Q4 2022 Sonic Automotive Inc Earnings Call
Good morning, and welcome to the Sonic automotive fourth quarter 2022 earnings Conference call. This conference call is being recorded today Wednesday February 15 2023.
Presentation materials, which accompany managements discussion on the conference call can be accessed at the company's website at IR Dot Sonic automotive dotcom.
At this time I would like to refer to the Safe Harbor statement of the private Securities Litigation Reform Act of 995.
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 by.
These risks and uncertainties are detailed on the company's filings with the Securities and Exchange Commission.
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 with the Securities and Exchange Commission earlier today.
I would now like to introduce Mr. David Smith, Chief Executive Officer, Sonic Automotive Mr. Smith, you may begin your conference.
Thanks, very much good morning, everyone and welcome to the Sonic automotive fourth quarter 2022 earnings call.
As he said I'm, David Smith, the company's chairman and CEO joining me on the call today is our president Mr. Jeff Dyke.
Our CFO Mr Heath Byrd.
Park, Chief operating officer, Mr. Jim King.
Chief digital retail off certain Mr. Steve Whitman.
And our vice President of Investor Relations, Mr. Daniel Island.
Today's Sonic reported another period of record financial results, including record fourth quarter and full year revenues.
<unk> from our fourth quarter performance include all time record quarterly revenues of $3 $6 billion.
13% year over year in.
And record fourth quarter gross profit of $576 million up 9% year over year.
Fourth quarter GAAP EPS reflects a $320 million pretax noncash impairment charge again, that's a noncash impairment charge, resulting in a net loss of $5.22 per share.
Excluding the effects of the noncash impairment charge and other nonrecurring items, we reported adjusted earnings per share of $2 61.
For the full year, we reported all time record annual revenues of $14 billion.
13% year over year.
And all time record annual gross profit of $2 $3 billion.
Up 21% year over year.
Full year, GAAP EPS was $2.23, including the effects of the previously mentioned noncash impairment charge.
Excluding onetime items adjusted EPS was $9.61.
Our fourth consecutive year of all time record annual adjusted EPS.
I'm extremely proud of our team's performance in the fourth quarter capping off another incredible year for Sonic automotive.
We could not have achieved these results without the continued support of our guests teammates manufacturers and lending partners.
Our team remains committed to delivering a world class guest experience in executing our long term strategic plan and we're excited to carry this momentum into 2023.
Before looking ahead to 2023 I'd like to add some color on the fourth quarter.
During the quarter, we began to see improvement in new vehicle production, which supported higher new vehicle retail sales volume at our franchise dealerships output.
Outperforming the industry volume change both quarter over quarter and year over year.
New vehicle gross profit per unit declined quarter over quarter and year over year, but was offset by higher volumes and incremental F&I gross profit driving growth and overall new vehicle related gross profit. Despite G. P a compression.
Our used vehicle business. Similarly outperformed the change in industry volume as a result of our diversified business model. Despite ongoing affordability concerns for the used vehicle consumer.
Used vehicle average selling prices have begun to decline, but still remain well above levels required to return to a monthly payment that is affordable for the average buyer at current interest rates.
Despite a rising interest rate environment.
Our performance continues to be a strength benefiting from higher retail unit volume and near record F&I per retail unit.
Our parts and service or fixed operations business remained strong with stable margins and volume and customer pay being complemented by improvements in warranty repair transaction volume.
So far in 2023, we have seen sequential declines in new vehicle GPU and volume due in part to the seasonal nature of our business as a result of our luxury brand waiting.
We believe this coupled with ongoing macroeconomic uncertainty and concerns around the effect of rising interest rates and elevated inflation on the average consumer could drive volatility in consumer demand and vehicle margins through at least the first half of 2023.
However.
We believe that our diversified automotive retail model positions us favorably to adapt our business to changes in market conditions as we progress through 2023.
As vehicle inventory supply demand began to rebalance and new and used vehicle pricing begins to move toward a new normal level. We believe any headwinds we may face in the franchise business should be a tailwind to echo park profitability and revenue growth minimizing the earnings downside to the consolidated.
Yes.
Coupled with our strong balance sheet and commitment to returning capital to stockholders.
We believe we are well positioned to continue to generate returns well above pre pandemic levels.
Turning now to our franchise dealership segment.
For the fourth quarter total franchise revenues were an all time quarterly record of $3 billion up 14% from the prior year period.
Adjusted segment income was $160 million down 3% year over year due to higher interest rates and segment adjusted EBITDA.
$213 million.
Which was up 4% from the prior year.
On a same store basis.
Fourth quarter franchise dealership revenues were up 12% from the prior year.
While gross profit was up 3%.
New vehicle gross profit was flat with a 5% increase in retail unit volume.
Set by 6% decrease in new retail G. P M.
260, $301 dollars per unit.
Used vehicle gross profit was down 29% driven by a 333% decrease in used retail GPU to 1400 $5 per unit.
I'll set partially by 6% increase in retail unit volume.
Parts and service gross profit increased by 12%.
With same store customer pay gross profit up 14%.
And same store warranty gross profit up 15%.
Same store F&I gross profit increased 11%.
On higher retail unit sales volume in fourth quarter record reported franchise dealership sediment F&I gross profit per retail unit of $2400 2400, $21 up 3% from the prior year.
As of December 31st our franchise dealership segment at approximately 24 day supply of new vehicle inventory up from 18 days supply at the end of the third quarter.
But well below the typical pre pandemic December level of 55 to 60 days of ball.
As you're aware this state's supply figure includes in transit inventory.
Our franchise dealership segment had approximately 26 day supply of used vehicle inventory.
One five days from the third quarter.
And in line with our optimal target level heading into the first quarter.
Given ongoing new vehicle inventory constraints recent declines in wholesale market pricing and our current outlook.
We continue to be disciplined in managing our used vehicle inventory volume and pricing in order to optimize gross profit levels as we go through 2023.
Now, let's turn to Echo Park results.
We reported record fourth quarter revenues of $589 million for Echo Park up 2% from the prior year and gross profit of $41 million flat year over year.
Echo Park retail sales volume for the quarter was 17435 units up 14% from the third quarter and 11% year over year.
Echo Park average used vehicle selling price decreased 12% from the quarter from the third quarter, but at $29500 per unit.
<unk> remains well above target affordability levels.
We continue to focus on optimizing our inventory sourcing mix and expand our inventory affordability by including five plus year old vehicles and Echo Park inventory.
For the fourth quarter, five plus year old vehicles represented 19%, but that could park retail used vehicle unit sales volume, which was flat from the third quarter of 2022.
And our non auction sourcing mix was 28% of sales in the fourth quarter compared to 32% in the third quarter.
For the fourth quarter, we reported Echo Park segment loss of $33.3 million compared to $31 million in the third quarter.
And adjusted segment loss of $20 3 million in the prior year.
Echo Park reported an adjusted EBITDA loss of $25 $4 million in the fourth quarter.
Compared to a loss of $23.2 million in the third quarter and a loss of $14 $6 million in the year ago period.
This sequential increase in adjusted EBITDA losses reflects a steeper than anticipated decline in used vehicle pricing during the fourth quarter.
Which resulted in a $533 per unit decrease in front end used vehicle GPU compared to the third quarter.
At the end of December our Echo Park segment had approximately 40 day supply of used vehicle inventory.
Which was down from 57 days supply at the end of the third quarter.
We believe maintaining a tight day supply of used inventory is critical as we proceed through 2023.
With the expectation for further declines in used vehicle pricing in the coming months.
Benefiting overall affordability and consumer demand, but potentially pressuring gpus during the transition period.
As discussed on our third quarter call. We are continuing to take a strategic measured approach to our Echo Park expansion plans as we balance our commitment to long term growth with our current priority to improve Echo park profitability and maintain our strong overall liquidity position.
In light of an uncertain macroeconomic outlook.
In the interim we believe that the continued evolution of our Echo Park E. Commerce platform will allow us to expand the Echo Park brand reach without investing the capital to open additional store locations.
For the fourth quarter Omnichannel sales through our new E Commerce platform accounted for 38% effective box retail unit sales volume compared to 31% in the third quarter.
Furthermore, 99% of Echo Park volume during the quarter was sold end to end online up from 7% in the third quarter.
As guests continued to utilize our enhanced e-commerce purchase experience with out of market borrowers representing nearly 50% of our ecommerce sales.
We continue to believe that our omni channel ecommerce platform combined with measured expansion of our physical footprint over the next two to three years.
Well I'll Echo park to reach 90% of U S population by 2025.
Supporting our long term goals for this business.
We continue to adapt the Echo Park strategy based on current used vehicle market conditions and remain confident in this segments long term growth prospects as the used vehicle market continues to normalize.
We are seeing the initial benefits of our cost of expanding our inventory offering to include five plus year old vehicles and shift our inventory sourcing away from wholesale auctions and expect adjusted EBITDA losses to improve throughout 2023, now targeting breakeven adjusted EBITDA in the first quarter of 'twenty.
24.
As we gain further visibility on our future used vehicle market conditions and the effects of strategic adjustments. We've made it up with Bob will provide an updated Echo park economic model and long term guidance.
As we announced earlier. This morning, we are very excited about our newly created power sports operating segment, which further diversify sonics retail portfolio.
We are very optimistic about the growth opportunity in this space and we'd like to welcome the teams from Black Hills, Harley Davidson in Sturgis, South Dakota T.
Mancuso power sports in Houston, Texas, and Horny tied Harley Davidson in temple, Texas to the Sonic automotive family.
In partnership with this group of Historic Power Sports brands, we believe we can realize incremental growth opportunities and expand our reach in this adjacent retail sector worth an estimated $34 billion in the U S.
With significant opportunity for consolidation.
In 2023, our power sports segment is expected to add approximately $200 million in annual revenues and adjusted EBITDA margins between eight and 10%.
Now turning to our balance sheet and capital allocation, we ended the fourth quarter with $805 million in available liquidity, including $501 million in cash and floorplan deposits on hand.
As an update on our share repurchase activity.
Since October one 2022, we repurchased approximately 700000 shares of the company's stock for approximately $35 $8 million.
Or an average of $48 25 per share.
In total during 2022, we repurchased five 6 million shares.
Representing 14% of shares outstanding as of the end of 2021 for approximately $262 million or an average of $47 eight per share.
As of today, we have a total of $455 million in remaining share repurchase authorization.
Presenting approximately 20% or so sonics current market cap.
Additionally, I'm pleased to report today that our board of directors approved a quarterly cash dividend of 28 cents per share payable.
Payable on April 14th 2023.
To all stockholders of record on March 15th 2023.
In closing our team is prepared to continue to execute at a high level in 2023, while remaining adaptable to changes in the automotive retail environment and macro economic backdrop.
Further we continue to operate our business with a long term view and remain committed to a disciplined.
Turn based balanced capital allocation strategy to maximize long term stockholder returns.
This concludes our opening remarks, and we look forward to answering any questions. You may have thank you.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. He.
You May press star two to remove yourself from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of John Murphy with Bank of America. Please proceed with your question.
Good morning, guys, maybe if I could start with the sort of a quick broad question here, but what are your planning assumptions generally for.
For 2023, where you think Gpus will go and what kind of SG&A leverage that you may have in 2023 roughly.
So John it's Jeff Dyke, you know, probably a 10% increase over this year somewhere between 14 and a half in 15 123 is what we're projecting in our numbers.
Margins is the big is going to be the big question, certainly, they're not going to stay where we saw them you know north of $6300 in the fourth quarter in the first quarter, we're seeing that number in the high fives.
We expect we expect that to probably continue in the first quarter, but as we go through the year that number could dip down into the high fours 4800 somewhere in that ballpark, but at the same time, new car volume will increase so we're projecting that we'll have higher new car volume lower.
Front end margin good sustained economic profitability I think our F&I targets for the year of about $30 25 to 50 Bucks somewhere in that ballpark off of where we ran last year, but.
But it shouldn't be a really healthy new car a year from our perspective. The mix is just gonna change more volume less front end gross and we expect that to sustain through the rest of the year you want to comment on SG&A Yeah sure.
You look at just the franchise business you know I think it will run in the mid sixties from an S. T. A N a perspective.
Overall, I would expect it to be between 65 and somebody still in the upper sixties as an overall company. So that's where we've got a couple of additional investments. This year are we'll be talking about branding and Petco park going forward in certain markets.
Because previously and some investments that we're doing and some technology innovation for the future. So that's driving it up a little bit but those are our forecast for now.
That's incredibly helpful. Thank you just a second question on the power sports business I mean, it seems like Youre walking into this not running into its an interesting sort of adjacency just curious where do you think that you'll ultimately goes in in size and scale and inside the company.
It sounds interesting sounds pretty profitable and relatively fragmented.
It's really fragmented. This is Jeff again, I mean look we're buying two to five times, which is kind of in and around where we're being we're valued you buy a franchise dealerships six to 10 times, we've gone in our first purchases and he told Harley Davidson.
We put in some technology some pay plans did a few changes in there now setting all time record volumes and profits, which is great for US. We think we can do that in the rest of the stores that we have but we're going to spend the next 12 to 18 months as you said walking here, we're going to develop playbooks processes technologies their technology is far behind what we see in <unk>.
Automotive retail.
So we think we can help there just super Super people are very talented very bright if we found in all the acquisitions that we've made there could be a tuck in here or there over the next 12 to 18 months, but overall yeah. Just the diversity of our portfolio. I think this is a great fit for us it's adjacent to what we do and I think we think it is.
Just a really smart move, but again, we'll walk into that and if you look at the diversification and what's going to happen with Echo Park. This year Echo Park is going to get better and better from an EBITDA perspective throughout the year as the franchise business becomes a little more challenged and as we walk into run into 24 here with Echo Park, we should be EBITDA profitable by by the <unk>.
First quarter. So if everything continues to happen the way, it's happening over projecting to happen from a depreciation perspective on pre owned car. So we liked the idea we think it's a really good fit a great valuations, but work will play by ear and see how things go over the next 12 to 18 months.
Maybe I'll just sneak in one last one on used vehicles sourcing I mean I'm. Just curious you know as you see this year progress you know what is your expectation for used vehicles sourcing at the at the franchise side as well as the Echo Park side I mean, you know how reliant we'd be on auctions versus self sourcing.
Hey, John This is David Smith, I, just wanted to finish up on the on the power sports.
Our team has been very involved in including Ah Ah Ah.
A big group of us going to Sturgis and seeing what a phenomenal experience that is it's it's important to remember that we are you know the acquisitions. We made are very very high quality, we believe.
Theyre, just one being as a hit.
Historic acquisition for them for the power sports industry and so the opportunity is that it's you know they've got half a million or so people go to to Sturgis. It's it's a phenomenon I'm very amazing profitability, but with huge upside as well, but that we are that we all saw.
When we looked at that and with Mancuso and with.
The Huntington Harley Davidson, so they're the ones that we've seen have.
Each and every day and we've had them we look at the numbers and the opportunity when you're talking about what is it I mean, it's.
It's really I mean, we see new opportunities coming along you know every week yeah. There there's no shortage of opportunities to buy stores, but again you know this is new for US we want to take our time do this the right way.
But it is you know, it's nice revenue, but great profitability in and well see how it goes there's just we're excited about we're gonna be disciplined about where we go from from here with it so.
And then onto your are your other question about yes about your sourcing mix look we're buying more and more cars off the street I do think as retail prices dropped from a premium perspective, theres going to be more availability of vehicles at the auction that gets us back into our Echo park rhythm a bit so it wouldn't surprise me to see you know some of the percentages are a little higher now drop into the 15% to 20%.
Range in terms of non.
So it turns a sourcing cars outside of the auctions. So so we'll see how that goes through the year, but certainly as prices dropped more cars are going to be available in the one to five year old category and that's going to play right into our hands. This is what we've been predicting that predicted it on the third quarter call the slope of the drop in depreciation was.
Faster than we thought would happen that's flattened out now and we think that will flatten out for a couple of months, but as we roll into April and May that depreciation trend is going to start again, and we think we'll see sub 25000 prices as we get towards the fourth quarter when that happens it's opened the door for Echo Park, that's our diversification model.
And it's just going to open the door for us to get to back to where we were from pre pandemic levels in terms of profitability. The volumes coming we had a nice fourth quarter with Echo Park in growth January was up 30% in volume February is tracking the same February as margins are getting a little bit better, which we would expect with a flattening out of the mark.
But the prices are still too high the gaps not big enough between new and used car pricing, yet, but it's getting there and as that happens all of those things played right into our hand, and as we've been projecting Echo Park will come Roaring back from an EBIT perspective.
I'm sorry in the self sourcing and also thank you for that and the franchise business I mean, I mean as far as you use business and franchise dealers.
We're buying a lot more cars off the street than we ever have right now, but we are starting to buy some more cars at auction lets just say in the third and fourth quarter that number was running 500 cars a month, it's probably running in the 12 to 1500 cars a month now and that'll probably hold steady through the rest of the year. We are sourcing a lot more cars off the street and that's helping our margins.
And where we are from franchise and we're we're in such a low day supply that if any tweaks in the marketplace. We can outrun real quickly I think we got a 26 day supply there or Echo Park does supply is actually a 30 day supply when you add north West's motorsport from the RFA acquisition that puts us up to 40. So both our day supply is that both at both Echo Park and the franchise stores are in Packable.
Right.
And we'll keep it that way as we move through 2023.
Sure.
All of these returns will actually help that as well you know we don't expect that to be very large in the beginning of the year, but as that increases that's going to help us sourcing at the franchise as well.
Okay. Thank you very much guys.
Yes, Sir.
Thank you our next questions come from the line of Daniel umbrella with Stephens. Please proceed with your question.
Hey, Yeah. Good morning, guys. Thanks, I had a question I just want to start following up on that prior answer I think you said January demand if I heard you right. It was up 30% and Echo Park.
I'm curious to know what you think is it just that prices have fallen enough to spur demand is it early tax refund season, I guess, what's driving that notable pick up in and do you think this is a head fake or have you seen enough data to say, maybe we've seen a bottoming from a used car demand standpoint at Echo Park.
And just sort of answered this.
Ah mitigates I'll jump in on this one because I think it's really fantastic. If you. If you were in some of our <unk>.
Internal meetings.
It's played out exactly how we thought other than some of the.
What was booked became a historic price drop in used vehicles other than the speed at which that happens. It's played out exactly how our Echo park team thought it would as far as the values of used vehicles.
100% I don't think it's a head fake the you know it's flattened out now in the first quarter, 100%, it's the average retail selling price dropping but that's that's the difference. It's all about the payments we've gone from $31500 down Echo Park Northwest Motorsports somewhere in the $27000 range.
And that'll continue to drop it's going to flatten out until the end of March maybe the end of April but no more than that and it'll start dropping again as that continues you're going to see this kind of growth rate. It's what we expect them. You know we sold 57 5600 cars in January we'll do a little better than that.
In February , but we're projecting nine and 10000 cars per month by the end of the year and that puts us in the positive range from an EBIT perspective, or at least breaking even there and getting positive in the fourth quarter. So early in the first quarter of 'twenty four or so.
We're well on our way.
As long as this trend continues and I don't think it's a head fake look new car inventories coming back.
The suppliers are increasing domestic supplies are increasing.
To see that across the board.
And as that happens that you just can't help but have a drop in used vehicle valuations. It's gonna happen, we've been saying, it's going to happen, but that's also why you run a really tight days' supply if you're caught up with a 40 50 60 day supply right now.
You've got problems coming your way and we just don't have that we've been very disciplined as we have in the past probably his disciplined today as we've ever been and we're ready for this and it's exciting times for Echo Park.
That's a great update thank you as you've learned more about that demand is picking up what is what do you think the long term mix of these older vehicles last few years five to eight was kind of a plug to.
To meet that affordability headwind I guess as you see your core coming back what have you learned about where that five to eight mix could fit in and what it means ultimately for long term economics, given the higher profitability on those units.
Yeah look it's gonna be 15, maybe 20% is where our Echo Park model is one to five year old cars and it works and we've proven that the five to eight year old brings a lot more complexity and there are a lot harder to get great margin, we agree with you and we sell them everyday on our franchise business and we're starting a lot of them now.
At Echo Park stores, there's a whole lot easier to sell one to five year old cars are in our model.
And as that inventory comes back I think you'll see a drop in the overall mix. It wont go away it will be higher than it's ever been in historically.
Because we like the margin it's there, but it's just not going to be as big a percentage of the mix as it is today.
So I'd call it 15% to 20% somewhere in that ballpark.
Got it and then last one for me just maybe on the franchise side, where Echo park trying to understand the long term impacts to your business from the big decline in lease penetration in the last few years, you know given the high luxury mix I'm guessing your lease penetration with higher we've seen that fall, which means less fewer lease returns in the coming years does that have.
Or your parts and service business as that customer comes back to you fewer times does that hamper. So were staying at Echo Park, just trying to think through what are the year two three and four impacts from this big decline in and leases underwritten last couple of years.
Yeah. It hurts their you know just you can't say it any other way I think we'll see 12% to 818% increases in leases this year or something of that nature it'll be primarily in the big lease markets that are driving that but it's certainly hurt hurt the business. That's a big chunk of our overall use carbon peripheral franchises use it represents around 30% to 35% of our overall.
And the highline stores could be higher than that and their auction lane cars too.
For Echo Park, so it's certainly hurt us.
But with the with the decline in pricing and inventory coming back we can find that inventory elsewhere, we're showing that we're buying more cars today than we bought in a long time at Echo Park them and we will continue to be able to do that as the prices as the prices come down. So most important thing is the gap between the payment that you make on a used vehicle and the payments.
Being made on a new vehicle that gap is widening new vehicle payments are going up prices have increased MSR fees are going up used vehicle prices are coming down that gap needs to be between 55, and 58% that of a new vehicle payment and when that happens it's game on for us.
Got it and so to be clear, you're not you're not thinking the lack of lease returns will be a hindrance to the core franchise used volume going forward you can overcome that headwind.
Not any more than it has been in the last 12 months I mean, its already been a hindrance and we expect that to continue but we're doing a good job in growing in sourcing that inventory from the customer that's buying that lease out the car is not gone. It's there with a customer they still have the car and we're sourcing that inventory buying it for them. So it's just moving from off lease too.
Buy off the street.
And as leasing comes back then that's just a big help to the industry not a hindrance. Yeah. He said. This is this is David he said it before the call Jeff about you know how how our team is an.
In our business and our teammates are they they adapt to the changing market and I think they've become better than ever about following up you know, it's our traffic management our emphasis on that it's been unprecedented in how we reach our customer base to acquire those cars.
Great well, thanks for all the color and best of luck.
Thank you.
Thank you. Our next question is coming from the line of <unk> Gupta with J P. Morgan. Please proceed with your questions.
Great. Thanks for taking the question I'm just following up on Echo Park.
Last time, you were profitable that business was at a much lower level of volume you know like six or 7000 cars per month.
Not exactly.
It would be close to 9000.
The difference there.
Primarily because of higher fixed expenses in the base are more stores I'm just trying to understand the bridge there.
Couple of follow ups.
Yeah, it's all of the above I mean, we built Echo park for growth and so our corporate expenses are significantly higher than they were in when we were breaking even or making money in the six to 7000, a month range, it's more like 9000.
It gets us to the breakeven number which we expect to be at before the year's over with and then the front end margin plays a big role in that as the prices get down below 25000 towards the 24000, Mark and then the depreciation flattens out to a more normalized depreciation schedule that is going to make a huge difference for us were just built to do real heavy volume.
It doesn't mean that if something changes or goes awry, we can't pull triggers to to reduce that overhead, but we didn't think it was the right thing to do.
The model works and we're very excited about that we've got a very strong franchise business, but that can pull us along here with great visibility.
So.
Hopefully that answers your question and this is David.
In addition to that I mean, we look at Echo Park is the.
Long term investments, we're making that investment in our Echo Park teams.
Training hiring and we're seeing it in the in the numbers. So we're seeing it in and we've got a world class guest experience you can see it in the in the feedback we are building our e-commerce.
Continuing to build out our e-commerce platform, its a long term investments not quarter to quarter.
And Roger this is Danny one more point to add there you know, we've got probably $10 million to $15 million of Floorplan interest headwind at Echo Park. This year with the higher volumes anticipated higher volumes on top of the higher rates that we've experienced and seen come about over the last three to five months. So that's another piece of what has helped US well you know caused us to raise that that overall breakeven volumes.
And the branding.
Yeah, we'll launch.
We'll launch the Echo Park brand in Houston, Texas, starting end of this month in March.
So there'll be some incremental expense that goes along with watching that brand is something that we did in Denver and our thoughts on location, which is a store that's really almost returned back to pre COVID-19 levels and a profit perspective, and a volume perspective.
And we just expect to start seeing that across the entire enterprise as we move through this year.
Got it.
Franchise side.
It was 60% in 'twenty two.
16.
423 is that is that just primarily you know the gross the GPU.
Would you be with moderate anymore.
Is there anything else you know are driving that increase or any other buckets that you would point out in terms of investments.
It's really a couple of things the only incremental investment is going to be in the I T. Innovation that we're doing will be spread across central Park and the franchise is the biggest driver is your denominator.
Gross.
Yeah.
Got it got it.
Parts and services any color you can give in terms of puts and takes for 2023.
Maybe across different segments, now, obviously very strong trends you're exiting the year, but now how do you see your 2022 we're playing out there yes.
Yes. This is Jeff mid to high single digit growth, if not a little better we saw.
12% growth I think in January .
And we couldn't be more excited about where we are from a fixed perspective, we've got a lot of internal projects going on there, including sourcing technicians are which is really important piece of this overall mix.
And so it should be a fantastic year from up from a fixed perspective and to be honest, there's internal projects you know.
Really the first time that we're putting a focus on traffic management as it relates to service them.
Marketing, even at the unsecured level, some innovative things with the manufacturer who's helping us with so there's a lot more focus on bringing customers in and retaining them. Then we really have done in the past. So I think we'll see that pay off as well.
Got it great.
Great. Thanks, Thanks for all the color.
Thank you. Thank you.
Thank you. Our next question is coming from the line of Bret Jordan with Jefferies. Please proceed with your questions Hey, good.
Morning, guys.
Morning.
Did you give a little more color around the power sports segment sort of Asps and N. G. P. You ranges for new and used and maybe what does the service business looked like in that space.
You know amazingly the margins in the power sports business are fantastic I mean, we're averaging front end margin, it's a little different but from Black Hills to man Coos of the front end margins are in the 3000 to 3500 dollar range backend margins around a thousand somewhere in that ballpark and we think we can help there.
In a big way with warranties and other things of that nature that we're working on in the volumes. It depends I mean, if you're talking about Harley or we're talking about metric, which is everything else, but in men, who said we sell see dues, we sell Polaris, we sell all kinds of different items and the.
Volume is solid and it's been solid since the date of purchase so we expect that to continue.
The I don't I don't know that I would call it pent up demand, but there's certainly a lot of desire for that product at the same kind of idea that you see on the new car sales last year, where we just didn't have the product to sell because the manufacturers haven't been able to get it to us that's loosening up a little bit just like we see all new cars.
But great margins, great volume, great profitability and great multiples. So we think it's an opportunity again, we're walking into this as we said earlier, but we've got 13 locations now and will spend again in the next 12 to 18 months developing our playbooks our processes our technology get those all.
Installed and then we'll see what the future holds for us and I would just add to that that this is David that we yeah. We did our research we mentioned.
I mentioned earlier.
Also met with Harley Davidson, we loved the team there.
Peter ship, and we love, where they're headed and yes.
Brand loyalty and the customer loyalty, it's <unk>, it's absolutely incredible said there's a.
We tried to again, we tried to get into it with buying you know really.
The top notch to the best of the best and we think we did that with with the stores that we are we bought so far.
Okay, Great and then a question on incentives, obviously, you're not big in for it and its Atlantis, but one of your peers was talking about increasing price.
Actual activity are you seeing that more broadly across other brands now as supply comes back or is it really pretty localized.
It's localized we're certainly not seeing that on the highline brands, maybe just a little bit to incentivize leasing.
We do have one very large grocery store.
And Dave Smith Motors, which is the largest grocery store in the world and you know where that service is really just the stop sales on 20 530 500 trucks you know.
Instead, it was gonna come back as inventory comes back and and as that starts rising and they've got a turn out of inventory that's going to happen in margins are going to fall.
We're working with our manufacturer partners to make sure they understand keeping that day supply at a reasonable level called out 25 to 35 days instead of pre pandemic 60 to 80 days is the right way to run this business and I think they all agree with that I hadn't heard one of them say that they don't.
Because profits are at all time high and you're.
The only way to screw that up as ourselves and so I think the manufacturers recognize that and they'll do a good job.
Trying to keep incentives down which will keep our you know pricing somewhere in the MSRP range as we move forward.
And then one last question I know historically, you were not moving inventory from franchise dealerships to help feed Echo Park is that still the case or is there an opportunity to.
Internally source some of the Echo Park inventories are getting older cars that maybe you don't want a salad a franchise dealership no. That's still the case, we sell everything at the franchise dealerships unless we have to push it through an auction. So that's still the case, we typically don't move inventory around between the two we did that <unk> and I did that in a different life in that really.
Didn't work.
So we've tried to stay away from that its a great idea.
But what you end up doing is you know the franchise stores lose out on volume.
And you've mess up their rhythm and so we prefer not to do that unless it's just absolutely necessary. If we wanted to echo park stores to be able to stand on their own their own eat what they kill.
Thank you.
Yeah.
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Our next questions come from the line of Diego Ortega with Morgan Stanley . Please proceed with your question.
Hi, good morning, I'm here on behalf of Adam Jonas.
A quick question ABS data showing that the auto borrower starting to feel some pressure.
Curious on your view on the consumer and demand going into 2023, and you mentioned that you know the volumes would be higher and especially with increasing affordability of the monthly payment, but I was just curious on your consumer views going into the year. Thanks.
I mean, we haven't seen anything yet that would tell us that consumer demand is just dropping way off I think it has a lot more to do with the average retail selling price of the vehicle than it does at this point the interest rates, depending on what happens with rates as we move forward.
It certainly can cause some volatility and certainly can cause floorplan issues, because our floor plan number is gonna be a hell of a lot higher this year than it than it has been in recent years, but overall, we've just not seen that the demand for pre owned cars is there.
And is that average retail price starts dropping there's pent up demand there.
And we will see that both on our franchise and Echo Park business.
Certainly it can play a role if you're financing and $80000 of online car or luxury vehicle.
But that certainly can play a role we just haven't seen it yet.
You look at general industry media definitely credit is tightening and you know this.
This is Ethan all the way if I look in my one concern going into 2023.
Is affordability is the economy and as rates go up you know I do think that it has the potential of impacting and he has penetration how people shop around a little bit more and so affordability is absolutely concerned we haven't seen it materially impact us at this point, but it is one of our concerns going into the year and you've got to imagine.
People, who have been you know people have been waiting for that used car prices to come down right as we've been saying and as soon as it does they're going to jump in the market and buy the car that they've been waiting to buy and we're seeing that now I mean, you look at our Echo Park volume itself like I said in January 30% training. The same in February if not even a little better.
And the franchise business is really strong as well it used business is really strong that will continue to get stronger as the prices dropped because there is definitely pent up demand there.
Great. Thank you.
Thank you.
Thank you we have reached the end of our question and answer session I would now like to hand, the call back over to David Smith for any closing closing comments.
Great. Thank you everyone. We appreciate you being on the call have a great day.
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