Sonic Automotive, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless noted. Sonic operates franchised dealerships and standalone pre-owned stores, including EchoPark.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2.401 billion | $2.288 billion | +4.9% |
| Gross profit | $352.5 million | $350.3 million | +0.6% |
| Operating income | $20.2 million | $36.4 million | −44.6% |
| Continuing-operations pretax income (loss) | $(3.9) million | $0.2 million | Declined |
| Net income (loss) | $(2.2) million | $(0.5) million | Loss widened |
| Diluted loss per share | $(0.05) | $(0.01) | — |
| Operating cash flow | $54.8 million | $79.5 million | −31.0% |
Gross margin was approximately 14.7%, versus 15.3% a year earlier. SG&A increased 4.3% to $304.9 million and rose to 86.5% of gross profit from 83.4%. The company declared dividends of $0.06 per share, compared with $0.05.
Revenue and segment trends
- New-vehicle revenue rose 0.8%, while units fell 3.3%; gross profit declined 2.5%. New-vehicle gross profit per unit was $1,925.
- Retail used-vehicle revenue increased 11.8% and units 11.1%, but gross profit fell 9.9%; gross profit per unit declined 18.9% to $1,090. Management attributed the lower front-end margin partly to a pre-owned pricing strategy intended to increase volume and F&I gross.
- Wholesale vehicle gross loss widened to $4.4 million from $1.2 million, with management citing market price declines and Houston-area inventory supply and allocation challenges.
- Fixed Operations revenue was nearly flat at $351.8 million; gross profit increased 0.2%, and gross margin edged up to 48.2%.
- Finance, insurance and other revenue increased 12.8% to $93.7 million; F&I gross profit per retail unit increased 8.0% to $1,490.
- Franchised Dealerships segment income fell 29.0% to $23.8 million. Pre-Owned Stores segment loss widened to $14.3 million from $5.4 million. Pre-owned revenue grew sharply, partly due to added stores and an acquired operation; reported growth is not directly comparable with same-store performance.
Cash, debt and liquidity
- Cash was $9.2 million at March 31, 2018. Reported available liquidity resources totaled $128.0 million, down from $171.8 million at year-end, including $99.0 million available under the revolving credit facility.
- Long-term debt, including current maturities, was $1.059 billion. Floor-plan notes payable totaled approximately $1.480 billion. Total debt and floor-plan financing should be considered separately because inventory floor-plan obligations are reported apart from long-term debt.
- Operating cash flow was $54.8 million; investing cash outflow was $56.1 million, including $65.7 million of capital expenditures. Financing cash inflow was $4.1 million. Combined trade and non-trade floor-plan financing was a net cash use of $32.9 million; the filing notes that cash-flow classification can materially affect reported operating and financing cash flows.
- Capital expenditures included $31.6 million for facility construction and $28.8 million for real estate acquisitions; construction commitments were $24.3 million. The company repurchased about 1.2 million shares for $23.4 million, with $84.2 million of authorization remaining.
- The company reported compliance with debt covenants. Its minimum liquidity ratio was 1.09 against a 1.05 minimum; fixed-charge coverage was 1.70 against 1.20; lease-adjusted leverage was 4.90 against a maximum 5.75.
Outlook, changes and notable items
- Management estimated 2018 U.S. new-vehicle SAAR at 16.8–17.0 million, versus 17.1 million in Q1 2018. This is an industry estimate, not company earnings guidance.
- Sonic expected to open four additional EchoPark stores by year-end 2018. Management cautioned that expansion may weigh on near-term results as it uses capital and management resources; the first-quarter pre-owned pricing and inventory transition was described as not indicative of anticipated results after transition.
- Management expects an annual effective tax rate of 26%–28%, before valuation-allowance changes or discrete tax adjustments. Q1’s 47.8% continuing-operations effective rate was affected by discrete tax items and the quarter’s loss position.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Adoption increased Q1 revenue by $1.0 million and operating income by $0.7 million; opening retained earnings was reduced by $3.9 million. Management did not expect a material ongoing net-income effect.
- Operating income included $5.1 million of lease-exit charges, $3.6 million of impairment charges, and approximately $9.2 million of compensation-related charges; management also cited approximately $1.5 million of legal and other charges and a $1.2 million net dealership-disposal gain in its adjusted SG&A discussion. A prior-year $14.6 million debt-extinguishment charge affected the comparison of other expense and pretax results.
- The company sold one luxury dealership for approximately $7.5 million in net cash, terminated another luxury dealership, and ceased operations at one Florida pre-owned store. Q1 included $0.2 million of discontinued-operations loss.
- Variable-rate debt exposure was approximately $1.5 billion after interest-rate caps; a 100-basis-point rate increase was estimated to raise Q1 interest expense by $3.1 million. The company terminated outstanding interest-rate swaps for $4.8 million in proceeds and retained interest-rate caps.
- Lease-exit accruals were $10.8 million. Pending legal proceedings had $4.7 million of reserves; Sonic could not estimate reasonably possible losses beyond recorded reserves. Management identified automotive demand, consumer credit, interest rates, manufacturer relationships, competition, expansion funding and litigation among relevant risks. Q1 is historically a lower-profit quarter.
Important facts for investors to verify
- Whether used-vehicle unit growth and stronger F&I gross can offset lower vehicle gross per unit, wholesale losses and ongoing pre-owned store losses.
- How much of reported revenue growth reflects store additions and acquisitions versus same-store performance, and the effect of ASC 606 on comparisons.
- Whether operating cash flow and liquidity can support planned store expansion, capital spending, dividends and repurchases while maintaining covenant headroom.
- Exposure to higher rates across floor-plan and other variable-rate borrowings, and the effectiveness and duration of interest-rate caps.
- Potential future costs from lease exits, legal proceedings, dealership guarantees and indemnifications; the filing does not provide a clear estimate of unreserved litigation exposure.