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spk00: Good morning and welcome to the Sonic Automotive Second Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, July 29, 2021. 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 8K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.
spk04: Thank you, and good morning, everyone, and welcome to Sonic Automotive's second quarter 2021 earnings call. As she said, I'm David Smith, the company's CEO. Joining me on the call today is our president, Mr. Jeff Dyke, our CFO, Mr. Heath Bird, our executive vice president of operations, Mr. Tim Keene, our chief digital retail officer, Mr. Steve Whitman, and our vice president of investor relations, Mr. Dan Weiland. We're excited to publicly announce today record-breaking operating and financial performance for our company during the second quarter of 2021. This performance would not have been possible without the tremendous effort and execution by our valued Sonic and Echo Park teammates. Congratulations and thank you all. We'd also like to thank our customers, manufacturers, and vendor partners for helping us achieve another record quarter. During the second quarter of 2021, Si continued to deliver exceptional performance in our franchise dealership segment. We also posted a fourth consecutive quarter of record revenue in retail unit sales volume for our Echo Park business. On a consolidated basis, we reported all-time record quarterly revenues of $3.4 billion, up 59% year-over-year. When compared to the second quarter of 2019 to exclude the effects of the onset of the pandemic, total revenues were up 28 percent. We generated all-time record quarterly income from continuing operations before taxes of $151 million, up 303 percent on year-over-year basis and up 310 percent when compared to the second quarter of 2019. We also reported all-time record quarterly earnings from continuing operations of $114 million or $2.63 per diluted share, compared to second quarter 2020 earnings from continuing operations of $31 million or 71 cents per diluted share, and adjusted earnings from continuing operations of $28 million or 64 cents per diluted share. These results reflect the strong consumer demand environment we've seen across all of our business lines since the latter part of 2020, but also showcase Sonic's continued ability to maximize operating efficiency at our franchise dealerships, as well as the continued successful expansion of Echo Park's nationwide network. We are confident that our strong operating performance can be sustained throughout the balance of 2021 and well into 2022. And we are well positioned to grow total annual revenues to $25 billion by 2025, while continuing to significantly increase our profitability. In our core franchise dealership segment, second quarter revenues were $2.8 billion, a 53% increase from last year, which reflects rebound in consumer demand since the height of the pandemic in 2020. Gross profit for the second quarter was $475 million, up 69% from the prior year. Total franchise pre-tax income was $165 million, an increase of $131 million, or 375% compared to last year. Same-store franchise dealership revenues rose 55% on a year-over-year basis, while gross profit was up 74%. On a two-year comparison, same-store franchise dealership revenues increased 25%, while gross profit grew 40% compared to the second quarter of 2019. Franchise dealership total variable gross per unit was nearly $5,100 per unit, 43% year-over-year and up 58% from the second quarter of 2019, benefiting from strong vehicle margins and all-time record F&I per unit of $2,110. Our franchise dealership performance has been enhanced by execution against our plan, including discipline around SG&A spend, focus on our parts and service business, and our continued ability to efficiently manage our inventory. Looking forward, we remain committed to optimizing our franchise dealership business, both through organic growth initiatives and through strategic acquisitions. To that end, earlier this week, we completed the acquisition of Subaru and Volkswagen franchises in Grand Junction, Colorado. These acquisitions enhance our brand portfolio and complement our overall growth strategy, and we expect to announce additional franchise dealership acquisitions in the near term as we drive toward $25 billion in total revenues by 2025. Turning now to Echo Park, the combination of our below-market pricing, efficient inventory procurement, logistics and reconditioning processes, and digital-enabled sales channel has allowed us to offer tremendous value to consumers, and our top-line growth reflects this growing brand recognition. We generated all-time record quarterly Echo Park revenues of $596 million, up 89% on a year-over-year basis, and a 104% increase compared to the second quarter of 2019. During the second quarter, Echo Park achieved all-time record quarterly retail sales volume of nearly 21,300 units, up 61% year over year. On a two-year comparison, Echo Park retail unit volume increased 69% compared to the second quarter of 2019. We are already halfway to our Echo Park network expansion goal of opening 25 new locations in 2021. Based on our success to date and plans for future markets, we expect Echo Park to achieve 25% population coverage by the end of 2021 and 90% population coverage by 2025. Further driving our expansion opportunity, we have made excellent progress with our proprietary digital retail platform, and are on track for a fourth quarter 2021 launch at Echo Park. In the meantime, we continue to drive market share gains in our existing Echo Park markets, and we anticipate our market penetration and brand recognition will continue to grow rapidly over the next decade as we expand our nationwide distribution network. Looking now at market share in more detail, Echo Park has shown a consistent trajectory from launch, indicating that our expansion is performing to plan. Within Echo Park's one- to four-year-old vehicle category, markets with Echo Park locations open for less than two years average a 5 percent share, while markets with Echo Park locations open for two to three years average an 8 percent share. And markets with Echo Park locations open for more than five years average a 14 percent share. In addition, our below market pricing drive sales opportunities on both ends of the one to four year old spectrum, where we compare favorably on price to both new vehicles and five to six year old vehicles, allowing us to expand our addressable market. In the longer term, we expect to continue to drive market share growth within Echo Park to an achievable target of 10% of that core market of one to four year old vehicles network-wide, which combined with the adjacent vehicle age segments positions the business for a potential volume of 2 million units annually at maturity. With our progress to date and the continuing development of our omnichannel retailing platform, we remain confident we can reach our interim goal of 575,000 units and $14 billion in Echo Park revenues by 2025. In addition to our top line results and continued expansion of Echo Park, our team remains committed to improving operating margins and managing expenses throughout the organization. In the second quarter of 2021, total SG&A expenses as a percentage of gross profit were 62.8%. an all-time quarterly record and a 1,210 basis point decrease from 74.9 percent in the second quarter of 2020. Franchise segment SG&A expenses as a percentage of gross profit were just 58.1 percent in the second quarter, a 1,660 basis point decrease from 74.7 percent in the second quarter of 2020. On a two-year comparison, this represents a 1,900 basis point improvement from 77.1% in the second quarter of 2019. With this expense leverage, we realized second quarter adjusted EBITDA margin of 5.7% of 220 basis points year over year and a 280 basis point improvement compared to the second quarter of 2019. These results reflect the permanent expense reductions we have previously communicated. While current operating results reflect a higher gross margin environment due to constraints on new vehicle inventory, we do not expect new vehicle GPUs to fully regress to pre-COVID levels once inventories begin to build. Assuming normalized new vehicle GPU of $2,500 and used vehicle GP of $1,300, without assuming additional unit sales volume or further parts and service growth, our pro forma franchise dealerships SG&A is expected to be in the 62% to 63% range, representing a 1,000 basis point improvement from pre-COVID levels as a result of the permanent changes in our expense structure. In addition to operating expense leverage, we continue to focus on strengthening our balance sheet. We ended the second quarter with over $600 million in available liquidity, including approximately $315 million in cash and deposit balances on hand. During the early part of the quarter, as we mentioned on our last earnings call, the company closed a new four-year, $1.8 billion credit facility which allowed us to extend our debt maturities, improved our borrowing costs, and raised our total available liquidity and floor plan capacity at attractive terms. With our available liquidity resources, we believe Sonic is well positioned to continue executing on our Echo Park growth plans while also strategically investing in the future of our franchise ownership business and continuing to return capital to shareholders through our dividend and share repurchase programs. I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.12 per share, payable on October 15, 2021, to all stockholders of record on September 15, 2021. In closing, our all-time record quarterly results demonstrate the company's continued focus on execution with strong franchise dealership performance, the continued expansion of Echo Park's nationwide footprint, and our success in maximizing operating efficiency throughout our organization, driving long-term earnings growth potential. Our strategic growth plan is based on demonstrating unique value to current and future customers through our pricing, guest experience, and growing nationwide reach at both Echo Park and our franchise dealerships. We believe that this consumer-focused approach will continue to deliver strong results for our shareholders and maintain Sonic and Echo Park's position as leaders in an evolving automotive retail environment. And before we turn the call over for your questions, I'd like to comment on today's announcement that the company has initiated a review process to evaluate potential strategic alternatives for our Echo Park business. As detailed in our press release, working together with our advisors and our board, we will explore a range of value creating alternatives for the business. No timetable has been established for the completion of the review, and allow me to remind you that there can be no assurance of a specific action or outcome. As the review progresses, we will remain committed to executing our accelerated expansion plan for Echo Park, bringing this unique and competitive offering to new markets to deliver value for our guests while also supporting the teammates that are central to cultivating the Echo Park experience. We are focused on continuing to build upon the positive momentum in the business and remain confident in the long-term growth opportunity ahead. As the review is ongoing, we will not speculate on any particular outcome or make any further comments related to the process. This concludes our opening remarks. We look forward to answering any questions you may have. Thank you very much.
spk00: At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Again, that is star 1 for any questions. Our first question comes from the line of Rick Nelson with Stevens. Please go ahead.
spk01: Thanks. Good morning. Great, great quarter. I'd like to follow up on this strategic alternative. I'm curious what is prompting that review at this time.
spk04: We're not going to comment any further than the statement that both is in the press release as well as in the opening statements from David. And once the evaluation is complete, then maybe additional comments. But at this point, I just wanted to make everyone aware that that process was underway.
spk01: Okay, gotcha. Thanks for that. So on the franchise side, we saw, you know, pretty meaningful expansion on the Echo side. We've had, you know, declines in that GPU. Can you help reconcile those differences?
spk04: Yeah, Rick, so why don't you take a – why don't we start – this is kind of a long-winded answer, but why don't we start and let me refer you to slide 22 of the investor presentation that we released this morning. And I think that will really help us kind of answer this question.
spk06: I'll give you a minute or a second to get there.
spk04: So as you can see on the slide, when you look at weeks one through nine, we had really normal market conditions and normal Echo Park margins. But beginning in week 10, wholesale prices rose above average market retail prices. And in my career, which is 25 years doing this, the market's never seen a wholesale pricing version of this length or magnitude at all.
spk06: In early April, we then decided to make a strategic decision to drive volume and market share, but also mitigate losses by adjusting our pricing strategy up.
spk04: As we move into the third quarter, market conditions are now beginning to return to normal, and we've returned to our normal pricing strategy that we were running in the first quarter. But, however, we do have a 40-plus current day supply of inventory. That's driven by new store openings. Traditionally, we run 30-day supply, 20 on the front line and 10 in the back line. And so we expect margin pressure to continue through August. But as we approach the end of the third quarter, we expect Echo Park margins to begin to normalize. Fourth quarter margins are going to look a lot like the first quarter, and as a result of the actions that we've taken, we do remain on track to sell the 100,000 to 105,000 cars that we told the street that we would sell at the beginning of the year. When you look on the franchise side, trade-ins make up a big percentage of our volume, about 60%. And so we're obviously trading for cars a lot cheaper than we're buying cars at the wholesale line. About 88% of our cars come from the auctions at the Echo Park level, where very few, a much smaller percentage of our cars come at the franchise dealerships. And that speaks for the industry as well. Everybody's got higher margins. But the exposure for Echo Park is that we buy a lot of wholesale cars at auctions, and we keep a short day supply. So we're going to run into margin events when you have an event like this. The good news is these events have happened one time in my 25 years and probably have happened one time in anybody that's on this call as well. So it's not a concern for us as we move forward. We believe things will return back to normal and getting closer to normal as we go into the month of September, certainly into the fourth quarter and as we move on into 2022.
spk01: Thanks for that, Jeff. So curious also if... You know, you're expecting losses in Q3 and Q4. Do we shift to profitability? Any sort of, you know, forecasts are helpful.
spk04: Yeah, here's how you would look at it. I think that the losses that you see and saw in the second quarter, they're going to kind of be relative in the month of July. We'll get a little better, but probably still show a loss in August. September should then turn positive, and then the fourth quarter will be back to the run rates that you saw in the first quarter. So that overhang that we have, and we wouldn't obviously have an overhang if we weren't opening so many stores, but we're buying a lot of inventory right now. And we're just not going to adjust our strategy because of an event that happens once in a lifetime. It's just not something we're going to do. It slows the entire business down. We're going to continue to grow our shares, David said in his opening comment. You know, we have a five-year-old store. Our most mature store in our most mature market's got 18% share in the Denver market, and we're averaging really 14% share in anything over five years. So we're not going to slow that down for a one-time event, and we think we've made the right decisions there. So a little bumpy road for July, August. Things get a lot better as September gets here and then back to normal in the fourth quarter.
spk01: Thanks for that. Also, I noticed you have an acquisition announcement today. We haven't seen one of those in a while. If you could speak to that and your appetite now to acquire on the franchise side.
spk04: I mean, look, we're bullish on the franchise side of the business and the Echo Park side of the business. There are a lot of deals out there right now, and so we're strategically buying deals that fit our footprint or markets that we're going into. New markets likely announced at Grand Junction, although we're in the state of Colorado. But there are a lot of opportunities out there right now, and as David said in his opening statement, you're going to see more purchases from us on the franchise side as we move through the rest of this calendar year.
spk01: Great. Thanks, and good luck as we push forward. Thank you so much. Thank you.
spk00: Your next question comes from the line of Rahat Gupta with J.P. Morgan.
spk04: Great. Thanks for taking the question. I know you don't want to give too much color on the strategic review, but, you know, in the event that, you know, you know there is a separation of you know the echo park business that might happen as one of the possibilities um is there any way you can frame for us you know or quantify you know the disenergies uh that would be uh that would be there you know in in that event um any any brief color on that would be helpful and how to follow up no we appreciate the question but we really can't comment further Anything qualitative to keep in mind in terms of shared resources or auctions or anything like that? This is Heath. Again, we're not going to comment on any of the details. I can just assure you that just like every decision that we make in this company, our focus is on increasing shareholder value and releasing as much value in this company as we can. And so that's the driver of every decision we make. But other than that, we just won't get into details of that analysis. No worries. I had to try. Just, you know, on the 2 million units, you know, at maturity, you know, what kind of like EBITDA margin profile, you know, can the business run at? You know, the 2025 targets imply like somewhere in low single digits, but we're still ramping up stores at that point. So any color on what kind of EBITDA margins or profitability of the business can be at maturity?
spk05: Yeah, you're going to continue to see expansion of that, in particular based on what we projected in 2025. That's based on an immature store set. So as we run those out toward maturity and you get a more mature store base, you'll see continued expansion beyond what that is there. We have not quantified what that opportunity or upside is, but I think the basis for Echo Park is that we're able to scale and leverage those expenses dramatically better and more efficiently than we are on the franchise side. And so we should see meaningful upside to EBITDA margin as you get north of the 575,000 units and continue to mature the store base.
spk04: And to Danny's point, we've always talked about how the expenses at Echo Park are more fixed. And so obviously that's going to drive a higher EBITDA margin as we scale. Got it. Any color on, like, what the matured stores, what kind of margin they are at? Obviously, keep taking into account the one-time hit this quarter on GPU, but any reference to that? So I guess the best way to look at it is SG&A is going to be in the mid-50s to 60% range, somewhere in that ballpark for a mature store.
spk05: If you go back to what our two most mature markets, Denver and Dallas, did in 2019 pre-COVID, each of those markets did $12 million in pre-tax. And so if you think about them running at, I think that year, 1,300, 1,400 units a month on average. So if you look at it from that perspective, even Dallas is going to be somewhere north of that $12 million into that revenue base.
spk04: And during that time frame, the share in those markets was lower. Denver's running last month, the month of June, we ran 18% market share there. So it's a much more mature market now. And we don't know where that share can go. We're calling out 10%, which is driving the $2 million. But, you know, our stores are at five years at 14%. So there's certainly upside to that number, and I think that's a critical thing to think about, you know, as we move forward. Got it. Got it. Just one last one, you know, on the SG&A side. You know, you gave us some color on, you know, the franchise, you know, the franchise business. in the context of what GPUs would look like. Just looking at the second quarter number, the 58% for franchise that has changed into gross, it looks like the leverage or the drop-through to the bottom line from the gross profit increase just seems to be much higher for you versus what we've seen at some of the peers. Almost like 75% to 80% drop-through of that gross profit benefit um is there is there something different or you know are there any changes that you have made uh you know over the last year when you were leading up uh some staff that you know it hasn't been any change in terms of the fixed sources variable comp model or anything of that sort you know that would lead to you know this kind of a drop through uh just just curious if you can share any thoughts there uh that'll be all thanks Yes, this is Heath. A couple of things. I missed a little bit of it, but I just want to, and David hit on it very well in the opening comments. You know, we, first of all, on a high level, I think we had actually had guidance in February of around 73% for 2021. For the year, we're running at 66, 67%. And for this year, we absolutely expect that to be our estimated percentage growth at that level, not the higher 73. If you look forward, you know, David articulated this, and try to normalize what we expect to see in 2022, where we still believe the GPU is going to be elevated on new. You normalize the used. We are looking at a 62%, and that includes Echo Park and the franchise business. And so as the Echo Park matures, we can actually improve that even better than the 62% range. But a couple of things that are driving the throughput, you know, we've got, if you look at our productivity on our sales associates, for example, you know, we used to sell 12 units per month for associate before these cuts that we put in place and these efficiencies. Now we're running 18, 19. And so that's a fundamental change that you can see even at these new levels we're maintaining. And so that's a big part of it. That is, there's changes, structural changes that have been made in organizations. The other one is the centralization of advertising, a huge component to our SG&A that is a structural change that's allowing that throughput to happen. We're spending a lot less on advertising and it's even more effective. And so those are two of the biggest that are the structural changes that are driving that viewpoint. It's not just a gross-driven event. It's a gross and expense-driven event. And we made a big deal out of that during COVID saying we really did take a lot of expense out of this business. I think we put in $84 million annually that's come out. It's running higher than that. And it's permanent, as David said in his opening statement. And so when you're looking at your models and forecasting for next year, you've really got to take that into consideration in terms of how you look at the business. And then the great news there is, and I don't know if you mentioned this or not, Heath, but our California market is really underperforming. in a big way compared to the rest of the markets. The market has just not come back as fast due to COVID. So if you look at our new car volume in California, it underperformed the rest of our stores by 1,000 basis points, used car volume down by 1,400 basis points, fixed up 600 basis points, total revenues down by 1,300 basis points, and gross profit down by 1,000. If California opens back up, It's just going to be fantastic for us. We've got a big chunk of our stores and our business out there. And so that's going to further enhance the growth portfolio, but it's also going to continue to lever the SG&A percentage band. So it really is coming from both sides. And the great news is we can have the new car margins return. I don't think they're going to return to pre-COVID levels again. I think the manufacturers are doing a smart job by keeping inventories tight, and they'll continue to do that even as we move forward.
spk06: So if you do model a $2,500 PBR, which is still well ahead of where we were pre-COVID, You get to have the growth and you get the big expense reductions that are permanent again in place, and that's just going to keep the SG&A coming down.
spk04: Then you add on top of that the performance of Echo Park getting back out of this, you know, crazy inversion time that we went through, and the picture just looks really, really good for us. And that's why, this is David, and that's why I noted that, you know, assuming, you know, no additional unit sales volume in that org, or further parts and service growth. You know, we're being conservative in these projections. Yeah, I think that's, when I look at some of the models I've seen from some of Alice on fine and sell side, from our perspective, I think what is being missed is the power of that SG&A reduction staying in place. I also think that some people are assuming that we go back to pre-COVID GPUs, which from our perspective, as Jeff mentioned, we think that new will be elevated continuing. And at least from our company specifically, the models are not giving Echo Park any credit. And as we've mentioned many times, 2022 is the tipping point of Echo Park. That's when we are going to be opening less stores than we have opened. And so I think when we look at some models that really don't jive with ours, those are the things I think they're missing. Got it.
spk05: Yeah, we can hear you.
spk04: Go ahead. Yeah, I think I missed the last few seconds. We need to cut off. But I can read the transcripts. Thanks for the call there. Yeah, I was just saying that, you know, as we look at some of the models from some of our buying sell-side analysts and, you know, when it doesn't really jive with our perspective, the things that I think are missing are the understanding of the permanent reductions that will continue regardless of any increase in volume. number one. Number two, the assumption that new GPU goes back, that the manufacturers go back to the 60-day supply, 65-day supply, and the new GPU goes back to 2019. From our conversations, as Jeff mentioned, that's not going to happen. Those will be elevated, continuing. The impact of California, at least specifically for us, and what is going to happen to the second half of 21 and into 2022. And again, Echo Park. Echo Park is that 2022 is our inflection point or tipping point where we are opening less stores than we have mature. And as we've stated before, we believe that is when the profitability, even though we have it today, it starts growing exponentially because you've got so many mature stores in place. Got it. Great. Thanks for all the color and good luck. You bet. Thank you.
spk00: Your next question comes from the line of John Murphy with Bank of America.
spk02: Good morning, guys. You answered a lot of my questions, but I'll ask just one or two more. You mentioned 2 million units is sort of the target for Echo Park at maturity. And I think, Jeff, you were saying there are some markets, and that's based on 10% market share on your – You target vehicles. There are some markets you're 14%, 15%. Could this be the kind of thing where this is not $2 million, it's $3 million, and then if you decide to expand in the iceberg of maybe slightly older vehicles or expand in the offering, you might be something significantly larger than that? How are you paying this $2 million other than just 10%? What's the opportunity beyond maybe that?
spk04: Yeah, I mean, if we take the five-year-old store average right now, it's 14%. So the number is bigger than 2 million. And, yeah, it could be 3 million, 4 million. You know, at the end of the day, we're always looking to take the inventory process that we have at Echo Park and the pricing model and to expand that. I would think of it differently. I don't think we expand into five-, six-, seven-, eight-year-old cars because it brings a lot of complexity to the model that really doesn't fit our model, adds cost and things of that nature that just doesn't fit the model. But what you might think about is instead of the traditional Echo Park less this crazy time, traditional Echo Park average retail price being $20,000 to $21,000, you might look at something like, okay, can I expand that to a $35,000 to $40,000 car? And so, because that's not an average retail price, we come anywhere near, and we're always looking at how can we take this great model that we have, the efficiency that we have with the model, which is really exceptional, and one of a kind, I think, in our industry, and expand that to grow Echo Park to further levels. So, Yeah, the $2 million is a good, safe number for us because we know we're going to be above 10% in terms of market share, and we understand what our defined market is. It's a smaller swim lane. It's not the traditional 40 to 43 million cars being sold every year. It's a smaller lane, but we can own a much larger percentage of that lane than what some of our competitors are talking about of the overall market. And so I think you're thinking right, and it's absolutely the way that we're thinking. And also, you always need to think about, because of our pricing strategies, part of that $2 million, which could be a lot higher numbers, we're pulling that 5- and 6-year-old buyer into the 1- to 4-year-old because we are priced so low that now they can afford a 1- to 4- rather than a 5- to 6-.
spk02: That adds to our TAM.
spk04: We're also pulling from new car buyers because I've got a 1- to 4-year-old car with a condition report of 4.5- It's just as good as a new car. And so I'm pulling from that $13 million as well. So we feel like we're going to have some... migration from those other populations into the 1 to 4 because of the way we price. And we do today. That's part of our volume today, and we expect that to continue to expand with our pricing model as we move forward. We see that happening, and that's part of the big share, you know, like I quoted for Denver, that we've got an 18% market share there in the 1 to 4 category, but it includes some 5- and 6-year-old vehicle buyers because the price is so low, and it includes people some new car buyers because we're 40 percent price below the new car uh traditional number so um all in um a great opportunity for us and again i think you're thinking right
spk02: And then just a second question. I'm not sure you're going to be willing to answer this, but, I mean, you said 88% of Echo Park, you know, units are sourced from auction. Will that be the case over time? And are the other 12% flowing from your franchised, you know, stores? I mean, I'm just trying to understand that inventory. I mean, you know, sourcing 2 million units, you know, you start getting into just simply big numbers, you know, big chunks of the market. So, I mean, does the sourcing strategy stay the same over time?
spk04: It's really not a strategy. At the end of the day, we buy as many cars off the street as we want, but just think about it. There's not a lot of customers trading in a one- or two-year-old car, and they're still upside down, have negative equity, whatever. It's just not as big a swimming pool as you might see for our franchise stores or some of our competitors where we're selling zero- to ten-year-old cars, and the average car on the road is eight, nine years old, and we trade those cars all the time. It drives the margin that you see on the franchise side. So, yeah, I think it can expand. If you look when we first started, that number was 6%, 7%, 8%. We've got it up to 12%. We've got, I think we have some opportunities here, but I don't think it's going to be as big a percentage overall of our sellable inventory as you might see at some of our competitors' set or even our own franchise stores. And we don't take cars from the franchise stores and move to Echo Park. We do the other way. Cars that don't fit the Echo Park model, we send to our franchise stores, and they benefit greatly from that. But, you know, it's certainly every day a topic of conversation for us is how do we increase the 12% because the margins are significantly better, you know, on a street purchase than they are buying a car at the auction. And one other point, we're not, I mean, I hear people all the time talking about not being able to buy inventory. We've never had a problem buying inventory. We haven't had a problem. When everybody says inventory is tight right now, we don't have a problem buying inventory. You've got to pay for it, and that's going to adjust the margins. But what we're not going to let that do is slow us down. The business is strong enough now that we're going to continue to power through. And when you have events like we had over the summer here, it just is not – a big enough event to worry us. We're going to continue to power through, drive our market share. Because we come out the other side of this, we're going to be a lot stronger for it. So we don't have any problems getting inventory. I want to make sure that I get that point across. Yeah, and this is David. And something to think about and related to that is as we grow our brand, our Echo Park brand in markets, you can see that our market share increases, but so do the number of quality trade-ins that we get that actually fit the Echo Park model that we then go and resell. So we definitely see those numbers growing.
spk02: Okay, and then just lastly, I mean, you know, there's the core part of the business, which is still a very, very good business outside Echo Park. I mean, do you have any designs about where that lands? I mean, you've given us an idea of, you know, two million units, but, like, obviously there's some upside there on Echo Park. I mean, where do you think that, you know, the core business, the core franchise business is? goes, you know, over time? How do you think about where that could pop out or where you go when you're making acquisitions?
spk04: Well, you know, there's a number of ways to answer that, and I know Jeff will have some comments on that, but, you know, the franchise business is still extremely fragmented, you know, in this country, and so there's still tremendous opportunity for growth in that area, which we alluded to that in our opening comments. Also, John, we've just never been in a position to grow, right? We just haven't had the liquidity. We've been shoring up our business. This team's been together since the end of 2018. And so we've positioned the company now from a liquidity perspective. We can kind of do what we need to do to grow in the franchise business and continue to grow Echo Park. And so now you're going to see us dive in there. We said it in the opening, we've got more franchises coming. We're going to grow the business. It's a great business. Like you said, it's highly profitable. We really have our house in order when it comes to our liquidity. And Heath can comment on that here in just a second. But also from an operational perspective, the turnover from our general manager turnover, 5% or less, the company has really strengthened its performance. Our playbook processes have matured, and so it's time to grow the business, and we're in a position to do that now. And there's been some deals that we just want to emphasize, too, that we absolutely look at the ROI of all of our investments. And so there have been some deals that we've passed on that just did not represent a great investment versus the investment in Echo Park. We think as we move forward, we're seeing more and more opportunities to get, you know, for great acquisitions that are accretive and will add a lot of value for our shareholders. Yeah, and if you look at it from a balance sheet perspective, our leverage ratio is extremely low. Our credit profile is improving from the agencies on a daily basis, so we've got really available access to the capital markets for additional needs if necessary.
spk02: I mean, would it be, actually, just to follow this, I mean, you look at automation, it's about 2% of the market. You've got Lithia making acquisitions pretty aggressively, talking about getting about 5% of the market. I mean, would you ever, I mean, I can't be on the spot right now because I'm sure, well, you may have some ideas about this, so I certainly ask. of where you could be as a percentage of the new market, right? If you're sitting here saying, hey, it could be 10% of the addressable market I'm going after in Echo Park, I mean, could you say 2%, 3%, 4%, 5% in the new vehicle market? Is that something you'd be willing to put out at some point as a target, or is this going to be just more opportunistic and you're going to roll up as you see fit over time?
spk04: Well, look, we just go back in the pool, right? And so that's a number I'm sure that we'll come with.
spk06: because there's just a ton of buying opportunities out there right now, and you see open papers buying, and you'll see us do the same, in particular between now and the end of the year.
spk04: And so, yeah, I think at some point in time we can define that, but we're really kind of starting to hit our stride from an M&A perspective. And so give us a few quarters, and we'll begin talking a little bit more about that as we kind of define how many of these stores are going to buy and where we're headed with this.
spk02: Great. Thank you very much, guys. You bet. Thank you.
spk00: Again, to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Mark Jordan with Jefferies.
spk03: Good morning. Thank you for taking my questions. I guess following up on the MA question, can you kind of talk about what multiples you're seeing now and how they compare their historical trends?
spk04: You know, they're different all over. It really depends on the brand and the markets that you're in. But, I mean, if you're going to go out and buy a Porsche store, you're going to pay, you know, north of a ten multiple. But if you're buying some of the domestic or imports, you know, it's five, five and a half, six, somewhere in that ballpark we're seeing. And it really does depend on the market, the city. There's just so many different, you know, issues with narrowing it down on kind of a nationwide basis as the numbers are different all over the place. And I think you would hear that from our competitive side as well.
spk03: Okay, great. And I guess following up on the Echo Park GPU question from earlier, You know, it looks like in the quarter you took some pricing up, yeah, I think above market to kind of offset some of those wholesale headwinds. So when we get back to more of a normal sourcing environment, this may be kind of an opportunity to rethink the pricing model or maybe just be a little bit above where you have been historically for Echo Park?
spk04: You know, it's an interesting conversation because what it showed in this timeframe is the strength of the brand. because we got as high as 108, 9, 10% of the market during the timeframe, trying to balance the loss and maintain our numbers in terms of share. So, you know, down the road as the brand strengthens and the guest gets to experience more than just price, but they get to experience just the great experience that you get, you know, coming into the store. And then we introduce in the fourth quarter our digital retailing platform, in our new website, which is going to be fantastic, there is definitely going to be opportunity for margin expansion. We have not defined that yet, but you will continue to see us stay very aggressive versus the market. That's our bread and butter. Could we go from $2,500 to $3,000 below market, down to $2,000 below market, and still get the same kind of market share that we're seeing today? We will definitely play with those numbers as the brand
spk06: you know expands across the country and becomes a nationwide main brand and i might have steve whitman just comment quickly um you know on our digital retailing platform yeah sure so we've taken a two-pronged approach uh to e-commerce here at sonic automotive in parallel we are improving echopark.com and building our proprietary uh digital retailing tool Our proprietary digital retailing tool is on track to launch in Q4 of this year. We have a big team of over 50 people of designers, developers, and product owners who are working on that right now. And that's really set to deliver a true end-to-end experience for the consumer without having a lot of human intervention like a lot of our other tools out there have. In parallel, we're improving EchoPark.com. Visits are up 156% versus a year ago. Leads are up 111% versus a year ago. And our cars sold from our website are up 74% versus a year ago. So we're improving EchoPark.com every single day. And we've actually, for the first time in May and then June and July, we actually generated more leads from EchoPark.com than we did from our third parties. Just shows the strength of the website and also shows the strength of our brand. Great. Thanks, Steve.
spk00: We have no further questions at this time. I'll turn the conference back over to management for any closing remarks.
spk04: Thank you, everyone, for joining us, and have a great rest of your week. Thank you.
spk00: Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.
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