Used vehicles play important role in dealer groups’ strong results

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CARY, N.C. – 

David Smith and members of Sonic Automotive’s leadership team were excited to share the company’s earnings results during the company’s second-quarter 2019 earnings call in July.

“We want to thank our teammates, customers, vendors and manufacturer partners for helping us achieve a record second quarter,” said Smith, who is Sonic Automotive’s chief executive officer.

But soon after starting his opening comments, Smith began to discuss the important role of Sonic’s EchoPark Automotive standalone used-vehicle business, which he said continued to grow at a record rate.

EchoPark’s second-quarter revenue of $291.7 million was a gain of 61.9% compared to the second quarter of 2018. EchoPark’s second quarter 2019 pre-tax profits were higher by $29.5 million, or 106.1%, compared to the second quarter of 2018.

“EchoPark continued its profitability streak, and we expect this profitability trend to continue,” Smith said.

The strong role that used vehicles play in helping auto dealer groups toward solid earnings was a common theme in earnings calls for Sonic and two other groups included in this feature: Lithia Motors and AutoNation.

Lithia Motors: Used among 3 highest-margin business lines

Used vehicles played an important role in Lithia Motors’ quarterly earnings. Lithia chief executive officer Bryan DeBoer shared during the company’s earnings call in July that it reported the highest adjusted second-quarter earnings in its history at $2.95 per share, which was a 17% increase over last year, on top of record revenues of $3.2 billion for the quarter.

He went on to say the company’s highest margin business lines all increased by double digits on a same store basis: Used-vehicle revenues increased by 12%, F&I revenue was up 14%, and service, body and parts revenues increased 10%.

DeBoer said those lines made up about 42% of the company’s revenues and 80% of its gross profit.

“From core and value auto used vehicles to lifetime oil contracts and one-stop service offerings, our operating model is specifically built to touch the entire lifecycle of vehicle ownership and all consumer types,” DeBoer said.

He went on to say the company’s diversification “creates strength in our revenue and profit streams.” That, combined with Lithia’s growth strategy, he said, “results in a unique opportunity unlike most other competitive models.”

DeBoer noted that Lithia is one of the three largest U.S. auto groups, retailing more than 335,000 vehicles annually, offering the second-largest owned inventory marketplace online and servicing more than 3.5 million vehicles a year. But the opportunity to grow remains, he said.

“Our industry is highly fragmented, with the top 10 dealership groups controlling less than 8% of the U.S. new-vehicle market and no single company controlling more than 2% of the used-vehicle market,” he said.

Lithia represents 1.2% of the combined addressable annual new- and used-vehicle market of more than $1 trillion. The company looks to expand its nationwide footprint over the coming quarters, DeBoer said. It plans to do that “through our disciplined acquisition strategy that historically has achieved an 80% success rate of exceeding our after-tax ROE targets,” he said.

“Our ability to retail a full age range of used vehicles is a hallmark of our growth,” DeBoer said. “Sourcing of the right used vehicle drives this business line. Our operational leaders have taken us to one-to-one used-to-new ratio. Technology now also supports our procurement decisions by guiding us to more of the right vehicles.”

AutoNation: ‘Driving the play’ in used

AutoNation executive chairman Mike Jackson said he was participating in the company’s second quarter 2019 conference call so he could officially introduce Cheryl Miller as the company’s new chief executive officer and president.

Jackson reported that the company achieved a record second quarter, with earnings per share of $1.12.

He turned the call over to Miller, and early on in her comments, she said the company continued to focus on its new-vehicle margins in the second quarter, which saw same-store new vehicle gross profit per vehicle retailed increased $165 or 10% compared to the same period a year ago. She also said same-store customer financial services showed another record-breaking quarter. Gross profit per vehicle retailed was $1,926, which was a $134 increase, or 7%.

She moved on to provide an update on the five AutoNation USA used-car stores, saying that the AutoNation USA group broke even in the second quarter for the first time. For the quarter, several AutoNation USA stores were profitable.

“While we have no plans to build additional stores in 2019, we continue to make steady progress,” she said.

In the Q&A period of the AutoNation conference call, Stephens analyst Rick Nelson brought up used-car volume, noting that same store sales showed a strong increase of 7.6% in the quarter. He asked Miller if any changes had taken place during the quarter compared to recent previous quarters.

“We’ve really been driving the play in used,” Miller answered. “So, we definitely see continued opportunity with exceptional customer experience.”

The company continues to use a one-price, no-haggle pricing strategy, she said, and she added that AutoNation would continue to build on the success of its We’ll Buy Your Car program.

“So, all those things combined, as well as a good inventory mix, helped us drive those used results,” she said.

More on Sonic: Echo Park volume five times higher

Based on the “revenue trajectory” through the year so far, annual EchoPark revenue should exceed $1.1 billion in 2019, Smith said. For the full year compared to 2018, that will represent a 57% increase in annual revenues.

Pre-owned vehicles could play a strong role there, as Sonic expects EchoPark to retail approximately 50,000 pre-owned vehicles in 2019. That is about five times the volume it sold two years ago, Smith said.

The Echopark.com site and the existing network of eight EchoPark locations continue to experience major organic growth, bringing in customers from more than 120 U.S. markets, he said.

“We are continuing to move forward with our EchoPark growth mode and expand our network to additional locations across the United States,” Smith said. He added that the cost to open even a large EchoPark location is considerably less expensive than the cost of a traditional new-vehicle franchise and real estate.

The company believes it can grow EchoPark revenue and profitability, he said.

“We believe this level of growth and doing it profitably sets us apart from other disrupters in the pre-owned auto retail market,” Smith said. “While we remain very bullish on the new-vehicle franchise business and we plan to grow that business both organically and opportunistically through acquisitions, it’s especially important to highlight that we believe we can achieve this EchoPark growth without having to pay the huge blue sky or goodwill multiples in today’s market for traditional new-vehicle franchises.”



Source : AutoFinanceNews