Sonic Automotive, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the same 2022 periods. Sonic operates franchised automotive dealerships, pre-owned retailer EchoPark and Powersports locations.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $3,652.9 million | $3,506.2 million | $7,144.1 million | $6,962.4 million |
| Gross profit | $568.9 million | $588.8 million | $1,122.5 million | $1,160.1 million |
| Operating income | $78.3 million | $154.8 million | $184.7 million | $309.2 million |
| Net income | $23.4 million | $94.8 million | $71.1 million | $192.1 million |
| Diluted EPS | $0.65 | $2.34 | $1.95 | $4.67 |
- Q2 revenue rose 4%, but gross profit fell 3%; gross margin was approximately 15.6%, versus 16.8% a year earlier. Operating income declined 49% and net income declined 75%.
- Vehicle sales and pricing pressure reduced vehicle profitability: Q2 consolidated new-vehicle gross profit per unit fell 29% to $4,861; used-vehicle gross profit per unit fell 30% to $732. Parts, service and collision repair revenue increased 11% to $443.7 million.
- Q2 interest expense was $45.9 million, up from $27.4 million. Floor-plan interest expense rose to $17.0 million from $6.1 million; other net interest expense rose to $28.9 million from $21.3 million.
- First-half operating cash flow was a use of $18.9 million, versus a source of $306.3 million in 2022. The filing attributes the 2023 use primarily to a $245.7 million inventory increase. Cash and equivalents declined to $119.7 million from $229.2 million at year-end.
- At June 30, long-term debt was $1.690 billion, including current maturities; floor-plan notes payable totaled $1.410 billion. Liquidity resources were reported at $868.7 million, including cash, a $287.0 million floor-plan deposit balance, and $289.0 million of revolver availability. The deposit is classified in other current assets, not cash.
Changes, unusual items and management outlook
- Results included $62.6 million of impairment charges in operating income. In connection with the EchoPark and Northwest Motorsport closures, Sonic disclosed approximately $75.2 million of total related charges, including impairments, inventory adjustments, lease-related costs and severance.
- Sonic announced indefinite suspension of operations at eight EchoPark locations and 14 related delivery/buy centers; it subsequently closed three Northwest Motorsport pre-owned locations. Management cited used-vehicle availability and pricing conditions, influenced by reduced new-vehicle production and historically low lease penetration.
- Franchised Dealerships Segment revenue increased, but segment income before impairment charges fell to $145.9 million from $162.1 million in Q2. EchoPark reported a $52.8 million segment loss before impairment charges, compared with a $34.2 million loss. Powersports revenue was $45.0 million, largely reflecting acquisitions.
- Management estimated 2023 U.S. new-vehicle industry volume at 15.0–16.0 million units. It expected elevated Franchised Dealerships fixed-operations activity to continue through the remainder of 2023, while warning of uncertain supply, demand, interest rates and used-vehicle pricing. Management said it did not anticipate materially negative changes to capital access or cost over the next 12 months.
- During the first half, Sonic repurchased approximately 1.6 million shares for $90.7 million and paid $20.2 million in dividends. The board approved a $0.29-per-share dividend after quarter-end, payable in October 2023.
Risks, contingencies and liquidity
- Variable-rate instruments totaled approximately $1.8 billion. Management estimated a 100-basis-point rate increase would raise first-half interest expense by approximately $8.4 million, after hedge effects.
- Sonic was in compliance with debt covenants at June 30, 2023; actual ratios were above or within required limits. The company warned covenant noncompliance could negatively affect liquidity.
- Management did not believe current or threatened legal matters were reasonably likely to have a material adverse effect, but noted that future adverse outcomes could materially affect results. The filing reports approximately $8.0 million maximum exposure under certain general indemnifications and a $4.3 million guarantee of a joint venture’s floor-plan commitments.
- Other disclosed risks include economic and consumer-credit conditions, competition, manufacturer relationships and vehicle supply, interest rates, and execution and integration of acquisitions.
Important facts for investors to verify
- How much of the reported earnings decline reflects ongoing operating trends versus EchoPark-related charges and the $20.7 million dealership-disposal gain?
- Whether EchoPark’s closures and operating changes improve segment losses, and how used-vehicle margins respond to auction-price volatility.
- Whether cash generation recovers as inventory levels and floor-plan borrowing change; distinguish cash from the floor-plan deposit included in reported liquidity resources.
- How higher borrowing costs and continued vehicle-margin pressure affect covenant headroom, dividends, repurchases and investment plans.
- Whether management’s 2023 industry-volume estimate and fixed-operations outlook remain consistent with subsequent market conditions.