In another example of how business is booming in the pre-owned car market, Sonic Automotive (SAH) announced they have repurchased almost $289 million of debt. The news sent the stock price higher as investors applauded the move.
CEO David Smith said Sonic used a combination of liquidity on hand, and free cash flow from operations to retire the debt. The move further strengthens the company’s balance sheet ahead of its earnings release later this quarter.
Analysts feared the company might over extend itself as it rolls out additional EchoPark sites in the U.S. EchoPark is the company’s newest proprietary dealership model featuring a customer focused, no pressure business model, that has been delivering stellar results for Sonic.
The locally focused dealerships enhance their brand image by engaging in nonprofit activities in their local areas, and promoting employee participation in local charity events.
Last month Sonic opened the doors of its latest EchoPark dealership in Long Beach, California. And, announced the decision to expand into the Atlanta market with a new EchoPark to open there this year.
In opening the Long Beach location, Smith noted that the new dealerships often draw not only on the local market, but also bring in customers from neighboring states as well.
In discussing the debt retirement, Smith said, “By capitalizing on market conditions, we have made substantial progress towards our target of reducing debt by $300 million by mid-to-late 2020. This deleveraging has significantly improved Sonic’s financial position going into 2020 by reducing interest expense and improving our debt-to-EBITDA ratio.”
The debt retirement should in no way indicate to shareholders the company is pulling in its horns at this juncture. Smith specifically stated that Sonic is getting its balance sheet in order to enable further expansion.
He told investors, “Our success in strengthening our balance sheet leaves us well positioned to continue to expand our EchoPark footprint and to explore potential acquisition opportunities for our franchised dealership portfolio.”
The debt retirement is directly in line with the company’s announced expansion plans, with the goal that EchoPark become a major contributor to growth for the company, and a driver in moving Sonic’s share price higher.
With this debt off the books, the announcement in 2020 of additional EchoPark locations should not surprise investors, given the improved balance sheet. When the Atlanta EchoPark opens it will be the company’s eleventh EchoPark dealership in its fifth state.
Steven Adams’s personal position in Sonic Automotive: none.
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