Sonic Automotive Sees EchoPark Growth, Luxury Demand Fueling Expansion

Key Points

• Sonic Automotive reported broad third-quarter operating improvements, including sequential gains in new- and used-vehicle gross profit per unit and F&I profit per unit. EchoPark unit volume rose 22% year over year, although management said it must improve expense leverage to convert growth into stronger margins.
• EchoPark expansion is set to resume after the company reduced its footprint to 18 locations. Sonic plans to open an Orlando store in December and add two to four locations next year, supported by improved vehicle sourcing and increasing lease-return supply.
• Management remains optimistic about luxury demand and the fourth-quarter selling season, while noting affordability challenges, extended loan terms and negative equity are limiting some buyers. Sonic is also evaluating acquisitions, share repurchases and automation/AI investments as part of its growth and capital-allocation strategy.

Sonic Automotive NYSE: SAH said its diversified automotive retail model, including franchised dealerships, EchoPark used-vehicle stores and powersports locations, positions the company to pursue growth while balancing exposure to different market conditions.

Speaking at the 50th Annual Automotive Symposium, Danny Wieland, senior vice president of investor relations and financial reporting, said Sonic operates 108 franchised dealership locations and generates roughly $15 billion in annual revenue. The franchised dealership business represents about 80% of revenue, while EchoPark accounts for about 15% and powersports contributes roughly 2%.

Within the franchise segment, Wieland said about three-fourths of gross profit comes from parts and service and finance and insurance, or F&I, rather than vehicle sales. He described those businesses as higher-margin and more stable through economic cycles. Sonic also has substantial exposure to luxury brands, with more than 60% of its franchise mix tied to brands including BMW, Mercedes and Jaguar Land Rover.

Third-Quarter Trends and Fourth-Quarter Outlook

Wieland said Sonic delivered top-line operational progress in the third quarter. He said the company was the only one among its public franchise peers to increase new-vehicle gross profit per unit, used-vehicle gross profit per unit and F&I profit per unit sequentially from the second quarter.

EchoPark’s used-vehicle unit volume increased 22% year over year in the third quarter, following 18% growth in the second quarter, according to Wieland. However, he said Sonic sees an opportunity to better leverage its expense base so that demand and revenue growth translate more effectively into profit-margin expansion.

Cody Karns, senior manager of investor relations and capital strategy, said management entered the fourth quarter with a positive demand outlook. He said new-vehicle sales were up year over year when excluding approximately 2,200 electric-vehicle sales in the prior-year period that were affected by the expiration of an EV tax credit.

Karns said Mercedes and BMW have indicated that incentive spending could increase in the fourth quarter as the manufacturers compete for luxury-market share in the U.S. Sonic has been building vehicle inventory ahead of what it expects to be a strong holiday selling season, he added.

Affordability, Credit and EV Demand

Management said vehicle affordability remains a central industry issue. Wieland cited average new-vehicle selling prices near $50,000 nationally and above $60,000 for Sonic’s luxury-heavy mix. Still, he said credit quality and financing availability among consumers actively shopping for vehicles have remained stronger than expected.

Wieland said some potential buyers remain sidelined by negative equity, particularly those who purchased vehicles during the elevated used-car pricing period of 2021 through 2023. At the same time, Sonic has continued to see stable financing penetration, lender participation and attachment rates for F&I products such as extended warranties.

The company views a roughly 16 million annualized new-vehicle sales environment as potentially becoming a “new normal,” Wieland said, as consumers adjust to high prices by extending loan terms. He noted that more than 70% of new-vehicle loans industrywide have terms of 72 months or longer, while 20% of monthly payments exceed $1,000.

On EVs, Karns said they represent about 10% of Sonic’s sales mix, reflecting the company’s luxury exposure and California presence. EVs have historically weighed on blended gross profit per unit, but he said that pressure has eased as manufacturers better aligned supply with demand. Used EVs were the only vehicle category to experience an increase in wholesale prices during the latest quarter, he said, supported by demand and a growing supply of off-lease vehicles.

EchoPark Expansion Resumes

Sonic is preparing to resume EchoPark expansion after reducing its footprint to 18 locations during a period of constrained nearly-new vehicle supply and elevated used-car prices. Wieland said the company expects EchoPark to operate at a high-70,000 annual unit run rate this year.

The company plans to open an EchoPark location in Orlando, Florida, in December and expects to add two to four locations next year. Wieland said EchoPark has improved its sourcing mix to nearly evenly split between auction and non-auction inventory, helping it source more attractively priced, higher-mileage vehicles for affordability-focused customers.

EchoPark typically prices vehicles at 90% to 95% of market pricing, management said. Wieland said the strategy has compressed front-end gross profit per unit, which has recently been in the $200 to $300 range, but supports high volume. EchoPark sells approximately 370 to 380 vehicles per rooftop per month, compared with 80 to 85 units at Sonic’s franchise dealerships.

Management also expects rising lease maturities to support used-vehicle supply. Wieland said lease maturities are expected to increase by about 500,000 units in 2026 and by another roughly 500,000 units next year, though they may not return to pre-pandemic levels of about 4.5 million annual maturities until 2028 or early 2029.

Capital Allocation and Technology Investments

Karns said Sonic’s capital allocation priorities include dividends, acquisitions and share repurchases. The company pays a dividend yielding about 2.5%, he said, and evaluates acquisitions and buybacks from the same pool of capital.

Management said it sees attractive acquisition opportunities in franchised dealerships and powersports. Karns said powersports locations can be acquired for roughly two to four times earnings, while franchised dealership valuations vary by brand category. If Sonic pursues larger acquisitions, share repurchases could take a back seat; if acquisition opportunities do not materialize, the company may return to buying back stock.

Wieland also said Sonic is expanding its use of automation and artificial intelligence. Potential applications include back-office workflows, service scheduling, vehicle diagnostics preparation, marketing and managing service-shop capacity. He said the company has already used robotic process automation in back-office processes for about eight years and is testing additional AI-driven tools.

About Sonic Automotive (NYSE:SAH)

Sonic Automotive, Inc is a U.S.-based automotive retailer headquartered in Charlotte, North Carolina. The company operates franchised dealerships that sell new and pre-owned vehicles from a range of automobile manufacturers, along with related automotive products and services.

Its dealership operations provide vehicle financing and insurance products, maintenance and repair services, replacement parts, and collision-repair services. Sonic Automotive also operates EchoPark Automotive, a used-vehicle business focused on offering pre-owned vehicles and related finance and service products through dedicated retail locations.

Founded in 1997 by automotive entrepreneur O.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.