SONIC AUTOMOTIVE INC quarterly report, Q1 FY2023

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Sonic Automotive, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparisons are primarily with Q1 2022. Sonic operates franchised dealerships, EchoPark used-vehicle stores, and powersports locations.

Financial performance and position

  • Revenue: $3.491 billion, up 1% year over year. Parts, service and collision revenue rose 13% to $430.5 million; total vehicle revenue declined slightly.
  • Profit: Gross profit was $553.5 million, down 3%; gross margin was 15.9%, versus 16.5%. Operating income fell 31% to $106.4 million. Net income declined 51% to $47.7 million; diluted EPS was $1.29, versus $2.33.
  • Cash flow: Operating activities used $34.0 million, versus generating $252.5 million. Inventory growth used $234.6 million. Investing activities used $107.5 million, including $75.1 million for a five-location powersports acquisition; financing activities provided $72.5 million. Cash fell to $160.2 million from $229.2 million.
  • Liquidity: Reported available liquidity resources totaled $892.6 million, including cash, a $272.0 million floor-plan deposit, $294.0 million of revolving-credit availability and $166.4 million of mortgage-facility availability. Current assets were $2.302 billion and current liabilities $2.057 billion.
  • Debt and interest: Long-term debt, including current maturities and net of issuance costs, was $1.733 billion. Floor-plan notes totaled $1.421 billion. Floor-plan interest expense increased to $14.6 million from $5.0 million; other net interest expense rose to $28.4 million from $20.8 million. A 100-basis-point rate increase would have raised quarterly interest expense by approximately $4.7 million, according to the filing.
  • Capital returns: Sonic repurchased approximately 1.6 million Class A shares for $90.7 million and declared a $0.28-per-share quarterly dividend. Remaining repurchase authorization was $373.6 million at quarter-end.

Material changes and segment trends

  • Franchised Dealerships: Segment revenue decreased 1% to $2.807 billion and segment income fell 33% to $109.8 million. Same-store new-vehicle gross profit per retail unit declined 17% to $5,434, amid higher invoice costs and increased price competition. Same-store used-vehicle revenue fell 10% and gross profit fell 19%. Fixed Operations revenue rose 11%, with gross profit margin increasing to 49.3%.
  • EchoPark: Revenue increased 5% to $650.5 million, but the segment loss widened to $46.8 million from $35.3 million. Combined used-vehicle and F&I gross profit per unit fell 28% to $1,906, principally because of higher inventory acquisition costs. Used-vehicle inventory supply was 48 days.
  • Powersports: Revenue was $34.0 million, reflecting acquisitions, including five locations acquired in February. Segment income was $0.6 million. New-vehicle inventory supply was 140 days and used-vehicle supply 133 days, above management’s stated normal or expected ranges.
  • Consolidated non-GAAP measure: Adjusted EBITDA was $133.4 million, versus $183.0 million in Q1 2022. This is a company-defined non-GAAP measure.

Outlook, commentary and risks

  • Management estimated 2023 U.S. total new-vehicle industry volume of 14.0–15.0 million units, up 2.2%–9.5% from 2022. This is an industry estimate, not company earnings guidance.
  • Sonic said it plans to continue expanding EchoPark’s physical and digital footprint, targeting coverage of 90% of the U.S. population by 2025. It also expects wholesale vehicle pricing and related gross profit to move toward normalized levels in the second half of 2023, while noting uncertainty.
  • Key risks include interest rates, inflation and consumer credit availability; vehicle supply, pricing and demand; inventory valuation and used-vehicle auction prices; competition; EchoPark’s operating performance; and access to cash or financing. Management noted ongoing supply-chain and inventory uncertainties.
  • Debt covenants were met at quarter-end; actual ratios included a 1.28 minimum-liquidity ratio, 1.70 fixed-charge coverage ratio and 2.58 lease-adjusted leverage ratio. Management expected covenant compliance for at least the next 12 months.
  • The annual goodwill and intangible-asset impairment testing date was changed prospectively from October 1 to April 30; management said it did not expect the change to produce different impairment results. No impairment charges were recorded in Q1 2023.
  • Management said current legal matters were not reasonably expected to have a material adverse effect, while acknowledging that future adverse outcomes remain possible. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.

Important facts for investors to verify

  • Whether lower vehicle gross profit per unit and rising competition continue to pressure earnings as inventory availability improves.
  • Whether EchoPark can narrow its losses and improve used-vehicle margins and inventory turnover.
  • How inventory investment, floor-plan borrowing and interest costs affect cash generation and liquidity.
  • Whether the stated industry-volume outlook, EchoPark expansion plan and expected wholesale-price normalization remain achievable.
  • The terms and restrictions on debt, dividends and share repurchases, and the comparability of reported operating cash flow given floor-plan cash-flow classifications.