SONIC AUTOMOTIVE INC quarterly report, Q3 FY2023

Sonic Automotive, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023. Unaudited results; comparisons are with the corresponding 2022 periods. Sonic operates franchised automotive dealerships, EchoPark used-vehicle stores and powersports dealerships.

Financial performance

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Revenue	$3,643.5 million	$3,448.1 million	$10,787.6 million	$10,410.5 million
Gross profit	$582.2 million	$580.7 million	$1,704.6 million	$1,740.9 million
Operating income	$137.4 million	$148.9 million	$322.1 million	$458.1 million
Net income	$68.4 million	$87.3 million	$139.5 million	$279.4 million
Diluted EPS	$1.92	$2.23	$3.85	$6.90

• Q3 revenue grew 6%, but gross profit was nearly flat and gross margin declined to approximately 16.0% from 16.8%. Operating income fell 8% and net income fell 22%; diluted EPS declined 14%.
• For the first nine months, revenue rose 4%, while gross profit fell 2%, operating income fell 30%, net income fell 50% and diluted EPS fell 44%. Gross margin was approximately 15.8%, versus 16.7%.
• Q3 new-vehicle revenue increased 14%, but new-vehicle gross profit declined 19%; reported retail new-vehicle gross profit per unit fell 29% to $4,649. Consolidated retail used-vehicle gross profit was up 3% in Q3, but down 22% year to date.
• Parts, service and collision repair revenue increased 11% in Q3 and 12% year to date; gross margin was 49.7% for Q3 and 49.6% year to date. Finance, insurance and other revenue increased 5% in Q3 and 2% year to date.

Segments and notable items

• Franchised Dealerships: Q3 segment income was $101.5 million, down from $146.3 million. Nine-month segment income was $357.2 million, down from $472.2 million. Higher new-vehicle volumes were offset by lower per-unit gross profit; fixed operations remained a source of growth.
• EchoPark: Segment losses were $16.9 million in Q3 and $116.5 million for nine months, versus losses of $31.1 million and $100.6 million, respectively. Same-market retail used-vehicle and F&I gross profit improved, but reported results included weaker unit economics and closure-related costs.
• Powersports: Segment income was $6.6 million in Q3 and $9.2 million year to date, compared with $1.2 million and $0.9 million. Growth primarily reflects acquisitions, including a five-location business acquired in 2023.
• Sonic announced indefinite suspension of operations at eight EchoPark locations and 14 related delivery/buy centers, and closed three Northwest Motorsport locations in Q3. It recorded $75.2 million of related charges in Q2 and an additional $4.8 million in Q3. The nine-month income statement includes $62.6 million of impairment charges; the amounts differ because the broader closure charges include other items. Management expects approximately $1.5–$2.0 million of additional quarterly closure expenses, excluding property-exit amounts.
• The company sold three franchised dealerships during the first nine months, generating $52.2 million of net cash; it reported a $20.4 million gain on disposal in the period.

Cash flow, debt and liquidity

• Nine-month operating cash flow was $104.2 million, down from $645.4 million. The 2023 period included a $230.7 million inventory cash use. Management says operating cash flow would have been $257.7 million if all floor-plan financing changes were classified as operating activities, versus $426.6 million in 2022; floor-plan classification affects reported operating and financing cash flows.
• Investing cash outflow was $171.4 million, including $153.6 million of capital expenditures and $75.1 million for business acquisitions, partly offset by dealership-sale proceeds. Financing cash outflow was $127.4 million, including $177.5 million of treasury-stock purchases, $71.5 million of long-term debt principal payments and $30.2 million of dividends, partly offset by floor-plan borrowings.
• Cash and equivalents were $34.6 million at September 30, versus $229.2 million at year-end 2022. Reported available liquidity was $796.5 million, including a $300.0 million floor-plan deposit balance, $288.9 million of revolving-credit availability and $173.0 million of mortgage-facility availability. The floor-plan deposit is an interest-offset resource, not cash available for general use without consideration of its purpose.
• Total debt, excluding floor-plan notes, was $1.684 billion, including $1.623 billion of long-term debt. Floor-plan notes payable totaled approximately $1.387 billion. Sonic had no borrowings under its $350 million revolving credit facility and $288.9 million of remaining availability at quarter-end.
• Financial covenants were met at September 30: actual liquidity ratio 1.27 versus 1.05 minimum; fixed-charge coverage 1.60 versus 1.20 minimum; lease-adjusted leverage 2.87 versus 5.75 maximum. Management expects covenant compliance for at least the next 12 months.
• Variable-rate instruments totaled approximately $1.5 billion. Management estimated that a 100-basis-point rate increase would have raised nine-month interest expense by approximately $7.4 million, after hedging effects.

Outlook, risks and capital allocation

• Management estimated full-year 2023 U.S. new-vehicle industry volume of 15.5–16.0 million units. This is an industry estimate, not company earnings guidance. The filing provides no specific revenue or earnings forecast.
• Management expects wholesale vehicle pricing and related gross profit to move toward normalized levels in Q4 2023, while volatility may continue into 2024 or beyond. It also expects elevated franchised fixed-operations activity through the remainder of 2023.
• Risks include interest rates, inflation, vehicle prices and consumer credit availability; vehicle and parts supply disruptions; the UAW strike and its potential effects on manufacturer inventory; competition and margin pressure; and the uncertain pace of industry sales. Management also notes risks related to EchoPark execution, acquisitions, manufacturer relationships, and legal and regulatory matters.
• The board declared a $0.29 per-share dividend during Q3, paid October 13, 2023, and subsequently approved a $0.30 per-share dividend for payment January 12, 2024. Sonic repurchased approximately 3.3 million shares for $177.5 million during the first nine months; $286.8 million remained authorized at September 30. Future dividends and repurchases remain subject to board discretion, cash needs and debt restrictions.
• Management reported no material change in risk factors from the 2022 Form 10-K, no material control changes during the quarter, and effective disclosure controls as of September 30. It did not believe current or threatened legal proceedings were reasonably likely to have a material adverse effect, while acknowledging future adverse outcomes could affect results.

Important facts for investors to verify

• Whether new-vehicle margin compression and weaker used-vehicle unit economics persist as inventory and competition change.
• EchoPark’s operating losses, store-suspension plan, further closure costs and progress toward improved segment performance.
• Cash generation, inventory investment and liquidity quality, including the distinction between cash and the floor-plan deposit balance.
• Interest expense sensitivity, variable-rate debt exposure, covenant headroom and refinancing needs.
• Whether the industry-volume estimate, wholesale-price outlook and announced dividend and repurchase activity remain consistent with operating cash flow and debt restrictions.