Sonic Automotive, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Sonic operated 114 franchises, 18 collision repair centers, and three EchoPark stores across 13 states. Results are compared with Q1 2015 unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $2.235 billion | $2.236 billion |
| Gross profit | $345.2 million | $335.0 million |
| Operating income | $42.3 million | $41.5 million |
| Continuing-operations income | $14.5 million | $14.4 million |
| Net income | $14.6 million | $14.0 million |
| Diluted EPS | $0.31 | $0.27 |
| Operating cash flow | $103.6 million | $44.1 million |
| Cash and cash equivalents | $2.4 million | $3.6 million at Dec. 31, 2015 |
| Total debt, excluding floor-plan liabilities | $843.7 million | $814.6 million at Dec. 31, 2015 |
Gross margin was approximately 15.4%, versus 15.0% a year earlier; operating margin was approximately 1.9% in both periods. Total floor-plan liabilities were $1.420 billion at quarter-end. Available liquidity resources were $249.8 million, comprising $159.6 million of revolving-credit availability, $62.9 million under used-vehicle floor-plan facilities, a $25.0 million floor-plan deposit, and $2.4 million cash. The deposit is included in other current assets, not cash.
Cash flow from operations benefited substantially from lower receivables and other assets; combined trade and non-trade floor-plan financing used $98.5 million. Investing activities used $40.2 million, primarily for property and equipment. Financing activities used $64.6 million, chiefly for $74.4 million of share repurchases.
Changes and operating drivers
- Revenue was essentially flat, while gross profit increased 3.0% and net income rose 4.7%. Lower share count following repurchases contributed to higher EPS.
- New-vehicle revenue declined 3.1%; same-store unit volume fell 2.4% and same-store gross profit fell 6.6%. Management cited brand and geographic mix, competitive pricing, and recalled vehicles subject to stop-sale orders.
- Used-vehicle same-store revenue rose 2.3% and unit volume 5.9%, but gross profit per unit declined 6.3% to $1,387. Wholesale gross loss widened to $1.1 million.
- Same-store fixed-operations revenue increased 9.1% and gross profit 7.9%; same-store F&I revenue rose 9.7%, with F&I gross profit per retail unit up 8.3% to $1,359.
- EchoPark revenue grew 53.3% to $24.0 million. Its segment loss improved to $3.4 million from $6.4 million; management said prior-year results included a $1.4 million impairment charge.
- SG&A rose 5.0% to $284.4 million. The quarter included an approximately $6.0 million charge related to hail damage in Texas. Q1 2015 included $6.2 million of impairment charges, absent in Q1 2016.
Outlook, risks, and unusual items
- Management estimated 2016 U.S. new-vehicle SAAR of 17.3 million to 17.6 million, compared with 17.1 million in Q1 2016 and a cited analyst average of about 17.7 million. This is an estimate, not company earnings guidance.
- Management expected new-vehicle gross-margin pressure could continue through 2016. It planned two additional Colorado EchoPark stores in Q2 and another by year-end; expansion into North Carolina, South Carolina, and Texas was expected to begin in 2017. The company cautioned that EchoPark and One Sonic-One Experience investment could weigh on near-term results.
- Stop-sale vehicles tied to manufacturer safety recalls raised inventory and floor-plan interest expense; effects could persist until replacement parts became available. Q1 floor-plan interest expense increased $1.7 million, including the impact of higher average new-vehicle balances and rates.
- Management expected an effective tax rate of 38%–40%, before possible valuation-allowance changes or unusual discrete tax items. First-quarter results are seasonally lower in operating profit than later quarters.
- Debt covenants were met at March 31, 2016. The actual consolidated liquidity, fixed-charge coverage, and lease-adjusted leverage ratios were 1.16, 1.75, and 4.21, respectively, against required levels of at least 1.05, at least 1.20, and no more than 5.50. Variable-rate exposure after swaps was approximately $1.1 billion; a 100-basis-point rate change would have changed quarterly interest expense by about $2.9 million.
- Interest-rate swaps had a reported fair-value liability of approximately $14.8 million. The filing estimated about $3.6 million of net expense would be reclassified from accumulated other comprehensive loss into earnings over the next 12 months.
- Subsequent to quarter-end, Sonic repurchased about 0.4 million shares for $6.4 million and declared a $0.05-per-share dividend payable July 15, 2016. Houston-area flooding caused inventory losses at certain dealerships; the impact was still being evaluated.
- The company reported numerous legal and administrative proceedings, including customer, employment, contractual, class-action, and governmental matters. It could not estimate a reasonably possible loss range beyond recorded reserves; adverse outcomes could materially affect results.
Important facts for investors to verify
- How much recalled stop-sale inventory remained, when repairs would be completed, and the related sales and floor-plan interest effects.
- The full financial and insurance impact of Houston flooding, and whether additional inventory or operating losses were recognized after this filing.
- Whether used-vehicle gross profit per unit and wholesale losses stabilize as vehicle supply and pricing change.
- EchoPark’s path to profitability, expansion spending, and the timing and economics of planned new markets.
- Liquidity, covenant headroom, variable-rate debt exposure, and financing needs for $55.7 million of construction commitments and $22.0 million of real-estate purchase commitments.
- Share repurchase and dividend capacity under debt restrictions, and the outcomes or potential exposure from pending legal matters.