On today’s show, we welcome back Jeff Dyke, President of Sonic Automotive, the fourth-largest U.S. dealership group. In this segment, Jim and Jeff discuss downsizing, the state of the used car industry, disruption from Tesla, and what’s on the agenda for EchoPark.
VIDEO TRANSCRIPTION:
Jim Fitzpatrick: Glad to have you back on the show Jeff.
Jeff Dyke: Glad to be here this morning, thank you.
Jim Fitzpatrick: Yeah, great. Let’s kind of jump right in here. Talk to us a little bit about fourth-quarter earnings, seems they were a little lower than expected. We’ll talk a little about some of the downsizing issues and such and the overall direction of Sonic Automotive and where it’s headed now.
Jeff Dyke: Yeah, sure. Well, a lot going on in the fourth quarter, it was really all year last year. As you are aware, I made public, you know Honda and BMW represent about 40% of our revenue and nearly that in our profits and both of those brands really struggled throughout 2018 and fourth quarter was no different. As a matter of fact, BMW got even worse and so it was just a difficult quarter and when they represent that much of your overall mix, both in revenue and profitability, it makes it hard to hit the numbers that we forecasted.
Still overall, when you look at used and fixed and some of the things we did, we felt good about where we are for the quarter, but it was just too much to overcome and so that was … there was a lot of scuttlebutt about that and fortunately, as we move into the first quarter, Honda is back up on it’s feet, which is great. We’re doing really well, we’re running up with them for the quarter so far and then BMW is launching new products. The X7, of course the Three Series, the X5 is launched and these products are bringing more margins, so our margins are really good in the first quarter, which is good to see, ’cause that’s been sort of flattish for the last few quarters and so we’re looking to have a really nice first quarter.
The new car volume is down, it’s been running down anywhere from five to eight percent for the last few quarters for us. This quarter’s no different, but our used car volume is way, way up, not including Echo Park. Our F&I numbers are … probably have an all-time record F&I quarter. Fixed operations is really good coming out of the chute, so we feel good about the first quarter and I feel good about the year.
Jim Fitzpatrick: Yeah. What do you attribute to the downturn in new car sales to?
Jeff Dyke: There’s just all kinds of issues that are going on out there and probably a lot of what was just being said in the press during the fourth quarter for the economy, raising interest rates. A lot of talk about the tax returns and all that stuff that was going on.
The new car volume’s just down and you know, we’re not losing any market share. Our market share is flat, but we’re certainly seeing a drop in the volume. But, look, it’s not anything to be afraid of from my perspective, because in my career, I’ve seen the eight, nine, 10, 11, 12, 13 million [inaudible 00:03:02] range, we’re still sitting at 16 1/2, 17 million, sorry that’s nothing to complain about, you just got to do a good job, [crosstalk 00:03:08], readjust, adjust your inventory levels, which we’ve done.
We’ve got a great day supply, both on new and used, we’re managing inventories and so, we’ll just adjust into the new market and a lot of our GM’s, quite honestly, really haven’t faced these kind of headwinds before, so they’re learning as we go a little bit, but we’re looking to have a nice first quarter and a great 2019 on the franchise side of the business.
Jim Fitzpatrick: Very good. You had some comments about Tesla that hit the press and its disruption, in perhaps your business there with BMW and such, can you elaborate on that a little bit?
Jeff Dyke: Yeah, sure. I mean look, they’re calling out to sell 300,000 cars this year and half of those in the California market and Sonic has a lot of highline stores in California; BMW, Mercedes, Lexus and if they’re going to add a 150,000 cars or a 125,000 cars in the market, that’s going to be a disruption.
We’re seeing that a little bit. I’ve got a lot of respect for that company, they’ve done a lot that most said that they couldn’t do. A little bit is a cult following Elon, as the world seems to do. Which is great for them, but our manufacturer partners are coming back and when you see what Audi is doing with their EBTH product, you see what Porsche’s bringing to the table, what BMW and Mercedes are bringing to the table. While they’re a little bit behind, I believe that you’re going to see a formidable fight and formidable product coming out of these manufacturers that have been doing this for a long time, as we move over the next couple of years. We’re looking forward obviously, to those products coming and hitting the California market, which would be a big deal for us.
Jim Fitzpatrick: What’s your view on Tesla being able to sell their vehicles directly to consumers and bypassing the franchise dealer system?
Jeff Dyke: Yeah, that’s a tough question. At the end of the day, you know, I’m fully supportive of our franchise system, our franchise laws and back those a 110%. We need to make sure we support the heck out of that, but I wouldn’t put anything past Elon and getting things done. You know, a lot of people said that he wouldn’t sell the number of cars that he’s saying and I sure as heck wouldn’t put it past him to be able to get some of those laws adjusted, so I think we need to do a good job of fighting that, but we need to be prepared if he is allowed to start selling direct and how we’re going to deal with that as an industry.
Jim Fitzpatrick: Right, right. Let’s switch gears a little bit. In the press recently, there was some talk about the CEO taking over and a five percent raise in increase amid downsizing. Can you address that today?
Jeff Dyke: Yeah, easy. David Smith became our CEO as Scott Smith retired and I think that when you move from a Vice President’s role into a Chief Executive Officer’s role, you’re going to get a pay bump, I mean it’s just natural.
Jim Fitzpatrick: Imagine that.
Jeff Dyke: Yeah, that’s all that was. Five percent was a small bump actually, in comparison to a lot of the other CEO’s in our industry and what they’re getting. No. I think some people just want to make news out of nothing, which is typical in this day and time. We didn’t look at it as an issue at all.
Jim Fitzpatrick: Sure, sure. Okay, great. Let’s talk about predictions and estimates for 2019’s first quarter. I know that you’re probably not at liberty to drill down too much, being a public company, but how’s it looking?
Jeff Dyke: Yeah, don’t want to end up in an orange jumpsuit, that’s for darn sure. Yeah, look, the quarter is looking good. Other than new car volume being off a little bit, our fixed operations business is good, our used car business is good, our F&I business is incredible and our used car business is on fire. It should be a nice quarter and look forward to talking to the street here in a few weeks.
Jim Fitzpatrick: Sure. Let’s talk about the used car industry. From your perspective, you’ve mentioned a couple of times that it’s on fire. Why is it on fire at Sonic and what’s that future look like?
Jeff Dyke: You know, I think that the combination between what we’ve done at EchoPark and EchoPark is just … I’m real excited to present this upcoming quarter and where we’re gonna end up. This will be by far our best quarter, both in volume and profitability and we’ve learned a lot with EchoPark and some of those things that we’ve learned we’re bringing to Sonic.
How we buy, the consistency in which we buy, the date supply that we run out, how fast we turn our cars and we already did a good job at Sonic, we’re doing an even better job now and I think when you combine all of those things, it’s made a big difference. You know, it should be a really good quarter, if not a record breaking quarter for us on the franchise side of the business and then Echo Park is just … you know, like I said, I can’t wait to present the numbers, it’s gonna be a lot of fun.
Jim Fitzpatrick: That’s great, that’s great. What are the future plans of EchoPark? How many stores do you have today and what will that look like in five years?
Jeff Dyke: We have eight locations today. Those are in Colorado, Texas, North Carolina. We’ll start to announce at the end of this quarter that we’re moving out of, sort of the Petri dish phase of getting the formula right and moving into the growth mode and between this year and the end of next year, we’re hoping somewhere in the 500 million to a billion in revenue we can add to the business, maybe more, we’ll see what that growth is going to be and there’s no number of stores that brings that because we have some stores … our Dallas store for example used 1600, 1700 cars this month and generate a lot of profitability, so it just depends on the market that we’re in and the amount of revenue that we’ll generate out of that market and we’re thinking 500 million to a billion a year, at a minimum, we’re going to be able to ad moving forward.
Now that we’ve kinda got our formula right, we’re in the right position, we’re gonna start moving and we’ll announce markets and where we’re headed at the end of the first quarter here and really start to kinda beat our drums a little bit, if you will, we figured this out and we’re very excited about where are with Echo Park.
Jim Fitzpatrick: That’s great. Carvana as made somewhat of a splash in our industry, both with dealers and also consumers out there. The notion that you can sit on your couch, in your sweatpants and purchase a vehicle and within a few hours, it pulls up at your front door on a flat bed truck. Will there be any kind of a component like that with EchoPark?
Jeff Dyke: There will be. That’s been part of, sort of getting the formula right and so we’ll announce in the coming month or so our ability to sell a vehicle online, but not only to sell a vehicle online, we’ll launch our car cash app and that app will allow a consumer to appraise their vehicle and our retail trade center will be handling the appraisal and we’ll offer that app to both our competition and the consumer and we’ll be the only ones out there putting the number on the car ourselves. We won’t be using any third party valuation tools or third party companies to put the number on the car.
Of course, we’ve been perfecting that process at Sonic for 10 years. We’ve had a retail trade center here appraising all of our guest cars for a long time, we now have that installed at the Echo Park store, so the app will get launched, it’ll be on the Apple app store here in the coming weeks and I suggest you go out there and try it, suggest everybody does.
Download that app and you know, Sonic put a number on that car, Echo Park put a number on the car and we’ll stand behind the car and come get it if the dealer or the customer chooses they want to sell us the car.
Jim Fitzpatrick: Like a CarMax, it could be a purchase right out, flat out, they don’t need to buy a car or trade the vehicle in with you.
Jeff Dyke: That’s exactly right and then I’ll even come get the car.
Jim Fitzpatrick: You yourself will come get the car? It’ll be Jeff Dyke … [crosstalk 00:10:35]. That’s pretty good service right there.
Jeff Dyke: That’s a good deal, yeah. We’ll come get the car. Very excited about launching that app. We’ve been working on it for a long time and I’m sure we’ll have some opportunities for it to sort of grow and meld into what we want further, but we’ve got it where we want it, so we’re very excited about getting it launched in the app store.
Jim Fitzpatrick: I bet. I bet. In five years from now, what do you think in terms of the number of stores?
Jeff Dyke: At Sonic, so you know, we’ve got about a 100 stores today. It doesn’t mean that we’re not out buying new stores. When I first got here, we had a 157 stores, we’re down to a 100, but our 100 stores are producing more, both in revenue and profit than they were when they were at 15. It wouldn’t surprise me if we downsized a little bit further on the new car side, but EchoPark’s going to grow.
Sonic’s approaching a 10 billion dollar revenue company, as a matter of fact, we’ll eclipse that this year with Echo Park revenue included and we expect Echo Park, over the next five years, to add 500 million to a billion a year, so you look at it, I think Echo Park will do over a billion in revenue this year in ’19, which is great, started four years ago and we said it’d take us about four years to get that thing to profitability, looks like we’re going to make that happen in the first quarter, so I’m very excited about that and if we can add that kind of revenue each year, you look at our market cap, you look where we’re at, I think Sonic and Echo Park have a really good story to tell. Doesn’t mean we won’t buy new car dealerships moving forward, but we’re not going to sit out there and invest 30, 40, 50 million dollars in a new car dealership when I can get a much bigger return out of Echo Park and drive Echo Park at the level that we’re driving.
Jim Fitzpatrick: Right. Right. That sounds great.
Jeff Dyke: Absolutely.
Jim Fitzpatrick: From your perspective as the President now, congratulations by the way … but the President …
Jeff Dyke: Thank you very much.
Jim Fitzpatrick: … now of one of the largest publicly traded companies out there, what are some of the things on the horizon that you’re kind of poking your head and say, we better watch out for this, you know the industry or your company better be aware of some of these things coming together. What would those be?
Jeff Dyke: Yeah, I mean look, you’re going to have to change the way you sell cars. We’ve been touting that here for years. You’ve got to bring the right technology in and you got to make the guest experience something that this industry is just not used to. You have to also be aware of what’s going on with ride sharing, with different ways of selling cars. You certainly want to make sure to watch Amazon, to watch some of these bigger companies, Apple with really deep pockets that could dive in.
I think you just need to be really aware of what’s happening and you need to diversify and that’s what we’ve done. If you look back at our company a few years ago, it’s all BMW and Honda and we’ve taken the steps to kind of shore that up, along with introducing Echo Park to the market, which is really turning out to be a big success for us now and so that diversification, I think, will help solidify our future and I think a lot of dealers out there need to make sure that they’re doing that and they’re watching the trends. You’re gonna have to sell cars online, you’re gonna have to have the right technology in place in order to make that happen and you’re going to have to make the investments to do it and if you don’t, you’re going to get outspent, people are going to run away from ya and I think it’s very important to pay attention to all of that.
Jim Fitzpatrick: No truer words have been spoken by Mr.Jeff Dyke, President of Sonic Automotive. Thank you so much for joining us Jeff, it’s always very enlightening. Our viewers and subscribers get a lot out of your visits here at CBT, so I really do appreciate it and the best of luck to you moving forward.
Jeff Dyke: Thanks so much. Let’s talk after the first quarter. We’ve got some fun stuff to talk about.
Jim Fitzpatrick: Great. I’m going to hold you to that.
Jeff Dyke: Sounds good. Take care.
Jim Fitzpatrick: All right. Thanks so much.
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