Sonic Automotive Inc.’s strategic review of its EchoPark used-vehicle operation reveals just how much potential the retailer’s leaders think the business has.
Growth projections provided by Sonic executives for EchoPark last week would put the size of that unit at 2 million vehicles sold annually a decade from now. That’s more than twice the volume that used-car megaretailer CarMax sells now. One analyst covering Sonic speculated that the EchoPark review could be the precursor to a spinoff of the rapidly growing business.
Sonic launched EchoPark in 2014 as a used-vehicle store in the Denver market, and the business has since expanded to 29 locations nationwide. EchoPark sold 40,931 vehicles in the first half of 2021. The unit lost money in the second quarter but has broken even or turned a profit in some previous quarters starting with the first quarter of 2019.
Sonic, the nation’s seventh-largest new-vehicle retailer, announced last week that it’s “considering a full range of potential alternatives” for EchoPark and that it has hired investment bank Lazard and U.S. law firm Kirkland & Ellis as financial and legal advisers.
Sonic didn’t provide possible outcomes of the EchoPark review but indicated that it’s happening because of the unit’s soaring sales and revenue. “No timetable has been established for the completion of the review, and the review may not result in any transaction,” Sonic noted in its statement.
Company executives declined to say more about the move.
“There’s going to be a whole lot of speculation,” Sonic President Jeff Dyke told Automotive News last week. “We thought long and hard about it and just, at this point, can’t make any comments about what’s going on there. At the end of the day, our goal is to maximize shareholder value.”
The review marks a change in tune for Sonic leaders. When asked about the potential separation of EchoPark from Sonic in July 2020, executives downplayed such a move.
“There are synergies between the two companies, and we think that’s what makes us valuable,” CFO Heath Byrd said then, referring to EchoPark stores and Sonic’s franchised dealerships.
J.P. Morgan analyst Rajat Gupta said in a note last week that the review “in our view hints at potential spin-off, and signs that profitability should inflect in 2022 making the business self-sustaining.”
EchoPark sells used vehicles that generally are between 1 and 4 years old with less than 50,000 miles and prices them up to $3,000 below market.
The approach draws customers seeking vehicles in that range, as well as would-be buyers of slightly older vehicles and new vehicles, Sonic executives have said.
Rapid expansion is under way. In July, Sonic opened one EchoPark retail sales center and four EchoPark delivery centers. It plans 140 EchoPark locations nationwide by 2025.
Sonic previously projected that EchoPark will account for the sale of 575,000 used vehicles and $14 billion in revenue annually by the end of 2025. Sonic executives last week said they expect EchoPark to achieve “25 percent population coverage by the end of 2021 and 90 percent population coverage by 2025.”
The 90 percent coverage is key to the even-higher sales projection now on Sonic’s radar. Company executives said last week that an EchoPark store on average will take five years to reach maturity. Beyond 2030, when all 140 EchoPark stores would be mature, EchoPark would be capable of retailing at least 2 million units annually, they said.
In contrast, CarMax sold 832,640 used vehicles in its 2020 fiscal year.