Edited Transcript of SAH.N earnings conference call or presentation 30-Jul-20 3:00pm GMT

Some noteworthy operating improvements sequentially from May to June 2020 include a 22% increase in new vehicle GPU, a 35% increase in franchise 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 EchoPark combined used and F&I gross profit per unit and a 154% increase in consolidated pretax profit. Above all, we remain disciplined in improving our financial liquidity, controlling expenses and enhancing profitability at both our franchise dealerships and EchoPark 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 nonrecurring tax item.

In addition to EPS growth year-over-year, other second quarter operating highlights include: SG&A as 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; EchoPark revenues of $315 million, which was up 8%; EchoPark retail sales volume of 13,207 units, up 5%; EchoPark 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 pretax 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 of COVID-19. During the month of June, Sonic experienced a dramatic recovery in new and used vehicle — new vehicle sales volumes, gross margin and fixed operations gross profit. This recovery accelerated during the second half of the month, well ahead of our previous forecast. I’m very happy to report that this strong sales momentum has continued throughout the month of July to date.

Now turning to EchoPark. As expected, EchoPark sales experienced a V-shaped recovery in sales volume and improved profitability as the second quarter progressed. By June, EchoPark had surpassed our original prepandemic unit volume forecast for the month. As noted in our press release this morning, second quarter EchoPark segment income increased 52%, demonstrating the operating leverage and profit potential of this model. Notably, all of our EchoPark 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 EchoPark stores offer, enabling our guests to enjoy a modern, hassle-free car-buying experience.

Moving on to our digital retailing 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 EchoPark expansion plans. We are dedicated to elevating our online retail guest experience to match the great guest experience our guests have come to expect on-site at our franchise dealerships at EchoPark stores and at echopark.com. As you can tell, we are very excited about EchoPark’s performance in this challenging environment and believe these quarterly results speak to the strength of this unique business model. EchoPark continues to outperform our original expectations, demonstrating the revenue growth, operating leverage and profit potential of this brand. Further, EchoPark is a unique and scalable business model that has not yet begun to reach its full potential.

Earlier this year, we announced that Sonic plan to grow its total revenues to $20 billion this decade. Since that time, we have actually revised our original EchoPark expansion strategy to achieve more rapid growth of the EchoPark brand. Based on EchoPark’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 EchoPark brand. While we remain committed to managing capital expenditure levels in the short term, the flexibility of the EchoPark model has proven greater than we originally anticipated.

By capitalizing on EchoPark’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 EchoPark 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 the next to last mile delivery model, this will allow us to quickly expand EchoPark 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 EchoPark mobile app or on-site at an EchoPark retail hub location. Based on these expansion plans, by 2025, we expect to have a nationwide distribution network consisting of a 140-plus EchoPark retail hubs and delivery and buy centers generating over 0.5 million retail vehicle sales annually and $14 billion in annual EchoPark 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 of our — by 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 EchoPark.

This concludes our opening remarks, and we’ll be happy now to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [2]

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I would like to follow up on this 5-year plan, quite interesting, 140 distribution points. It looks like in the slide deck 5 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?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [3]

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Rick, it’s Jeff Dyke. Sure. We’re going to — we’ll open 20 delivery and buy centers next year. That’s our plan. We’ll probably get 3 to 4 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 EchoPark in the Greenville market, so we’ll put a small facility up there. The great news is that those facilities are really light on rent, maybe an investment of $1 million to $2 million versus a medium-sized store, that’s anywhere from $5 million to $12 million and a big store, it’s $15 million to $25 million. So we can very efficiently and effectively move into a market. Those delivery and buy centers will do 300 to 400 plus a month, maybe as much as 500 a month. When you add that to the hubs for a medium store at 750 or large store at 1,500, it just makes all the sense in the world. It allows us to rapidly move out EchoPark’s brand to medium and big markets across the country, grow it a lot faster than we had originally anticipated. That’s where 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.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [4]

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

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [5]

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So it will — this is Jeff again. It will be 20 delivery and buy centers a year and probably somewhere in the 3 to 5 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 yes, 3 to 5 hubs a year and around 20 delivery and buy centers a year.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [6]

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And Rick, this is David. Something to — is the 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.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [7]

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And do you charge a fee to the consumer to get these vehicles to the market? Or is that something Sonic will…

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [8]

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Within 200 to 300 miles. Right now, there is no fee that we’re going to charge to the consumer. We’ll see — we’ll play that by year 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 year. We have a lot of flexibility in the model, so we’ll see how that works as we move forward.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [9]

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Yes. Do you deliver to people’s driveways or they come to a central location and…

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [10]

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No, they’re going to come to a central location. We’re not going to deliver the last mile. That’s where you had 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 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.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [11]

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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 your 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, playing up and dropping off the car.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [12]

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Yes. Do you anticipate any cannibalization of your existing hub stores as you push into these markets? Or do you view it as incremental sales?

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [13]

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We view as incremental sales.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [14]

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Yes. It’s 100% incremental, Rick.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [15]

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

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Nels Richard Nelson, Stephens Inc., Research Division – MD [16]

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Okay. Got you. Your slide deck, Page 16 talks about maturity of the hub stores and to use delivery and buy centers, the types of volume. Any updated thoughts as to how long it takes to reach maturity?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [17]

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So we were telling everybody that it takes a year to get a store or 6 quarters or so to get a store to where we feel like it’s mature, but they — we just keep beating all the maturity levels. And so you look at Tampa, David said it earlier, it was profitable in the first 2 months of operation. So maybe 3 to 4 years for profitability and mature volume, something of that nature. But we’re learning every time we open one of these stores, they keep opening faster, they ramp up quicker. And so it seems like we go from 0 to 400 cars sort of immediately and then we sort of ramp up over time. I think full maturity is somewhere in the 3- to 4-year range.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [18]

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And something to keep in mind is that, that Tampa store opened right in the depths of COVID. So it’s not like it opened — I mean, it really kind of opened in the worst time and still became profitable very quickly.

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Operator [19]

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

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [20]

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I really appreciate all the details in the slide deck. They’re very helpful. Just kind of question on just on the SG&A profile here going forward. You’ve talked about the $84 million expense reduction. You gave us the pro forma EPS base. But as you’re expanding into this EchoPark growth strategy going forward with the delivery and buy locations, how should we think about the profile of SG&A to gross here in the near term, at least in the initial years of the — of this expansion plan before they hit maturity, the things like marketing dollars or overhead costs or just things like that, like guest experience management centers, appraisals? Just curious as to should we be expecting any kind of step-up in expenses here. Or like how are you managing this within the overall cost bucket for the overall company? And I have a follow-up.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [21]

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Yes. This is Heath. Obviously, and we 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. And if you look at both the models and EchoPark is where our growth is, if you look at EchoPark, 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 EchoPark, 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.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [22]

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And Rajat, also the existing EchoPark stores are performing so well that they’ll offset the cost of the opening of new stores. So he’s right, the $84 million is going to drop straight to the bottom line, that $7 million a month in SG&A reduction. You could just — you could take that and add that to what we did last year, come up with a new sort of EPS model.

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [23]

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Got it. So the SG&A to gross like going forward should be like 72%, 73% range, is that a good number to model in terms of…

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [24]

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Yes.

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [25]

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Got it. Got it. Okay. That’s helpful.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [26]

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And the interesting thing on the point that you made about advertising. Our advertising is our price, right? So all of our advertising goes into Internet advertising, social media. It’s not TV, it’s not the brand advertising that 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 that we can deal with now. Over 30,000 leads every month. And so that price is the advertising, and that’s what drives profitability in that EchoPark segment so quickly.

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [27]

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Got it. Got it. That’s helpful. And just on this accelerated growth plan. It looks like this business, the capital outlays are not that much for the delivery centers. It seems like the business is starting to function more dependent of the franchise stores, cash flow is improving. Does this in any way accelerate a potential separation of EchoPark from the franchise business? Just curious as to what the latest thoughts are there. Can you just clearly — this is an attractive business. So just — can you just give any thoughts on that?

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [28]

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Yes. I’ll answer that. Thank you for the question. But I think it’s just — we’re going to continue to grow the business as we put out there, and we’d 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.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [29]

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And Rajat, I would add, we actually believe that we are the omni-channel and the omni-product option. We’ve got the full spectrum of automotive needs all the way from new, used that are more than 5 — 4-year-old, fixed F&I on the franchise side as well as the separated EchoPark and that gives us the full spectrum 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 truly become the omni-channel choice. You can do on site, you can do it online or you can do somewhere in between. And so there are synergies between the 2 companies, and we think that’s what makes us valuable.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [30]

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And one things that we do as well, as we’ve talked about in the previous call, is that a lot — there’s a lot of vehicles that come to us at EchoPark 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.

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [31]

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Got it. That’s helpful update. And just lastly, just on July, more of a near-term question. Thanks for the color on the SG&A to gross. And like just — just curious to [know how do you] use spending within the month? And like just what — how are you planning for August? And like what’s your outlook here in the near term on auction pricing, sourcing pricing? Like, how are you doing your planning in terms of like what GPUs could trend for the rest of the [year]?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [32]

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So this is Jeff. Look, July is a lot like June. It’s just — 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 of 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 great quarter for us.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [33]

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And this is Heath. I’ll add. When you look at that slide, I believe this 33 — yes, 33, and you look at each of the months. I think it’s very telling. 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, 141% of last year’s pretax, we’re very pleased with.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [34]

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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.

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Rajat Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [35]

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Got it. Great. Those have been super helpful recently.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [36]

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Thank you so much.

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Operator [37]

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Your next question is from the line of Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [38]

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You provided us with the update in mid-June, targeting $0.23 to $0.33 of EPS. And that was already a whole lot better than the minus $0.50 from first quarter results and continue to surprise to the upside. What happened between — I know you talked about the acceleration, but hoping to get a little bit more color on what drove that $0.23 to $0.33 up to effectively $0.64, excluding the onetime tax benefit?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [39]

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Yes, 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 $0.64, I think when we went into June, we had $0.01 kind of on the books, and we made $0.63 in the month of June alone. And so it was just a fantastic month across the board. We hit on all cylinders. EchoPark, it was the single best month we’ve had in EchoPark’s history in terms of volume and profitability. I think we averaged 560 something cars a store, did $550,000 in profit per location, averaged almost $1,000 in profit per unit in EchoPark. 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 into — for the rest of the third quarter. There’s just nothing sort of standing in our way at this point. Even with the hotspots 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 EchoPark are 25 to 30. I think our best performance is our Charlotte store at 34 units per sales associate. So it just — we are having a blast in 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.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [40]

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And this is David. I think that a big part of the 2 is that our — not just our top 4 or 5 leaders in our — our leadership team down into the stores and regionally are all — have been with us a very long time, and we have very low turnover. And a lot of these guys have been through the financial crisis and all of that. So when this — when the pandemic hit, our team jumped on it and really executed. And it’s like necessity is the mother of invention, right? They implemented some of these reductions and raised the bar, as Jeff was saying, for productivity per person. And 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 — again, it’s not just the top 4 or 5 people. It’s down into the stores that they know they can do it, and they’re very excited about it.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [41]

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I’ll also add that in June, all EchoPark stores were cash flow positive. That’s the first, even our young stores, like Tampa, Long Beach were making money, were cash flowing. So that’s a big deal for us. We looked and we say it’s going to take 6 months, 9 months to get them profitable. And we’re getting them profitable in 8 weeks. So the model is really paying off for us, and that’s why we’re going to go on this tariff from an expansion perspective.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [42]

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Because we keep getting better as time goes on in how we open the stores. It’s much more efficient. If we had opened the Tampa store, like we used to open 1 — 2 or 3 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.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [43]

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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 will start cannibalizing the volumes from your franchise use. Is that the right way to think about it that the volumes on franchise use will start to deteriorate and then really ramp up the EchoPark volumes?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [44]

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Quite the opposite.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [45]

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It’s a different customer.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [46]

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Yes. 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 1- to 4-year-old at EchoPark. And if you look at our Denver market, our stores in Denver are having record — our franchise stores in Denver having record volume numbers at this point and our EchoPark stores are having record volume numbers. And so 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 use car business. So it’s quite the opposite. That’s why we keep these stores together. They work in harmony together. We sell a lot of cars out of franchise stores, and we’ll continue to do that even with the delivery and buy centers.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [47]

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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 Cox and the Darwin Automotive partnership. I know digital has been something you’ve considered in the past. I think the thought was maybe you do something last November. That got kicked down the road a bit. And here we are again. So just 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?

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [48]

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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’s shops and buy the car completely online. In fact, that very rarely happens even in our competitors world. It exists from — e-commerce is shopping. It is getting the price, it is getting the credit, it is getting financing. It is putting down a down payment, it is getting the 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 to on-site or remotely with our centralized cost support, right? And so Darwin is that typing. We already 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, 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 2 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 were — 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 on making the product that it needs to be. With the combination of Cox Automotive and Darwin, with our experience in the store, we believe, it’s 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 will be going into EchoPark in August. And Cox Automotive and Darwin’s product will be rolling out in the fourth quarter of 2020.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [49]

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Okay. Great. I appreciate it.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [50]

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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 EchoPark customers are just part of the market. These people have — they love coming and shopping at our stores. The people that are going to be served by this new — our e-commerce, which is, again, as Heath said, we’ve very deliberately been rolling this out of the pace where we thought 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.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [51]

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We’ve been very diligent with EchoPark, 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 got to get done, it will be all of that.

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Operator [52]

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Your next question is from the line of Bret Jordan with Jefferies.

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Ethan David Huntley, Jefferies LLC, Research Division – Equity Associate [53]

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This is actually Ethan Huntley on for Bret. Looks like lack in new vehicle supply is expected to sort of continue to weigh on things here in the back half of the year. When you guys expect those levels to normalize? And then should we see this sort of offset by higher GPUs?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [54]

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Yes, this is Jeff. That’s exactly right. It’s going to be a tough road for July, August, September, although we are seeing inventories improve. They’re just not going to improve rapidly. I would look for October, November time frame to get some normalized inventory levels. And the great news is, this 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 that — it’s all — it all work in our favor as we move towards the end of the year.

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Ethan David Huntley, Jefferies LLC, Research Division – Equity Associate [55]

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

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [56]

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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, 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 COVID 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.

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Ethan David Huntley, Jefferies LLC, Research Division – Equity Associate [57]

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Got you. 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?

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [58]

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From a retail 13, 14 — yes, retail is going to be 13%, 14% and probably again the same in ’21. Fleets look 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 because the inventory comes back, it will be steady as she goes from a new car perspective.

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Operator [59]

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(Operator Instructions) Your next question is from the line of John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [60]

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I just wanted to follow up on this Cox, Darwin development. And I mean you kind of talked about sort of an interface and a smarter interface and that — and the like. But Cox is Manheim. They auction about 5 million vehicles a year, and they recon a lot of them. I’m just curious, as you look at this, is there an opportunity due to source and recon vehicles directly from Manheim? And then turnaround and retail them very quickly and increase your turns and really kind of leverage 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.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [61]

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Yes. 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. On reconditioning lines, 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 farfetched and it’s good thinking. But in terms of sourcing, if we’re not — 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.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [62]

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

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [63]

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Yes. They’ve never built a proprietary instrument for anybody. And they are — they’ve just been unwilling to do that historically. But 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 2 things with what we’ve already built internally, it’s going to be a great product for the consumer from a user interface perspective.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [64]

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

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [65]

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No. I mean, if you look at the progress that we’ve made in F&I, and I tip my hat to JM&A, who’s just done a great job with us. Ally has done a great job with us. I mean on our June numbers, I think, we’re a little over all 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, really doesn’t make a whole lot of sense to take the capital go off and create a thin coat. So that’s…

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [66]

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That’s taking the risk. We’re eliminating the risk.

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [67]

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Yes, in terms 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 — it slows us down, and we’ve got a handful 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.

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Heath R. Byrd, Sonic Automotive, Inc. – Executive VP & CFO [68]

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And John, we’ve actually see — we’ve looked at it several times, the return on capital is so low, unless you have a high sub-prime population, and we just do not have a high sub-prime population.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [69]

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Got it. Okay. And then just lastly, I mean, 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, 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, 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 used 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 why do you think it’s kind of different than what some other folks are going after?

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Frank Jeff Dyke, Sonic Automotive, Inc. – President & Director [70]

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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 take — we’ll look at them. We look at them every day. And we may do a deal here or there. But the returns at EchoPark are so high versus the returns that we’re getting, the capital you have to put into the facility, you name it. It just makes a lot more sense to put your cash into EchoPark, but that does not mean that we won’t — 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 EchoPark.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [71]

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Yes. And this is David. I think that one of the things we want 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. And so really, it’s not an emotional thing, it’s just simply — when we talk about a 55% return on this new model with EchoPark and echopark.com, those returns are just — it’s hard — it’s very difficult, if not impossible to beat those kind of returns in our business.

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Operator [72]

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And at this time, I’m showing there are no further questions. I’ll turn the call back over to you, Mr. Smith.

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David Bruton Smith, Sonic Automotive, Inc. – CEO & Director [73]

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Great. Thank you very much. We appreciate everyone, and thank you. Have a great rest of your week.

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Operator [74]

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