cash flow.