Good morning, and welcome to the Sonic Automotive Fourth Quarter 2020 Earnings Conference Call. This conference call is being recorded today, Wednesday, February 17, 2021. Presentation materials, which accompany management's discussion 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 and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause the actual results to differ materially from the statements made. Those 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. Jeff Dyke, President of Sonic Automotive. Mr. Dyke, you may begin your conference.

Thank you. And special note, everybody, I was caught in Texas in this unprecedented snow and ice storm. We're low on electricity. So if for some reason I cut out, Heath Byrd will take over my speaking notes. With that, good morning, everyone, and welcome to Sonic Automotive's Fourth Quarter and Full Year 2020 Earnings Call. I'm Jeff Dyke, the company's President. Joining me on the call today is our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Vice President of Investor Relations, Mr. Danny Wieland; and our Chief Digital Retail Officer, Mr. Steve Wittman, who recently joined our team to drive the expansion of our omnichannel digital retail platform. Earlier today, we reported the highest quarterly revenues and earnings in our company's history, with record fourth quarter revenues of $2.8 billion and an adjusted EPS of $1.50, up 54.6% from the fourth quarter of 2019. In addition, the full year 2020 was our second consecutive year of all-time record adjusted earnings, with adjusted EPS of $3.85, up 45.3% from $2.65 in 2019. These record results reflect the strength of our diversified business model, the dedication of our teammates, and the support of our manufacturers and vendor partners in the face of unprecedented challenges this year. During 2020, we took targeted measures to improve operating efficiencies and manage expenses throughout our entire organization, fundamentally improving our cost structure. As a result, we achieved all-time record adjusted SG&A expenses as a percentage of gross profit of 68.1% for the fourth quarter of 2020, down 560 basis points from 73.7% in the fourth quarter of 2019. Full year 2020 adjusted SG&A expenses as a percentage of gross profit were 72.9%, 400 basis points better than 2019. For 2021, we expect to continue to see a benefit from our permanent SG&A reductions. However, the rapid rate of expansion at EchoPark may drive an increase in SG&A as a percentage of gross profit, while still being accretive to the bottom line overall. Turning to our core franchise dealership segment. Fourth quarter revenues were $2.4 billion, down 1.2% from the prior year and up 11.5% sequentially from the third quarter of 2020. Franchise dealership segment income increased $37.1 million or 68.2% compared to the fourth quarter of last year, driven by strong new vehicle and F&I gross profit per unit and a $30.3 million reduction in adjusted SG&A expenses. Franchise dealership segment adjusted SG&A as a percentage of gross profit was 65.2%, down 810 basis points from the fourth quarter of 2019. Looking at EchoPark. For the fourth quarter, revenues were an all-time record of $386.9 million, up 25.4% from the prior year quarter. This growth was driven by a 17.1% increase in used vehicle unit sales volume to 14,841 units. For the full year 2020, EchoPark revenues were $1.4 billion, a 22.1% increase compared to 2019, with retail sales volume of 57,161 units, up 15.4% from 2019. For the first quarter of 2021, we expect to retail between 18,000 and 19,000 units at EchoPark, on our way to delivering between 100,000 and 105,000 units for the full year of 2021. As part of our EchoPark expansion strategy, we recently completed the acquisition of 2 pre-owned businesses in Maryland and New York, expanding our geographic footprint into the Mid-Atlantic and Northeast. These include Carbiz serving the greater Baltimore Washington Metro area and Used Car King, a Syracuse-based pre-owned group serving car buyers throughout New York state. Each of these businesses already embraces the same culture and values that define EchoPark, with a highly qualified team focused on providing an exceptional experience and incredible value to their guests. We're in the process of transitioning these acquisitions into our EchoPark model and expect them to generate total annual revenues in excess of $350 million at maturity before any revenues from future delivery and buy centers that these markets will support. By way of update, our delivery and buy center concept, our first market in Greenville, South Carolina, retailed 166 units and was profitable in January in its 6 full months of operation. Our second delivery and buy center in Knoxville, Tennessee opened in late December and retailed 55 units in its first full month, nearly mirroring what we saw in Greenville in month 1. For comparison, before entering these markets with the delivery and buy center model, we sold an average of 10 to 12 units per month in Greenville and 2 to 3 units per month in Knoxville from our nearest hubs, demonstrating that these truly are incremental sales into the adjacent markets. The opening of 4 new EchoPark locations in the fourth quarter and 7 for the full year of 2020 brings our total at year-end to 16. These, plus the 2 acquisitions completed to date, along with the opening of our Phoenix, Arizona store next week and the additional openings in 2021, will give us over 40 points in place by the end of 2021. As you can see, we are well underway in establishing our 140-plus point EchoPark nationwide distribution network, which is expected to retail over 0.5 million pre-owned vehicles annually and drive $14 billion in annual revenue in EchoPark by 2025. In the meantime, we're focused on addressing the tremendous growth opportunity and untapped value in EchoPark's unique pre-owned vehicle sales concept. Car buyers nationwide continue to discover the exceptional pricing, inventory selection, and purchase experience that EchoPark offers. The guest-centric in-store experience combined with our omnichannel tools and delivery center model offers EchoPark shoppers a full range of buying options to meet their needs. Our consumer studies, including a Harris Insights Poll commissioned in September of 2020, continue to reaffirm our belief in an omnichannel approach that matches the ideal purchase experience for the vast majority of car buyers. When we launch our new digital retail platform in the fourth quarter of this year, we expect to provide our guests with an online experience that sets a new standard of excellence in this industry. Before we turn the call over for your questions, I'd like to talk about the market conditions and trends we're seeing throughout the first 1.5 months of 2021. The new vehicle sales momentum and elevated margins from the fourth quarter carried into 2021, and the industry slowdown in used vehicle demand in November and December has steadily improved in January and February to date. While the pressure on used vehicle margins at EchoPark persisted longer than we expected in the fourth quarter, January total gross per unit was back in line with our model and our expectations for 2021. Our franchise dealerships, parts, and service business continues to recover more slowly than we'd like but is showing signs of improvement. Adjusted for calendar differences year-over-year, our fixed operations gross was down roughly 4% in January compared to nearly 6% for the fourth quarter. We believe as the vaccine rollout continues to gain momentum and Americans feel more comfortable resuming daily activities as the year progresses, our parts and service business will bounce back. F&I continues to be a highlight of our business as we reached $2,000 per unit for the first time in the fourth quarter and continue to expect growth in this area in 2021. In closing, 2020 was a challenging year in many ways. However, our fourth quarter and full year results show the strength and resiliency of our franchise and EchoPark models. We are much leaner, more efficient, and a stronger company than we were prior to 2020, and we believe each of our business segments is well-positioned for both near-term and long-term success. The stage is set for an exciting 2021 for Sonic Automotive, with 25 new EchoPark locations to open and the rollout of our new omnichannel digital retail platform by the end of the year. As always, we look forward to keeping you updated on our progress throughout the year. And this concludes my opening remarks. And now I'm going to turn the call over to Heath Byrd for a few opening remarks of his. Thank you.

Thank you, Jeff. Before we open up for questions, I just wanted to provide a little bit more color on what we're seeing in our 2021 outlook. As Jeff mentioned, these numbers and this outlook are in line with what we're seeing in January and February. Also keep in mind, as Jeff mentioned, he's in the middle of the storm, some of these numbers in the first quarter are going to have some impact from the storms. This impacts Texas, which you guys know is one of our largest franchise markets. It is our largest EchoPark market. It's also going to affect Birmingham and Nashville. And so hopefully, it peaks up quickly, but obviously, there'll be some impact. Those stores right now are closed. It's also important to note that the outlook I'm going to go over real quickly, the majority of the growth is weighted to the second half of the year. Obviously, we believe that things will pick up dramatically as vaccines are rolling out, and we get back to normal. So on the franchise side. On new, we expect the growth rate to be up double digits on volume. GPU, we think it will continue to be elevated. We're also aware of the shortage of inventory through the first half and start to normalize in the second half of the year. Franchise used, we are expecting and looking to a low double-digit growth in volume. The GPUs, as Jeff mentioned, are normalizing, and we expect that to normalize at approximately $1,300 for the full year. Fixed, we are forecasting the year to be up single - high single digits. This is definitely weighted to the second half of the year. We still have, as you all know, a large portfolio related to California, and we still see some closing there. So we think that will ramp up more in the second half of the year. F&I growth, low double-digit growth. We continue to see opportunity to increase our GPU and continue to surpass the $2,000 per unit. On the EchoPark segment, as Jeff mentioned, we had 16 stores at the end of the year. We actually opened up 4 in the fourth quarter. That will grow to 40 locations by the end of 2021. That is 2.5 times our current footprint, so very busy with new stores. Units, we expect growth of 75% to 85% in units year-over-year. As a percentage of the total revenue, EchoPark was about 15% of total revenue in 2020. We expect that to grow to 20% to 25% in 2021 as it continues to be a higher percentage of the business here at Sonic. EchoPark EBITDA was approximately $11 million in 2020. That includes the drag of $6.6 million from the new stores. We expect that to be approximately double that in 2021, and that includes a drag of about $12 million to $14 million of EBITDA related to the new stores that are opening in 2021. And that EBITDA growth is definitely weighted to the second half of the year as we open up new stores and they start maturing. From a CapEx perspective, on EchoPark, we have budgeted $75 million in CapEx for that growth. You can see treating all those or developing all those locations at such a low CapEx spend. This is a capital-light strategy. And this allows us to take that free cash flow that is generated on the franchise side and increase our liquidity and also increase our opportunities for growth on the franchise side. So you can see very low CapEx to get to that 40 new stores at EchoPark. So from a consolidated standpoint, a couple of things to keep in mind. I think it's important we talk about this each year. The profit cadence at Sonic because of our portfolio mix, about 15% to 20% of our profitability will come in the first quarter, 25% in the second, 25% in the third, and 30% to 35% in the fourth quarter. Again, that's that luxury brand mix that has such a big fourth quarter. SG&A perspective, on a consolidated basis, 2020 was 72.9%. We expect that to be flat to slightly up in 2021. The franchise SG&A will continue to leverage. We've mentioned the $84 million that we continue to see in reduced expenses, but that will be offset - that lowering of SG&A on the franchise side will be offset due to the new stores that we're opening at EchoPark. Another thing to keep in mind, if you're looking at Q1, typically because of seasonality cadence, our SG&A as a percentage of growth is typically 700 to 900 basis points worse from when you relate it to Q4. EBITDA, we expect that to be low double-digit growth in EBITDA. Tax rate and shares, we are modeling an expected tax rate of approximately 26% to 28%. Share count will maintain approximately 44 million. We will do share repurchases to ensure there's no dilution from the investments that will happen in 2021. And with that, I will turn the call over for questions.

I'd like to dig in a bit to EchoPark. I guess on the franchise side, the used business was a little tough from a GPU standpoint. If you could talk about what you think happened in November, December, and things seem to be back on track here in January outside of the weather issues.

Rick, this is Jeff Dyke. So on the franchise side of the business, a couple of things happened. One, as you know, we've got a lot of stores in our portfolio on the West Coast, and we've got a lot of BMW stores there. And with the unprecedented amount of lease returns that are coming back, the margin that we're losing on those lease returns because BMW and a lot of the high-line dealers held lease returns for a while going through COVID. We're getting all those returns back. Our margins are a lot less on those cars today than they were 4 or 5 months ago, so that's playing a big role. We don't expect that to continue. BMW is working with us and so are the other high-line manufacturers. So we don't expect that to continue, but it certainly played a role in our margin on the franchise side throughout the fourth quarter and a little bit in January, but it's certainly normalizing. On the EchoPark side, you really have to break the segment down - the used car segment down into the 1 to 4-year-old category and then older. Anything 5 years and older, we're all making great margin on, and that exists on the franchise side of the business but not at EchoPark because at EchoPark, we're 1 to 4 years only. And the margin on the 1- to 4-year-old and our 30-day supply inventory targets that we keep and turning that inventory really fast, which helps us get to the high volumes that we need for our model, created an overhang in terms of margin erosion longer in the fourth quarter than we thought it would. The good news is that inventories are back in line, margins are relative again to where we were pre-COVID, and so we're off to the races again. And you couple that with a great first quarter, 18,000 to 19,000 cars and our focus on selling 100,000 to 105,000 cars for the year, and EchoPark is just going to have a smashingly good year. So unprecedented times when you have these massive swings in inventory valuations. It definitely affected what was a shrinking 1 to 4-year-old category in terms of volume in the fourth quarter across the country. It certainly affected the margin. And but we're back on track and expect no issues as we move forward.

Okay. Great. So looking at 2021, I guess, from a different perspective. If we go back to pre-COVID earnings power 2019, add in the benefits of that $84 million in cost takeout, we've got benefits from lower floor plan interest expense lower rates there. I'm calculating a number around $4.71. And then F&I should be higher in 2021 compared to 2019. We've got growth in EchoPark in 2021 compared to 2020 and 2019. You had excess free cash flow, it looks like that would support buybacks or acquisitions. I'd like to get your comments there. Anything I'm missing? I guess, the GPU, probably not sustainable, but should be bigger in 2021 compared to 2019?

So this is Jeff. A lot to unravel there. When you - I expect our GPUs in the first half of 2021 to be great, just like they have been. I expect all that to carry over. I expect F&I. We eclipsed a $2,000 mark. I expect F&I to continue to do very, very well. I think from an EPS perspective and an EBITDA perspective, the only thing, Rick, that you should really need to think about a little bit there is the drag that we'll get. We're going to open 25 stores. There's a lot of complexity moving from - we grew EchoPark, we stopped growing it. We made it profitable. We proved our model. And now we're going back into growth mode. And there's a lot of complexity in growing that many stores that fast, but we're very confident that we can get that done. But it is going to - as Heath stated in his opening statements, it is going to create drag from the SG&A perspective. So I think you need to make sure that as you're modeling '21, you sort of - you make sure that you include those thoughts in your model because there is, I would say, somewhere between $12 million and $15 million drag from opening those up from an SG&A perspective.

Yes, Rick. This is Heath. I'll just add, I think you're spot on, I think that if you look at the total business model and all the metrics that drive profitability, you got tailwinds in almost every category. We do think that fixed will pick up in the second half of the year. New, as Jeff mentioned, GPUs are still going to be elevated in this half. We usually have a lot of opportunity based on what we discussed in the opening comments on both the EchoPark and franchise side. And so really, the drag is the opening of EchoPark. But all the other segments, we expect to have tailwinds and have a very good year in every one of those segments, with the drag being the expansion, the accelerated expansion of EchoPark and the expenses related to that.

It should be another record-setting year for all intents and purposes. As Heath discussed, the tailwind should really drive us to another record-setting year.

And then finally, on the balance sheet. I think net debt-to-EBITDA below 2x, actually closer to 1x, you should be able to fully fund CapEx with free cash on the franchise side of the house. What is your thoughts, I guess, about capital allocation, your targeted leverage ratio and what you do with the excess cash?

Yes, a couple of things. You're exactly right. The fact that we have - with EchoPark, it is a capital-light kind of strategy. We can actually grow that without continuing. We're at the point now that we don't have to utilize all the free cash flow from the franchise side of the business. So number one, we believe that we can start accumulating additional liquidity, which can be used for opportunities on the franchise side, number one. And number two, nothing has been contemplated, but we absolutely have capacity. If we see a good opportunity, we obviously have capacity from a debt perspective.

Got it. And would you contemplate accelerating EchoPark growth or would the infrastructure not support that?

Well, obviously, from a CapEx perspective, we've got plenty of cash to do it. It's a resource perspective. We're actually putting up a store every 2 weeks, actually every week almost. And so it is a resource perspective more than it is capital.

Rick, this is Jeff. So the other thing is that - and it's one thing you saw us do in the fourth quarter is we acquired 2 dealer groups from a pre-owned perspective that fit our model, and so that's another piece of the evolution that's happening at EchoPark that will allow us to grow faster because you have already personnel in place, you have facilities in place, no real capital constraints to build. And so all we have to do is train, build the inventory pipeline and price, and away we go. And so it makes us be able to expand quicker. So as those deals - as those opportunities come along, you'll see us take advantage of that because it will allow us to move even faster towards that $14 billion number that we've been talking about for 2025.

And to add to that, this is Danny. I think the one thing that - on the pre-owned side relative to franchise acquisitions, we can accomplish those in a much shorter time frame in as little as 30 days, much lower EBIT multiple. You don't have manufacturer considerations in terms of approvals and things that can slow and drag out that process. So it allows us to, as you said, accelerate that growth, do so much more cost effectively and solve even capital resource constraints.

Yes, I think that's a very good point. Then what you have to do in the expense to entry into like an acquisition of the pre-owned is dramatically less than on the new side.

Your next question comes from the line of Rajat Gupta from JPMorgan.

I appreciate all the color on the 2021 moving parts. Just one point of clarification and then a couple of questions. Sort of for the first quarter, the comment around 15% to 20% of earnings, was that like - was that an EPS number or was that EBITDA or pretax? I just wanted to clarify that seasonality that you have provided for this year.

Yes, that is a profit. It's related to profit, 15% to 20% of our total profit for the year, we realized in Q1.

This is the net income, is that it or?

Yes, from a net income or EPS perspective. If you look back to the years prior to that, that's typically our seasonal cadence for the quarterly contributions.

Okay. I understand. And just taking into account the strength you're seeing on the new vehicle grosses as well, is that right? Or is that just more of a normalized trajectory excluding the benefits of...

Yes, it's purely a percentage of the total year. It definitely takes into account what we're seeing in January and February, but we expect to see that throughout the year. So as a percentage, we still think it's 15% to 20% we'll see in the first quarter. And if you look at what new grosses did from Q3 to Q4, that's where you see our luxury rating come in even relative to the rest of the industry, and we get the downside of that coming out of Q4 into Q1.

Got it. Okay. That's helpful. And then just on the EchoPark side of things, you guided to roughly $20 million to $22 million in EBITDA for this year. I mean this is still like - you're still 90% away from your 5-year target here. So when is the period or the quarter for the year really where you can see earnings there inflecting? I mean you have obviously ramping up these new stores and the added costs coming with that. But I mean you're essentially guiding to 2021 EBITDA flat with 2019 levels for EchoPark. So despite several - despite twice the number of units, and you're going to continue to add a lot more stores going forward. So is 2022 the real year of inflection? Or is it 2023? Just curious if you could just give us some sense of that trajectory towards your 5-year plan on EBITDA. And I have one last follow-up.

So Rajat, this is Jeff Dyke. One of the things that you need to think about is, in 2019, we really slowed opening stores, right, to prove the profitability of the EchoPark concept, right, that we could actually sell a bunch of cars and make money. And so now that we're moving into - we've never opened 25 stores in 1 year. In '20, we opened 7, and so there's a lot of drag that comes along with that. We could, tomorrow, stop opening stores and return to really high profitability. But you're going to see us grow another 25 stores in '22, another 25 stores in '23, on our way to having this 140-plus distribution network across the country. You'll continue to see profitability improve as we move into '22 and '23, where you have more stores that are maturing. It's taking 6, 8, 9 months to get the stores really off the ground and profitable. The great news about our recent announcement today is the delivery center was profitable in 6 months. We sold that 166 units and made money in the first 6 months, so that's really, really good news for us. And our second delivery center is taking off the same way as our first. So I would expect profitability to be what we're calling out this year, and I would expect to see that continue to improve as the stores continue to mature.

And if you look at - based on our projections, 2022 is when you start seeing - you now got 40 locations, 45 locations that have gone through their maturity or a portion of their maturity. So to answer your question specifically, 2022 is when we see that tipping point that you've started having enough stores that have matured that more is hitting that bottom line profit.

And just to add to that, for each of the 25-store cohorts that we open, that's $12 million to $14 million of EBITDA drag from a preopening and pre-breakeven loss perspective. And so that's steady from 2021 through 2025. From the initial base stores, the 16 we got today going into '22, it will be 40-plus stores. Those will continue to mature. So if you're comparing our outlook for 2021 back to 2019 levels, it's really the $20 million we did in 2019 is comparable to the $33 million to $35 million that we forecast for 2021, excluding that drag from new stores, if that helps.

Correct.

Got it. That's helpful color. And just last one on the digital rollout, could you give us a sense of how many cars were sold through those channels where it was a contactless transaction, either the customer getting it home delivered or just picking up the car? And also, if you could give us an update on the rollout of the Darwin-Cox platform, how that's going? Any updates on that? Or when you expect that to be fully live with all the inventory, that will be helpful. That's it for me.

Sure. Rajat, this is Steve Wittman. Two questions there, so the first one, on the percentage of cars that have gone through additional channels, so we actually think about it a little bit differently. We think about it from a consumer perspective because we want to make sure we serve the consumer throughout their customer journey. And this journey can be a mix of physical and digital interactions with us, both on our websites, in our call centers, and, of course, in our physical locations. And we've tried to really be consumer-centric here, right? So we've done, like Jeff mentioned, we've done some good research which told us that only really 9% of consumers want to execute their process 100% digitally. About 75% of consumers, conversely, want to have a hybrid model. So we actually think about omnichannel as a hybrid model where the consumer can dip in and out of both physical and digital and have a seamless handoff between the two so that we can be adaptable to their needs. So that's our strategy. Our strategy is to have an omnichannel infrastructure in place. Our strategy is also to make sure that, that handoff is seamless, so the consumer doesn't notice anything when they talk to a person versus when they interact online. Now specific data for Sonic in the last year, about 90% of our consumers actually start on our website before they come in, and they come into our stores. About 40% of our consumers take action online. What I mean by take action online means that they fill out of the contract form, fill out the financing form, talk to some person in the GEC, they chat, that kind of thing. And the last thing, we do see about 10% of consumers go end-to-end online with the Darwin tool. And that's - on average, saves our consumer about 2 hours at the dealership. That time saving is a key piece in delighting our consumers and they both dip in and out of physical and digital. So that's the first answer for the first question. The second question is how we're thinking about our digital strategy this year. And really, at the parallel path. So the two paths are: one, we're optimizing what we have with Darwin and Cox relationship, and you've seen some of those changes already happen online. You can go to our EchoPark website and look at our vehicle listing page, and you can see that we've dramatically simplified it. We've made consumer interaction with our photos better. We've given consumers more options and seen more cars above the fold. So we tried to improve what the consumer is seeing right now on our websites. Same thing with Darwin, we made the process clear, where the consumer is in the process. We've simplified the language to really turn it into consumer language, not dealer language. In parallel, we've kicked off a massive project here at Sonic to create the best e-commerce platform in the automotive industry. And what we're doing here is we're partnering with an outside firm and we're looking at what are the best e-commerce experiences that consumers have in automotive, but also outside automotive. So consumers have great experiences on Amazon, on Wayfair, on Walmart.com, and we want to apply those learnings to the car buying industry and give consumers something really, really special that leapfrogs the competition. We don't want to just be a copycat of what's already out there. So I'm super excited about that. We're tapping into talent outside of the industry. Of course, we're leveraging our industry expertise. And we're not only just thinking about e-commerce from a today standpoint, we're also creating a modern tech stack that will be adaptable to our future needs. So it'll last not just 1 year or 2 years, but 5 years and 10 years.

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

First question around sourcing used vehicles. And there's a lot that seems to be shifting with lease returns and sourcing more online and away from these physical auctions. And it just seems like there's a lot of shifting here, so maybe getting beyond just like the next quarter or two, we're just thinking later this year or over the next 5 years, where do you envision sort of the bulk of your sourcing coming? How do you think it's shifting? Obviously, you're trying to make it more efficient over time and lower cost transaction and pricing both. I'm just curious, how do you think about this and what kind of opportunity there might be for EchoPark and your franchise dealers?

John, it's Jeff Dyke. So look, we're buying a lot of our inventory now through the auctions, and that is going to transition to us buying more and more cars off the street, and we're working on some different applications, as part of Steve Wittman's comments that he made a second ago, to make it much easier for the consumer to trade a vehicle into us off the street. And so while that's a smaller percentage of our overall inventory today, less than 15%. We expect that to grow to north of 25% to 30% as we move forward and take more opportunities for consumers off the street. There's not - we don't have a hard time buying inventory. In particular, in the 1 to 4 category, which is where the bulk of the inventory is, so there's no concern for us as we move forward on, can you get enough cars to support your 140 networks, to support all of the franchise stores and everything that you do. We certainly will take a number of our cars in on trade. But most of those cars that we take on trade at EchoPark are moving over to our Sonic stores, to our franchise stores where they are turning those cars really fast at higher margins, which has been a big, a great thing for us and synergies between the two companies. But there's no concern in terms of sourcing. The sourcing will shift over time to more cars off the street from our perspective than versus buying in the auction lanes at the closed sales.

But do you envision a period of time where you're sourcing more than 50% of your new vehicle inventory through trades and off street repurchases? And you said 20% to 30%, I think it's your current comments, but I mean, could this be the majority of your vehicles at some point in the future?

Yes. I think that it can be the majority in the future as long as that 1 to 4-year-old supply is there. What tends to happen is the vehicles that you buy off the street for 5, 6, 7, 8-year-old cars, they're not the 1 to 4-year-old cars, and that's EchoPark's model, and so from a franchise perspective, sure. But on the EchoPark side, we'll continue to source a higher percentage through the auctions, through the manufacturers, through the rental car companies as we see opportunities because that low-cost product that we're looking for in that 1 to 4 category, that's what drives our volume at EchoPark. And there are less opportunities to buy off the street in the 1 to 4-year-old category than there are in the older cars.

Got it. Okay. That's helpful. Second question just on the Carbiz and Used Car acquisition. It sounds like it's a way to really drive hyper growth in the new market. But how does the integration of those work? I mean given that you have sort of a standard model you're running your stuff, you know exactly what you're dealing with, what you're getting and how you're doing it. When you're acquiring these stores, there's a whole lot of legacy assets, people and processes. How does that integration work?

Yes. It's a lot easier than you might think because you don't have all the franchise constraints that we have to deal with on the new car side. Very quickly, our buying system takes over, they're buying, and we're supplying inventory into both locations already, so we're filling that up. Our training team is then putting in our playbooks and our processes. The great thing is we've got 4 really good facilities now in very, very good locations, 1 being in Laurel, Maryland, which is just a really good used car market. Then we've got all the great people and the assets already on the ground. So now what we have to do is go - and they were already one price they were already sellers trying to do some things that EchoPark does but just hadn't figured out the formula. And what we're doing is just coming in and finishing the pieces of the formula, which is allowing us to really move a lot faster. And that's what's great in this evolution of EchoPark. As we're looking at these stores, and there's plenty of them out there, and we're thinking, well, gosh, we could go buy a facility instead of having to go build and find and search for real estate and all that stuff, we could go buy a facility that is already in operation if it meets our standards, and they have - they share in some of the same cultures and characteristics. And then convert those fairly easily in both leadership groups of both organizations. As a matter of fact, they introduced this to each other and snapped in real quickly. And as a matter of fact, one of the guys that we purchased is now running our distribution - part of our distribution network in the delivery and buy centers. So it's a very exciting time for us because it's going to allow us to be even more efficient and more effective with less capital than what we were doing prior.

Yes. That's very, very interesting. And then just lastly, I mean you kind of highlighted that the new vehicle market might be a little bit inventory tight, GPUs relatively strong for the first half of the year. It seems like that makes a lot of sense. Just curious on the chip shortage side, if you're seeing any kind of shocks to production schedules and vehicles in transit that are not showing up just yet? Or is that something you expect to be dealing with in the coming weeks and months as this thing really kind of hits? And then does end up being - how positive is the automakers focus on very rich mix and it's not such a bad thing?

Look, at the end of the day, the manufacturers are learning and we're all learning. Shorter date supply means higher margins and better turn rates, and the manufacturers then have to spend less on incentives. And so I suspect that you're going to see a permanent change in our industry. I do not think that we'll ever get back to the high, high levels of inventory and slower turn. We're all pushing for that, including the manufacturers. The chip piece has not had an immediate impact. It's going to have an impact as we move forward over the next month or two. But again, remember, short supply has created all-time best run-in margins, very easy inventory management, and that fits right into our breadbasket because that's how we're built. It's really tight. They supply everything, and it makes it nice when the whole rest of the world has to do that. We all get to have better margins, so I think the industry is learning a big lesson here over the last 12 months with that.

Your next question comes from Mark Jordan from Jefferies.

Mark Jordan on for Bret. Thinking about the franchise side, specifically the parts and service segment, are you able to provide a breakout for maybe each channel and where you see the largest headwinds to recovery there?

So sure. I mean, we can get that to you after the call. At the end of the day, the body shop business is really defunct, a lot less driving, a lot less accidents. And so that's been a big struggle for everybody in the industry in total. And the parts business follows the service business and the service ROs are down because people are not driving as much. And so we saw about a 4% decline in January, a 6% decline in the fourth quarter. We expect that, and Heath was saying this earlier on, we expect that to really change as we move into the back half of the year. The vaccines are out, and people are getting more comfortable driving around. That's going to make a big difference for us, and we expect the back half of the year to be much better from a fixed perspective than the first half.

This is Danny. Mark, adding to that, if you look at it from the segments, our customer base overall for the fourth quarter was roughly flat, down about 0.5 point on same store. But if you look at it from part and service, collision repair. Collision repair was down almost 20% in the fourth quarter. And I think that's in line with what we've heard from some of the competitors in the space. Wholesale parts are also down. You got lower activity in the service lines and our dealerships, the independent shops are certainly having the same or similar impact.

And Mark, one other thing to add to that is that the parts that the body shops are buying from our parts department. So certainly parts is off by that percentage as well.

Great. Great. And then I guess switching over to EchoPark, just thinking about - we've seen quite a few online-only used vehicle platforms emerge recently. Can you maybe talk about how EchoPark differentiates from those platforms? And what advantages do you have by providing that physical footprint that the customers might want to visit?

Yes, sure. I'll start and Steve Wittman can chime in here in a second. But our data shows that 75% of the customers out there want to come touch and feel a car. And we think we have a physical footprint plan that will allow us to grow across the country very efficiently, capital-light, as Heath was saying earlier. And so in many cases, those online platforms are spending more capital than we are on physical plants, getting their inventory up and running. But at the end of the day, we feel like we have a very, very good plan, an effective and efficient plan to roll out our plant and our facilities across the country and then provide our really cheap pricing from a used car perspective. And we're $2,500 to $3,000 cheaper than our average competitor in the 1- to 4-year-old market. And it's going to be very difficult to compete with that as we open up across the country and make that happen.

And this is Heath. I'll just add, and Jeff said it, but there's really - for me, there's really three components that differentiate EchoPark from all the competitors. And number one, as Jeff mentioned, is price. We have the cost structure that we can provide the lowest price and high-quality vehicles. And when you ask a consumer what they're looking for, the very first thing, from a used vehicle, price is the number one driver. So to me, the pricing strategy in our expense structure is the number one differentiator. Number two, as Steve Wittman discussed, the data says that people want to buy cars differently. And if you're going to be used-only, you're going to miss out on a large percent of the population. If you're going to be a physical on-site only, you're going to miss out on a growing percent of the population. You have to have the ability to do both, and that is a strategy that Wittman walked through, and that is our strategy to address the journey that the consumer wants. And then the third component is operational expertise. I mean, we have demonstrated for years that we lead the industry in inventory management. We've got years and years of experience running automotive dealerships. So when you add all of those three together, the best price, the ability to buy what you want and the expertise to operate, those are the things that differentiate EchoPark from the competitors from our perspective.

And this is Steve Wittman, just to add on to that. We're designing our digital ecosystem in a way that's flexible, right? Let the consumer shop out of the digital and physical world. The consumer doesn't view those as 2 separate things anymore, right? We've all been on Amazon and we've been in physical stores, and that's the way consumers think about digital retailing in the automotive industry. We're going to give them the ability to shop and to do whatever they want online from wherever they want. If they're sitting on the beach, we can let them shop their car there or they're at their desktop at an office, we're going to let them shop their car there. So flexibility in being grounded in consumer needs and consumer understanding is key. Number two, that seamless handoff is very important. The consumer shouldn't notice when they get in and out of digital or physical. We're going to have the infrastructure so that if the consumer goes out 5 steps online, they're able to pick up at step 6 when they talk to somebody in our GE - in our call center or chat with somebody or going to our dealership. That seamless integration between digital and physical, without the consumer noticing, is critical to an outstanding consumer experience. And then lastly, it's transparency, right? And this is all about keeping in line with the EchoPark equity, being transparent with our products and services online, also where our products exist, giving the consumer the opportunity to come in and touch, feel, smell the product that they want to or else do everything they want to online and looking at our cars and our products and services. So that flexibility, that seamless handoff, and transparency are going to be hallmarks of our digital products.

And this is Heath again. We believe that you heard Steve talk about - Steve Wittman talk about, we are listening to the consumer, right, what they really want. And we believe that the leading indicator for long-term success is customer satisfaction. And I think if you look at our ratings, if you look at the customer satisfaction, you can see that we lead the industry, and EchoPark has a phenomenal reputation from the consumer satisfaction perspective, and that's the leading indicator for long-term growth. If you meet the needs of the consumer, you're going to have long-term success.

And Mark, this is Jeff. If you add to that, if you look at our Greenville performance, Greenville's got our highest NPS, highest customer satisfaction scores already. So we're really excited about that because you're doing the entire transaction basically online other than state-regulated pen to paper and then delivering that car from one of our centers down to Greenville where we have an office. And yes, we have our highest satisfaction scores in that marketplace. So the customer is telling - we're listening, as Heath said, the customer is telling us yes, this is the right formula. This is exactly what we want. We love the experience. Most importantly, they love the price. And that's the big difference. If you can create the cost structure that supports your ability to run the price, $2,500 to $3,000 a car below retail, then it allows us to really expand and grow and do that effectively and efficiently. So really good news early on for us coming out of our delivery and buy centers, and we look forward to updating you guys more as we roll out more.

There are no further questions at this time. I turn the call back to Jeff for closing remarks.

I appreciate everybody joining us on the call. Sorry for the opening here in Texas being with all the weather, but we worked our way through that and certainly appreciate everybody. We'll talk to you on the next call. Thank you.

That concludes today's conference call. Thank you, everybody, for joining today. You may now disconnect.