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Sonic Automotive, inc (NYSE:SAH)
Q2 2021 Earnings Call
Jul 29, 2021, 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 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, July 29, 2021. 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 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, Chief Executive Officer of Sonic Automotive. 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 2021 Earnings Call. As she said, 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; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland. We're excited to publicly announce today record-breaking operating and financial performance for our company during the second quarter of 2021.

This performance would not have been possible without the tremendous effort and execution by our valued Sonic and EchoPark teammates. Congratulations, and thank you all. We'd also like to thank our customers, manufacturers and vendor partners for helping us achieve another record quarter. During the second quarter of 2021, Sonic continued to deliver exceptional performance in our Franchised Dealerships segment. We also posted a fourth consecutive quarter of record revenue and retail unit sales volume for our EchoPark business.

On a consolidated basis, we reported all-time record quarterly revenues of $3.4 billion, up 59% year-over-year. When compared to the second quarter of 2019, to exclude the effects of the onset of the pandemic, total revenues were up 28%. We generated all-time record quarterly income from continuing operations before taxes of $151 million, up 303% on a year-over-year basis and up 310% when compared to the second quarter of 2019. We also reported all-time record quarterly earnings from continuing operations of $114 million or $2.63 per diluted share, compared to second quarter 2020 earnings from continuing operations of $31 million or $0.71 per diluted share, and adjusted earnings from continuing operations of $28 million or $0.64 per diluted share.

These results reflect the strong consumer demand environment we've seen across all of our business lines since the latter part of 2020 but also showcase Sonic's continued ability to maximize operating efficiency at our Franchised Dealerships as well as the continued successful expansion of EchoPark's nationwide network. We are confident that our strong operating performance can be sustained throughout the balance of 2021 and well into 2022, and we are well positioned to grow total annual revenues to $25 billion by 2025, while continuing to significantly increase our profitability.

In our core Franchised Dealerships segment, second quarter revenues were $2.8 billion, a 53% increase from last year, which reflects rebound in consumer demand since the height of the pandemic in 2020. Gross profit for the second quarter was $475 million, up 69% from the prior year. Total franchise pre-tax income was $165 million, an increase of $131 million or 375% compared to last year. Same-store Franchised Dealership revenues rose 55% on a year-over-year basis, while gross profit was up 74%.

On a two-year comparison, same-store Franchised Dealership revenues increased 25%, while gross profit grew 40% compared to the second quarter of 2019. Franchised Dealership total variable gross per unit was nearly $5,100 per unit, up 43% year-over-year and up 58% from the second quarter of 2019, benefiting from strong vehicle margins and all-time record F&I per unit of $2,110. Our Franchised Dealership performance has been enhanced by execution against our plan, including discipline around SG&A spend, focus on our parts and service business and our continued ability to efficiently manage our inventory.

Looking forward, we remain committed to optimizing our Franchised Dealership business, both through organic growth initiatives and through strategic acquisitions. To that end, earlier this week, we completed the acquisition of Subaru and Volkswagen franchises in Grand Junction, Colorado. These acquisitions enhance our brand portfolio and complement our overall growth strategy, and we expect to announce additional Franchised Dealership acquisitions in the near term as we drive toward $25 billion in total revenues by 2025.

Turning now to EchoPark. The combination of our below-market pricing, efficient inventory procurement, logistics and reconditioning processes and digital-enabled sales channel has allowed us to offer tremendous value to consumers and our top line growth reflects this growing brand recognition. We generated all-time record quarterly EchoPark revenues of $596 million, up 89% on a year-over-year basis and a 104% increase compared to the second quarter of 2019. During the second quarter, EchoPark achieved all-time record quarterly retail sales volume of nearly 21,300 units, up 61% year-over-year.

On a two-year comparison, EchoPark retail unit volume increased 69% compared to the second quarter of 2019. We are already halfway to our EchoPark network expansion goal of opening 25 new locations in 2021. Based on our success to date and plans for future markets, we expect EchoPark to achieve 25% population coverage by the end of 2021 and 90% population coverage by 2025. Further driving our expansion opportunity, we have made excellent progress with our proprietary digital retail platform and are on track for our fourth quarter 2021 launch at EchoPark.

In the meantime, we continue to drive market share gains in our existing EchoPark markets and we anticipate our market penetration and brand recognition will continue to grow rapidly over the next decade as we expand our nationwide distribution network. Looking now at market share in more detail, EchoPark has shown a consistent trajectory from launch, indicating that our expansion is performing to plan. Within EchoPark's one- to four-year-old vehicle category, markets with EchoPark locations opened for less than two years average a 5% share; markets with EchoPark locations opened for two to three years average an 8% share; and markets with EchoPark locations opened for more than five years average a 14% share.

In addition, our below-market pricing drives sales opportunities on both ends of the one- to four-year-old spectrum, where we compare favorably on price to both new vehicles and five- to six-year-old vehicles, allowing us to expand our addressable market. In the longer term, we expect to continue to drive market share growth within EchoPark to an achievable target of 10% of that core market of one- to four-year-old vehicles networkwide, which, combined with the adjacent vehicle age segment, positions the business for a potential volume of two million units annually at maturity.

With our progress to date and the continuing development of our omnichannel retailing platform, we remain confident we can reach our interim goal of 575,000 units and $14 billion in EchoPark revenues by 2025. In addition to our top line results and continued expansion of EchoPark, our team remains committed to improving operating margins and managing expenses throughout the organization. In the second quarter of 2021, total SG&A expenses as a percentage of gross profit were 62.8%, an all-time quarterly record and a 1,210 basis point decrease from 74.9% in the second quarter of 2020.

Franchised segment SG&A expenses as a percentage of gross profit were just 58.1% in the second quarter, a 1,660 basis point decrease from 74.7% in the second quarter of 2020. On a two-year comparison, this represents a 1,900 basis point improvement from 77.1% in the second quarter of 2019. With this expense leverage, we realized second quarter adjusted EBITDA margin of 5.7%, up 220 basis points year-over-year and a 280 basis point improvement compared to the second quarter of 2019. These results reflect a permanent expense reductions we have previously communicated.

While current operating results reflect a higher gross margin environment due to constraints on new vehicle inventory, we do not expect new vehicle GPUs to fully regress to pre-COVID levels once inventories begin to build. Assuming normalized new vehicle GPU of $2,500 and used vehicle GPU of $1,300, without assuming additional unit sales volume or further parts and service growth, our pro forma Franchised Dealership's SG&A is expected to be in the 62% to 63% range, representing a 1,000 basis point improvement from pre-COVID levels as a result of the permanent changes in our expense structure.

In addition to operating expense leverage, we continued to focus on strengthening our balance sheet. We ended the second quarter with over $600 million in available liquidity, including approximately $315 million in cash and deposit balances on hand. During the early part of the quarter, as we mentioned on our last earnings call, the company closed a new four-year $1.8 billion credit facility which allowed us to extend our debt maturities, improved our borrowing costs and raised our total available liquidity and floor plan capacity at attractive terms.

With our available liquidity resources, we believe Sonic is well positioned to continue executing on our EchoPark growth plans while also strategically investing in the future of our Franchised Dealership business and continuing to return capital to shareholders through our dividend and share repurchase programs. I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.12 per share, payable on October 15, 2021, to all stockholders of record on September 15, 2021.

In closing, our all-time record quarterly results demonstrate the company's continued focus on execution with strong Franchised Dealership performance, the continued expansion of EchoPark's nationwide footprint, and our success in maximizing operating efficiency throughout our organization, driving long-term earnings growth potential. Our strategic growth plan is based on demonstrating unique value to current and future customers through our pricing, guest experience and growing nationwide reach at both EchoPark and our Franchised Dealerships. We believe that this consumer-focused approach will continue to deliver strong results for our shareholders and maintain Sonic and EchoPark's position as leaders and in evolving automotive retail environment.

And before we turn the call over for your questions, I'd like to comment on today's announcement that the company has initiated a review process to evaluate potential strategic alternatives for our EchoPark business. As detailed in our press release, working together with our advisors and our Board, we will explore a range of value-creating alternatives for the business. No timetable has been established for the completion of the review and allow me to remind you that there can be no assurance of a specific action or outcome.

As the review progresses, we will remain committed to executing our accelerated expansion plan for EchoPark, bringing this unique and competitive offering to new markets to deliver value for our guests while also supporting the teammates that are central to cultivating the EchoPark experience. We are focused on continuing to build upon the positive momentum in the business and remain confident in the long-term growth opportunity ahead. As the review is ongoing, we will not speculate on any particular outcome or make any further comments related to the process.

This concludes our opening remarks. We look forward to answering any questions you may have. Thank you very much.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Rick Nelson with Stephens. Please go ahead.

Rick Nelson -- Stephens -- Analyst

Hi. Thanks. Good morning. Great quarter. I'd like to follow up on this strategic alternative, curious what is prompting that review at this time.

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

Rick, this is Heath. We're not going to comment any further than the statement that was in the press release as well as in the opening statements from David. And once the evaluation is complete, there may be additional comments. But at this point, I just wanted to make everyone aware that, that process was underway.

Rick Nelson -- Stephens -- Analyst

So on the franchise side, we saw a pretty meaningful expansion. And at the EchoPark side, we saw declines in that GPU. Can you help reconcile those differences?

Jeff Dyke -- President, Director

Yes, Rick, so why don't you take -- why don't we start -- this is kind of a long-winded answer, but why don't we start -- and let me refer you to Slide 22 of the investor presentation that we released this morning. And I think that will really help us kind of answer this question. I'll give you a second to get there. So as you can see on the slide, when you look at weeks one through nine, we had really normal market conditions and normal EchoPark margins. But beginning in week 10, wholesale prices rose above average market retail prices.

And in my career, which is 25 years doing this, the market has never seen a wholesale price inversion of this length or magnitude at all. In early April, we then decided to make a strategic decision to drive volume and market share, but also mitigate losses by adjusting our pricing strategy up. As we move into the third quarter, market conditions are now beginning to return to normal, and we've returned to our normal pricing strategy that we were running in the first quarter. But however, we do have a 40-plus current day supply of inventory.

That's driven by new store openings. Traditionally, we run 30-day supply, 20 on the front line and 10 in the back line. And so we expect margin pressure to continue through August. But as we approach the end of the third quarter, we expect EchoPark margins to begin to normalize. Fourth quarter margins are going to look a lot like the first quarter. And as a result of the actions that we've taken, we do remain on track to sell the 100,000 to 105,000 cars that we told The Street that we would sell at the beginning of the year. When you look on the franchise side, trade-ins make a big -- trade-ins make up a big percentage of our volume, about 60%.

And so we're obviously trading for cars a lot cheaper than we're buying cars at the wholesale line. About 88% of our cars come from the auctions at the EchoPark level where very few -- a much smaller percentage of our cars come at the Franchised Dealerships, and that speaks for the industry as well. Everybody's got higher margins. But the exposure for EchoPark is, is that we buy a lot of wholesale cars at auctions and we keep a short-day supply.

So we're going to run into margin events when you have an event like this. The good news is these events have happened onetime in my 25 years and probably have happened one time in anybody that's on this call as well. So it's not a concern for us as we move forward. We believe things will return back to normal, and getting closer to normal as we go into the month of September, certainly into the fourth quarter and as we move on into 2022.

Rick Nelson -- Stephens -- Analyst

Got it. So curious also if you're expecting losses in Q3 and Q4, or do we shift to profitability? Sort of forecast here would be helpful.

Jeff Dyke -- President, Director

Yes. Here's how you would look at it. I think that the losses that you see and saw in the second quarter, they are going to kind of be relative in the month of July. We'll get a little better, but probably still show a loss in August. September should then turn positive. And in the fourth quarter, we'll be back at the run rates that you saw in the first quarter. So that overhang that we have, and we wouldn't obviously have an overhang if we weren't opening so many stores, but we're buying a lot of inventory right now. And we're just not going to adjust our strategy because of an event that happens once in a lifetime.

It's just not -- it's not something we're going to do. It slows the entire business down. We're going to continue to grow our share as David said in his opening comment. We have a five-year-old store. Our most mature store in our most mature markets got 18% share in the Denver market, and we're averaging really 14% share in anything over five years. So we're not going to slow that down for a onetime event. And we think we've made the right decision there. So a little bumpy road for July, August; things get a lot better when September gets here and then back to normal in the fourth quarter.

Rick Nelson -- Stephens -- Analyst

Also, I noticed you have an acquisition announcement today. We haven't seen one of those in a while. If you could speak to that and your appetite to acquire on the franchise side?

Jeff Dyke -- President, Director

I mean, look, we're bullish on the franchise side of the business and the EchoPark side of the business. There are a lot of deals out there right now. And so we're strategically buying deals that fit our footprint or markets that we're going into. New markets like we announced with Grand Junction, although we're in the state of Colorado. But there are a lot of opportunities out there right now. So -- and as David said in his opening statement, you're going to see more purchases from us on the franchise side as we move through the rest of this calendar year.

Rick Nelson -- Stephens -- Analyst

Great. Thanks and good luck everybody going forward.

Jeff Dyke -- President, Director

Thank you so much.

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

Thank you.

Operator

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

Rajat Gupta -- JPMorgan -- Analyst

Hi, great. Thanks for taking the question. I know you don't want to give too much color on the strategic review, but in the event that there is a separation of the EchoPark business that might happen as one of the possibilities, is there any way you can frame for us or quantify the dissynergies that would be there in that event? Any brief color on that would be helpful. And I have a follow-up.

Jeff Dyke -- President, Director

No, we appreciate the question, but we really can't comment further.

Rajat Gupta -- JPMorgan -- Analyst

Okay. Anything qualitative to keep in mind in terms of shared resources or auctions or anything like that?

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

Rajat, this is Heath. Again, we're not going to comment on any of the details. I can just assure you that just like every decision that we make in this company, our focus is on increasing shareholder value and releasing as much value in this company as we can. And so that's the driver of every decision we make. But other than that, we just won't get into details of that analysis.

Rajat Gupta -- JPMorgan -- Analyst

No worries. I had to try. Just a -- and the two million units at maturity, what kind of EBITDA margin profile can the business run at? The 2025 targets imply like somewhere in the low single digits, but you're still ramping up stores at that point. So any color on what kind of EBITDA margins or profitability of the business can be at maturity?

Danny Wieland -- Investor Relations

Yes, you're going to see -- you're going to continue to see expansion of that, in particular, based on what we projected in 2025. That's based on an immature store set. So as we run those out toward maturity and you get a more mature store base, you'll see continued expansion beyond what that is there. We have not quantified what that opportunity or upside is. But I think the basis for EchoPark is that we were able to scale and leverage those expenses dramatically better and more efficiently than we are on the franchise side. And so we should see meaningful upside to EBITDA margin as you get north of 575,000 units and continue to mature the store base.

Jeff Dyke -- President, Director

Yes. And to Danny's point, we've always talked about how the expenses at EchoPark are more fixed. And so obviously, that's going to drive a higher EBITDA margin as we scale.

Rajat Gupta -- JPMorgan -- Analyst

Got it. And any color on like what the matured stores, what kind of EBITDA margin there? Obviously, keep taking into account the onetime hit this quarter on GPU, but -- any reference to that?

Jeff Dyke -- President, Director

So I guess the best way to look at it is SG&A is going to be in the mid-50s to 60% range, somewhere in that ballpark for a mature store.

Danny Wieland -- Investor Relations

If you go back to...

Rajat Gupta -- JPMorgan -- Analyst

Got it. Okay.

Danny Wieland -- Investor Relations

If you go back to what our two most mature markets, Denver and Dallas, did in 2019, pre-COVID, both -- each of those markets did $12 million in pre-tax. And so if you think about them running at, I think, that year was 1,300, 1,400 units a month on average. So if you look at it from that perspective, EBITDA is going to be somewhere north of that $12 million into that revenue base.

Jeff Dyke -- President, Director

And during that time frame, the share in those markets was lower. Denver is running last month -- the present month of June, we ran 18% market share there. So it's a much more mature market now, and we don't know where that share can go. We're calling out 10%, which is driving the $2 million, but our stores are at five years at 14%. So there's certainly upside to that number, and I think that's a critical thing to think about as we move forward.

Rajat Gupta -- JPMorgan -- Analyst

Got it. Got it. Just one last one. On the SG&A side, you gave us some color on the franchise business in the context of like what GPUs could look like. Just looking at the second quarter number, the 58% for franchise unit gross. It looks like the leverage or the drop-through to the bottom line from the gross profit increase just seems to be much higher for you versus what we've seen at some of the peers, almost like 75% to 80% drop-through of that gross profit benefit. Is there something different?

Or are there any changes that you have made over the last year when you were laying off -- when you laid off some staff that -- has there been any change in terms of the fixed sources variable comp model or anything of that sort that would lead to this kind of a drop through? Just curious if you could share any thoughts there. That would be all.

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

Yes. This is Heath. A couple of things. I missed a little bit of it, but I just want to -- and David hit on it very well in the opening comments. We -- first of all, on a high level, I think we had actually had guidance in February of around 73% for 2021, for the year, we're running at 66%, 67%. And we -- for this year, we absolutely expect that to be our SG&A percent of gross at that level, not the higher 73%. If you look forward, David articulated this and tried to normalize what we expect to see in 2022, where you -- we still believe that GPU is going to be elevated on new, you normalize the used. We are looking at a 62% and that includes EchoPark and the franchise business.

And so as the EchoPark matures, we can actually improve that even better than the 62% range. But a couple of things that are driving the throughput. We've got -- if you look at our productivity on our sales associates, for example, we used to sell 12 units per month for associate before these cuts that we put in place and these efficiencies, now we're running 18, 19. And so that's a fundamental change that you can see even at these new levels we're maintaining.

And so that's a big part of it that is changes -- structural changes that have been made in organization. The other one is centralization of advertising, a huge component to our SG&A that is a structural change that's allowing that throughput to happen. We're spending a lot less on advertising, and it's even more effective. And so those are two of the biggest that are the structural changes are driving that throughput.

Jeff Dyke -- President, Director

It's not just a gross-driven event. It's a gross and expense-driven event, and we made a big deal out of that during COVID saying we really did take a lot of expense out of this business. I think we quoted $84 million annually that's come out. It's running higher than that. And it's permanent, as David said in his opening statement. And so when you're looking at your models and forecasting for next year, you really got to take that into consideration in terms of how you look at the business. And then the great news there is -- and I don't know if you mentioned this or not, Heath, but our California market is really underperforming in a big way compared to the rest of the markets.

The market has just not come back as fast due to COVID. So if you look at our new car volume in California, it underperformed the rest of our stores by 1,000 basis points; used car volume down by 1,400 basis points, fixed up 600 basis points; total revenue was down by 1,300 basis points and gross profit down by 1,000 basis points. As California opens back up, it's just going to -- it's going to be fantastic for us. We've got a big chunk of our stores and our business out there. And so that's going to further enhance the gross portfolio, but it's also going to continue to lever the SG&A percentage down. So it really is coming from both sides. And the great news is, is we can have the new car margins return -- I don't think they're going to return to pre-COVID levels.

Again, I think the manufacturers are doing a smart job by keeping inventories tight and they'll continue to do that even as we move forward. So if you do model a $2,500 PVR, which is still well ahead of where we were at pre-COVID, you get to have the gross growth and you get the big expense reductions that are permanent, again, in place, and that's just going to keep the SG&A coming down. Then you add on top of that the performance of EchoPark getting back out of this crazy inversion time that we went through into picture, just works really, really good for us.

David Bruton Smith -- Chief Executive Officer, Director

And that's why -- this is David. And that's why I noted that assuming no additional unit sales volume in that or further parts and service growth, we're being conservative in these projections.

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

Yes. And I think -- I think that's -- look, it's some of the models I've seen from -- on some of the analysis on line and sell side. From our perspective, I think what is being missed is that the power of that SG&A reduction staying in place. I also think that some people are assuming that we go back to pre-COVID GPUs which, from our perspective, as Jeff mentioned, we think that will be elevated continuing. And at least from our company specifically, the models are not giving EchoPark any credit. And as we've mentioned many times, 2022 is the tipping point of EchoPark. That's when we are going to be opening less stores than we have opened. And so I think when we look at some models that really don't jive with ours, those are the things I think they're missing.

Rajat Gupta -- JPMorgan -- Analyst

Got it. Hello?

Jeff Dyke -- President, Director

Yes, we can hear you. Go ahead.

Rajat Gupta -- JPMorgan -- Analyst

Yes. I think I missed like the last few seconds when you'd cut off, but I can read the transcripts. So thanks for the color. [Technical Issues] the store openings versus...

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

Yes, I was just saying that as we look at some of the models from some of our buy and sell-side analysts and when it doesn't really jive with from our perspective, the things that I think are missing are the understanding of the permanent reductions that will continue regardless of any increase in volume, number one. Number two, the assumption that new GPU goes back -- that the manufacturers go back to the 60-day supply, 65-day supply and the new GPU goes back to 2019. From our conversations, as Jeff mentioned, that's not going to happen.

Those will be elevated, continuing. The impact of California, at least specifically for us, and what is going to happen to the second half of '21 and into 2022. And again, EchoPark. EchoPark is that -- 2022 is our inflection point or tipping point where we are opening less stores than we have matured. And as we stated before, we believe that is when the profitability, even though we have it today, it starts going exponentially because you've got so many mature stores in place.

Rajat Gupta -- JPMorgan -- Analyst

Got it. Great and thanks for all the color and good luck.

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

You bet. Thank you.

Operator

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

John Murphy -- Bank of America -- Analyst

Good morning, guys. You've answered a lot of my questions, but I'll ask just one or two more. You mentioned two million units is sort of the target for EchoPark at maturity. And I think, Jeff, you were saying there are some markets that that's based on 10% more market share on your target vehicles. But there are some markets you're 14%, 15%. I mean could this be the kind of thing where this is not $2 million, it's $3 million. And then if you decide to expand in the iceberg or maybe slightly older vehicles, or expanding the offering that you might be something significantly larger than that? I mean how are you paying this $2 million other than just 10%? What's the opportunity beyond maybe that?

Jeff Dyke -- President, Director

Yes. I mean if we take the five-year average, right -- the five-year-old store average right now is 14%. So the number is bigger than $2 million. And yes, it could be $3 million, $4 million. At the end of the day, we're always looking to take the inventory process that we have at EchoPark into pricing model and to expand that. I would think of it differently. I don't think we expand into five, six, seven, eight-year old cars because it brings a lot of complexity to the model that really doesn't fit our model, adds cost and things of that nature, that just doesn't fit the model.

But what you might think about is instead of the traditional EchoPark -- less this crazy time, traditional EchoPark average retail price being $20,000 to $21,000, you might look at something was, OK, can they expand that to a $35,000 to $40,000 car? And so -- because that's not an average retail selling price we come anywhere near. And we're -- look, we're always looking at how can we take this great model that we have, the efficiency that we have with the model, which is really exceptional and one of a kind, I think, in our industry and expand that to grow EchoPark to further levels?

So -- yes, the $2 million is a good, safe number for us because we know we're going to be above 10% in terms of market share. And we understand what our defined market is. It's a smaller swim lane. It's not the traditional 40 million to 43 million cars being sold every year. It's a smaller lane, but we can own a much larger percentage of that lane than what some of our competitors are talking about of the overall marketing. So I think you're thinking right. And it's absolutely the way that we're thinking.

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

And also you can think about because of our pricing strategies, part of that $2 million, which could be a lot higher numbers, we're pulling that five- and six-year-old buyer into the one- to four-year old because we are priced so low that now they can afford a one to four rather than a five to six. That adds to our TAM. We're also pulling from new car buyers because I've got a one- to four-year-old car with a conditional report of 4.5. It's just as good -- I mean it's just as good as a new car. And so I'm pulling from that $13 million as well. So we feel like we're going to have some migration from those other populations into the one to four because of the way we price.

Jeff Dyke -- President, Director

And we do today. That's part of our volume today, and we expect that to continue to expand with our pricing model as we move forward. We see that happening, and that's part of the big share, like I quoted for Denver, that we've got an 18% market share there in the one to four category, but it includes some five- and six-year-old vehicle buyers because the price is so low, and it includes some new car buyers because we're 40% priced below the new car traditional number. So all in, a great opportunity for us. And again, I think you're thinking right.

John Murphy -- Bank of America -- Analyst

And then just a second question. I'm not sure you can -- you're going to be willing to answer this, but I mean, you said 88% of EchoPark units are sourced from auction. Will that be the case over time? And are the other 12% flowing from your franchised stores? I mean I'm just trying to understand that inventory -- I mean you're sourcing two million units, you start getting into, obviously, just simply big numbers, big chunks of the market. So I mean does the sourcing strategy stay the same over time at EchoPark?

Jeff Dyke -- President, Director

It's really not a strategy. At the end of the day, we buy as many cars off the street as we want, but just think about it. It's not a lot of customers trading in a one- or two-year-old car. And they're still upside down, have negative equity whatever. It's just not as big a swimming pool as you might see for our franchise stores or some of our competitors where we're selling zero- to 10-year-old cars, and the average card on the road is eight, nine years old, and we trade for those cars all the time, that drives the margin that you see on the franchise side. So yes, I think can expand. If you look when we first started, that number was 6%, 7%, 8%.

We've got it up to 12%. We've got -- I think we have some opportunities there, but I don't think it's going to be as big a percentage overall of our sellable inventory as you might see at some of our competitor set or even our own franchise stores. And we really don't -- we don't take cars from the franchise stores and move to EchoPark. We do the other way. Cars that don't fit the EchoPark model, we send to our franchise stores, and they benefit greatly from that. But it's certainly every day, a topic of conversation for us is how do we increase the 12% because the margins are significantly better on a street purchase than they are buying a car at the auction.

And one other point, we're not -- I mean I hear people all the time talking about not being able to buy inventory. We don't have -- we've never had a problem buying inventory. We haven't had a problem. When everybody says inventory is tight right now, we don't have a problem buying inventory. You got to pay for it, and that's going to adjust the margins. But it's -- what we're not going to let that do is slow us down. The business is strong enough now that we're going to continue to power through.

And when you have events like we had over the summer here, it just is not -- it's not a big enough event to worry us. We're going to continue to power through, drive our market share because we come out the other side of this, we're going to be a lot stronger for it. So we don't have any problems getting inventory. I want to make sure that I get that point across.

David Bruton Smith -- Chief Executive Officer, Director

Yes. And this is David. And simply to think about it and related to that is, as we grow our brand, our EchoPark brand and the markets, you can see there our market share increases, but so do the number of quality trade-ins that we get that actually fit the EchoPark model that we then go and resell. So we definitely see that -- those numbers growing.

John Murphy -- Bank of America -- Analyst

Okay. And then just lastly, I mean, there's a core part of the business which is still a very, very good business outside EchoPark. I mean -- we're -- I mean do you have any designs about where that lands? I mean you've given us an idea of two million units, but like obviously, there's some upside there on EchoPark. I mean where do you think that the core business -- the core franchise business goes over time? How do you think about where that could top out or where you go when you're making acquisitions?

David Bruton Smith -- Chief Executive Officer, Director

Well, there's a number of ways to answer that, and I know Jeff will have some comments on that. But the franchise business is still extremely fragmented in this country. And so there's still tremendous opportunity for growth in that area, which we alluded to that in our opening comments.

Jeff Dyke -- President, Director

Also, John, we've just never been in a position to grow, right? We just haven't had the liquidity. We've been shoring up our business. This team has been together since the end of '18. And so we positioned the company now from a liquidity perspective, we can kind of do what we need to do to grow in the franchise business and continue to grow EchoPark. And so now you're going to see us dive in there. We said that in the opening, we've got more franchises coming. We want to grow the business. It's a great business.

Like you said, it's highly profitable. We really have our house in order when it comes to our liquidity, and Heath can comment on that here in just a second, but also from an operational perspective. The turnover from our general manager turnover is 5% or less, the company has really strengthened its performance. Our playbook processes are really -- have matured. And so it's time to grow the business, and we're in a position to do that now.

David Bruton Smith -- Chief Executive Officer, Director

And there's been some deals that just want to emphasize, too, that we absolutely look at the ROI of our -- of all of our investments. And so there have been some deals that we've passed on that just did not represent a great investment versus the investment in EchoPark. But we think as we move forward, we're seeing more and more opportunities to get -- for great acquisitions that are accretive and will add a lot of value for our shareholders.

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

Yes. And if you look at it from a balance sheet perspective, our leverage ratio is extremely low. Our credit profile is improving from the agencies on a daily basis. So we've got ready available access to the capital markets for additional needs if necessary.

John Murphy -- Bank of America -- Analyst

I mean would it be -- actually, just a follow-up on this. I mean you look at AutoNation, it's about 2% of the market. You got Lithia making acquisitions pretty aggressively, talking about getting about 5% of the market. I mean would you ever -- I certainly can't put you on the spot right now because I'm sure -- well, you might have some ideas about this. So I certainly ask of where you could be as a percentage of the new market, right?

Because you're sitting here saying it can be 10% of the addressable market I'm going after in EchoPark. I mean could you say 2%, 3%, 4%, 5% in the new vehicle market? Is that something you'd be willing to put out at some point? Is it a target? Or is this going to be just more opportunistic and you're going to roll up as you see fit over time?

Jeff Dyke -- President, Director

Well, look, we just dove back in the pool, right? And so that's a number I'm sure that we'll come with because there's just a ton of buying opportunities out there right now and you see our competitors buying, and you'll see us do the same, in particular, between now and the end of the year. And so yes, I think at some point in time, we can define that. But we're really kind of starting to hit our stride from an M&A perspective. And so give us a few quarters, and we'll begin talking a little bit more about that as we kind of define how many of these stores we're going to buy and where we're headed with this.

John Murphy -- Bank of America -- Analyst

Great. Thank you very much guys.

Jeff Dyke -- President, Director

Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Mark Jordan with Jefferies.

Mark Jordan -- Jefferies -- Analyst

Good morning. Thank you for taking my questions. I guess following up on the M&A question. Can you kind of talk about what multiples you're seeing now and how they compare to historical trends?

Jeff Dyke -- President, Director

It's -- they're different all over. It really depends on the brand and the markets that you're in, but -- I mean if you're going to go out and buy a Porsche store, you're going to pay north of a 10 multiple. And -- but if you're buying some of the domestic or imports, it's five, 5.5, six, somewhere in that ballpark we're seeing. And it really does depend on the market, the city. There's just so many different issues with narrowing it down on a kind of a nationwide basis because those numbers are different all over the place. And I think you would hear that from our competitive set as well.

Mark Jordan -- Jefferies -- Analyst

Okay. Great. And I guess following up on the EchoPark GPU question from earlier. It looks like in the quarter, you took some pricing up, I think, above market to kind of offset some of those wholesale headwinds. So when we get back to more of a normal sourcing environment, is this maybe kind of an opportunity to rethink the pricing model or maybe just be a little bit above where you have been historically for EchoPark?

Jeff Dyke -- President, Director

You know it's an interesting conversation because what it showed in this time frame is the strength of the brand. Because we got as high as 108%, 109%, 110% of the market during the time frame, trying to balance the loss and maintain our numbers in terms of share. So down the road, as the brand strengthens, and the guest gets to experience more than just price, that they get to experience just the great experience that you get coming into the store. And then we introduce in the fourth quarter, our digital retailing platform in our new websites are just going to be fantastic, there is definitely going to be opportunity for margin expansion.

We have not defined that yet, but you will continue to see us stay very aggressive versus the market. That's our bread and butter. And that to -- could we go from 2,500 to 3,000 below market down to 2,000 below market and still get the same kind of market share that we're seeing today. We will definitely play with those numbers as the brand expands across the country and becomes a nationwide known brand. And I might have Steve Wittman just comment quickly on our digital retailing platform.

Steve Wittman -- Chief Digital Retail Officer

Yes, sure. So we've taken a two-pronged approach to e-commerce here at Sonic Automotive. In parallel, we are improving echopark.com and building our proprietary digital retailing tool. Our proprietary digital retailing tool is on track to launch in Q4 of this year. We have a big team of over 50 people of designers, developers and product owners who are working on that right now. And that's really set to deliver a true end-to-end experience for the consumer, without having a lot of human intervention like a lot of our other tools out there have.

In parallel, we're improving echopark.com. So echopark.com, visits are up 156% versus a year ago, leads are up 111% versus a year ago, and our cars sold from our website are up 74% versus a year ago. So we're improving echopark.com every single day. And we've actually, for the first time in May and then June and July, we actually generated more leads from echopark.com than we did from our third parties, just shows the strength of the website and also shows the strength of our brand.

Mark Jordan -- Jefferies -- Analyst

Great. Thanks Steve.

Operator

We have no further questions at this time. I'll turn the conference back over to management for any closing remarks.

David Bruton Smith -- Chief Executive Officer, Director

Thank you, everyone, for joining us, and have a great rest of your week.

Jeff Dyke -- President, Director

Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

David Bruton Smith -- Chief Executive Officer, Director

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

Jeff Dyke -- President, Director

Danny Wieland -- Investor Relations

Steve Wittman -- Chief Digital Retail Officer

Rick Nelson -- Stephens -- Analyst

Rajat Gupta -- JPMorgan -- Analyst

John Murphy -- Bank of America -- Analyst

Mark Jordan -- Jefferies -- Analyst

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