EchoPark has its first profitable quarter

Sonic Automotive Inc.'s EchoPark brand of standalone used-vehicle stores turned a profit for its first quarter ever, and Sonic executives have a bold prediction: EchoPark will grow to sell more used vehicles and make more money than the franchised dealerships that make up the nation's fifth-largest auto retailer.

"As we expand our footprint into other areas across the country, we believe EchoPark will exceed the overall volumes and profitability of our franchised dealerships," Sonic CEO David Smith said last month in a statement. "We believe the combination of our customer-centric shopping experience, high-quality vehicle offerings, rock-bottom pricing and transparent trade-in appraisals is disrupting the pre-owned markets that we serve."

Sales at EchoPark's eight stores more than doubled to 11,051 vehicles in the first quarter, and revenue surged 90 percent to $249.6 million. Its total front-end and finance-and-insurance gross profit per vehicle — which includes little to no front-end gross — jumped 25 percent to $2,351 in the quarter.

That all helped EchoPark to post pretax income of $200,000 for the three-month period. EchoPark launched its first store in late 2014. And more stores are coming.

"Our EchoPark brand had an historic quarter demonstrating the huge growth EchoPark will achieve as we add additional markets across United States. We expect 2019 EchoPark revenues to exceed $1 billion," Smith told analysts after Sonic issued its earnings April 25. "We expect EchoPark to retail approximately 50,000 pre-owned vehicles in 2019, which is about five times the volume we were selling just two years ago."

EchoPark's sales in the first quarter represented nearly 29 percent of Sonic's used-vehicle sales. Sonic's total used-vehicle unit sales jumped 14 percent to 38,463.

Revenue for Sonic's franchised segment of 92 stores dropped 5.7 percent to $2.14 billion in the quarter, while gross profit for the franchised dealerships dipped 2.1 percent to $333 million.

EchoPark's store in Grand Prairie, Texas, in March sold about 1,600 vehicles and made more than $2 million, making it the most profitable store in all of Sonic Automotive for the month, Smith and Sonic President Jeff Dyke said on the call with analysts.

And EchoPark, which operates three stores in Colorado, four in Texas and one in North Carolina, has sold vehicles to customers in 121 markets across the U.S., with some shoppers traveling hundreds of miles to buy a vehicle, Sonic said.

Sonic expects to open another EchoPark store in Texas by the end of 2019, according to a regulatory filing. It also plans to add EchoPark stores by the end of 2020 in the Atlanta, Los Angeles and Florida markets, Dyke said.

An EchoPark store in San Antonio moved late last month from a spot in the southern part of the market to a location in north San Antonio, Dyke told Automotive News.

"We just found a better location," he said.

Dyke said an additional EchoPark store is scheduled to open this year, but Sonic has not disclosed the location or timing.

"We'll open a couple of more markets next year," Dyke told the analysts. "If you think about Atlanta and the size of market that is, you think about the L.A. market, you look at the Florida markets, whether it's Fort Lauderdale, Miami, you look at Orlando, and you look at Pittsburgh, Pa., Philadelphia, Pa. — there's just a ton of opportunity."
Sonic may add a second Dallas location for EchoPark, Dyke said. Existing franchised facilities in the Los Angeles market also could be used for an EchoPark store. Sonic also found a location in the Atlanta market and could open an EchoPark store there in the first quarter of 2020.

Analysts were pleased by EchoPark's growth. Bank of America upgraded the stock to a buy from neutral in a note to investors the day after Sonic released earnings. Sonic shares surged by 25 percent over two days in late April.

Some analysts, however, are waiting for more results.

"We are encouraged by the swing to profitability at EchoPark with all stores profitable in the month of March," Rick Nelson, an analyst with Stephens, wrote in a note to investors last month. But he noted that he's looking for evidence of sustained profitability in new markets "before getting constructive on the stock."

Jefferies analyst Bret Jordan, in a note to investors following earnings, said as EchoPark grows, its used-retail segment margins are likely to drop.

"We believe EchoPark could expand profitability longer term with improved inventory procurement, as roughly 90 percent of the vehicles are currently purchased at auction — a somewhat inefficient source of supply and contributor to limited profits at the front-end sale," Jordan wrote in the note.

Sonic, of Charlotte, N.C., ranks No. 5 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 122,717 new vehicles in 2018. It retailed 139,605 used vehicles for the same period, ranking it No. 6 on Automotive News' list of the top 100 dealership groups in used-vehicle sales.