Sonic Automotive Inc Q2 FY2020 Earnings Call

Good morning. And welcome to the Sonic Automotive Second Quarter 2020 Earnings Conference Call. This conference call is being recorded today, Thursday, July 30, 2020. Presentation materials, which management will be reviewing on the conference call, can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities 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 with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Sonic and EchoPark's Chief Executive Officer. Mr. Smith, you may begin your conference.

Thank you, and good morning, everyone and welcome to Sonic Automotive's second quarter 2020 earnings call. Again, I'm David Smith, the company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; and our Executive VP of Operations, Mr. Tim Keen. Today in addition to discussing results for the second quarter of 2020, I'll also provide an update on trends we saw within the second quarter and into July, as well as an announcement on our latest digital partnerships and accelerated expansion plans for EchoPark. After that, we'll be happy to take your questions. As the second quarter progressed, we continued to see substantial improvement in operating conditions and automotive retail consumer demand. While April was a challenging month that weighed on our quarterly results, May improved greatly and we saw a dramatic acceleration in the rate of recovery during the second half of June with rising consumer demand for new and used vehicles and service repairs in the majority of our markets. Limited new vehicle inventory in certain brands drove higher gross per unit and actions we took in April to manage our used inventory allowed us to take advantage of used vehicle sourcing opportunities benefiting used vehicle GPU in May and June. Some noteworthy operating improvements sequentially from May to June 2020 include, a 22% increase in new vehicle GPU, a 35% increase in franchise used vehicle GPU, a 16% increase in franchise F&I per unit, a 16% increase in franchise fixed operations gross profit per day, a 32% increase in EchoPark combined used and F&I gross profit per unit, and a 154% increase in consolidated pretax profit. Above all, we remain disciplined in improving our financial liquidity, controlling expenses and enhancing profitability at both our franchise dealerships and EchoPark stores throughout the quarter. These factors contributed to Sonic achieving adjusted EPS of $0.64, compared to $0.62 for the second quarter of 2019. On a GAAP basis, we reported EPS of $0.71 for the second quarter of 2020, including a $0.07 benefit from a nonrecurring tax item. In addition to EPS growth year-over-year, other second quarter operating highlights include; SG&A as a percent of gross profit of 74.9%, a decrease of 230 basis points; total SG&A reduction of $64 million or 22% compared to the second quarter of 2019; EchoPark revenues of $315 million, which was up 8%; EchoPark retail sales volume of 13,207 units, up 5%; EchoPark segment income of $2.6 million, up 52%; and available liquidity of $455 million as of June 30, 2020, an increase from $312 million as of March 31 2020. During the second quarter, we continued to improve our operating efficiency, building on our experiences during the last financial crisis, as well as more recent lessons learned during this pandemic. We are very pleased with the success of these efforts, which have enabled us to operate in a much leaner, more profitable manner. Through these initiatives, Sonic expects to decrease SG&A expenses by approximately $7 million per month or $84 million annualized as compared to pre-COVID-19 levels. I'd like to emphasize that this represents over 50% of our adjusted pre-tax profit in 2019, indicating tremendous earnings upside as we return to more normalized business levels. Moving on to our operating segments. Our franchise dealerships year-over-year performance reflects the challenges we faced in April and early May as a result of COVID-19. During the month of June, Sonic experienced a dramatic recovery in new and used vehicle sales volumes, gross margin, and fixed operations gross profit. This recovery accelerated during the second half of the month well ahead of our previous forecast. I'm very happy to report that this strong sales momentum has continued throughout the month of July to date. Now turning to EchoPark. As expected EchoPark sales experienced a V-shaped recovery in sales volume and improved profitability as the second quarter progressed. By June, EchoPark had surpassed our original prepandemic unit volume forecast for the month. As noted in our press release this morning, second quarter EchoPark segment income increased 52%, demonstrating the operating leverage and profit potential of this model. Notably, all of our EchoPark stores were cash flow positive in June 2020, including our Tampa store in just its second full month of operation. This momentum has continued into July as more and more guests realize the tremendous value in the pricing, quality, and convenience that our EchoPark stores offer enabling our guests to enjoy a modern hassle-free car-buying experience. Moving on to our digital retailing initiatives. As we announced this morning we are very excited about our historic strategic partnership with Cox Automotive and Darwin Automotive to develop a first-of-its-kind proprietary e-commerce platform and user interface by the fourth quarter of this year. This digital retailing partnership will be key to accelerating our EchoPark expansion plans. We are dedicated to elevating our online retail guest experience to match the great guest experience our guests have come to expect on-site at our franchise dealerships, at EchoPark stores, and at echopark.com. As you can tell, we are very excited about EchoPark's performance in this challenging environment and believe these quarterly results speak to the strength of this unique business model. EchoPark continues to outperform our original expectations, demonstrating the revenue growth, operating leverage, and profit potential of this brand. Further, EchoPark is a unique and scalable business model that has not yet begun to reach its full potential. Earlier this year, we announced that Sonic planned to grow its total revenues to $20 billion this decade. Since that time, we have actually revised our original EchoPark expansion strategy to achieve more rapid growth of the EchoPark brand. Based on EchoPark's extraordinary success to date and after an extensive review of our growth strategy over the past several quarters, we are dramatically accelerating our expansion of the EchoPark brand. While we remain committed to managing capital expenditure levels in the short term, the flexibility of the EchoPark model has proven greater than we originally anticipated. By capitalizing on EchoPark's highly trained guest experience center team, our centralized appraisal, inventory, and pricing procedures, as well as the development of the newly announced proprietary e-commerce user interface, we can strategically and efficiently build out a national footprint by opening new EchoPark delivery and buy centers in adjacent markets to our existing locations in a very capital-efficient manner, realizing returns on investment in excess of 55%. By utilizing enhanced online sales capabilities and the next to last mile delivery model, this will allow us to quickly expand EchoPark into new markets across the country with minimal capital outlays or overhead costs, as our customers nationwide will now be able to shop on echopark.com through our EchoPark mobile app or on-site at an EchoPark retail hub location. Based on these expansion plans by 2025, we expect to have a nationwide distribution network consisting of 140-plus EchoPark retail hubs and delivery and buy centers, generating over 0.5 million retail vehicle sales annually and $14 billion in annual EchoPark revenues. The plans that we've announced today are based on internal modeling we've been conducting for the past several months, even by our most conservative models and taking into account the more recent events of COVID, we believe these objectives are quite achievable and we have the team and tools in place to execute our plan. Our first delivery and buy center in Greenville, South Carolina opened last Friday and delivered its first vehicles on Monday. Progress is well underway for opening the next several markets and we look forward to providing updates on our progress and results over the coming months. Before we get to questions, I would like to take a moment to express how proud I am of the way our team continues to focus on meeting the needs of our guests, our teammates, and our business partners during these challenging times and beyond. I want to personally thank each of our teammates for all of their efforts and continued commitment to taking care of our guests as well as their dedication to the future of Sonic and EchoPark. This concludes our opening remarks and we'll be happy now to take your questions.

And your first question is from Rick Nelson with Stephens. Please go ahead.

Thanks. Good morning. I would like to follow up on this five-year plan quite interesting 140 distribution points. It looks like in the slide deck five hubs next year. Maybe you could speak to these delivery locations, how many of those you're thinking about for next year? And some color I guess around how you're going to attack these markets where you don't have stores?

Hey Rick, it's Jeff Dyke. We're planning to open 20 delivery and buy centers next year and aim to have three to four open this year. As David mentioned in his opening remarks, we already opened Greenville last week, and it's performing well. We're delivering cars in the market using our existing BMW store and property there. We also own property for EchoPark in Greenville, where we'll establish a small facility. The good news is that these facilities require minimal rent, with an investment of about $1 million to $2 million, compared to a medium-sized store that costs between $5 million to $12 million and a large store that ranges from $15 million to $25 million. This allows us to enter a market efficiently. Each delivery and buy center can handle 300 to 500 transactions a month. When combined with medium store hubs at 750 transactions or large store hubs at 1,500, it makes perfect sense. It enables us to expand the EchoPark brand into medium and large markets across the country much quicker than we expected. This is how we plan to reach the 140 unit target by 2025 and generate $14 billion in revenue. We're very excited about this progress, and the brand is thriving, which supports these initiatives.

And Jeff or David, how many hubs storage do you envision to achieve this plan, and how many delivery pickup locations?

So, it will be 20 delivery and buy centers a year and probably somewhere in the three to five range in terms of hubs a year. We'll attack the bottom half of the U.S. first and then you'll see us start moving into the northern part of the U.S. But yes, three to five hubs a year and around 20 delivery and buy centers a year.

And Rick, this is David. The key to understanding this model is that our retail hub centers, the large stores, also function as reconditioning centers. They are highly profitable while allowing us to recondition vehicles, which is very important.

And do you charge a fee to the consumer to get these vehicles to the market, or is that something Sonic will...

Within 200 to 300 miles, we are not charging any fees to consumers at this time. We will evaluate this situation as we progress and assess how it affects our margins. It will depend on consumer demand, so we will monitor its development. Currently, in Greenville, we are already delivering cars to the market without any charge, and our margins are satisfactory, meeting our expectations. We have a lot of flexibility in our model, so we will see how this evolves in the future.

Yes. Do you deliver to people's driveways or they come to a central location and...

No they're going to come to a central location. We're not going to deliver the last mile. That's where you had a lot of complexity and a lot of expense and so that's just not something we're going to do. We're going to deliver to the neighborhood so to speak. And so in Greenville, right now it's going to our BMW-MINI store where guests are picking the cars up. But again we have property right across the street from there and right across the street from CarMax, where they do a lot of volume in the marketplace. So we'll build something that's quite reasonable in terms of expense there. And delivering to the marketplace from our Charlotte and eventually in the first quarter our Atlanta location.

And Rick, this is Heath. I think it's important to note that we think there's value in having knowledgeable delivery, right? It's not someone that's driving a truck and dropping off a car and handing your keys and asking for a signature. It is someone that knows the vehicle can hook up your Bluetooth, can give you a full walk around and a true delivery on a product that's this complex as a vehicle. We think that is a better user experience than someone that knows nothing about the vehicle playing up and dropping off the car.

Yes. Do you anticipate any cannibalization of your existing hub stores as you push into these markets, or do you view it as incremental sales?

We view it as incremental sales.

Yes. It's 100% incremental, Rick.

When you look at most of our sales – existing sales, they're not – we're purposely targeting markets that are beyond that reach.

Okay. Got you. Your slide deck Page 16 talks about maturity of the hub stores and to use delivery and buy centers the types of volume. Any updated thoughts as to how long it takes to reach maturity?

So we were telling everybody that it takes a year to get a store or six quarters or so to get a store to where we feel like it's mature but they – we just keep beating all the maturity levels. And so you look at Tampa David said it earlier, it was profitable in the first two months of operation. So maybe three to four years for profitability and mature volume something of that nature. But we're learning every time we open one of these stores they keep opening faster they ramp up quicker. And so it seems like we go from zero to 400 cars sort of immediately and then we sort of ramp up over time. I think full maturity is somewhere in the three to four year range.

And something to keep in mind is that that Tampa store opened right in the depths of COVID. So it's not like it opened – I mean it really kind of opened in the worst time and still became profitable very quickly.

Exciting stuff. Thanks and good luck.

Best of luck, Rick.

Thank you.

Your next question is from the line of Rajat Gupta with JPMorgan. Please go ahead.

Thanks. Good morning and thanks for taking my question and I really appreciate all the details in the slide deck. They're very helpful. Just kind of question on just on the SG&A profile here going forward. You've talked about the $84 million expense reduction. You gave us the pro forma EPS base. But as you're expanding into this EchoPark growth strategy going forward with the delivery and buy locations, how should we think about the profile of SG&A to gross here in the near term, at least in the initial years of the – of this expansion plan before they hit maturity the things like marketing dollars or overhead costs or just things like that like guest experience management centers appraisals? Just curious as to, should we be expecting any kind of step-up in expenses here. Or like how are you managing this within the overall cost bucket for the overall company? And I have a follow-up. Thanks.

Yes. This is Heath. Obviously, and we reported previously, there's always some opening expenses as we ramp up. But we used to indicate there's about $2 million for every store and that's been dramatically less going forward. Obviously, the delivery and buy centers will be a lot less than that as well. But what we're finding is they are ramping up so quickly. And if you look at both the models and EchoPark is where our growth is if you look at EchoPark, it leverages so much better than the franchise stores. And so that $84 million is straight to the bottom line. But as we grow the EchoPark, again with the way that we're doing with the buy and delivery centers it's not going to – with the leverage of that segment it is not going to impact materially the numbers we've given you.

And Rajat also the existing EchoPark stores are performing so well that they'll offset the cost of the opening of new stores. So he's right the $84 million is going to drop straight to the bottom line that $7 million a month in SG&A reduction. You could just – you could take that and add that to what we did last year come up with a new sort of EPS model.

Got it. So the SG&A to gross like going forward should be like 72%, 73% range is that a good number to model in terms of...

Yes.

Got it. Got it. Okay. That's helpful.

And the interesting thing on the point that you made about advertising. Our advertising is our price right? So all of our advertising goes into Internet advertising, social media. It's not TV, it's not the brand advertising that some of our competitors do. And that allows us to bring the price down, drive more volume and make more profit. And so we've seen that we've got more leads that we can deal with now. Over 30,000 leads every month. And so that price is the advertising and that's what drives profitability in that EchoPark segment so quickly.

Got it. Got it. That's helpful. And just on this accelerated growth plan. It looks like this business, the capital outlays are not that much for the delivery centers. It seems like the business is starting to function more dependent of the franchise stores, cash flow is improving. Does this in any way accelerate a potential separation of EchoPark from the franchise business? Just curious as to what the latest thoughts are there. Can you just clearly – this is an attractive business. So just – can you just give any thoughts on that?

Yes. I'll answer that. Thank you for the question. But I think it's just – we're going to continue to grow the business as we put out there and we'd just rather not get into what-ifs and possibilities in that area. But we're going to – certainly, we want to execute on this plan that we put out today.

I would add that we believe we are the best option for both omni-channel and omni-product solutions. We offer a complete range of automotive needs, from new and used vehicles to financing options on the franchise side, in addition to the separated EchoPark, which allows us to cover the full spectrum of the industry. We see this as a robust model. Moreover, with our expansion plan, as we enhance our e-commerce capabilities and aim to excel in that area, we truly position ourselves as the omni-channel choice. Whether customers prefer to engage on-site, online, or somewhere in between, we offer that flexibility. There are synergies between our two companies, and we believe that is what adds to our value.

One thing we do, as mentioned in the previous call, is that many vehicles come to us at EchoPark, and we are able to share them with our retail stores, which has significantly increased the value and profit for our retail franchise stores.

Got it. That's a helpful update. I have a question about July, which is more short-term. Thank you for the information on SG&A to gross. I'm curious about your spending patterns within the month. How are you planning for August? What is your short-term outlook on auction pricing and sourcing pricing? How are you approaching your planning regarding GPU trends for the rest of the period? Thank you.

So, this is Jeff. July has been a lot like June. It's been a great month so far. We mentioned in our presentation that new car volume is around 15% to 20%. Used vehicle volume is up in the low single digits, while fixed operations are down in the low single digits. The good news is that our profitability is increasing and is expected to be around 140% in July. SG&A is stable, projected to be in the upper 60% range, just as we anticipated. I would expect that to continue into August and September. There's no reason to believe that new car inventory isn't improving, which means new car volume will also get better. Margins are strong across all areas, so we anticipate a strong third quarter.

And this is Heath. I'll add that when you look at that slide showing the 33, particularly for each month, it’s quite revealing. It's important to note that you can't compare June and July in terms of operational metrics, as June is typically stronger being a quarter-ending month. However, July is showing extremely strong performance on its own. Additionally, with our SG&A reduction at 141% of last year's pre-tax, we are very pleased.

I think we're planning a mid-September, sort of, third week of September update for you guys. We'll continue to send out our update slides for everybody on a monthly basis. So we can keep you kind of up to speed on what's going on and keep a lot of color coming at you in terms of our performance.

Got it. Great. Those have been super helpful recently. And thanks again and good luck.

Thank you so much.

Thank you.

Your next question is from the line of Armintas Sinkevicius with Morgan Stanley. Please go ahead.

Thank you for your question. In mid-June, you provided an update with an EPS target of $0.23 to $0.33, which was a significant improvement from the negative $0.50 in the first quarter. It’s also been surprising to see the numbers go up. Can you elaborate on what factors contributed to the increase from the $0.23 to $0.33 range to approximately $0.64, excluding the one-time tax benefit?

June was an exceptional month, possibly our best non-December profit month in the company's history, driven by volume, gross margin, and SG&A performance. Everything aligned for us. When we entered June, we had $0.01 on the books and generated $0.63 in profit for that month alone, making it a remarkable month overall. We've performed well across the board. EchoPark saw its best month ever in terms of volume and profitability, averaging over 560 cars sold per store and $550,000 in profit per location, with nearly $1,000 profit per vehicle. These are impressive numbers, and we anticipate this trend will continue. We're experiencing similar success in July, and we expect it to carry on through the third quarter. We are executing at a high level despite the COVID hotspots in Texas and Florida, and our expenses are excellent. We're learning and improving, with our sales associates increasing their sales from an average of 10 to 11 cars to 17 at EchoPark, and up to 25 to 30 in some locations. Our Charlotte store even reached an impressive 34 units sold per sales associate. We're enjoying this success and expect it to continue for the remainder of the quarter and into the end of the year.

It’s David. A significant factor is that our leadership team, from the top four or five leaders down to the stores and regions, has been with us for a long time, resulting in very low turnover. Many of them have experienced the financial crisis, so when the pandemic occurred, our team quickly adapted and executed effectively. Necessity drove innovation, leading to implemented reductions and a push for higher productivity per person. They realized they could achieve more with fewer people, and now they believe in this change and are engaged in the process. It's not just the top leaders; everyone in the stores understands they can succeed and are genuinely enthusiastic about it.

I'll also add that in June all EchoPark stores were cash flow positive. That's the first even our young stores like Tampa and Long Beach were making money were cash flowing. So that's a big deal for us. We looked and we say it's going to take six months, nine months to get them profitable. And we're getting them profitable in eight weeks. So the model is really paying off for us and that's why we're going to go on this tariff from an expansion perspective.

We continue to improve over time in how we open our stores, making the process much more efficient. If we had opened the Tampa store in the same way we did two or three years ago, it would not have been profitable. The team has learned how to open a store and achieve profitability very quickly, even during the pandemic.

Okay. And then with the new delivery and buy centers you mentioned the one in Greenville is located at a BMW-MINI store. That sounds like it will start cannibalizing the volumes from your franchise use. Is that the right way to think about it that the volumes on franchise use will start to deteriorate and then really ramp up the EchoPark volumes?

Quite the opposite.

It's a different customer.

Yes. And remember we're sharing inventory. So that BMW store is going to get all the trade-ins that we don't sell because we only sell 1- to 4-year-old at EchoPark. And if you look at our Denver market our stores in Denver are having record our franchise stores in Denver having record volume numbers at this point and our EchoPark stores are having record volume numbers. And so, I think our Denver market is selling 1500 cars something like that a month having record profit along with the franchise stores growing their use car business. So it's quite the opposite. That's why we keep these stores together. They work in harmony together. We sell a lot of cars out of franchise stores and we'll continue to do that even with the delivery and buy centers.

Okay. And then just the last one here. With regards to digital maybe you could get us under the hood there a little bit and share your thoughts on the Cox and the Darwin Automotive partnership. I know digital has been something you've considered in the past. I think the thought was maybe you do something last November. That got kicked down the road a bit. And here we are again. So just what's been the holdup to this point? And how do you envision it being differently? What do you envision the end result looking like?

Sure. This is Heath. From our perspective, e-commerce is a broad concept. It’s not just about buying a car entirely online, as that rarely happens even among competitors. E-commerce encompasses shopping, comparing prices, securing credit, obtaining financing, making down payments, receiving the product, and completing paperwork. Customers navigate through these various elements at different stages of their experience. Therefore, we need a robust infrastructure to support each of these components. If someone gets stuck at a particular step, we can seamlessly transition them to on-site or remote assistance with our centralized support. Darwin plays a crucial role in this process. We currently utilize Darwin to assist customers on-site, and now we're extending its capabilities into the online e-commerce domain, allowing us to easily convert customers who pause at the credit stage by providing immediate support. This is a vital aspect of our e-commerce strategy in the automotive field, which differs significantly from purchasing simple items like shoes. The integration of Darwin enables us to shift between various phases of the shopping experience. Additionally, we've thoroughly researched all available options and decided to partner with Cox Automotive. They have not previously developed a proprietary system for any dealership group, and they have agreed to do so for us. With their extensive technological resources and automotive expertise, Cox will enhance Darwin to provide a best-in-class user experience. As customers progress through the e-commerce funnel, we aim to ensure that the process is intuitive, user-friendly, and visually aligned with leading e-commerce platforms, making it much simpler for them. Our approach has been deliberate because we don’t want to hastily assemble something just for marketing purposes. We aim to provide a truly customer-centric shopping experience, which requires careful development. By combining Cox Automotive's capabilities with Darwin and our in-store experience, we believe we can become a leader in offering an omni-channel solution for our customers. Currently, Darwin is being rolled out for our franchise operations, with an anticipated deployment at EchoPark in August. Additionally, products from Cox Automotive and Darwin are expected to launch in the fourth quarter of 2020.

And this is David. It's crucial to recognize the size of this market. Even the largest competitors hold only a small portion of it. Our current EchoPark customers represent just a segment of the market. They enjoy shopping at our stores. The new e-commerce platform, as Heath mentioned, has been rolled out at a measured pace to ensure it can achieve significant profitability, as demonstrated by the 55% return on these deals. This will attract new customers who prefer to shop in that manner.

We've been very diligent with EchoPark and we're being very diligent with this process as well. And we've got a history of that. We want to make it right make it industry-leading. And when we got to get done it will be all of that.

Okay, great. Appreciate it.

Your next question is from the line of Bret Jordan with Jefferies.

Good morning. This is actually Ethan Huntley on for Bret. Thanks for taking my question. Looks like lack in new vehicle supply is expected to sort of continue to weigh on things here in the back half of the year, when you guys expect those levels to normalize? And then should we see this sort of offset by higher GPUs?

Yes, this is Jeff. That's exactly right. It will be challenging for July, August, and September, although we are seeing some improvement in inventories. However, the improvements won't be rapid. I expect to see normalized inventory levels around October or November. The good news is that low supply leads to high margins. We are experiencing strong margins and certainly seeing improvements from a gross perspective. New models are being introduced, which will all work in our favor as we approach the end of the year.

Got you, great. And then with some pockets of the country where COVID seems to be flaring up again, are you guys seeing any demand changes in any particular regions lately?

There has been some difficulty in recovering on the West Coast, and we've adjusted our trend analysis for you on a monthly basis as shown in the charts. However, Texas and Florida have not experienced any significant impact on our business due to recent flare-ups; it's primarily an issue of new vehicle inventory. We are taking all necessary precautions related to COVID for both our guests and associates, so we don't feel it's negatively affecting our business as much as the shortages in new vehicle inventory, especially on the East Coast.

Got you. And then just sort of high level. Do you guys have any internal projections on where you think Star will shake out maybe for 2020 and 2021?

Retail is expected to be around 13% to 14%, and likely the same again in 2021. Fleets are currently the most affected, particularly due to issues facing rental car companies like Hertz. However, as inventory begins to return, demand for cars will remain steady, leading to consistent performance from a new car standpoint.

Great. That's all I have. Thanks very much for taking my questions.

You bet.

Thank you.

Your next question is from the line of John Murphy with Bank of America.

Good morning guys.

Hey, John.

I wanted to follow up on the Cox Darwin development. You mentioned an interface and a smarter interface. Cox is affiliated with Manheim, which auctions around five million vehicles annually and reconditions many of them. I'm interested to know if there's an opportunity to source and recondition vehicles directly from Manheim, and then quickly retail them to increase inventory turnover while leveraging delivery and buy centers. It appears that partnering with them could be beneficial for your operations.

Yes, they are already a great partner, and we source most of our inventory from them. They do an excellent job for us. We have collaborated with them on several reconditioning projects, and they've made improvements in that area. We have ongoing discussions with them, especially regarding the centers near our stores. This is a reasonable consideration. In terms of sourcing, we are one of their top buyers in the country, and we maintain a strong relationship with them. They continue to do a fantastic job for us, and we source the majority of our inventory through them.

And it's really important to remember that this is a partnership like they've never done before.

Yes, they have not created a proprietary instrument for anyone, and historically, they have been unwilling to do so. However, there is significant competition, and their perspectives are shifting. When you combine their offerings with Darwin, which acts as a conduit, along with what we have already developed internally, it will result in an excellent product for consumers in terms of user interface.

Okay. And then also on the used car wing, I mean, is there any discussion or thought internally of building out a captive finco?

No. I mean, if you look at the progress that we've made in F&I and I tip my hat to JM&A who's just done a great job with us. Ally has done a great job with us. I mean, on our June numbers, I think we're a little over all 2100 all in. PUR, which is an all-time record for us, and that's sort of industry best, I mean I think automation may be a little bit higher than that. And so when you get into that level really doesn't make a whole lot of sense to take the capital go off and create a thin coat. So that's…

That's taking the risk. We're eliminating the risk.

There is no interest in taking on that risk. It does not provide any additional benefits for us. We have strong relationships with banks, and that is proving effective. Introducing more complexity would only slow us down, and we currently have enough on our plate with our existing plans. Adding that would create unnecessary complications that we prefer to avoid.

And John, we've actually see we've looked at it several times the return on capital is so low unless you have a high sub-prime population and we just do not have a high sub-prime population.

Got it. Okay. And then just lastly, I mean, what you're doing here seems to be much more focused on expanding rapidly in the used car market, which makes a lot of sense. But just curious as you look at some of the activities that are going on in the new car franchise side, where there's an acceleration in M&A activity, what do you think about that? And is there any opportunity in that direction, or is it kind of just full throttle higher returns, higher margins on the used side and that's kind of the direction you're going to go in more as far as growing the business going forward? I mean, what's the opportunity set on the new side? And why do you think it's kind of different than what some other folks are going after?

This is Jeff. We have a strong appreciation for the franchise business; it's really effective for us financially. We're actively exploring any potential acquisition opportunities and continuously assess them. We might pursue a deal occasionally, but the returns from EchoPark significantly outstrip those from our franchise investments, considering the capital required for those facilities. Therefore, it makes more sense to invest in EchoPark right now. That said, we are currently examining a couple of opportunities and will see how things unfold. Investing in EchoPark is proving to be more cost-effective.

Yes, this is David. I want our investors to recognize how dedicated our team is to maximizing ROI and managing our capital more effectively than ever in the company's history. We're truly focused on this aspect. When we mention a 55% return from our new model with EchoPark and echopark.com, those returns are exceptionally challenging to surpass in our industry.

Great. Thank you very much guys.

Thank you.

And at this time, I'm showing there are no further questions. I'll turn the call back over to you Mr. Smith.

Great. Thank you very much. We appreciate everyone and thank you. Have a great rest of your week.

And this does conclude today's conference call. You may now disconnect.