Sonic Automotive, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; management states fourth-quarter revenue increased 2% year over year. Sonic operates franchised dealerships and EchoPark used-vehicle stores.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $9.77 billion | $10.45 billion |
| Gross profit / margin | $1.42 billion / 14.6% | $1.52 billion / 14.5% |
| Operating income | $33.9 million | $307.7 million |
| Continuing-operations net income (loss) | $(50.7) million | $144.5 million |
| Net income (loss) | $(51.4) million | $144.1 million |
| Diluted earnings (loss) per share | $(1.21) | $3.30 |
| Cash from operating activities | $281.1 million | $170.9 million |
| Cash and cash equivalents at year-end | $170.3 million | $29.1 million |
Operating margin fell to 0.3% from 2.9%; reported net loss was chiefly affected by a $268.0 million non-cash goodwill impairment charge. Gross margin edged up to 14.6% from 14.5%. Cash from operations improved, though the filing notes that floor-plan financing classification can materially affect reported operating and financing cash flows.
At year-end, floor-plan notes payable were approximately $1.324 billion and long-term debt, including current maturities, was approximately $720 million—about $2.0 billion of total indebtedness including floor-plan financing. Company-reported available liquidity resources were $526.4 million, including cash, borrowing availability and a $73.2 million floor-plan deposit balance. Sonic reported compliance with its debt covenants; actual ratios included a 2.78x lease-adjusted leverage ratio against a 5.75x maximum.
Material changes versus 2019
- Consolidated revenue declined 6.6%. Franchised Dealerships revenue fell 10.2%, while EchoPark revenue rose 22.1% to $1.42 billion, or approximately 14.5% of consolidated revenue.
- U.S. new-vehicle industry sales fell 14.7%. Same-store new-vehicle revenue declined 8.5%, but gross profit per unit increased 19.0% to $2,508, helped by tight supply and higher selling prices.
- Same-store franchised retail used-vehicle revenue decreased 1.9%; gross profit decreased 12.8%. EchoPark’s reported used-vehicle and F&I gross profit per unit fell 12.3% to $2,013, primarily reflecting higher inventory acquisition costs.
- Fixed Operations revenue declined 11.6% as pandemic restrictions and reduced driving suppressed repair demand. F&I revenue increased 2.7%, supported by higher gross profit per retail unit.
- Operating cash flow rose to $281.1 million from $170.9 million. Cash increased substantially, while inventories decreased and reported floor-plan balances shifted.
- Sonic repurchased approximately 2.2 million Class A shares for $71.7 million and paid $0.40 per share in dividends during 2020. Remaining repurchase authorization was approximately $69.5 million.
Outlook, commentary and risks
Management estimated 2021 new-vehicle SAAR of 15.5 million to 16.0 million units, a 6.9%–10.3% increase from 2020. It expected continued economic recovery but cautioned that pandemic developments, consumer confidence and financing availability, manufacturer production and inventory, incentives, and other disruptions could alter results. The filing also identifies February 2021 winter weather and power outages in Texas as affecting a material portion of revenue-generating locations.
Sonic announced an accelerated EchoPark plan targeting 25 additional stores annually from 2021 through 2025 and a nationwide network of more than 140 points by 2025. Management views this as a growth opportunity, but expansion requires capital and EchoPark’s per-unit gross profit weakened in 2020.
Principal risks include further pandemic effects, vehicle and parts supply disruption, used-vehicle price and inventory volatility, competition and online/direct sales, manufacturer relationships and brand concentration, consumer credit availability, and the company’s substantial debt and lease commitments. Variable-rate exposure was approximately $1.2 billion after hedges; a 100-basis-point rate increase was estimated to change 2020 interest expense by about $19.8 million. The filing also discusses LIBOR transition risk, legal proceedings whose potential loss range could not be estimated, environmental indemnities, and potential withdrawal liability related to a critically underfunded multiemployer pension plan.
Unusual items include the $268.0 million goodwill impairment, related to the franchised-dealership reporting unit during the first quarter, and approximately $2.0 million of additional impairment charges. The impairment generated a $51.3 million tax benefit, while non-deductible amounts contributed to an unusual effective tax rate. Management reported no additional goodwill impairment in its October annual assessment. The company’s 2020 segment results also included approximately $4.0 million of franchised-dealership disposal gains and $5.2 million of gains on EchoPark-related land and buildings.
Important facts for investors to verify
- Whether revenue and margins recover while new-vehicle supply, repair activity and consumer demand normalize.
- Whether EchoPark expansion delivers improved per-unit economics and inventory turns; its year-end inventory supply was 41 days versus the stated 30–35-day target.
- Liquidity, floor-plan financing, debt maturities, lease obligations and ongoing covenant compliance, especially as expansion and capital spending continue.
- The sensitivity of goodwill and franchise-asset valuations to forecasts, discount rates and market conditions after the 2020 impairment.
- Potential cash or earnings effects from litigation, environmental obligations, tax positions and the underfunded multiemployer pension plan.