Sonic Automotive Inc., citing lower used-vehicle availability and higher wholesale pricing, has indefinitely suspended operations at eight EchoPark used-only locations and an unspecified number of delivery/buy centers, and it will take a significant second-quarter charge.
The Charlotte, N.C., company said it anticipates a one-time charge from $60 million to $80 million, noting that all but $3 million to $5 million is noncash exempt.
In a regulatory filing Thursday, Sonic said the charge will include the impairment of fixed assets and right-of-use leased assets from $50 million to $60 million and other items from $10 million to $15 million. Sonic, in the filing, said the majority of the impairment charge “relates to a non-cash impairment of long-lived assets. Sonic’s future cash expenditures related to this plan are expected to be between $3 million and $5 million principally related to severance costs.”
Sonic, in a late Thursday news release, did not identify which EchoPark locations it has indefinitely suspended.
The retailer said the action will allow it to send additional used vehicles to key markets and address current demand.
It wasn’t immediately clear how many jobs would be cut as a result of the changes.
Sonic said it maintains its goals for EchoPark to reach breakeven earnings before interest, taxes, depreciation and amortization by the first quarter of 2024 and reach 90 percent of the U.S. population, which it previously said it would reach by 2025.
“Sonic now believes that the timing of achieving this goal will be predicated on how quickly the pre-owned market normalizes related to inventory availability and pricing,” the company said in a statement. “Currently, Sonic’s focus is on improving EchoPark’s financial performance.”
The auto retailer said it expects continued volatility in the wholesale price environment into 2024. Improvements in wholesale pricing, Sonic said, would benefit the overall profitably of the EchoPark model.
EchoPark, which launched in 2014 in Denver, historically targeted pricing its used vehicles up to $3,000 below market to attract customers.
Stephens Inc. analyst Daniel Imbro, in a note to investors Thursday, said the company believes EchoPark’s adjusted EBITDA profitability won’t happen until the third quarter of 2024.
“We believe used supply will remain constrained for the coming years due to the dearth of off-lease cars in the marketplace and thus we are already modeling a longer timeline to profitability,” he wrote, adding the “update also increases our concerns around the used-only space, as we believe supply will become a larger headwind.”
Last year, Sonic widened the net for used vehicles to sell at EchoPark from 1 to 4 years old to up to 8 years old.
“Additionally, expected new vehicle production increases over the next 12-18 months will benefit pre-owned availability and further improve both consumer affordability and EchoPark profitability,” Sonic said in its Thursday statement. “These improvements in market conditions will enable Sonic to continue the expansion of EchoPark’s geographic footprint into new markets.”
EchoPark’s first-quarter revenue rose 4.6 percent to $650.5 million, a first-quarter record. The used vehicle-only business lost $46.8 million in the quarter, worse than its $35.3 million loss a year earlier.
EchoPark stores sold 19,980 used vehicles in the first quarter, jumping 34 percent.
Sonic ranks No. 6 on Automotive News‘ list of the top 150 dealership groups based in the U.S., with retail sales of 101,168 new vehicles in 2022.