Sonic Automotive Inc.'s decision to pare its used vehicle-only EchoPark footprint for now comes as the public auto retailer grapples with lower used-vehicle availability and higher wholesale pricing, both of which have wreaked havoc on EchoPark's business model.
Sonic said last week that it indefinitely suspended operations at eight EchoPark locations and an unspecified number of delivery/buy centers. It also will take a one-time impairment charge of $60 million to $80 million in the second quarter, noting that all but $3 million to $5 million related mostly to severance costs is noncash.
"It sounds like they just want to try and maximize profitability in certain markets at the expense of the eight stores they're going to shut down," David Whiston, an analyst with Morningstar in Chicago, told Automotive News.
Sonic's move marks a significant change in fortune for EchoPark, which had as many as 52 locations as recently as September, including 11 Northwest Motorsports used- only stores.
In July 2021, Sonic launched a strategic review of the growing EchoPark business. At the time, one analyst speculated the review could have been a precursor to an EchoPark spinoff. Sonic, citing timing and market conditions, ended the strategic review in July 2022 without taking further action.
The Charlotte, N.C., company did not identify which EchoPark locations it has indefinitely suspended. It also wasn't immediately clear how many jobs would be cut as a result of the changes.
At least five EchoPark locations, one in Georgia and two each in New York and Maryland, are labeled as temporarily closed online. An EchoPark delivery center, in Salt Lake City, is labeled as permanently closed online, but it is unclear when that closure happened.
A Baltimore Business Journal story last week said EchoPark's Baltimore and Laurel, Md., locations will shut down in August, eliminating 34 jobs.
Evan Berney, who sold two used-vehicle stores to Sonic in 2021 that became EchoPark locations and is now EchoPark's digital operations director, told the publication that the two locations are not closing permanently. Berney said that both could reopen; all real estate is remaining; and employees are receiving 60-day severance packages and are being offered the chance to transfer to other Sonic or EchoPark locations. Sonic declined to comment further before its second-quarter earnings call.
Sonic last week said it maintains its goals for EchoPark to reach breakeven earnings before interest, taxes, depreciation and amortization by the first quarter of 2024 and ultimately reach 90 percent of the U.S. population, aided by a growing number of omnichannel sales.
Sonic previously said it would reach that goal by 2025.
"Sonic now believes that the timing of achieving this goal will be predicated on how quickly the pre-owned market normalizes related to inventory availability and pricing," the company said in a statement.
"Currently, Sonic's focus is on improving EchoPark's financial performance."
Stephens Inc. analyst Daniel Imbro, in a note to investors last week, said his company believes EchoPark's adjusted EBITDA profitability won't happen until the third quarter of 2024.
The auto retailer said it expected continued volatility in the wholesale price environment into 2024. Improvements in wholesale pricing, Sonic said, would benefit the overall profitably of the EchoPark model.
EchoPark, which launched in 2014 in Denver, historically targeted pricing its used vehicles up to $3,000 below market to attract customers.
Last year, Sonic widened the net for used vehicles to sell at EchoPark from 1 to 4 years old to up to 8 years old.
Whiston said he thinks the store suspensions will be for more than a quarter or two.
"But it shouldn't be for two-plus years or anything like that, even though it will take awhile for used cars to get better," he said. "You don't want to derail Echo's momentum any longer than you have to because it's a young, growing business."
EchoPark's first-quarter revenue rose 4.6 percent to $650.5 million, a record for that period. The used vehicle-only business lost $46.8 million in the quarter, worse than its $35.3 million loss a year earlier.
EchoPark stores sold 19,980 used vehicles in the first quarter, jumping 34 percent.
Sonic, in its statement, said expected new-vehicle production increases during the next 12 to 18 months will benefit used-vehicle availability and "further improve both consumer affordability and EchoPark profitability. These improvements in market conditions will enable Sonic to continue the expansion of EchoPark's geographic footprint into new markets."
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June 25, 2023 at 11:00AM
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