Sonic Automotive, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Sonic operates franchised dealerships and EchoPark used-vehicle stores. At quarter-end it operated 92 franchised-dealership stores and eight EchoPark stores.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2.389 billion | $2.401 billion | Down 0.5% |
| Gross profit | $359.0 million | $352.5 million | Up 1.8% |
| Operating income | $87.3 million | $20.2 million | Up $67.1 million |
| Income from continuing operations | $42.3 million | $(2.0) million | Turned profitable |
| Net income (loss) | $42.2 million | $(2.2) million | Turned profitable |
| Diluted EPS | $0.98 | $(0.05) | Improved $1.03 |
| Operating cash flow | $(94.3) million | $54.8 million | Down $149.2 million |
| Capital expenditures | $30.6 million | $65.7 million | Down $35.1 million |
Gross margin was approximately 15.0%, versus 14.7% a year earlier; operating margin was approximately 3.7%, versus 0.8%. The improvement in earnings was substantially affected by a $46.7 million net gain on franchised-dealership disposals. Results also included $6.3 million of executive transition costs and $2.0 million of impairment charges. Q1 2018 included significant compensation, lease-exit, impairment and legal charges.
- Revenue mix: New-vehicle revenue was $1.066 billion, down 9.7% reported; used-vehicle revenue was $820.4 million, up 15.7%; parts, service and collision revenue was $341.4 million, down 2.9%; F&I revenue was $106.2 million, up 13.4%.
- Same-store trends: New-vehicle sales volume fell 8.2%, while gross profit per unit rose 6.1% to $2,145. Retail used-vehicle volume rose 13.5%, but gross profit per unit fell 9.5% to $947. Fixed Operations revenue grew 2.3%; F&I revenue grew 14.0%, with F&I gross profit per retail unit up 10.1% to $1,618.
- Segments: Franchised Dealerships revenue was $2.140 billion, down 5.7%; segment income was $73.5 million, including the disposal gain. EchoPark revenue rose 89.8% to $249.6 million; segment income was $0.6 million, compared with a $14.3 million loss, including $1.9 million of impairment charges.
Balance sheet, debt and liquidity
- At March 31, 2019, cash was $2.7 million, current assets $2.023 billion and current liabilities $1.966 billion. Total assets were $4.139 billion and stockholders’ equity was $852.3 million.
- Long-term debt, including current maturities, totaled $919.4 million. Floor-plan liabilities were $1.486 billion ($763.1 million trade and $722.8 million non-trade). The filing reports $202.6 million of revolving-credit availability and $7.7 million of used-vehicle floor-plan availability. Total stated liquidity resources were $295.1 million, including an $82.0 million floor-plan deposit classified in other current assets.
- Operating and finance lease liabilities totaled approximately $395.5 million at quarter-end. Adoption of ASC 842 on January 1, 2019 recognized approximately $406.9 million of right-of-use assets and $419.5 million of lease liabilities; adoption also reduced beginning retained earnings by $7.4 million, net of tax.
- Operating cash use reflected, among other items, higher other assets and lower trade floor-plan payables. Proceeds of $121.7 million from dealership sales supported investing cash flow. Management notes that the classification of floor-plan changes can materially affect reported operating versus financing cash flow without changing overall liquidity.
Outlook, commentary and risks
- Management estimated 2019 U.S. total new-vehicle SAAR of 16.5–17.0 million; its cited analyst range was 16.8–17.0 million. Q1 total SAAR was 17.0 million, while retail SAAR was 12.7 million, down 4.5% year over year.
- Sonic expected to open one additional EchoPark store in Texas by year-end 2019. Management said EchoPark expansion may weigh on near-term results as the company allocates capital and management resources. No formal full-year earnings or revenue guidance was provided.
- Management expected an annual effective tax rate of 26%–29%, before valuation-allowance changes or discrete tax adjustments. The reported Q1 continuing-operations rate was 31.0%.
- Debt-facility covenants were met at quarter-end. Actual covenant ratios were 1.16 liquidity (minimum 1.05), 1.43 fixed-charge coverage (minimum 1.20), and 4.90 lease-adjusted leverage (maximum 5.75). Variable-rate exposure was approximately $914.3 million after interest-rate caps; a 100-basis-point rate increase was estimated to change Q1 interest expense by approximately $2.5 million.
- Risks include vehicle demand and consumer-credit conditions, manufacturer relationships and incentives, pricing competition, EchoPark execution and funding needs, interest rates, legal proceedings, and import tariffs or other trade restrictions. Pending legal matters had reserves of $1.7 million; the company could not estimate reasonably possible losses beyond recorded reserves. General indemnification exposure was estimated at up to $24.2 million, with no significant amount recorded.
- Q1 seasonality is typically weaker for operating profit than later quarters. The company declared a $0.10-per-share dividend payable in April and subsequently approved another $0.10-per-share dividend for July; future dividends remain subject to board decisions, covenants and financial conditions.
Most important facts for investors to verify
- How much of the sharp earnings improvement reflects recurring operations versus the $46.7 million dealership-disposal gain and prior-year unusual charges.
- Whether EchoPark can sustain unit growth and improve segment profitability while front-end used-vehicle gross profit per unit remains pressured.
- Cash conversion and liquidity: reconcile negative operating cash flow, the $82.0 million floor-plan deposit and reported total liquidity, and monitor floor-plan funding needs.
- Debt and lease obligations, covenant headroom, variable-rate exposure and the effects of the new lease-accounting presentation.
- Progress against the 2019 SAAR assumption and planned EchoPark expansion, alongside the company’s sensitivity to consumer demand, rates, manufacturer incentives and trade restrictions.