Sonic Automotive’s EchoPark program has turned a corner in a big way.
The retailer’s line of standalone used-car stores is now profitable and should break $1 billion in revenues this year, Sonic said Thursday in reporting financial results for the first quarter.
And the dealership group’s leadership believes its EchoPark operations will eventually outpace its franchised dealerships in terms of volume and profitability.
In Q1, EchoPark generated $249.6 million in revenue, an 89.8% year-over-year increase.
Pre-tax profit for EchoPark was $14,9 million in Q1, compared to $14.7 million in pre-tax loss a year ago.
The standalone used-car stores had $5.0 million in positive cash flow (Adjusted EBITDA) during the quarter, up $8.3 million year-over-year.
“We are very pleased with the results for the quarter with our franchised dealerships offering a solid performance and EchoPark beginning to show what is possible from what we have developed over the last several years,” David Smith, who is chief executive of both Sonic and EchoPark, said in a news release.
Amid the stores “still maturing,” EchoPark revenue should top the billion-dollar threshold this year, Smith said, pointing out that nearly 29% of Sonic’s consolidated used-car unit sales in Q1 came from EchoPark.
“This is currently being accomplished through eight locations that serve a multitude of surrounding markets across the United States. 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,” Smith said.
“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,” he said. “At our EchoPark stores, we continue seeing the markets we serve expand as customers have recognized the value we offer and are traveling hundreds of miles to purchase their vehicle from EchoPark.”
Sonic and EchoPark president Jeff Dyke, who has talked extensively with AuSM about EchoPark in the past, said in Thursday’s release he was pleased with operations of both in Q1, calling the quarter “one of our best starts to a year that I can remember.”
As for the standalone stores, Dyke said: “Our EchoPark operating model has evolved over time as we continue to listen to what customers want when shopping and buying a pre-owned vehicle. Of course, customers want it to be an easy, transparent process where they get a quality product at a great price.
“It sounds simple, but the magic is when you can give customers exactly what they want and make money doing it. Our EchoPark stores offer a unique and customer-friendly buying experience from the time customers first type in EchoPark.com on their computer or mobile device, to the moment they sign that last document electronically so they can begin to enjoy their car or truck,” Dyke said.
“We provide an exceptional guest experience and value pricing along the lines of what Costco does for its customer base, while managing inventory days' supply well below industry norms. Our proprietary inventory management and pricing tools that we have invested in for years are really paying off,” he said.
EchoPark had more than 11,000 unit sales in Q1 (up 100.3%), Dyke said, with all-in days’ supply below 30 days and a front-line inventory days’ supply of less than 20.
“This model allows us to remain very flexible and take advantage of inventory availability and valuation shifts in order to keep our pricing well below our competition,” Dyke said. “We believe in keeping our operating expenses very low so we can offer our guests the best pricing and guest experience in the industry today."
In a late November interivew at the Charlotte, N.C., EchoPark location, Dyke discussed how establishing a rhythm in buying is key in inventory management for EchoPark. So is consistency. Buying to a number. And not over-buying.
“You’re going to sell more cars on a Saturday than you do on a Thursday, but we know those rhythms, so we buy in conjunction with that,” Dyke said during that interview. “And we try not to over-buy; we do have projections for what we think we’re going to sell the next week, and we try to buy to that number. And then the next week, buy to that number.
“Everything is done by week, so that we keep a consistent flow of inventory. And that’s critical. Inventory management is imperative in order to be able to be profitable in a store like this.”
On the financial side, Sonic and EchoPark executive vice president and chief financial officer Heath Byrd said in Thursday's news release that the expansion plans for the standalone store chain could bring in incremental revenues between $500 million and $1 billion annually, based on EchoPark’s current performance.
“We believe the improved strength of our balance sheet and the positive cash flows from our EchoPark and franchise operations will allow us to fund the expansion of EchoPark internally without the need to access capital from the public markets,” Byrd said.
Smith, the Sonic and EchoPark CEO, recapped several of the hallmarks the standalone stores achieved during the quarter.
“There were several 'firsts' for the EchoPark operations during the quarter beyond the unit and revenue growth we have become accustomed to seeing. Two of the more significant 'firsts' relate to positive cash flow and profitability. Adjusted EBITDA for EchoPark was $5.0 million during the quarter,” Smith said.
“At the EchoPark store operating level, the contribution of Adjusted EBITDA during the first quarter was $6.1 million, offset by negative corporate level Adjusted EBITDA of $1.1 million. For the other significant 'first,' the pre-tax results for EchoPark were $0.2 million for the first quarter of 2019,” he added.
“This is the first quarter of profitability for the entire business unit. Operationally, it performed even better than the $0.2 million, as this amount includes an impairment charge of $1.9 million. Absent the impairment charge, EchoPark posted a pre-tax profit of $2.1 million. We look forward to sharing more of these 'firsts' with everyone in the future.”