Sonic Automotive, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Sonic operates franchised dealerships and the EchoPark pre-owned vehicle business. This was the first full quarter to include locations acquired in the December 2021 RFJ Auto acquisition.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $3,586.6 million | $2,786.8 million | +28.7% |
| Gross profit | $571.3 million | $400.9 million | +42.5% |
| Gross margin | 15.9% | 14.4% | +1.5 percentage points |
| Operating income | $154.4 million | $87.9 million | +75.7% |
| Net income | $97.3 million | $54.2 million | +79.5% |
| Diluted EPS | $2.33 | $1.25 | +86.4% |
| Operating cash flow | $252.5 million | $90.3 million | +$162.2 million |
| Cash and equivalents | $360.2 million | $299.4 million at Dec. 31, 2021 | +$60.8 million |
Revenue growth reflected acquisitions and higher vehicle prices; reported results are not directly comparable on a same-store basis. Gross profit and earnings also benefited from unusually strong per-vehicle margins amid constrained supply. SG&A rose 33.7% to $387.0 million, but declined to 67.7% of gross profit from 72.2%.
Segments and operating trends
- Franchised Dealerships: Revenue was $2,961.3 million versus $2,279.7 million; pretax segment income increased to $163.8 million from $70.6 million. Same-store retail new-vehicle units fell 14.5%, while same-store retail new-vehicle gross profit per unit rose 134.4% to $6,799. Same-store used-vehicle units declined 16.2%, but gross profit per unit increased 35.7% to $1,728.
- EchoPark: Revenue increased 23.3% to $625.3 million, while the segment recorded a $34.9 million pretax loss versus $2.0 million income a year earlier. Same-market used-vehicle units declined 48.2%, and same-market combined vehicle and F&I gross profit per unit fell 11.3% to $2,064. Expansion and newer markets contributed to reported revenue.
- Fixed operations and F&I: Consolidated parts, service and collision revenue increased 18.6% to $380.5 million; gross margin was 49.0%, compared with 48.3%. Consolidated F&I revenue increased 15.1% to $166.6 million, while retail-unit volume fell 5.6%.
Cash, debt and capital allocation
- Reported operating cash flow was $252.5 million. The filing notes that floor-plan financing classification affects reported cash-flow categories: including changes in both trade and non-trade floor-plan balances, operating cash flow would have been approximately $196.2 million.
- Cash was $360.2 million. Total available liquidity resources were reported at $784.6 million, including cash, $274.0 million of revolving-credit availability, $24.9 million of mortgage-facility availability and a $125.5 million floor-plan deposit.
- Long-term debt, including current maturities, was $1,546.3 million net of issuance costs. Floor-plan notes payable totaled approximately $1,196.1 million. Long-term debt decreased from $1,561.3 million at year-end, while other net interest expense rose to $20.8 million from $10.3 million, primarily following issuance of $1.15 billion of senior notes in October 2021.
- The company reported covenant compliance. Actual covenant ratios included a 1.26 liquidity ratio versus a 1.05 minimum, 2.66 fixed-charge coverage versus a 1.20 minimum, and 2.11 lease-adjusted leverage versus a 5.75 maximum.
- During the quarter, Sonic repurchased 0.7 million shares for $33.7 million and declared a $0.25-per-share dividend. After quarter-end, it repurchased an additional 1.0 million shares; remaining authorization was approximately $150 million.
Outlook, risks and unusual items
- Management estimated 2022 U.S. total new-vehicle SAAR at 15.0–15.5 million units. It cited continued semiconductor and other supply constraints, low vehicle inventory, inflation, rising interest rates, consumer demand and financing availability as uncertainties.
- Sonic planned to open 25 additional EchoPark stores annually through 2025, targeting a distribution network reaching 90% of the U.S. population. The filing describes this as a growth plan, not guaranteed guidance.
- Management expected fixed-operations activity, particularly customer-pay repairs, to continue recovering during the remainder of 2022. It also cautioned that elevated wholesale vehicle prices may not be sustainable and could normalize.
- Variable-rate instruments totaled approximately $1.2 billion after considering hedges. A 100-basis-point rate change would have changed quarterly interest expense by approximately $7.9 million, including $7.4 million related to floor-plan facilities.
- Legal proceedings are ongoing; Sonic recorded approximately $1.6 million of reserves at March 31, 2022 and could not estimate a reasonably possible loss range beyond accrued amounts. It also guaranteed approximately $4.3 million of a joint venture’s floor-plan commitments.
- No impairment charges were recorded in the quarter. The filing states that COVID-19 and supply-chain disruption continued to affect operations. Management identified potential demand, inventory, valuation, acquisition-integration and liquidity risks.
Important facts for investors to verify
- How much of reported growth and profit improvement is attributable to RFJ Auto and other acquisitions versus same-store performance.
- Whether elevated new- and used-vehicle gross profit per unit and pricing can persist as supply conditions, interest rates and consumer demand change.
- EchoPark’s path to improved same-market sales and profitability, and the returns and funding needs associated with planned expansion.
- Debt service, variable-rate exposure, covenant headroom and the sustainability of dividends and share repurchases alongside capital spending.
- Developments in legal proceedings, supply constraints, and the accuracy of management’s 2022 industry-volume estimate.