Sonic Automotive, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Sonic operates franchised dealerships and EchoPark pre-owned vehicle stores. Unless noted, amounts are in millions; comparisons are with 2018.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,614.1 | $2,505.7 | $5,003.2 | $4,906.5 |
| Gross profit | $381.3 | $362.4 | $740.3 | $714.9 |
| Operating income | $63.0 | $50.6 | $150.3 | $70.8 |
| Income from continuing operations | $26.8 | $17.1 | $69.1 | $15.1 |
| Net income | $26.6 | $16.9 | $68.8 | $14.7 |
| Diluted EPS | $0.61 | $0.39 | $1.60 | $0.34 |
- Q2 gross margin was approximately 14.6% versus 14.5%; operating margin was approximately 2.4% versus 2.0%.
- Same-store Q2 retail used-vehicle revenue rose 13.5%, while gross profit per unit fell 12.2% to $897, reflecting EchoPark’s volume-oriented inventory and pricing strategy. Same-store F&I revenue increased 13.6%; F&I gross profit per retail unit rose 7.0% to $1,644.
- EchoPark revenue increased 61.9% in Q2 and 73.7% year to date. Its segment income was $2.1 million in Q2, versus a $27.3 million loss a year earlier; six-month segment income was $2.7 million, versus a $41.7 million loss. The prior-year comparisons included substantial non-recurring compensation charges.
- Six-month franchised-dealership segment income included a $46.7 million net gain on dealership disposals and $6.3 million in executive transition costs. Q2 2018 included a $38.0 million disposal gain, among other unusual items, making reported comparisons less representative of ongoing operations.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $56.9 million, compared with positive $38.1 million in 2018. Investing cash flow was positive $72.4 million, including $121.3 million from dealership sales; financing cash flow was negative $19.3 million. Cash ended at $2.1 million.
- Capital expenditures were $51.2 million in the first half; facility-construction commitments were $26.3 million.
- At June 30, total debt, net of issuance costs, was $914.3 million, excluding floor-plan financing and lease liabilities. Floor-plan notes payable totaled approximately $1,467.8 million. Lease liabilities totaled approximately $384.9 million.
- Reported available liquidity resources were $302.0 million, including $202.6 million of revolving-credit availability, $95.0 million in floor-plan deposits, $2.2 million in used-floor-plan availability and $2.1 million of cash. The deposit is classified in other current assets and is not designated as a floor-plan prepayment.
- Sonic reported compliance with debt covenants. Credit-facility actual ratios were 1.17 for minimum liquidity (1.05 required), 1.55 for fixed-charge coverage (1.20 required), and 4.20 for lease-adjusted leverage (5.75 maximum).
Outlook, commentary and risks
- Management estimated 2019 U.S. new-vehicle SAAR at 16.5–17.0 million; the Q2 industry SAAR was 17.0 million. This is an industry estimate, not company earnings guidance.
- Management expected the annual effective tax rate to be 26%–29%, before valuation-allowance changes or discrete tax adjustments.
- The company cited consumer demand and credit access, manufacturer incentives and supply, competition, EchoPark expansion and funding needs, and economic conditions as factors that could affect results. Variable-rate debt and floor-plan balances create interest-rate exposure; a 100-basis-point increase would have increased first-half interest expense by approximately $5.5 million.
- Risks newly highlighted included potential import duties and trade restrictions and uncertainty surrounding LIBOR’s anticipated transition after 2021. The company also faces ongoing legal and administrative proceedings; it accrued $1.7 million for pending matters but said it could not estimate reasonably possible additional losses.
- ASC 842 lease adoption added right-of-use assets and lease liabilities and reduced opening retained earnings by $7.4 million, net of tax, for impairment identified at adoption. Management said the standard did not materially affect income or cash flows.
Important facts for investors to verify
- How much reported earnings growth reflects dealership-sale gains and other non-recurring items, versus ongoing store operations.
- Whether EchoPark can sustain sales growth and improve profitability while front-end used-vehicle gross profit remains low or negative.
- The drivers of negative operating cash flow, the continued availability of revolving and floor-plan financing, and covenant headroom.
- The full obligations and cash-flow effects of leases, including sublease assumptions and future commitments.
- Developments in legal proceedings, indemnification exposure, interest rates and the LIBOR transition, as well as actual vehicle-market conditions versus management’s SAAR estimate.