Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive Second Quarter 2020 Earnings Conference Call. This conference call is being recorded today, Thursday, July 30, 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 reform on Form 8K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Sonic and EcoParks Chief Executive Officer. Mr. Smith, you may begin your conference.

Thank you and good morning, everyone, and welcome to Sonic Automotive's second quarter 2020 earnings call. Again, I'm David Smith, the company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke, our CFO, Mr. Heath Byrd, and our Executive VP of Operations, Mr. Tim Keene. Today, in addition to discussing results for the second quarter of 2020, I'll also provide an update on trends we saw within the second quarter and into July. as well as an announcement on our latest digital partnerships and accelerated expansion plans for Echo Park. After that, we'll be happy to take your questions. As the second quarter progressed, we continued to see substantial improvement in operating conditions and automotive retail consumer demand. While April was a challenging month that weighed on our quarterly results, May improved greatly and we saw a dramatic acceleration in the rate of recovery during the second half of June with rising consumer demand for new and used vehicles and service repairs in the majority of our markets. Limited new vehicle inventory in certain brands drove higher gross per unit and actions we took in April to manage our used inventory allowed us to take advantage of used vehicle sourcing opportunities benefiting used vehicle GPU in May and June. Some noteworthy operating improvements sequentially from May to June 2020 include a 22% increase in new vehicle GPU, a 35% increase in franchised used vehicle GPU, a 16% increase in franchise F&I per unit, a 16% increase in franchise fixed operations gross profit per day, a 32% increase in Echo Park combined used and F&I gross profit per unit, and a 154% increase in consolidated pre-tax profit. Above all, we remain disciplined in improving our financial liquidity, controlling expenses, and enhancing profitability at both our franchise dealerships and Echo Park stores throughout the quarter. These factors contributed to Sonic achieving adjusted EPS of $0.64 compared to $0.62 for the second quarter of 2019. On a GAAP basis, we reported EPS of $0.71 for the second quarter of 2020, including a $0.07 benefit from a non-recurring tax item. In addition to EPS growth year over year, other second quarter operating highlights include SG&A has a percent of gross profit of 74.9%, a decrease of 230 basis points. Total SG&A reduction of $64 million, or 22%, compared to the second quarter of 2019. Echo Park revenues of $315 million, which is up 8%. Echo Park retail sales volume of 13,207 units, up 5%, Echo Park segment income of 2.6 million, up 52%, and available liquidity of $455 million as of June 30, 2020, an increase from $312 million as of March 31, 2020. During the second quarter, we continued to improve our operating efficiency building on our experiences during the last financial crisis as well as more recent lessons learned during this pandemic. We are very pleased with the success of these efforts which have enabled us to operate in a much leaner, more profitable manner. Through these initiatives, Sonic expects to decrease SG&A expenses by approximately $7 million per month or $84 million annualized as compared to pre-COVID-19 levels. I'd like to emphasize that this represents over 50% of our adjusted pre-tax profit in 2019, indicating tremendous earnings upside as we return to more normalized business levels. Moving on to our operating segments, our franchise dealerships' year-over-year performance reflects the challenges we faced in April and early May as a result Thank you for joining us today. Now turning to Echo Park, as expected, Echo Park sales experienced a V-shaped recovery in sales volume and improved profitability as the second quarter progressed. By June, Echo Park had surpassed our original pre-pandemic unit volume forecasts for the month. As noted in our press release this morning, second quarter Echo Park segment income increased 52%, demonstrating the operating leverage and profit potential of this model. Notably, all of our Echo Park stores were cash flow positive in June 2020, including our Tampa store in just its second full month of operation. This momentum has continued into July as more and more guests realize the tremendous value in the pricing, quality, and convenience that our Echo Park stores offer, enabling our guests to enjoy a modern, hassle-free car buying experience. Moving on to our digital retail initiatives, as we announced this morning, we are very excited about our historic strategic partnership with Cox Automotive and Darwin Automotive to develop a first of its kind proprietary e-commerce platform and user interface by the fourth quarter of this year. This digital retailing partnership will be key to accelerating our Echo Park expansion plans We are dedicated to elevating our online retail guest experience to match the great guest experience our guests have come to expect onsite at our franchise dealerships, at Echo Park stores, and at EchoPark.com. As you can tell, we are very excited about Echo Park's performance in this challenging environment and believe these quarterly results speak to the strength of this unique business model. Echo Park continues to outperform our original expectations Demonstrating the revenue growth, operating leverage, and profit potential of this brand. Further, Echo Park is a unique and scalable business model that has not yet begun to reach its full potential. Earlier this year, we announced that Sonic planned to grow its total revenues to $20 billion this decade. Since that time, we have actually revised our original Echo Park expansion strategy to achieve more rapid growth of the Echo Park brand. Based on Echo Park's extraordinary success to date and after an extensive review of our growth strategy over the past several quarters, we are dramatically accelerating our expansion of the Echo Park brand. While we remain committed to managing capital expenditure levels in the short term, the flexibility of the Echo Park model has proven greater than we originally anticipated. By capitalizing on Echo Park's highly trained guest experience center team, our centralized appraisal, inventory, and pricing procedures, as well as the development of the newly announced proprietary e-commerce user interface, we can strategically and efficiently build out a national footprint by opening new Echo Park delivery and buy centers in adjacent markets to our existing locations in a very capital efficient manner Realizing returns on investment in excess of 55%. By utilizing enhanced online sales capabilities and a next-to-last-mile delivery model, this will allow us to quickly expand Echo Park into new markets across the country with minimal capital outlays or overhead costs, as our customers nationwide will now be able to shop on EchoPark.com through our Echo Park mobile app, or on site at an Echo Park retail hub location. Based on these expansion plans, by 2025, we expect to have a nationwide distribution network consisting of 140 plus Echo Park retail hubs and delivery and buy centers generating over half a million retail vehicle sales annually and $14 billion in annual Echo Park revenues. The plans that we've announced today are based on internal modeling we've been conducting for the past several months. Even by our most conservative models and taking into account the more recent events of COVID, we believe these objectives are quite achievable and we have the team and tools in place to execute our plan. Our first delivery and buy center in Greenville, South Carolina, opened last Friday and delivered its first vehicles on Monday. Progress is well underway for opening the next several markets, and we look forward to providing updates on our progress and results over the coming months. Before we get to questions, I would like to take a moment to express how proud I am of the way our team continues to focus on meeting the needs of our guests, our teammates, and our business partners during these challenging times and beyond. I want to personally thank each of our teammates for all of their efforts and continued commitment to taking care of our guests as well as their dedication to the future of Sonic and Echo Park. This concludes our opening remarks and we'll be happy now to take your questions.

And ladies and gentlemen, at this time, if you do have a question, please press star then a number one on your telephone keypad. Again, that star then a number one for any questions. And your first question is from the line of Rick Nelson with Stevens. Please go ahead, sir.

Thanks. Good morning. I'd like to follow up on this five-year plan. You know, quite interesting, 140 distribution points.

It looks like, you know, it's like that five hubs next year.

Maybe you could speak to these delivery locations. How many of those you're thinking about for next year? And some color, I guess, around how you're going to attack these markets where you don't have stores.

Hey Rick, it's Jeff Dyke. Sure, we'll open 20 delivery and buy centers next year. That's our plan. We'll probably get three to four open this year. As David said in his opening comments, we opened Greenville already last week, and that's going quite well already. We're delivering cars into the marketplace. We're actually using our BMW store and property that we already have there, but we own property for Echo Park in the Greenville market, so we'll put a small facility up there. The great news is those facilities are really light on rent. Maybe an investment of $1 to $2 million versus a medium-sized store that's anywhere from $5 to $12 million and a big store that's $15 to $25 million. So we can very efficiently and effectively move into a market. Those delivering buy centers will be $300 to $100 plus a month, maybe as much as $500 a month. When you add that to the hubs for a medium store at $750 or a large store at $1,500, it's It just makes all the sense in the world. It allows us to rapidly move out Echo Park's brand to medium and big markets across the country, do it a lot faster than we had originally anticipated. That's when we get the 140-unit mark by 2025 and the $14 billion in revenue. So we're very excited about that. The brand is doing very, very well, and it's allowing us to go ahead and make these moves.

Jeff or David, how many hubs, stores do you envision to achieve this plan and how many delivery pickup locations?

So this is Jeff again. It will be 20 delivery and buy centers a year and probably somewhere in the three to five range in terms of hubs a year. We'll attack the bottom half of the U.S. first, and then you'll see us start moving into the northern part of the U.S., But, yeah, three to five hubs a year and around 20 delivering buy centers a year.

And, Rick, this is David. And something, too, that is a key to understanding this model is that our, if you think about it, our retail hub centers, the big stores, are reconditioning centers as well. So they're highly profitable while they allow us to recondition vehicles. and that's something that's very important.

And do you charge the fee to the consumer to get these vehicles to the market or is that something sonic?

Within 200 to 300 miles right now there is no fee that we're going to charge the consumer. We'll see how, we'll play that by ear as we move forward and see how that works out for us, look at the margins. It's going to depend on consumer appetite, so we'll see kind of how that works. Right now with Greenville, we're delivering cars into the market already. There is no charge to that. The margins are good, so we're meeting our expectations already, but we'll play that by ear. There's a lot of flexibility in the model, so we'll see how that works as we move forward.

Do you deliver to people's driveways or do they come to a central location?

They're going to come to a central location. We're not going to deliver the last mile. That's where you add a lot of complexity and a lot of expense. And so that's just not something we're going to do. We're going to deliver it to the neighborhood, so to speak. And so in Greenville right now, it's going to our BMW mini store where guests are picking the cars up. But, again, we have property right across the street from there and right across the street from CarMax. where they do a lot of volume in the marketplace. So we'll build something that's quite reasonable in terms of expense there and delivering to the marketplace from our Charlotte and eventually in the first quarter our Atlanta location.

And Rick, this is Heath. I think it's important to note that we think there's value in having knowledgeable delivery, right? It's not someone that's driving a truck and dropping off a car and handing you keys and asking for a signature. It is someone that knows the vehicle, can hook up your Bluetooth, can give you a full walk around and a true delivery. On a product that's this complex as a vehicle, we think that is a better user experience than someone that knows nothing about the vehicle, pulling up and dropping off the car.

Do you anticipate any cannibalization of You know, your existing hub stores as you push into these markets, or do you view it as incremental sales?

We view it as incremental sales. Yeah, it's 100% incremental, Rick.

When you look at most of our sales, existing sales, they're not – we're purposely targeting markets that are beyond that reach.

Your slide back, page 16, talks about maturity of the hub stores and these delivery and buy centers, the types of volume. Any updated thoughts as to how long it takes to reach maturity?

So, you know, we were telling everybody that it takes a year to get a store or, you know, six quarters or so to get a store to where we feel like it's mature, but they just keep, we just keep beating all the maturity levels. And so you look at Tampa, David said it earlier, you know, it was profitable in the first two months of operation. So maybe three to four years for profitability and mature volumes, something of that nature. But we're learning every time we open one of these stores, they keep opening faster. They ramp up quicker. It just seems like we go from zero to 400 cars sort of immediately, and then we sort of ramp up over time. You know, I think full maturity is somewhere in the three- to four-year range.

And something to keep in mind is that that Tampa store opened right in the depths of COVID. You know, so it's not like it opened, and it really kind of opened in the worst time and still became profitable very quickly.

Mm-hmm. Exciting stuff. Thanks, and good luck. Thanks a lot, Rick. Thank you.

Your next question is from the line of Rajat Gupta with JPMorgan. Please go ahead.

Hey, good morning, and thanks for taking my question, and I really appreciate all the details in the slide deck. They're very helpful. You know, just to cut a question, you know, on, you know, just on the SG&A, Profile here going forward. You've talked about the 84 million expense reduction. You know, you gave us the pro forma EPS space. But as you're expanding into, you know, the Echo Park growth strategy going forward, you know, with the delivery and buy location, how should we think about the profile of SGN to gross here in the near term, at least in the initial years of this expansion plan before they hit maturity? You know, just things like marketing dollars or, you know, overhead costs or, you know, just things like that, you know, like guest experience management centers, you know, appraisals. I'm just curious as to should we be accepting any kind of step-up in expenses here or, like, how are you managing this, you know, within the overall cost bucket for the overall company? And I will follow. Thanks.

Yeah, this is Heath. Obviously, and we've reported previously, there's always some opening expenses as we ramp up, but we used to indicate there's about $2 million for every store, and that's been dramatically less going forward. Obviously, the delivery and buy centers will be a lot less than that as well, but what we're finding is they are ramping up so quickly that and if you look at both the models and Echo Park is where our growth is, if you look at Echo Park, it leverages so much better than the franchise stores and so that $84 million is straight to the bottom line but as we grow the Echo Park, again, with the way that we're doing with the buy and delivery centers, it's not going to, with the leverage of that segment, it is not going to impact materially the numbers we've given you.

And Also, the existing Echo Park stores are performing so well that they'll offset the costs of the opening of new stores. So Heath's ride to $84 million has dropped straight to the bottom line. That's $7 million a month in SG&A reduction. You know, you could just take that and add that to what we did last year and come up with a new sort of EPS model.

Got it. So the SG&A growth, like, going forward should be in, like, 72%, 73% range. Is that a good number? to model in terms of... Got it. Got it. Okay.

And the interesting thing on the point that you made about advertising, you know, our advertising is our price, right? So, you know, all of our advertising goes into Internet advertising, social media. It's not TV. It's not the brand advertising some of our competitors do. And that allows us to bring the price down Drive more volume and make more profit. And so we've seen that we've got more leads than we can deal with now, you know, over 30,000 leads every month. And so that price is the advertising, and that's what drives profitability in that Echo Park segment so quickly. Got it.

Got it. That's helpful. And, you know, just on this accelerated growth plan, You know, it looks like this business, the capital outlays are not that much, you know, for the delivery centers. You know, seems like the business is starting to function, you know, more dependent of the franchisee stores. Your cash flow is improving. Does this in any way, you know, accelerate a potential separation of Echo Park from the franchisee business? You know, just curious. Thank you for the question. I think it's just we're going to continue to grow the business as we put out there and we just rather not get into what ifs and possibilities in that area.

But we're going to Certainly, we want to execute on this plan that we put out today.

And, Regine, I would add, you know, we actually believe that we are the omni-channel and the omni-product option. You know, we've got the full spectrum of automotive needs, all the way from new, used, that are more than four-year-old, fixed, F&I on the franchise side, as well as the separated Echo Park. And so that gives us the full spectrum of of the industry. We think that's a very strong model. And on top of that, with this expansion plan, as we open up that e-commerce option and improve that and become best in class on the e-commerce side, we've truly become the omni-channel choice. You can do on-site, you can do online, or you can do somewhere in between. And so there are synergies between the two companies, and we think that's what makes us valuable.

And one of the things that we do as well, as we've talked about in a previous call, says that, you know, there's a lot of vehicles that come to us at Echo Park that we then are able to share at our retail stores that have added a lot of value, a lot of profit to our retail franchise stores.

Yeah, that's a helpful update. And just lastly, you know, just on July, more of a near-term question, you know, thanks for the color on, you know, BSG&A to gross and, like, just curious to have the The GPUs trending within the month and, you know, like, just what, how are you planning for, you know, August and, like, what's your outlook here in the interim on your auction pricing, your sourcing pricing? So, like, how are you internally planning in terms of, like, what our GPUs could trend here for the rest of the year?

So this is Jeff. Look, July is a lot like June. It's been a great month so far. I think we put it out there in our deck. New car volume is about the same, 15% to 20% somewhere in that ballpark. Used vehicle volume up in the low single digits, down in the low single digits on fixed operations. But the great news is that our profitability is up, and it's going to be up in July in the 140% range or so. So the SG&A is there. It's going to be in the upper 60% range in terms of – so it's holding just like we said it would. And I would model that on into August and September. There's no reason for us to believe – the new car inventory is getting better, so new car volume will improve as we move forward. Margins are good across the board. So the third quarter should be a good quarter for us.

and this is Heath. I'll add, you know, when you look at that slide, I believe it's 33 and you look at each of the months, I think it's very telling and obviously you can't compare June and July when you look at the operational metrics because June was a quarter ending month and those are always stronger. So July on its own is looking extremely strong and I guess obviously with our SG&A reduction, Last year's pre-tax, we're very pleased with.

I think we're planning a mid-September, sort of third week of September update for you guys. We'll continue to send out our update slides for everybody on a monthly basis so we can keep you kind of up to speed on what's going on and keep a lot of color coming at you in terms of our performance.

Got it. Great. Those have been super helpful recently. Thanks again and good luck. Thank you so much. Thank you.

Your next question is from the line of with Morgan Stanley. Please go ahead.

Great. Thank you for taking the question. You know, you provided us with the update in mid-June targeting 23 to 33 cents of EPS, and that was already, you know, a whole lot better than the minus 50 cents from first quarter results. and, you know, continue to surprise to the upside. What happened between, you know, I know you talked about the acceleration, but hoping to get a little bit more color on what drove, you know, that 23 to 33 cents up to, you know, effectively 64 cents excluding those, the one-time tax benefit.

Yeah, June was just an outstanding month. Maybe our best profit month non-December in our company's history. And it was volume, gross. SG&A, you name it, it all happened. It all came together for us. And if you think about it, in our 64 cents, I think when we went into June, we had a penny, you know, kind of on the books, and we made 63 pennies in the month of June alone. And so it was just a fantastic month across the board. We hit on all cylinders. It was the single best month we've had in Echo Park's history in terms of volume and profitability. I think we averaged 560-something cars a store, did $550,000 in profit per location, and averaged almost $1,000 in profit per unit at Echo Park. Those are gold standard numbers. And that's going to continue to happen. I mean, we're seeing that in July, and we expect it to continue on for the rest of the third quarter. There's just nothing sort of standing in our way at this point. Even with the hot spots opening up in Texas and in Florida with COVID, We're just executing at a very, very high level, and the expenses are just outstanding. We're learning our throughput is better than it's ever been. Our sales associates that were selling 10 and 11 cars per sales associate are now at 17. At Echo Parker, 25 to 30. I think our best performance is our Charlotte store at 34 units per sales associate. So it just, you know, we are having a blast and getting better than this, and so it's going to be a great run for the rest of the quarter and into the final part of the year. This is David.

I think that a big part of it, too, is that not just our top four or five leaders, our leadership team down into the stores and regionally have been with us a very long time, and we have very low turnover. A lot of these guys have been through the financial crisis and all of that. When the pandemic hit, our team jumped on it and really executed. It's like Necessities of Mother's Invention, right? They implemented some of these reductions and raised the bar, as Jeff was saying, for productivity per person. They said, look, you just have to do more with fewer people and execute it and found out they could actually do it. And now they're believers and they're bought in. It's not just the, you know, again, it's not just the top four or five people. It's down into the stores that they know they can do it and they're very excited about it.

I will also add that in June, all Echo Park stores were cash flow positive. That's the first. Even our young stores like Tampa, Long Beach, you know, we're making money. We're cash flowing. So that's a big deal for us. You know, we looked and we say it's going to take six months, nine months to get them profitable, and we're getting them profitable in eight weeks. So the model is really paying off for us, and that's why we're going to go on this terror from an expansion perspective.

Because we keep getting better. as time goes on in how we open the stores. It's much more efficient. If we had opened a Tampa store like we used to open one two or three years ago, it wouldn't have been profitable. So the team is learning, and even in the pandemic, has figured out how to open a store and get profitable really fast.

Okay. And then with the new delivery and buy centers, you mentioned the one in Greenville is located at a BMW mini store. That sounds like it'll start cannibalizing the volumes from your franchise used. Is that the right way to think about it, that the volumes on franchise used will start to deteriorate and then really ramp up the Echo Park volumes?

Quite the opposite. It's a different customer. Yeah. And remember... We're sharing inventory, so that BMW store is going to get all the trade-ins that we don't sell because we only sell one to four-year-old cars at Echo Park. If you look at our Denver market, our franchise stores in Denver are having record volume numbers at this point, and our Echo Park stores are having record volume numbers. I think our Denver market is selling 1,500 cars, something like that a month, having record profit, along with the franchise stores growing their used car business. So it's quite the opposite. That's why you keep these stores together. They work in harmony together. We sell a lot of cars out of the franchise stores, and we'll continue to do that even with the delivering buy centers.

Okay. And then just the last one here with regards to digital, maybe you could get us under the hood there a little bit and share your thoughts on the cost in the Darwin Automotive Partnership. I know digital has been something you've considered in the past. I think the thought was maybe you'd do something last November. That got kicked down the road a bit, and here we are again. So just what's What's been the holdup to this point, and how do you envision it being differently? What do you envision the end result looking like?

Sure. This is Heath. I'll start off by saying from our perspective, e-commerce is a spectrum. It isn't just – e-commerce isn't just someone that shops and buys a car completely online. In fact, that very rarely happens even in our competitor's world. It exists from – e-commerce is shopping. It is getting the price. It is getting credit. It is getting financing. It is putting down a down payment. It is getting a product. And it's getting paperwork done. And people go in and out of that spectrum at different parts of their experience. And so you have to have an infrastructure that can handle each of those elements. And if someone stops on the third step, you can easily transfer it onsite. or remotely with our centralized call support, right? And so Darwin is that typing. We want to use Darwin right now to service our customers on site. And so Darwin Online takes that into the online e-commerce world so that we can easily convert someone that stops at credit and calls and wants to talk with someone at that point or comes on site online We never lose that deal, right? So that's a very, very important part of an e-commerce strategy in an automotive world. This is not like buying a pair of shoes, right? There's too many parts. And so that piping of Darwin allows us to move back and forth in those settings. We then looked and we did research of every single company out there. and we are going with Cox Automotive. They have never built a proprietary system for any dealership group and they've agreed to do that. As you know, they've got the technology resources, the automotive experience and so they are going to be building on top of Darwin that best in industry user experience so as people go down that spectrum or funnel of e-commerce, It is going to be intuitive. It's going to be easy to use. It's going to look very similar to other e-commerce companies, and it makes it a lot easier. And so that combination, we took our time because this isn't something that you should just throw together just so you can put a slide out there and name something, whatever it is, and say you're in e-commerce. We want to do it right. We want to do it where the customer can shop the way they want to. and it's not something you throw together quickly and so we were very specific about taking our time and making that the product that it needs to be. But the combination of Cox Automotive and Darwin with our experience in the store, we believe is going to be the industry leader in an omni-channel option for our customers. Timing wise, we anticipate that we will have Darwin is rolling out right now on the franchise side and they'll be going into Echo Park in August and Cox Automotive and Darwin's product will be rolling out in the fourth quarter of 2020. Okay.

Great. Appreciate it.

And this is David. It's so important to remember how big this market is and even the largest competitors have just a very small fraction of the market. So our existing Echo Park customers are just part of the market. These people have, you know, they love coming and shopping at our stores. The people that are going to be served by this new, you know, our e-commerce, which is, again, as Heath said, we've very deliberately been rolling this out at a pace where we thought, you know, we could make, it can be extremely profitable, as we mentioned, the 55% return on these deals. And these will be to new customers who choose to shop in that way.

We've been very diligent with Echo Park, and we're being very diligent with this process as well, and we've got a history of that. We want to make it right, make it industry-leading, and when we get done, it will be all of that.

Okay, great. I appreciate it.

Your next question is from the line of Brett Jordan with Jefferies. Please go ahead, sir.

Hey, Brett. Hey, good morning. Thanks for taking my questions. Looks like a lack of new vehicle supply is expected to sort of continue to weigh on things here in the back half of the year. When do you guys expect those levels to normalize? And then should we see this sort of offset by higher GPUs?

Yeah, this is Jeff. That's exactly right. It's going to be a tough road, you know, for July, August, September, although we are seeing inventories improve. They're just not going to improve rapidly. I would look for October-November timeframe to get some normalized inventory levels. The great news is low supply equals high margin, and so we're making great margin and certainly making up from a gross perspective. New models are coming out, and so it'll all work in our favor as we move towards the end of the year.

Gotcha. Great. And then with some parts of the country where COVID seems to be flaring up again, are you guys seeing any demand changes in any particular regions lately?

A little bit in fixed on the West Coast. That's what kind of we've kind of adjusted our trend there for you guys on a monthly basis, as you can see on the charts. It's just been a little bit more difficult to come back on the West Coast. But other than that, You know, like I said earlier, Texas and Florida, the flare-ups there have not really affected our business. It's more new vehicle inventory than it is that. And we're doing all the right things from a public perspective for our guests and our associates, taking all the right precautions, doing all the right things. So we're not really finding that to be a detriment to the business as much as we are in new vehicle inventory shortages, in particular on the East Coast. Gotcha.

And then just sort of high level, do you guys have any internal projections on where you think Star will shake out, maybe for 20 and 21? You know, from a retail start?

13, 14. Yeah, retail is going to be 13, 14, you know, and probably again the same in 21. At least what's most impacted, right, just because all the rental car companies and the big problems that you see with Hertz, et cetera, But it's steady as she goes. In particular, as the inventory comes back. The demand is there for the cars. As the inventory comes back, you know, it will be steady as she goes from a new car perspective.

Great. That's all I have. Thank you very much for taking my questions. You bet.

Thank you. And once again, if you do have a question, please press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1 for any questions. Your next question is from the line of John Murphy with Bank of America. Please go ahead.

Good morning, guys. I just wanted to follow up on this Cox-Darwin, you know, development. And, you know, I mean, you kind of, you know, talked about sort of an interface and a smarter interface and the like. But, you know, Cox, you know, is Mannheim. They, you know, auction about 5 million vehicles a year, and they recon a lot of them. I'm just curious, you know, as you look at this, is there an opportunity to source and recon vehicles directly from Mannheim and then turn around and retail them, you know, very quickly and increase your terms and really kind of leverage these delivery and buy centers? I mean, it just seems like you're tying up with somebody that can really help you out on the back end there.

Yeah, I mean, they're already a great partner, and we source a majority of our inventory through them as it is, right? They do a great job for us. Reconditioning-wise, we've worked with them on several projects like that. They've made some improvements. It's certainly discussions that we've had with them, in particular those centers that are close to our stores. So that's not something that's far-fetched. It's good thinking. but in terms of sourcing, we're one of their top buyers in the country and so we have a great relationship with them. They do a great job for us and we source the majority of our inventory through them.

And it's really important to remember that this is a partnership like they've never done before.

Yeah, they've never built a proprietary instrument for anybody and they've just been unwilling to do that historically but You know, there's a lot of competition out there. I think their minds are changing on how that works. And when you combine them with Darwin, which is sort of a piping to the swimming pool, if you will, when you combine those two things with what we've already built internally, it's going to be a great product for the consumer from a user interface perspective.

Okay. And then also on the used car being, I mean, is there any discussion or thought internally of building out a captive Finco.

Now, I mean, if you look at the progress that we've made in F&I, and I tip my hat, you know, to JM&A, who's just done a great job with us. Ally's done a great job with us. I mean, our June numbers, I think, were a little over 2,100 all in. PUR, which is an all-time record for us. And that's sort of industry best. I mean, I think Automation may be a little bit higher than that. and so when you get into that level, it really doesn't make a whole lot of sense to take the capital, go off and create a thin cut. We're eliminating the risk. Yeah, there's tons of risk. There's just no appetite here for that. It doesn't do anything more for us. We've got great relationships with banks. It's all paying off. It adds complexity and as you know, we hate complexity. It just slows us down. and we've got our hands full now with what we're off and running and doing and what we laid out today so that would just add a lot of complexity that we're not interested in having.

And John, we've actually, let's see, we've looked at it several times and maternal capital is so low unless you have a high subprime population and we just do not have a high subprime population.

Got it. Okay. And then just lastly, I mean, you know, what you're doing here seems to be much more focused on expanding rapidly in the used car market which makes a lot of sense. but just curious, you know, as you look at some of the activities that are going on in the new car franchise side where there's an acceleration in M&A activity, you know, what do you think about that and is there any opportunity in that direction or is it kind of just full throttle, higher returns, higher margins on the U side and that's kind of the direction you're going to go in more as far as growing the business going forward? I mean, what's the opportunity set on the new side and, you know, why do you think it's kind of different than what some other folks are going after?

I mean, this is Jeff. We love the franchise business. It's fantastic. It's a cash machine for us. If there's opportunities out there for us to buy, we'll look at them. We look at them every day. And, you know, we may do a deal here or there, but the returns at Echo Park are so high versus the returns that we're getting, the capital you have to put into a facility, you name it. It just makes a lot more sense to put your cash into Echo Park, but that does not mean that you won't see us do a deal. We're looking at a couple of deals right now, as a matter of fact. and we'll see what happens but it's a lot more cost effective to invest those dollars in Echo Park.

Yeah, this is David. I think that, you know, one of the things we want, you know, our investors to understand how focused our team is on ROI and allocating our capital better than we ever have in the history of the company. We're really focused on that. So really it's not an emotional thing. It's just simply, you know, we talk about Thank you very much, guys. Thank you. And at this time, I'm showing there are no further questions. I'll turn the call back over to you, Mr. Smith. Thank you very much. We appreciate everyone, and thank you. Have a great rest of your week.

And this does conclude today's conference call. You may now disconnect.