AutoNation reported its first-quarter results in mid-April, sharing a solid start to the year for used-car sales and more

Sonic Automotive announced its Q1 performance shortly after. Sonic’s highlights included quarterly revenues hitting record levels.

The following explores both auto retail giants’ respective performances during the quarter, and their plans for the future amid a hot used-vehicle market.

Inside AutoNation's results

Diving further into AutoNation’s Q1 results,  revenue came in at $6.8 billion. The 14% year-over-year increase was driven by used-vehicle revenue, which spiked by 47% from the same quarter last year. This offset the 6% decline in new-vehicle revenue, chief financial officer Joe Lower  pointed out.  It was also boosted by after-sale performance, with revenue up 18% year-over-year, showing a strong service department  performance across the dealer group.

AutoNation used-vehicle retail unit sales were up by 11% compared to the same period of the prior year. The company explained this was driven by “superior used-vehicle sourcing, a broad selection of inventory, a proven operating model, demonstrated digital scale and an admired brand.”

AutoNation chief executive officer Michael Manley said during the group's earnings call that the company’s used-car performance was reflected in good volume growth on a same-store basis.

During the quarter, Manley said AutoNation also sharpened their analytics capabilities, which aided in sourcing and pricing decisions in the used-car market.

“And these disciplines are a work in progress, but I think you can clearly see they're going to have a beneficial impact on our business,” Manley said.

For example, during the first quarter, the dealer group recognized the need to rebalance some of its used-vehicle inventory to help improve margins when studying collected data. Because of these actions, the company is entering the second quarter with used margin per used unit sold on the upswing.

“Success in the used-car market is basically dictated by your ability to manufacture great quality, well priced, desirable used cars,” Manley said.

As far as used sourcing goes, it was a challenging environment for many dealers in 2021, with a shortage of quality used vehicles.

Manley said used success starts with efficient and effective reconditioning, as well as most importantly,  an ability to competitively acquire used inventory.

“And with strong consumer demand, we continue to focus on our self-sourcing capabilities for used vehicles, which I think further strengthens both our franchise dealerships, but also our AutoNation USA businesses,” said Manley.

The dealer group’s growing “We’ll buy your car” digital channel has seen success, as well, and purchasing vehicles directly from consumers boosted used inventory this past quarter.

The company will be continuing to expand its used-vehicle retail business by leveraging its existing capabilities and the AutoNation USA growth plan,  coupled with rich data and analytics.

“These core elements will accelerate growth and further differentiate the company in the used-vehicle market,” Manley said.

Marc Cannon, chief of customer experience for AutoNation, and his team have used different media channels to advertise the AutoNation brand and its offerings as 2022 kicked off.

Typically, AutoNation would “really use the data that's available to see how the demographic that we're targeting in that particular area is consuming information,” Manley said. “And then he (Cannon) just basically builds an optimum plan to try and make sure that we hit communication goals and marketing goals in the timeframe that we need to launch it.”

And Cannon does that individually, by each and every market, even though there are some commonalities.

The company plans to continue to expand after entering two new markets in the first quarter with AutoNation USA Charlotte in North Carolina and AutoNation USA Charleston in South Carolina. Both stores were profitable during their first four months open.

And they’re not stopping there. AutoNation's target is to have over 130 AutoNation USA stores in operation from coast-to-coast by the end of 2026, growth which is expected to help secure a larger share of the used-vehicle market.

When the 130 new rooftop number was discussed, Manley shared the company was looking at two things: “the most attractive markets that we are not necessarily in with our existing footprint” and secondly, capital allocation.

“These stores in the future can do many other things for us. So, that 130 is our baseline today. It may well grow, and we may get more aggressive for other reasons,” Manley said.

During the Q&A portion of the earnings call, Manley said, “I'm going to leverage our existing business, but also AutoNation’s U.S. growth plan and our embedded structure improvements … and this is going to help grow and strengthen our business and the brand.”

Sonic sees record quarterly revenue

Sonic  started the year off with a bang, as quarterly revenues hit record levels. The dealer group brought in $3.6 billion, an all-time quarterly record and a 28.7% year-over-year income. Record first-quarter income came in at $128.9 million, up a whopping 77.5% and income from continuing operations hit $97.3 million.

The dealer group also benefited from record low first quarter SG&A (selling, general and administrative) expenses, which were down 67.7% year-over-year.

Sonic’s quarterly success was pushed in part by performance at its used-only rooftops — the EchoPark stores. This arm of the dealer group brought in revenues of $625.3 million, up 23.3% year-over-year. And the company continues to grow EchoPark’s nationwide distribution network.

In late April, the company expanded with the opening of its newest delivery center in Columbus, Ga. This is Sonic’s 38th brand location and its fourth in Georgia. EchoPark’s delivery centers follow “consumer trends of online shopping to retail store buying desires within the auto category,” the company said. EchoPark market share was 2.1% of the 1- to 4-year-old vehicle segment in the company’s current markets in Q1 of 2022.

In the press release announcing the quarterly results, Jeff Dyke, president of Sonic, said, “In 2022, we have continued the nationwide expansion of the EchoPark Automotive brand, opening locations in three new markets and rolling out the new EchoPark.com to 80% of our EchoPark web traffic nationwide.”

He explained that early results from the digital platform are promising, contributing to higher conversion rates, incremental out-of-market sales volume and high F&I product attachment rates.

Steve Wittman, chief digital officer at Sonic, said during the Q&A portion of the call that the company is very pleased with the progress so far at Echopark.com and aims to achieve 100% rollout by the end of Q2.

In fact, the early results are showing that the new website is driving an incremental 30% in conversation rates.

“So, it’s going to drive incremental volume for us as we continue to roll that out,” Wittman said.

“We are really extending our inventory, extending our appeal to consumers, which in turn is driving incremental volume,” Wittman said, noting there is more to come on the website, but the company is seeing “very strong early results.”

Dyke said, “Our focus on the guest experience continues to pay dividends, with EchoPark recently achieving the highest guest experience scores in the preowned competitive segment.

“With the continuing evolution of our digital retail offerings and our exceptional guest experience, we believe EchoPark’s omnichannel strategy is well positioned to grow market share in the highly fragmented used-vehicle market.”

This past quarter, the EchoPark segment of the business brought in revenue of $625.3 million, up 23.3% year-over-year.

And the company has big goals when it comes to its EchoPark business. By 2025, the dealer group aims to deliver 575,000 vehicles and generate $14 billion in annual EchoPark revenues. During the quarter, EchoPark’s used-vehicle inventory had approximately 57 days’ supply, “including the effect of building up inventory for newly opened and future locations,” the company said.

Inventors on the call wanted to make sure the EchoPark business model is nimble enough to adjust to the current used-car environment, as well as ride the wave of changes in the future.

Dyke assured investors, “As far as the EchoPark business goes, we are very nimble and can certainly adjust to suit the environment.”

Wittman pointed out the EchoPark business is a “long-term investment.”

“None of us think that used-car prices are permanently in this strange $30,000 average (pricing environment), and as the saying goes, we are skating to where the puck is going to be, not where it is right now,” Wittman said.

During the Q&A, Sonic execs also discussed industry trends, including used-car prices, consumer demand and inventory levels and age.

According to Dyke, used-car prices — albeit currently high — are not going to continue to appreciate.

“Inventory levels will at some point come back to a certain extent, and that will play right into EchoPark’s hands. So, we’re very confident where we are and feel like we have things going certainly in the right direction,” said Dyke.

One question on the earnings call pertained to whether the dealer group had seen any slowing in demand in the used-car market caused by high prices and low supply.

A strong response from Dyke. 

“The demand is definitely there,” he said.

“There were still be 37 to 40 million cars sold in America this year, in terms of pre-owned, so the demand is there,” said Dyke.

But there’s a catch. He said the problem is that we’re pushing $500 a month averages on used-car payments, when it used to be about $400 a month. “And it’s too close to new-car pricing,” he said.

Ideally, Sonic leaders shared that you want your average used-vehicle selling price to be about one half of your new-car selling price. These days, it’s sitting at about 70%, they said.

“It’s too close to the new vehicle price … that’s out of the norm, and that’s what is causing someone to maybe think that there’s not a demand there,” said Dyke.

But tides are bound to turn when used pricing inevitably cools off a bit.

“When used-vehicle price averages fall below $25,000, look out, because a lot of cars are going to be sold, and a lot of those that are suffering that acquire a lot of cars from auctions, are going to benefit in a big way … that’s coming — just maybe not this year,”’ said Dyke.

Sonic leaders were also questioned on the fact that their used-car inventory has been reaching past the usual 1- to 4-year-old bucket that made up most of their volumes in the past, and spilling over into the 5- to 8-year-old range.

“We are seeing customers keep their lease returns; we are seeing a lot of that. The cars parked in our inventory are moving up in age. There’s no doubt about that. We’re trading for more cars,” said Dyke. And the franchised side of the business bought very few vehicles from auction in the first quarter.

The average age of used vehicles in the dealer group is on the upward swing, and Sonic dealers are just starting to keep those older vehicle trades to sell, instead of sending them off to auction as they may have in the past.

“The customers want the 5- to 8-year-old cars. There’s a lot of demand for that … We are trying to fill that demand, and we want to focus on that rather than just sitting this one out and focusing on the 1- to 4-year-old cars,” said David Smith, CEO of Sonic Automotive.