Sonic Automotive, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Sonic operates franchised dealerships and EchoPark used-vehicle stores. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $2,111.9 | $2,614.1 | $4,419.9 | $5,003.2 |
| Gross profit | $307.4 | $381.3 | $658.0 | $740.3 |
| Operating income (loss) | $53.5 | $63.0 | $(168.3) | $150.3 |
| Net income (loss) | $30.8 | $26.6 | $(168.5) | $68.8 |
| Diluted EPS | $0.71 | $0.61 | $(3.94) | $1.60 |
| Operating cash flow | Not stated separately | Not stated separately | $227.7 | $(56.9) |
- Q2 revenue fell 19.2% year over year; gross profit declined 19.4%. Gross margin was approximately 14.6%, broadly in line with the prior-year quarter.
- First-half revenue declined 11.7%. The first-half operating and net losses primarily reflect a $268.0 million non-cash goodwill impairment recorded in Q1; the associated tax benefit was $55.8 million.
- Q2 segment income before taxes and impairment charges was $38.3 million, versus $36.8 million a year earlier. First-half segment income on this basis was $63.0 million, versus $100.1 million; the prior-year period included a $46.7 million dealership-disposition gain, partly offset by executive transition costs.
- Q2 diluted EPS increased to $0.71 from $0.61 despite lower revenue. First-half diluted EPS was $(3.94), versus $1.60.
Operations and changes versus prior period
- COVID-19 restrictions and weaker consumer activity materially affected vehicle sales and service activity in March and April. Activity began recovering in May. In June, same-store new-vehicle unit sales were down about 15% year over year, used-vehicle sales were up about 9%, and fixed-operations gross profit was down about 2%.
- Q2 same-store franchised new-vehicle unit sales fell 24.6%; gross profit per unit rose 8.6% to $2,218, partly reflecting manufacturer supply constraints. Same-store franchised used-vehicle sales fell 11.7%, and gross profit per unit declined 13.6% to $1,122 amid strategic price reductions.
- Franchised fixed-operations same-store revenue and gross profit each declined about 24.5% in Q2. F&I gross profit per retail unit rose 11.3% to $1,730, partly offsetting lower sales volume.
- EchoPark same-store used-vehicle sales declined 6.9% in Q2; combined used-vehicle and F&I gross profit per unit fell 5.2% to $1,968. First-half EchoPark same-store used-vehicle sales rose 4.8%.
- Management reduced costs through workforce and compensation actions, lower advertising and other spending, and postponed capital expenditures. It estimated approximately $7 million per month of ongoing expense reductions compared with pre-pandemic levels.
Cash, debt and liquidity
- At June 30, cash was $115.7 million, compared with $29.1 million at year-end 2019. Total available liquidity resources were reported at $455.2 million, including $183.4 million of revolving-credit availability, $69.0 million under a new line of credit, and an $83.9 million floor-plan deposit.
- Long-term debt, including current maturities and net of issuance costs, was $749.5 million. Floor-plan payables totaled approximately $1,217.3 million. Total assets were $3,595.4 million and stockholders’ equity was $744.7 million.
- Reported first-half operating cash flow was $227.7 million; investing cash outflow was $62.5 million and financing cash outflow was $78.7 million. Cash flow presentation is materially affected by whether floor-plan financing is classified as operating or financing: management stated that treating all floor-plan changes as operating would have produced operating cash flow of approximately negative $163.6 million.
- The company reported compliance with debt covenants at June 30. Actual covenant ratios were 1.13 for minimum liquidity (1.05 required), 2.10 for fixed-charge coverage (1.20 required), and 3.23 for maximum lease-adjusted leverage (5.75 maximum).
- Capital expenditures were $61.7 million in the first half; facility construction commitments were $21.8 million. Sonic repurchased approximately 1.0 million shares for $27.8 million in the first half. The board approved a $0.10-per-share quarterly dividend and, after quarter-end, authorized an additional $60 million of share repurchases.
Outlook, risks and unusual items
- Management expected continued recovery in the second half of 2020 but gave no quantified earnings or revenue guidance. It warned that a renewed wave of shutdowns could hurt demand, that new-vehicle shortages emerging at June-end could affect Q3 sales, and that supplier disruption could constrain operations.
- Management said COVID-19 had not then affected its cost of or access to capital and did not anticipate material adverse changes in access in the near or longer term; this outlook was subject to significant pandemic and economic uncertainty.
- Further goodwill impairment remained possible if operating conditions worsened or the stock price fell below levels that triggered the Q1 assessment. The company said no additional impairment test was required based on Q2 conditions.
- Other risks include consumer demand and credit availability, manufacturer relationships and inventory supply, competition, interest-rate exposure, litigation and covenant compliance. A 100-basis-point rate increase was estimated to raise first-half interest expense by approximately $11.6 million.
- Pending legal matters are ongoing; Sonic recorded reserves of approximately $0.5 million in total, but could not estimate a reasonably possible loss range beyond amounts accrued. Certain indemnification obligations had maximum stated exposure of approximately $42.0 million, with recorded amounts not significant.
Investor facts to verify
- How the Q1 goodwill impairment and its tax effects influence reported versus underlying earnings.
- Whether vehicle supply, consumer demand and fixed-operations activity sustain the recovery described through June.
- Liquidity composition, covenant headroom and floor-plan cash-flow classification, including the $83.9 million deposit included in available liquidity.
- Capital allocation plans, including the dividend, expanded buyback authorization, EchoPark expansion and construction commitments.
- Potential further impairment, litigation exposure and sensitivity to variable interest rates.