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Sonic Automotive Inc (NYSE:SAH)
Q2 2020 Earnings Call
Jul 30, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 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 risk and uncertainties that could cause actual results to differ materially from the statements made. These risk 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.

David Bruton Smith -- Chief Executive Officer, Director

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 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.

And for second quarter progress, we continued to see substantial improvement in operating conditions and automotive retail consumer demand. While April was a challenging month that weighed on our -- 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 franchised 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 pre-tax 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 experience -- 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 Franchised 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 vehicles -- new 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 forecasts. 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 pre-pandemic unit volume forecasts 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 realized 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 and 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 franchised 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 plan 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 Echo Park 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 under way for opening in 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 of our -- by 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.

Questions and Answers:

Operator

[Operator Instructions] And your first question is from the line of Rick Nelson with Stephens. Please go ahead, sir.

Nels Richard Nelson -- Stephens Inc. -- Analyst

Thanks. Good morning. So one 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 tack these markets where you don't have stores.

Jeff Dyke -- President, Director

Hey, Rick, it's Jeff Dyke. Sure. We're going to -- we'll open 20 delivering and buy centers next year. That's our plan. We'll probably get three to four opened this year. As David said in his opening comments, we opened Greenville already last week, and that's going quite well already. We're delivering cars into the marketplace. We're actually using our BMW store and property that we already have there. But we own property for EchoPark in the Greenville market, so we'll put a small facility up there. The great news is as those facilities are really light on rent. Maybe an investment of $1 million to $2 million versus a medium sized store that's anywhere from $5 million to $12 million and a big store that's $15 million to $25 million. So we can very efficiently and effectively move into a market.

Those delivery and buy centers will do three to 100-plus a month, maybe as much as 500 a month. When you add that to the hubs, our medium store 750 or large store 1,500, it just makes all the sense in the world. It allows us to rapidly move out EchoPark's brand to medium and big markets across the country, move a lot faster than we had originally anticipated, that's to reach at the 140 unit mark by 2025 and the $14 billion in revenue. So we're very excited about that. The brand is doing very, very well and it's allowing us to go ahead and make these moves.

Nels Richard Nelson -- Stephens Inc. -- Analyst

And Jeff or David, how many of the hubs stores do you envision to achieve those plan in having delivery and pickup locations?

Jeff Dyke -- President, Director

So it will -- this is Jeff again. 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 US first and then you'll see us start moving into the northern part of the US. But, yeah, three to five hubs a year and around 20 delivery and buy centers a year.

David Bruton Smith -- Chief Executive Officer, Director

And Rick, this is David. And something to -- that is key to understand this model is that our -- if you think about it, our retail hub centers or the big stores are reconditioning centers as well. So they're highly profitable, while they allow us to recondition vehicles, and that's something that's very important.

Nels Richard Nelson -- Stephens Inc. -- Analyst

And do you charge a fee to the consumer to get these vehicles to the market or is that something Sonic [Speech Overlap]

Jeff Dyke -- President, Director

Within 200 to 300 miles, right now, there is no fee that we're going to charge the consumer. We'll see -- we'll play that by ear as we move forward and see how that works out. We'll of course look at the margins. It's going to depend on consumer appetite. So we'll see kind of how that works. Right now, in Greenville we're delivering cars into the market already. There is no charge to that and the margins are good. So we're meeting our expectations already, but we'll play that by ear. We have a lot of time building the model, so we'll see how that works as we move forward.

Nels Richard Nelson -- Stephens Inc. -- Analyst

And do you deliver to people's driveways or they come to a central location and it's...

Jeff Dyke -- President, Director

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 deliver into the marketplace from our Charlotte and eventually in the first quarter our Atlanta location.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

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 the 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 pulling up and dropping off the car.

Nels Richard Nelson -- Stephens Inc. -- Analyst

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

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

We view as incremental sales.

Jeff Dyke -- President, Director

Yeah, it's 100% incremental, Rick.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

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

Nels Richard Nelson -- Stephens Inc. -- Analyst

Okay. Can I turn your slide deck? Page 16 talks about maturity of the hub stores and these delivery and buy centers, the types of volume. Any updated thoughts as to how long it takes to reach maturity?

Jeff Dyke -- President, Director

So, we were telling everybody that it takes a year to get a store -- or six quarters or so to get a sort to where we feel like it's mature. But they just keep -- 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. It just 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.

David Bruton Smith -- Chief Executive Officer, Director

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

Nels Richard Nelson -- Stephens Inc. -- Analyst

Exciting stuff. Thanks and good luck.

David Bruton Smith -- Chief Executive Officer, Director

Thanks a lot, Rick.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

Hey, good morning and thanks for taking my question. And really appreciate all the details in the slide deck are very helpful. Just had a question there on -- just on the SG&A profile here going forward. You've talked about the $84 million expense reduction. You gave us a pro forma EPS base. But as you are expanding into this EchoPark growth strategy going forward with the delivery and buy location, how should we think about the profile of SG&A to gross here in the near term, at least in the initial years of these -- of this expansion plan before they hit majority, 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 do you -- how are you managing this within the overall cost bucket with the whole company? And I have a follow-up. Thanks.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah. This is Heath. Obviously -- and we reported previously, there's always some opening expenses as we ramp up, but we use to indicate there is 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 as -- 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 franchised 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 number we've given you.

David Bruton Smith -- Chief Executive Officer, Director

And, Rajat, also, the existing EchoPark stores are performing so well that they will offset the costs of the opening of new stores. So Heath's right. The $84 million just drops straight to the bottom line. That $7 million a month in SG&A reduction, you can just -- you could take that -- now, that's what we did last year to come up with the new sort of EPS model.

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

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

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah.

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

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

David Bruton Smith -- Chief Executive Officer, Director

[Speech Overlap] An interesting -- interesting thing on the point that you made about advertising, our advertising is our price, right. So all of our advertising goes into an advertising in social media. It's not TV, it's not the brand advertising 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.

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

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 -- for the delivery centers, and seems like the business is starting to function more independent of the franchisee stores, your cash flow is improving. Does this in any way accelerate a potential separation of EchoPark from the franchisee business? Just curious as to what the latest thoughts are there. Clearly, this is an attractive business. So just what the latest thoughts are there?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Yeah, 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 just put out there and we just rather not get into what else and possibilities in that area. But we're going to -- certainly we want to execute on this plan that we've put out today.

David Bruton Smith -- Chief Executive Officer, Director

And Rajat, I would add. We actually believe that we are the omnichannel and the omni-product option. We've got the full spectrum of automotive needs, all the way from new, used that are more than four year old, fixed F&I on the franchise side as well as the separated EchoPark is that gives us the full spectrum of the industry -- we think that's a very strong model. And on top of that, with this expansion plan, as we open up that e-commerce option and improve that and become best in class on the e-commerce side, we truly become the omnichannel choice you can do on site, you can do online or you can do somewhere in between. And so there are synergies between the two companies, and we think that's what makes us valuable.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

And one of the things that we do as well, as we've talked about in the previous call, is that a lot -- there's a lot of -- there is a lot of vehicles that come to us at EchoPark that we then are able to share at our retail stores that have added a lot of value, a lot of profit to our -- our retail franchise stores.

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

That's helpful update. And just lastly, just on July, more of a near-term question. Thanks for the color on the SG&A to gross and like. Just curious to have a huge spending within the month. And you know, like, just -- how are you planning for August and like what's your outlook here in the near term on your auction pricing, your sourcing pricing? So what internally have you planned in terms of like what our GPUs could trend here for the rest of the year? Thanks.

Jeff Dyke -- President, Director

So, this is Jeff. Look, July is a lot like June. It's been a great month so far. I think we put it out there in our deck. New car volume is about the same, up 15% to 20%, somewhere in that ballpark. Used vehicle volume up in the low -- low single digits. Down in the low single digits on fixed operations. But the great news is that our profitability is up, and it's going to be up in July in the 140% range or so. So the SG&A is there. It's going to be in the upper 60% range in terms of -- so it's holding just like we said it would. And I would model that on into August and September. There is no reason for us to believe -- the new car inventory is getting better, so new car volume will improve as we move forward. Margins are good across the board. So the third quarter should be a great quarter for us.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

And -- this is Health. I'll add. When you look at that slide, I believe it is 33, you look at each of the months, I think it's very telling. And obviously you can't compare June and July when you look at the operational metrics because June was a quarter ending months and those are always stronger. So July on its own is looking extremely strong. And I guess, obviously, with our SG&A reduction, 141% over last year's pre-tax, we're very pleased with.

David Bruton Smith -- Chief Executive Officer, Director

Yeah. 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.

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

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

David Bruton Smith -- Chief Executive Officer, Director

Thank you so much.

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Thank you for taking the question. You provided us with the update in mid-June targeting $0.23 to $0.33 of EPS and now it's already a whole lot better than the minus $0.50 from first quarter results and continue to surprise to the upside. What happened between -- I know you've talked about the acceleration but hoping to get a little bit more color on what drove that $0.23 to $0.33 up to effectively $0.64, excluding the one-time tax benefit?

Jeff Dyke -- President, Director

Yeah. June was just an outstanding month, maybe our best profit month non-December in our Company's history, and it was volume, gross, SG&A, you name it, it all happened, it all came together for us. And if you think about it in our $0.64, I think when we went into June we had $0.01 kind of on the books and we made $0.63 in the month of June alone. And so it's just a fantastic month across the board. We hit on all cylinders at EchoPark. It was the single best month we've had in EchoPark's history in terms of volume and profitability. I think we averaged 567 [Phonetic] cars a store, did $550,000 in profit per location and averaged almost $1,000 of profit per unit at EchoPark. Those are gold standard numbers.

And that's going to continue to have -- I mean, we're seeing that in July, and we expect that to continue on into -- for the rest of the third quarter. There's just nothing sort of staying in our way at this point. Even with the hot spots opening up in Texas and in Florida with COVID, we're just executing at a very, very high level and the expenses are just outstanding. We're [Indecipherable] better than it's ever been. Our sales associates that were selling 10 and 11 cars per sales associate are now 17, at EchoPark they are 25 to 30. I think our best performance is our Charlotte store, 34 units per sales associate. So it just -- we are having a blast and getting better than this. And so it's going to be a great run for the rest of the quarter and into the final part of the year.

David Bruton Smith -- Chief Executive Officer, Director

And -- this is David. I think that a big part of the two is that our -- not just our top four or five leaders -- our leadership team down into the stores and regionally are all -- they've been with us a very long time and we have very low turnover. And a lot of these guys have been through the financial crisis and all of that. So when this -- when the pandemic hit, our team jumped on it and really executed. And -- it's like necessity is the mother of invention, right. But they implemented some of these reductions and raised the bar for as Jeff was saying for productivity per person, that look, you just have to do more with fewer people and executed and found out they could actually do it, and now they're believers and they're bought in. It's not just the -- again, it's not just the top four or five people, it's down into the stores that they know they can do it and they're very excited about it.

Jeff Dyke -- President, Director

I will also add that in June all EchoPark stores were cash flow positive. That's a first. Even our young stores like Tampa, Long Beach were making money or 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 profitable in eight weeks. So the model is really paying off for us. And that's why we're going to go on this deal from an expansion perspective.

David Bruton Smith -- Chief Executive Officer, Director

Because we keep -- we keep getting better as time goes on and how we open the stores. It's much more efficient. If we had opened the Tampa store like we used to open one, two or three years ago, it wouldn't have been profitable. So the team is learning and even in the pandemic, has figured out how to open a store and get profitable really fast.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. And then with the new -- 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 used. Is that the right way to think about it, that the volumes on franchised usual start to deteriorate and then really ramp up the EchoPark volumes?

Jeff Dyke -- President, Director

Quite the opposite.

David Bruton Smith -- Chief Executive Officer, Director

It's a different customer.

Jeff Dyke -- President, Director

Yeah. 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 want to sell [Indecipherable] at EchoPark. And if you look at our Denver market, our stores in Denver having record -- our franchise stores in Denver having record volume numbers at this point and our EchoPark stores having record volume numbers. And so, I think our Denver market selling 1,500 cars, something like that a month, having record profit along with the franchise stores growing their used car business. So it's quite the opposite. That's why you keep these stores together. They work in harmony together. We saw a lot of cars on the franchise stores and we'll continue to do that even with the delivery and buy centers.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. And then just the last one here. With regards to digital, you -- maybe you could get us under the hood there a little bit and share your thoughts on the cost in 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 take down the road a bit, and here we are again. So just what -- what's been the hold-up to this point and how do you envision it being differently? What do you envision that the end result looking like?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Sure. This is Heath. I'll start off. I think from our perspective, e-commerce is a spectrum. It isn't just -- e-commerce isn't just someone that's shops and buy the completely online. In fact that very rarely happens even in our competitors' world. It exists from e-commerce is shopping, it is getting the price, it is getting credit, it is getting financing, it is pretty done a down payment, it is getting a product and it's getting paperwork done. And people go in and out of that spectrum at different parts of their experience. And so you have to have an infrastructure they can handle each of those elements and if someone starts on the third step you can easily transfer to onsite or remotely with our centralized call support, right.

And so Darwin is that -- that type -- you only use Darwin right now to service our customers onsite. And so Darwin online takes that into the online, e-commerce world so that we can easily convert someone that stops at credit and calls and wants to talk to someone at that point or comes on site, we never lose that deal, right. So that's a very, very important part of an e-commerce strategy in an automotive world. This is not like buying a pair of shoes, right. There's two parts. And so that tightening of Darwin allows us to move back and forth in those settings.

We then looked at -- we did research of every single company out there and we were -- we are going to Cox Automotive. They have never built a proprietary system for any dealership group, and they've agreed to do that. As you know, they've got the technology resources, the automotive experience and so they are going to be building on top of Darwin that best in industry user experience. So, as people go down that spectrum or funnel of e-commerce, it is going to be intuitive, it's going to be easy to use, it's going to look very similar to other e-commerce companies and it makes it a lot easier.

And so that combination -- we took our time because this isn't something that you should just throw together just so you can put a slide up there and name something whatever it is and say you're in e-commerce. We want to do it right. We want to do it, where the customer can shop the way they want to, and it's not something you throw together quickly and so we were very specific about taking our time and making that the product that it needs to be. With the combination of Cox Automotive and Darwin, with our experience in the store, we believe this is going to be the industry leader in an omnichannel option for our customers.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Timing?

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Timing-wise, we anticipate that we will have -- Darwin is rolling out right now on the franchise side and they will be going into EchoPark in August. And Cox Automotive and Darwin's product will be going out in the fourth quarter of 2020.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. Great. Appreciate it.

David Bruton Smith -- Chief Executive Officer, Director

And this is David. It's so important to remember how big this market is. And even the largest competitors have just a very small fraction of the market, so that our existing EchoPark customers are just part of the market. These people have -- they love coming and shopping at our stores. The people that are going to be served by this new -- our e-commerce, which is again the sweet side, we've very deliberately been rolling this out at the pace where we thought we could make -- it can be extremely profitable. As we mentioned the 55% return on these deals. And this will be to new customers who choose to shop in that way.

Jeff Dyke -- President, Director

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 get done, it will be all of that.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. Great. I appreciate it.

Operator

Your next question is from the line of Bret Jordan with Jefferies. Please go ahead, sir.

David Bruton Smith -- Chief Executive Officer, Director

Hi, Bret.

Ken Usdin -- Jefferies LLC -- Analyst

Hey, good morning. It's just actually Usdin only on for Bret. Thanks for taking my questions. Looks like a lack of new vehicle supply is expected to sort of continue to weigh on things here in the back half of the year. When do you guys expect those levels to normalize? And then, should we see this sort of offset by higher GPUs?

Jeff Dyke -- President, Director

Hey, yeah, this is Jeff. That's exactly right. It's going to be a tough road for July, August, September. Although we are seeing things improve, they're just not going to improve rapidly. I would look for October, November timeframe to get some normalized inventory levels. But the great news is there is low supply with high margin, and so we we're making great margin and certainly making up from a gross perspective. New models are coming out. And so -- it's all -- it all work in our favor as we move toward the end of the year.

Ken Usdin -- Jefferies LLC -- Analyst

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

Jeff Dyke -- President, Director

A little bit in fixed on the West Coast. That's what kind of -- we've kind of adjusted our trend there for you guys on a monthly basis, as you can see on the charts. It's just been a little bit more difficult to come back on the West Coast. But other than that, like I said earlier, Texas and Florida, the flare-ups there have not really affected our business. It's more new vehicle inventory than it is that. And we're doing all the right things from a COVID perspective for our guests and our associates, taking all the right precautions, doing all the right things. So we're not really finding that to be a detriment to the business as much as we are new vehicle inventory shortages, in particular on [Indecipherable].

Ken Usdin -- Jefferies LLC -- Analyst

Got you. And then just sort of high level. Do you guys have any internal projections on where you think retail will shake out maybe for '20 and '21?

Jeff Dyke -- President, Director

Yeah. Retail is going to be 13%, 14%, and probably again the same in '21. Fleet was the most impacted right just because all the rental car companies and the big problem that you see with Hertz, etc. But it's steady as she goes. In particular, it's the inventory from [Indecipherable] the demand is there for the cars because inventory comes back -- it will be steady as she goes from a new car perspective.

Ken Usdin -- Jefferies LLC -- Analyst

Great. That's all I had. Thank you very much for taking my questions.

Jeff Dyke -- President, Director

You bet.

David Bruton Smith -- Chief Executive Officer, Director

Thank you.

Operator

[Operator Instructions] Your next question is from the line of John Murphy with Bank of America. Please go ahead.

John Joseph Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. I just wanted to -- I just wanted to follow up on this Cox-Darwin development. And I mean you kind of talked about sort of an interface and a smarter interface and that and the like, but Cox is Manheim. They auction about 5 million vehicles a year and the recon a lot of them. I'm just curious as you look at this, is there an opportunity for you to source and recon vehicles directly from Manheim and then turn around and retail them very quickly and increase your turns and really kind of leverage these delivery and buy centers? I mean, it just seems like you're tying up with somebody that can really help you out on the back end there.

Jeff Dyke -- President, Director

Yeah, I mean, they are already a great partner and we source a majority of our inventory through them as it is, right. They do a great job for us. We can do [Indecipherable] We've worked with them on several projects like that. They've made some improvements to certainly discussions that we've had with them in particular those centers that are close to our stores. So that's not something that's [Indecipherable] it's good thinking. But in terms of sourcing, if we're not -- we're one of their top buyers in the country. And so, they -- we have a great relationship with them. They do a great job for us and we source the majority of our inventory through them.

David Bruton Smith -- Chief Executive Officer, Director

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

Jeff Dyke -- President, Director

Yeah. They've never built a proprietary instrument for anybody. And they are just -- they've just been unwilling to do that historically, but there's a lot of competition out there. I think their minds are changing on how that works. And we combine them with Darwin which is sort of a piping to the swimming pool, if you will, when you combine those two things with what we've already built internally, it's going to be a great product for the consumer from a user interface perspective.

John Joseph Murphy -- Bank of America Merrill Lynch -- Analyst

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

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

No. I mean, if you look at the -- look at the progress that we've made in F&I, and I'm tipping my hat to [Indecipherable] who has just done a great job with us allies, done a great job with us. I mean, our June numbers I think were a little over 2,100 all in, PUR which is an all-time record for us. And that's sort of industry best. I mean, I think AutoNation may be a little bit higher than that. And so when you get into that level, really things will make a whole lot of sense to take the capital, go off and create [Speech Overlap]

David Bruton Smith -- Chief Executive Officer, Director

We're not taking the risk. We're eliminating the risk.

Jeff Dyke -- President, Director

Yeah. There's tons of risk. There's just no appetite here for that. And it doesn't do anything more for us. We've got great relationships with the banks. It's all paying off. It adds complexity. And as you know we hate complexity. It's just -- it slows us down. And we got a handful now with what we're off and running and doing than what we laid out today, so that we just add a lot of -- a lot of complexity that we're not interested in having.

David Bruton Smith -- Chief Executive Officer, Director

And John, we've actually -- you see -- we've looked at it several times. The [Indecipherable] capital is so low it let you have a high subprime population and we used to not have a high subprime population.

John Joseph Murphy -- Bank of America Merrill Lynch -- Analyst

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 is 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? What's the opportunity set on the new side and why you think it's kind of different than what some other folks are going after?

Jeff Dyke -- President, Director

I mean -- this is Jeff. We love the franchise business. It's fantastic. It's a cash machine for us. If there is opportunities out there for us to buy, we'll take -- we're looking and we'll look at them every day. And we may do a deal here or there, but the returns to that [Indecipherable] are so high versus the returns that we're getting, the capital you have to put into facility, you name it. It just makes a lot more sense to put your cash into EchoPark, but that does not mean that we won't -- you won't see us do a deal. We're looking at a couple of deals right now as a matter of fact. And we'll see what happens. But it's a lot more cost effective to invest those dollars in EchoPark.

David Bruton Smith -- Chief Executive Officer, Director

Yeah -- and this is David. I think that one of the things we want our investors to understand how focused our team is on ROI and allocating our capital better than we've -- we ever have in the history of the Company. We're really focused on that. And so, really, it's not a emotional thing, it's just simply -- we talk about a 50% return on this new model with EchoPark and echopark.com, those returns are just -- it's hard, it's very difficult to find [Indecipherable] beat those kind of returns in our -- in our business.

John Joseph Murphy -- Bank of America Merrill Lynch -- Analyst

Okay. Great. Thank you very much, guys.

David Bruton Smith -- Chief Executive Officer, Director

Thank you.

Operator

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

David Bruton Smith -- Chief Executive Officer, Director

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

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

David Bruton Smith -- Chief Executive Officer, Director

Jeff Dyke -- President, Director

Heath R. Byrd -- Executive Vice President, Chief Financial Officer

Nels Richard Nelson -- Stephens Inc. -- Analyst

Rajat Gupta -- JP Morgan Chase & Co. -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Ken Usdin -- Jefferies LLC -- Analyst

John Joseph Murphy -- Bank of America Merrill Lynch -- Analyst

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