Sonic group scales back EchoPark footprint

Less could be more for Sonic Automotive Inc. and its EchoPark brand of used-vehicle stores.

In June, Sonic revealed it was suspending operations at eight EchoPark used-only locations and at an unspecified number of delivery/buy centers. On its second-quarter earnings call last month, the retailer indicated the figure included 14 EchoPark delivery/buy centers and three Northwest Motorsport used-only stores in the Pacific Northwest, in addition to the eight EchoPark stores.

Sonic CEO David Smith, speaking on the company's July 27 earnings call, said the suspended operations represented just 14 percent of sales volume, or $74 million in revenues, for its EchoPark unit.

EchoPark, which launched in 2014 in Denver, historically targeted pricing its used vehicles up to $3,000 below market to attract customers. But EchoPark had been suffering from lower used-vehicle availability and higher wholesale pricing.

And last year, Sonic even widened the net for used vehicles to sell at EchoPark, from 1 to 4 years old to up to 8 years old.

"With the used-car market the way it is, with the tight supply and the high prices that there's been, there were a finite number of vehicles that we could buy that fit the EchoPark model, that fit the year models that we wanted to buy and then at the prices we wanted to buy them," Smith told Automotive News.

The availability and pricing hurdles made it difficult for the auto retailer to get inventory to all EchoPark locations and to buy inventory in local markets, said Sonic President Jeff Dyke.

"Today you're just not able to buy enough inventory in the 1 to 5 [year-old] segment to support as many stores as we have," Dyke said on the earnings call. "So we pared down to the number of stores that we knew we could buy inventory for."

The move lowered EchoPark's total locations from around 50 to 25, Dyke said. Sonic did not disclose the locations where it suspended operations. As recently as September, EchoPark had 52 nationwide locations, including 11 Northwest Motorsport used-only stores.

"We can sell more units out of the 25 remaining locations than the 50 units because you can stock the shelves properly," Sonic CFO Heath Byrd said on the earnings call.

Dyke said Sonic has the ability to adjust the EchoPark store counts in either direction depending on where the used-vehicle market goes. The auto retailer said it is seeing positive signs.

"The lights are definitely out in the stores that we closed but [that] doesn't mean they can't be turned right back on and that would be the intention if the market improves like we think it's going to do," Dyke said. "It's just not going to happen in this calendar year. We've got a long way to go to get back down to the $21,000, $22,000 price level, if we do. But certainly rapidly improving prices and rapidly improving availability is occurring right now."

Sonic said the move led to a $13.2 million quarterly loss for EchoPark, which also saw revenue fall 9.1 percent to $600.6 million in the second quarter.

The auto retailer recorded an impairment charge of $75.2 million for the quarter. Sonic said it expects ongoing expenses tied to the closed EchoPark stores will range from $2.5 million to $3 million a quarter.

"The pause at EchoPark, in our view, provides the company time to evaluate growth during the volatile used-vehicle pricing environment," Michael Ward, an analyst for Benchmark Co., wrote in a research note last week.

To be sure, Sonic is not the only publicly traded auto retailer grappling with a difficult used-vehicle market.

Penske Automotive Group chairman Roger Penske said on a July 26 second-quarter earnings call that the company closed a standalone CarShop store in Arizona because of a low supply of used vehicles in the U.S.

The closure of the used-vehicle Scottsdale, Ariz., store, which opened in 2021, was in the first quarter. Penske said the company continues to focus on vehicle sourcing and remains committed to the CarShop brand.

"The continued availability of late-model, lower-mileage vehicles remains very challenging," Penske said.

At the end of the second quarter, Penske Automotive had seven CarShop locations in the U.S. and 13 in the U.K. The auto retailer said CarShop revenues rose 1.5 percent to $475 million in the second quarter.

In contrast to both Sonic and Penske, AutoNation Inc. is actively growing its network of AutoNation USA used-vehicle stores. Three AutoNation USA locations opened in the first half of the year, giving the brand a total of 16 locations.

AutoNation said it plans to grow the division to more than 130 locations by the end of 2026, though CEO Mike Manley seemed to hint on the company's July 21 second-quarter earnings call that timeline may be flexible.

"I'm not going to be governed by a timeline that has been developed in the marketplace," Manley said. "We're very clear on the location we want to be on and have a fantastic strategy and team working on it."

Through the rest of 2023, plans call for adding seven AutoNation USA stores, Manley said. The pace of new store construction will accelerate, he added, "only if I believe operationally we can cope with it [and] it is the right location and the right capital."

Gail Kachadourian Howe and Mark Hollmer contributed to this report.