Sonic Automotive Inc

NYSE:SAH

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the Sonic Automotive Fourth Quarter 2021 Earnings Conference Call. The conference is being recorded today, Wednesday, February 16, 2022. The presentation materials accompanying the Management's discussion on the conference call can be accessed at the company's website, ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor statement under Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed by the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

[David Smith, CEO]

Great. Thank you very much, and good morning, everyone, and welcome to Sonic Automotive's fourth quarter and full year 2021 earnings call. As he said, this is David Smith, the company's CEO. Joining me on the call today are Sonic President, Jeff Dyke; our CFO, Heath Byrd; our Chief Digital Retail Officer, Steve Wittman; and our Vice President of Investor Relations, Danny Wieland. Also joining us is Mr. Tim Keen, who is recently promoted to EchoPark Automotive Chief Operating Officer. Today, Sonic Automotive reported all-time record results delivering all-time record revenues for both the fourth quarter and the full year 2021. We are very proud of our team's performance for the quarter, which capped off a year of significant growth for our company. In addition to our record financial performance, we achieved several important milestones that position Sonic for continued growth in 2022 and beyond. On a consolidated basis, Sonic delivered record revenues of $3.2 billion for the fourth quarter of 2021 and $12.4 billion for the full year, up 14% and 27%, respectively. We continue to see increased customer traffic at our stores and robust consumer demand, which, combined with our sales and marketing activities and improved digital channels, drove our strong sales growth during the quarter. This was achieved despite the challenging conditions which have persisted throughout the industry, including inventory constraints and supply chain issues. At the same time, we continue to see benefits from the steps we took in both 2020 and 2021 to permanently reduce our expense structure, enhancing operating efficiency throughout organization. For the fourth quarter, adjusted SG&A expenses as a percentage of gross profit was 63.3%, a 480 basis point improvement year-over-year. This contributed to fourth quarter adjusted EPS of $2.66 per diluted share compared to fourth quarter 2020 adjusted EPS of $1.50 per diluted share, a 77% increase. This represents our 12th consecutive quarter of year-over-year EPS growth. For the full year, we delivered adjusted EPS of $8.46 per diluted share compared to adjusted EPS of $3.85 per diluted share in 2020, a 120% increase and our third consecutive year of record-setting adjusted EPS. In the fourth quarter, we took significant measures to continue the strategic expansion of our nationwide footprint. Our landmark acquisition of RFJ Auto, one of the largest transactions in automotive retail history, is projected to add $3.2 billion in 2022 revenues, which are incremental to Sonic's previously stated target of $25 billion in total revenues by 2025. With 33 locations in 7 states and a portfolio of 16 automotive brands, this strategic acquisition has added 6 incremental states to Sonic's geographic coverage and 5 additional brands to our portfolio, including the highest volume Chrysler Dodge Jeep RAM dealer in the world and Dave Smith Motors. Through this single transaction, we have substantially increased our geographic footprint, brand presence and added considerable upside to our growth trajectory. In addition to RFJ Auto, we also completed several other strategic acquisitions to drive further growth in our franchise dealership segment. We would like to welcome our newest teammates at Momentum Chrysler Dodge Jeep RAM in the Greater Houston market, Volkswagen and Fallston in Maryland and Sun Chevrolet in Upstate New York. These follow our earlier acquisitions of four Audi, Subaru and Volkswagen franchises in Colorado during the previous year -- or previous quarter rather. With these strategic additions, we have significantly enhanced our geographic coverage and brand portfolio while ensuring that we remain disciplined in investing in the right businesses at the right return. We want to take this opportunity to sincerely thank all of our manufacturer partners for their amazing support and dedication to our industry without which we couldn't have achieved our record growth in 2021. Turning now to our EchoPark business. In the fourth quarter, we continued the nationwide expansion of our unique preowned vehicle concept, adding five locations in four states, bringing our EchoPark brand to over 30% of the U.S. population, which is ahead of our target of 25% reach by the end of 2021. With our progress to date in growing our EchoPark distribution and digital network, we are well positioned to achieve our previously stated goal of 90% U.S. population coverage by 2025. In the interim, we have continued to invest in the human capital necessary to support the long-term success of EchoPark. With the promotion of Tim Keen to the Chief Operating Officer of EchoPark; and the addition of Thien Truong, Chief Revenue Officer; Dino Bernacchi, Chief Marketing Officer; Steve Wittman, Chief Digital Retail Officer; and a Chief Technology Officer, which will be appointed shortly. As an update on the development and launch of our proprietary e-commerce platform, echopark.com, starting late in 2021, we have now gone live with a percentage of web traffic in select markets. Early results are very positive with a 68% increase in website cars sold conversion rate, which is overwhelmingly positive feedback from our guests and better-than-expected F&I sales by the new platform. To-date, over 90% of the end-to-end online transaction were out-of-market sales and were completed in as little as 10 minutes. Our rollout continues to progress, and we expect to roll out our new digital platform to our entire EchoPark network later this year, allowing us to market our entire EchoPark inventory nationwide. Turning now to our balance sheet. During the fourth quarter, we continued to strengthen Sonic's balance sheet and liquidity resources, including an amendment to increase the total capacity of our credit facilities to $2.95 billion. We also took advantage of attractive capital markets conditions and a corporate credit rating upgrade to refinance our existing debt maturities at favorable terms, lowering our borrowing costs and supporting our long-term growth plan with the issuance of $1.15 billion of unsecured senior notes to complete the RFJ Auto acquisition and for other general corporate purposes, including the repayment of debt. We ended the year with over $700 million in available liquidity, including approximately $400 million in cash and deposits on hand. As part of our balanced capital allocation strategy, since the end of the third quarter of 2021, we purchased over 1 million shares of Class A common stock for an aggregate purchase price of $50.4 million. In addition, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.25 per share, which is a 108% increase from its previous level of $0.12 per share payable on April 14, 2022, to all stockholders of record on March 15, 2022. This dividend increase reflects the strong performance and cash flow generation of our business, our positive outlook for the future and our commitment to delivering returns to our stockholders. Our fourth quarter and full year 2021 results demonstrate the strong consumer demand we've continued to experience despite pandemic-related headwinds, our success in maximizing operating efficiencies at our franchise dealerships continued expansion of the EchoPark brand and the constant commitment and diligence of our valued team members. We are especially grateful to our teammates for their continued dedication and commitment to Sonic and EchoPark which ultimately makes our success possible. Our distinctive guest-centric culture that is at the heart of everything we do, combined with our enhanced operating model has enabled us to post another year of record results in 2021. Looking ahead, we remain focused on implementing our strategic plans to fuel further expansion throughout our franchise dealerships as well as EchoPark. We are very excited to enter 2022 with a strong foundation to increase profitability and drive our future growth. We look forward to effectively executing our road map to deliver long-term value for our guests, our teammates and stockholders alike. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

[Operator]

[Operator Instructions] Our first question today comes from Rick Nelson at Stephens. Rick, please go ahead, your line is now open.

[Rick Nelson, Stephens Inc.]

Thanks a lot. Good morning. And great quarter. I'd like to, I guess, start by asking about inventory supplies on the new car side. When you think the challenges will abate? And is there any visibility into an inventory might start to normalize? Maybe you could speak to BMW, Honda, two big brands of yours, what you're hearing from them.

[Jeff Dyke, President]

Rick, it's Jeff Dick. Thanks for the question. Look, new car inventories from our perspective are going to continue to be tight. We ended the quarter at about 11 days supply. That's where we are right now. We got some unfortunate news yesterday from some of the manufacturers, Toyota, Lexus, BMW included that they're cutting back some of the allocation for February and March due to microchip shortages. So we expect this to kind of ebb and flow as we move through the first and second quarter. But all indications are that as we move towards the end of the year, things are going to start to get better. That's with all of our brands, including BMW, including Honda. Yesterday was a bit of a surprise, to be quite honest with you. We were not expecting that. And so it goes, we've dealt with that for the last couple of quarters. And as you can see what happened in the fourth quarter, we've made adjustments. Obviously, our SG&A is in great shape. We've moved our margins up. We had record front-end margins, over $6,500 a copy in a new car for the quarter or for December. And we see that continuing. We had a great January. The margins are still high. And that's going to persist on as long as the day supply is going to stay tight. I said this before, I don't think new car supply is going to come back ever to where it was prior to the pandemic starting. I look for B&W to get to a 16- to 20-day supply for us, they're at about a 10-day supply now as we move towards the summer, hopefully, without any more of the announcements that we had yesterday. But new inventory is going to be tight. We think it's going to get better as the year goes on and then progress a bit better as we move into '23.

[Rick Nelson, Stephens Inc.]

Thanks Jeff. Where do you think GPUs settle once inventories do recover until we go back to pre-pandemic levels? Or do you think manage things tighter and GPUs -- some of those elevated GPU can carry up?

[Jeff Dyke, President]

Yes. I'm the biggest cheerleader sitting on as many brand meetings as I can. And we're pressing very hard for them not to bring inventory levels back to pre-pandemic levels. And so margins are going to stay high. The margins prior to the pandemic are low. We should be selling cars at MSRP. I mean this industry needs to get away from doing all the negotiating it’s a hell a lot less complex, much easier, and it brings the right value for the vehicle. So I think that prior to the pandemic, you saw Sonic Automotive, somewhere in the $2,000 to $2,300 range in terms of funding margin. That number is going to stay north of $4,000, if not higher, as we move forward, and I would work that into all the models. I just don't see margins coming back going back to pre-pandemic levels ever. I certainly don't see them coming back in '22 or '23. And that's great. It's great for the industry, it keeps us healthy, it puts lots of cash in the bank, lets us make investments like we did in RFJ and make investments in EchoPark and continue to what we're doing. So with -- as David said in his opening, with the permanent reduction of SG&A, it just makes it up for a really great run here in these next few years if we can keep our manufacturer partners in line with day supply, which we're all working on. I think that's the only thing that can screw this up is if they bring the supply back to the 60-, 70-, 80-day levels that we used to see, I just don't see that happening.

[Heath Byrd, CFO]

And Rick, this is Heath. I'll just add to, if you look at Sonic specifically, all of our models indicate the same thing that Jeff is saying that it's going to stay well over $4,000 at least in 2022. Some of it is going to be impacted by RFJ's mix. Their mix is a little bit different than ours and that brings the GPU down a bit. So it's going to be a combination of that lower inventory driving the higher GPU, keep maintaining it higher and a little bit of an impact of our RFJ's mix that reduces ours.

[Rick Nelson, Stephens Inc.]

Good to hear. Speaking of RFJ, like to hear about any early learnings, any positive or negative surprises kind of come about there.

[David Smith, CEO]

Yes. Fortunately, this is David. So unfortunately, everything has been very, very smooth. We've got so far, have been very pleased with the team and Rick Ford and his leadership team are still in place and everything has been going very smoothly.

[Jeff Dyke, President]

Yes. The only thing I would add to that is I think that we can learn a lot from each other. They do a fantastic job running smaller stores in mid- to small markets. And so they've got a lot to offer there. I also might open the door for us to do some tuck-in acquisitions of those type of stores. It really has not been on our radar in the past that might be on our radar now. But overall, as David said, them coming into our culture, the cultures were so similar already. Rick Ford, Myron Heronema and that whole team are doing a fantastic job running their platform. Early results have been fantastic, beat our expectations. So we're very, very excited and bullish on this acquisition. It was a fantastic acquisition for our organization at this time, just an absolute great addition to the family of Sonic Automotive.

[Rick Nelson, Stephens Inc.]

Good to hear. I'm curious thoughts on your appetite for additional acquisitions. Do you go slower now while you integrate our RFJ or you in the market to do more deals?

[David Smith, CEO]

This is David. We are very focused on integrating RFJ and also focused on EchoPark and continue our growth there. And so we're going to be very disciplined on further acquisitions. That's not to say that if something came along that we wouldn't take a look at it because that's really what happened with RFJ and that deal came together in record time over, only about the three-month period. So it was -- but it was a great team, and we knew a lot of those people, and so it was a very special deal so that -- but I think barring something like that, I think you're going to see us really focused on driving our growth of our existing businesses and continuing on the growth path that we've already announced.

[Rick Nelson, Stephens Inc.]

Finally, if I could ask on EchoPark. I believe you previously had targeted profitability in late 2022. I'm curious if that expectation has changed, I don't see it in your slide deck?

[Jeff Dyke, President]

This is Jeff. In our mature stores, that's true. Obviously, with the used car market right now that the margins are really difficult. The average retail selling prices moved from about $21,000 to about $29,000, which is moving the average payment for the customer up from $400 to call it $500. And that's been a bit of a challenge. But as the new car inventory levels begin to come back, the prices ease. We've seen prices ease about $2,000 a car over the last 6 weeks and what we've been able to buy at the auctions. We're going to see our stores that our 3 to 5 years old begin to get profitable. Our 5-year-old-plus store certainly do that as we move towards the end of the year and us getting sort of the EBITDA back on track. I do think that the first quarter and the second quarter are going to continue to be tough. We're looking -- we've already started a little bit with the 5-year-old model car at EchoPark. There's some requests from our consumers for us to sell more than the 1- to 4-year-old model. So we're looking at 5- and 6- and 7-year-old cars. We do that in a handful of stores now. We'll see how that goes. We've got some retooling to do because of the complexities and reconditioning in order to do that. But we're taking it one quarter at a time here. We'll see how things progress as we go through the year. And if we need to make some adjustments like that, we'll do that. We are going to expand -- continue to expand. EchoPark will reach 50% of the nation by the end of the year. We're also introducing with Dino Bernacchi, joining our team. We'll start our marketing and branding campaigns this summer. So you can expect a drag on the stores and the marketing spend somewhere in the $40 million to $50 million range for the year when you combine those two things, added into our plan as we move forward, and that's what we have in our forecast internally here. But yes, if the markets continue to come down like we think they're going to from a pre-owned perspective where we can get that average retail prices at least below $25,000, it really puts a lot of wind in our sales for EchoPark. And we're just one quarter at a time watching that. We need to add another year or two to drop the average retail selling price we will. But it's a quarter-by-quarter watch year before we start making some of those moves.

[David Smith, CEO]

Yes. And this is David, may want to chime in on this. But we achieved the number one position in our reputation.com surveys from our [indiscernible], from our customers. And as Jeff said, the -- our customers are telling us what they want, and they want more than just the 1- to 4-year-old cars in many markets. So I don't know if you guys want to touch on that, but that was just incredible performance to be able to open as many additional stores as we did and still achieve that #1 spot and being able to deliver that guest experience to our customers is absolutely incredible.

[Jeff Dyke, President]

I guess the only thing I would add is it's becoming more than just about price. That's how we really drove a lot of our traffic. And now the guest experience is really taking hold. The rest of the nation or half the nation this year will be able to experience EchoPark by the end of the year. When you combine all that, EchoPark's just getting stronger and stronger and stronger. And that's what we projected. We think the margins continue to improve. Inventory levels continue to improve, although it's going to be slow until those new car inventory levels come back in the rental car companies get out of the auction lanes for buying cars instead of selling cars again, it's just going to be a little bit of a slow drag here for the next few months. But it's nothing -- it's short term. Used cars are not going to continue to appreciate that's just not typical. We'll be in a depreciating market, if we're not already in it as we move forward here over the next couple of quarters, and we look things to get back to normal from an EBIT perspective at EchoPark.

[Heath Byrd, CFO]

And Greg, this is Heath. I'll just add. I view 2022 is really the coming out party for EchoPark. We've got, as Jeff mentioned and David mentioned, our branding has begun. With Dino, we're building the infrastructure to make that happen. And we're also getting the digital retail platform being rolled out this year. And so once you combine that branding and it becomes a household name, coupled with the ability to buy online that's going to be a tipping point for us. And so this is -- from my perspective, this is really a coming out year for 2022.

[Jeff Dyke, President]

And Steve Wittman, I think, needs to comment here on where we are from an e-commerce perspective. Rick, for you guys in our digital retailing platform, Steve?

[Steve Wittman, Chief Digital Retail Officer]

Yes, sure. So as David mentioned in his opening comments, we've launched a website and proprietary digital retailing tool in North Carolina. We've expanded to the South Carolina recently as well. Overall, the results are very positive. The new site is driving 68% incremental cars versus the old -- the cars sold versus the old site. Of those cars sold end-to-end online, financing penetration is 100% and extended warranty penetration is 50%. Additionally, we've enabled nationwide shipping on our new website. So the consumer can go on to a website, find a car in Long Beach and have it shipped to Charlotte and we enable the consumer to do that. And that's really interesting what we've seen is that 90% of the cars we sold online have been shipped from outside of North Carolina. So that new ability to shop nationwide inventory is really driving incremental volume for us. Additionally, we're seeing very strong internal -- technical internals on the website. It's 30% faster than the old site, bounce rate are down 70% and time on site is up 75%. And lastly, we've talked to consumers who have used the new tool. They love it. They talk about the simplicity of it, the ability to go end-to-end online in an automated way with no human interaction and also the transparency. We are very transparent about the price, the payments, the products we sell to the consumer, and we're getting great feedback from them early on here. So it's going to be a huge enhancement to our overall business.

[Rick Nelson, Stephens Inc.]

Thanks a lot for the commentary there. Much appreciate it, and good luck.

[Operator]

The next question comes from John Murphy from Bank of America. John please go ahead, your line is open.

[John Murphy, Bank of America Merrill Lynch]

Good morning guys. I just wanted to follow up on used in EchoPark specifically. I mean, Jeff, as you look at this, I mean I think your target is that the vehicles sold here would be basically 40% less or 60% of the value of newer the pricing would be sort of that kind of a gap which is kind of more normal. Where did you say that relative gap is right now? Is it like half that or maybe even less in the used market -- on used to new pricing?

[Jeff Dyke, President]

No, I mean -- That's a great question. That's the big issue is the new car prices are butting up closer and closer to new car prices. So it typically runs in the 50% range, 55% range, it's now pushing up towards 70%. 67%, I think, is the kind of automotive number. That's just that's too high. And so what happens is the used car customer can switch off and buy a new car a lot easier in particular, if there was inventory out there, I think it would even be tougher. But we've got to get back down to that 55% range and bring that monthly payment down closer to $400. That's where EchoPark and the wind really kicks in. And we're in such really good shape with our base supply we don't have a lot of inventory. This is on the franchise side and the EchoPark side. We're sitting at a 36-day supply, something like that, a little higher maybe at EchoPark for store openings. But we're in really good shape with the inventory. What you worry about is the rest of the market out there that might have a 60, 80, 90-day supply, they're still sitting on cars that they pay if the height of the market, they're going to have issues. So all that inventory needs to bleed through and that average cost of sales needs to come down on preowned, that's going to put us back closer to that 55% level. That's going to drive the big, big volumes that we're very accustomed to at EchoPark. So we're being very patient. We've got this great franchise business that's printing a lot of money. It gives us a lot of flexibility. And so we're being real patient with EchoPark. I don't want to go change the model up given what's going on in this appreciating used car environment. But if we have to, and we're being asked to by our customers, as David said, "Hey, could you guys start selling some 5- and 6- and 7-year-old cars, we're looking at it. We put that inventory into the Tampa market, and that store took off. We put it in Birmingham and that store is taking off. So we're going to play around with a little bit. That will drop that average retail selling price and it needs to get below 25,000 and really get to 22% or 23%, that's when we really start seeing the volumes come back.

[John Murphy, Bank of America Merrill Lynch]

So Jeff, when we think about the 2021, '22 new vehicle sales, I mean, RFJ for '22 is 14.5. So I mean we're lower than most folks. But let's say we're going to have three years of pretty depressed by supply constrained volume years, in the next few years, there's not going to be that many young, used vehicles available because they just wouldn't have been made and sold. So I mean, don't you have to kind of push into sort of 4- to 5- to 6- to 7-year-old vehicles in the coming years, just because, I mean, the vehicles won't be there, right, in the 1- to 3-year bucket. So I'm just curious, how do you -- I mean, what does that change in your model? I mean, you were talking about sort of on the production side, there might be some changes. But I mean, other than that, is it really just getting good vehicles at lower price points that just happen to be a year or two older. I mean you can deliver a good product at that age. I'm just curious what's the difference in what you need to run in the business model?

[Jeff Dyke, President]

Yes. It's real simple. We've got to retool our reconditioning system. I mean 1 to 4-year cars are a lot easier to recondition than a 5-, 6- and 7-year-old car in the parts availability issue that's out there. So we've got to have a different level tech. And we can retool very quickly to do that. It would take us 90 to 120 days to begin to sell that 6, 7, 8-year old car. That's not something that we can't do. But I'll tell you, there are off-lease cars coming back this year than last, about 25% to 30% more. And you might think that next year, they're not. But there's a lot of customers that stayed in their leases. They bought their leases out. So the cars are going to come back in a different way. They're not going to come back through the traditional lease lanes, they're going to come back or swim lanes. They're going to come back from the customer returning that car via us buying the car off the street. We've also -- we've been able to increase EchoPark's purchases off the street from, call it, in the fourth quarter around 10%, 11%, 12%. We're pushing January, February in the 18% range. We think we can get that number up to 30%. But John, if you're being logical guess, the answer is yes. We can retool and sell that 5, 6, 7-year old car, it's a lot easier and a lot less complex. We can just sell 1 to 4. But you're probably right. You're probably going to see us move maybe talk a little more in the second quarter about selling some of that 6-, 7-, 8-year old inventory and buying those cars off the street. They're a lot easier to buy off the street. We do it every day at our franchise stores. And we can also leverage our franchise stores to buy more of those dollars off the street to feed EchoPark, something we've never done before. But the inventory is there for us to do that. Customers are coming in every day for us to do that. We can utilize our service lines to buy more and more cars. And so logically, probably, yes, as we move into the middle of the summer and into the third quarter, you'll see us making some of those moves.

[Heath Byrd, CFO]

And John, this is Heath. Just to add a couple of the differences in that model. Basically the way you make -- when you look at the unit economics, the way you make money on a one to four compared to 5% to 8% will be different. You see -- on the 5% to 8%, you would be seeing a higher front-end GPU and less F&I because the underwriting obviously is different for this 5 to 8-year old for warranties.

[John Murphy, Bank of America Merrill Lynch]

Got it. Okay. And then just flipping back to the franchise side. I mean the parking service recovery is pretty good, but it seems like there's a lot of legs left there. I mean, how do you see that progressing through '22 and maybe even into '23 as the world, knock on wood, hopefully normalizes? I mean it just seems like there's a huge opportunity still there in backlog.

[Jeff Dyke, President]

Yes, we agree 100%. Our customer pay grew over 18% in the fourth quarter, which is great. Really can't control warranty. That's down. I think it was 11%, if I'm not mistaken. But we agree with you, 1,000%. There's a lot of room there. We're hiring technicians left and right now, adding capacity into several of our brands and there's a lot of upside. In particular, on the West Coast, they were sort of first in and last out of all of this. So there's certainly opportunity to grow there, and we're budgeting that way.

[Heath Byrd, CFO]

As the supply chain improves, we're going to see a lot more growth there. It's been historically high, work in process in our dealership. So it's really been -- not really the parts of the shipping of those parts that has been an issue, but as that goes up, which we think it will, in time that, that will improve.

[Jeff Dyke, President]

Yes. And we did -- we got hit in the fourth quarter. We had a ton of attacks that we’re all sick really smacked us around a bit. So there's plenty of upside in the fixed business.

[John Murphy, Bank of America Merrill Lynch]

Okay. And then just lastly, real quick on rising rates. I mean, is this an issue? I mean you've got a one-for-one to give a duration of the loans and leases. You don't go up one-for-one with Fed funds rate. So I'm just curious how you think about rising rates. I mean have you just gauged the backlog in both new and used is just so strong and not supplied at the moment like this is going to be largely subsumed or overwhelmed with the backlog of demand. I mean how do you think the balance of power is there?

[Heath Byrd, CFO]

Well, from a demand perspective, I think we budgeted in four rate hikes for the year. And as long as those are moderate, we don't think that it's going to become an affordability issue. Actually, the actual vehicle prices becoming more affordability issue than the financing. And from a standpoint of expenses from our perspective, obviously, we factored in those increases if it impacts our floor plan, et cetera. But at this point, we think the demand is so high and the supply is so low that rate increases are not going to impact the demand to the point that it's material for the industry.

[John Murphy, Bank of America Merrill Lynch]

Great. Thank you very much guys. Appreciated.

[Operator]

The next question today comes from Rajat Gupta of JP Morgan. Rajat please go ahead. Your line is now open.

[Rajat Gupta, JPMorgan]

Great. Thanks for taking the question. Just wanted to follow up again on the used car market. You're hearing some mixed commentary there around demand and growth. Industry data continues to suggest a pretty bleak picture year-to-date. Can you get a sense of what you're seeing at your franchise stores on the used car side, maybe quarter-to-date? What the demand backdrop really looks like, particularly as we head into the tax season? And maybe relatedly, any views on pricing. I mean you did suggest earlier that you do expect it to correct over the next couple of quarters. But do you see another leg up here into the tax season before we start to see the leg down? I'm just curious how you view that dynamic here in the near term? And then I have a follow-up.

[Jeff Dyke, President]

Yes. Certainly, the used car volume is going to pick up in March and April and May from where it was in January and what we're seeing in February, as it always does. But the demand is there. I mean we're going to sell 40 million used cars in this country this year, and that's 36 million to 40 million. It is pretty consistent for the last decade. It's the price point, right? That's pushing demand up for new cars really because the used car price points are so high and that's got to give. And it's going to give. I mean that's going to happen. Used cars are not -- like I said earlier, are not going to continue to appreciate. We do believe we're starting to see the depreciation cycle start, if the last six weeks are any indication of that. And so the used car demand is there. It's still very strong. It's just a matter of providing the inventory at the right price payment that you can get for the consumer because most of our consumers are payment buyers both on the EchoPark side and the franchise side. And we've got to hit that right price point. Our stores have literally gone from selling an average retail selling price of $23,000 on the franchise side to $30,000 or $31,000. And it's just too high, it's butting up too close to the new car pricing and the payment that you can get on a new car. So we're going to battle that headwind here for the next couple of quarters, for sure, first quarter, second quarter, maybe even into the third quarter but it is going to slowly and progressively get better. And that's the message that we -- that's what we -- the message we've been getting from the manufacturers. That's what our autonomous teammates are telling us, and that's what we budgeted for.

[David Smith, CEO]

And Rajat, this is David. As you can imagine, as the new car day supply is 10, 15 days, naturally, customers who can't get a new car are going to buy a car from our franchise stores that's a 2- or 3-year-old pre-owned car that's in great shape because that's just the only thing they can get. And so it may be closer to the price of a new vehicle but they're still going to -- they need a new vehicle. So they're going to go for 2 or 3-old preowned vehicle.

[Rajat Gupta, JPMorgan]

Got it. Great. And then maybe just a follow-up on EchoPark maybe into like the full year puts and takes. You mentioned that you expect this kind of like reduced unit volume metering to continue here for the next couple of quarters. I mean any numbers you could put around that in terms of volume expectations or just EBITDA losses? Have we -- are we going to see a continued improvement on that EBITDA loss? Or should stay at this kind of level, like for some time? Just maybe some numbers around how the EchoPark volume and loss trajectory could play out this year. And maybe if you could tie that into like just some other puts and takes for the full year for the overall business as well.

[Jeff Dyke, President]

Yes. So let's just call, depending on what happens to the inventory. This is a little bit of a guess, but 110,000 to 120,000 cars, somewhere in that ballpark for EchoPark this year. EBITDA progressively getting better as each quarter goes through the year and we get to the fourth quarter positive EBITDA problem, maybe even in the third quarter. I think the first quarter is going to be tough. It's certainly going to be tough just because of where the inventory levels are right now, getting a little better in the second quarter, progressively getting better in the third and then in the fourth quarter. But some of the EBITDA is dragged from moving to 50% coverage in the country. So drag from opening the stores that that $10 million to $15 million range we've been talking about on an annualized basis. And then the investment of that $30 million to $35 million, maybe even $40 million. We'll see how it goes in our marketing and branding campaigns that Dino is working on that we'll launch this summer. This is, as he said earlier, coming out party kind of year for EchoPark. We're very, very bullish on what our customers are telling us. Our reputation.com scores, as David said earlier. We're ranked #1 in the nation for a preowned dealership group in those reputation dotcom stores. And so when you add it all together, this is just a great year. It's going to be a great year for EchoPark. We're going to increase our revenue, increase our volume. EBITDA is going to continue to improve as we move through the year. Inventory is going to get better. It's going to roll us into being in an even better position when we roll to '23 as inventories come back to hopefully a 25- to 30-day supply level. So hopefully, that gives you enough insight on what EchoPark is going to look like as we move forward.

[David Smith, CEO]

Yes. And this is David, and it's as Jeff was talking about earlier, the fact that we've kept our day supply and line and been disciplined about that, it's sure a whole lot easier to crank up the volume as the market drops -- as the market value of the pre-owned vehicles drops, we can crank up that volume rather quickly versus if we were carrying a large day supply going into that situation. It's a real drag on performance.

[Jeff Dyke, President]

Yes. Sorry. I mean we could have sold more cars in the fourth quarter on preowned. There's no question about that, but we had no idea from September through December or January, what the appreciation issue is going to be. Is it new car inventories are tighter and tighter? So we maxed out our gross profit, had the biggest grossing quarter fourth quarter we've ever had in pre-owned and the biggest grossing year we've ever had in pre-owned and took advantage of the market. We can do that because our day supply is so nimble. We carry 10 days in the pipeline, 20 days on the front line, and we can move very, very quickly to adjust for the market versus some of those competitors that are out there that are sitting at 70, 80, 90-day supply of product. There's a lot of water in that inventory that they're going to have to deal with.

[David Smith, CEO]

And one of the things that's a big positive for EchoPark for this year is the rollout of the digital retailing platform not only creates the incremental opportunity for consumers, but the efficiencies are going to really show through the SG&A because it truly is a humanless transaction. There's no one behind the scenes that's doing paperwork and it is done completely automated. And so that will get us from units per sold per month to higher 30, 35 because the work is being done by the consumer online.

[Jeff Dyke, President]

We look forward, we'll have a day where we get to really show the tool, and we look forward to really rolling that out and showing everybody. It is a very special tool weapon and the team did and BottleRock, our business partner, just did a fantastic job with the development of the tool. And when we get to the point where we're ready to display it, we'll put it out there for everybody to really see first time where you got a tool that someone can buy car online beginning to end with no human interaction. Robots or bots as we call them, and a lot of great technology driving what is a fantastic guest experience. And we'll be excited to share that with you in the coming quarter or two.

[David Smith, CEO]

Yes. And we will be setting up an Analyst Day to walk all of you do that as well.

[Rajat Gupta, JPMorgan]

Got it. Got it. And maybe just to clarify the advertising number in the $30 million to $50 million, that's a year-over-year number? I think you spent like $36 million for the full year in EchoPark advertising in '21.

[Jeff Dyke, President]

Yes, that's totally incremental.

[Rajat Gupta, JPMorgan]

That's all incremental. Okay. Got it. And just lastly, you gave us some color on the EchoPark EBITDA trajectory. You mentioned, Heath mentioned, like 4,000-plus new GPUs for the year. Services continue to recover? I mean where do you think like any range around what SG&A to gross might look like for the company for 2022 in the ballpark just for modeling?

[Heath Byrd, CFO]

I think if you do the modeling and look at the math, understanding that there's a couple of things to drag it on SG&A, if you look at wages, everyone's experiencing this, but it's an incredible increase in wages from a standpoint of merit increases and retaining good talent. And so that's up about 6.4% from a corporate perspective. So that's going to be a drag on your SG&A. And then you add in the $50 million that Jeff was talking about, about the investments with EchoPark. And then finally, we've got a little bit, it's probably $5 million to $10 million of what, I would call, RFJ transition. Work that we need to do to run through SG&A. We've got a lot of opportunity with synergies with RFJ, but there needs to be some double work to get that in place. So it will definitely have a return, but you'll have that drag in the SG&A as well. So you got 6.4% increase in the wages. That's not the total comp that you see in the reports, but that's our corporate team, coupled with the investments that Jeff mentioned, and 5% to 10% on expenses for RFJ transition, and that gets you to the number that we're expecting for 2022.

[Rajat Gupta, JPMorgan]

Got it. That’s helpful. Thanks and good luck.

[Heath Byrd, CFO]

One thing more, just to be aware of, as you look at SG&A and overall I think it's very important that everyone understands in sort of the sequencing of our earnings. In Q1, it is always around 15%. It's never been more than 19% of the total year. Two, second quarter and third quarter runs around 25% each quarter. And then the fourth quarter is the remaining profitability. We've run that type of percentages and cadence for the last 15 years. And so as you model our bottom line, that is typically the way that it works.

[Jeff Dyke, President]

Yes. And I think if you guys refer -- this is Jeff. I think if you guys referred back to Heath's comments last year, we gave the same kind of guidance. And for whatever reason, the third and fourth quarter always get tossed up. They're always wrong. And I can't be stated any more clear here's the secret sauce. It's 15% in the first quarter, 25% in the second quarter, 25% in the third quarter and 35% or better in the fourth quarter. That's how our profit works and we've been very, very consistent in that over the years, and it played out exactly like that in '21. And guess what, it's going to play out like that in '22.

[Rajat Gupta, JPMorgan]

Got it. And you ultimately depend a lot on the new vehicle gross margin cadence, I guess, right? And it's such a big lever, but below that total?

[Jeff Dyke, President]

I'm sorry. Can you repeat that?

[Rajat Gupta, JPMorgan]

I was just saying, like, I mean, the new vehicle gross GPU is such a big unknown or, I would say. That has such a big influence on like the cadence or the seasonality of it, which just makes it a little difficult.

[Heath Byrd, CFO]

Keeping in mind is the new vehicle GPU that we mentioned earlier is that decreases that we're also going to increase volume of new vehicle sales as well.

[Jeff Dyke, President]

Yes, -- it's going to be 15%, 25%, 25% and 35% it's going to be right in that ballpark.

[Rajat Gupta, JPMorgan]

Okay. Great.

[Operator]

[Operator Instructions] The next question comes from Bret Jordan from Jefferies. Bret, your line is open, please go ahead.

[Bret Jordan, Jefferies]

Did you say what percentage of your EchoPark product came from auction in the quarter?

[Jeff Dyke, President]

Yes. So about 82%, 83%, somewhere in there. That number is pushing up or pushing down going into the first quarter. We're buying about 18% of our cars off the street now, keeping about 18% of our cars with trade-ins and vehicle purchases off the street. So that's been a big focus for us. A little harder to buy 1- to 4-year-old cars off the street than it is to buy 5, 6, 7-year old cars off the street as John Murphy was talking about earlier from BofA. But we're going to -- we believe we can move that number up to about 30% of our overall inventory, and we're working diligently on that. We've launched our first marketing and branding plan around that. That went out sort of December-ish time frame and that continues to gain strength. We're getting a lot more traffic into our site to buy vehicles. So you can expect that number of purchases off the street and trade steps for EchoPark to grow to the 30% range. And then it will grow even further as we expand the portfolio to selling 5 and 6 and 7-year old cars.

[Bret Jordan, Jefferies]

Okay. And on pricing, I mean, obviously, your deck shows that you're selling 3-year-old or 4-year-old cars at prices that would be comparable to 5 or 6. As you sell 5 to 8, are you pricing more in line with the market? Or are you still trying to be below the competitive price significantly?

[Jeff Dyke, President]

Yes, we'll still be below the -- we'll still have a competitive price advantage, but we'll have positive margin on those vehicles. And we see that right now in the stores that we're selling those vehicles that our margins are much better overall in the stores from a front-end perspective, in the stores that we sell 1 to 8, then we do the stores that sell 1 to 4. It's just the 1- to 4-year-old stores, the volume is significantly higher because the price advantage is so much greater in normal times.

[Bret Jordan, Jefferies]

The smaller front-end loss, smaller F&I on the back end, just how to think about it.

[Jeff Dyke, President]

That's how we look at it. But for a blended number overall, that's about that same $2,500 range.

[Bret Jordan, Jefferies]

Okay. And as you see more of the EchoPark online test market, are you seeing the F&I attachment comparable to what you saw in the original larger in-person EchoPark stores?

[David Smith, CEO]

Yes, absolutely. We're seeing extended warranty penetration at over 50%, which is in line with what we're seeing in store. And what consumers are saying is they love the transparency, and they love the value reframing we do with them online. You talked about how much the extended warranty costs but versus repairs that they would potentially have to make down the road. So very positive feedback from consumers and our F&I penetration has exceeded our expectations to date.

[Jeff Dyke, President]

Yes. That's been the best single -- I mean the performance of the website is fantastic from a metric perspective, but may ensure it's a great relief given our model, we roll that side out and here comes our warranty penetration and here comes our finance penetration. And for those to really improve over what we've seen at the store level is just great. That's fantastic news for us and gives us a lot of energy enrolling that side out everywhere.

[David Smith, CEO]

Yes. And this is David Smith. And that's really to highlight, that's our benchmark, right? That's our best or for success that seeing that new website work in that way, we're making at least, if not more, than we are in an in-person transaction. That's the key. And that's what we're seeing. That's a big takeaway from this call.

[Bret Jordan, Jefferies]

Okay. And then I guess I might have missed this. But I mean, obviously, you talked a few quarters ago or a couple of quarters ago about sort of evaluating EchoPark and alternatives. Is the disruption in the market and obviously the craziness around used vehicle sourcing and margin, delaying that? I mean, is there any update on that strategy?

[David Smith, CEO]

This is David. No, we don't have any additional comment on that from our Just please refer to our previous disclosure.

[Bret Jordan, Jefferies]

Okay. Great. And then 1 last question, and this goes back to the prior as far as the breakout on a quarterly profit contribution, 15, 25 -- 25, 35. Is your feeling, I guess, the read through and obviously, GPUs at very high levels, is your feeling, I guess, on the full year that GPUs will stay relatively consistent in the sense of your outlook as far as the supply that we're going to be running these front ends that are still at very high levels and relatively stable?

[Heath Byrd, CFO]

Yes. If you look at our internal models, is basically flat across the board. Again, the RFJ impacts and their mix has a little bit of an impact. It’s just going to be sort of the mirror image of 2021. You're going to -- we're going to end up, if you put them together, they're going to be sort of a mirror image when it comes to our new gross.

[Danny Wieland, VP of IR]

And Brett, this is Danny. I mean I think to Heath's point, if you look at what the second quarter of last year looked like when we were in the high 30-day supply, we were running just shy of 4,000 new GPU, but it was close to an 18 million saw because we had the inventory to support that. And as GPUs come down, that's going to imply that inventory or at least production is increasing. So we believe, as David just said that the volume could offset from an overall earnings perspective, the volume could offset the GPU compression to where it may affect the overall earnings level for next year, but it doesn't affect the cadence in our view from the quarter-to-quarter.

[David Smith, CEO]

Yes. And Brett, if you look at it, I don't care what branded is, we are substantially sold through the pipeline on all new vehicles that we have at Sonic. It is substantially sold through. So the demand is there. A little more inventory. I believe the margins may come level off a little bit but a lot of volume. So we don't want 60-day supply inventory. We don't need more 45-day supply inventory. They could just get it back to the 20- and 30-day supply you got great demand, great margin, and it sets up '22 and really '23 for just to be fantastic years for the industry.

[Bret Jordan, Jefferies]

Okay, great. Thank you.

[Operator]

There are currently no further questions. So I will now pass the conference back over to David Smith for closing remarks. Dave Smith, please go ahead.

[David Smith, CEO]

Thank you very much, and thank you, everyone, and you all have a great rest of your week. We appreciate you attending the call.

[Operator]

This concludes the Sonic Automotive Fourth Quarter 2021 Earnings Conference. Thank you for your participation. You may now disconnect.