Sonic Automotive, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comparisons are with Q1 2020, a period significantly affected by the initial COVID-19 disruption and a $268.0 million goodwill impairment charge.
Business context
Sonic operates franchised automotive dealerships and EchoPark pre-owned vehicle stores. At quarter-end it had 84 franchised dealership stores and 21 EchoPark stores. Management’s previously announced EchoPark expansion plan targets 25 additional stores annually from 2021 through 2025, with a planned nationwide network of more than 140 locations.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $2.787 billion | $2.308 billion |
| Gross profit | $400.9 million | $350.6 million |
| Operating income (loss) | $87.9 million | $(221.9) million |
| Income (loss) from continuing operations | $53.7 million | $(199.1) million |
| Net income (loss) | $54.2 million | $(199.3) million |
| Diluted EPS | $1.25 | $(4.68) |
| Operating cash flow | $90.2 million | $(47.2) million |
| Capital expenditures | $67.7 million | $19.8 million |
Revenue rose 20.7%; gross margin was approximately 14.4%, versus 15.2% a year earlier. The prior-year operating result included the $268.0 million non-cash goodwill impairment; there was no impairment charge in Q1 2021. Adjusted EBITDA, a non-GAAP measure, was $111.2 million versus $60.2 million.
Segments and key operating trends
- Franchised dealerships: Segment revenue was $2.280 billion, up 15.3%, and segment income before taxes and impairment charges was $70.5 million, versus $22.7 million. Same-store new-vehicle gross profit rose 52.8%, supported by 13.8% higher unit sales and a 34.4% increase in gross profit per unit. Management attributed stronger pricing partly to manufacturer supply disruptions and production delays.
- Used vehicles: Consolidated used-vehicle revenue rose 28.2%, but gross profit fell 3.9%; gross profit per unit declined 18.1% to $658. Franchised same-store used-vehicle gross profit per unit fell 11.3% to $1,112, reflecting higher inventory acquisition costs.
- Fixed operations: Revenue declined 4.1% and gross profit declined 1.8%. The total gross margin improved to 48.3% from 47.2%; management cited continued pandemic-related weakness in repair demand and warranty activity.
- Finance, insurance and other: Revenue increased 25.5%; gross profit per retail unit rose 8.5% to $2,045.
- EchoPark: Revenue increased 52.9% to $507.1 million, largely reflecting ten store openings in the prior year and higher sales volume. Segment income was $2.0 million, slightly below $2.1 million. Combined used-vehicle and F&I gross profit per unit rose 2.0% to $2,339. Reported used-vehicle gross profit was negative $1.1 million.
Cash, debt and liquidity
- Cash and cash equivalents were $77.2 million at March 31, down from $170.3 million at year-end. Total available liquidity resources, including cash and undrawn facilities, were reported as $435.0 million, versus $526.4 million.
- Long-term debt, including current maturities and net of debt issuance costs, was $711.9 million. Floor-plan notes payable totaled approximately $1.226 billion: $538.8 million trade and $687.6 million non-trade.
- Operating cash flow was $90.2 million; investing cash use was $75.6 million and financing cash use was $107.7 million. Financing cash use included $42.2 million of treasury-stock purchases and net repayments on floor-plan and other debt. Cash-flow presentation is affected by whether floor-plan financing is classified as operating or financing; management stated that operating cash flow would have been $38.8 million if all floor-plan changes were classified as operating.
- The company reported compliance with debt covenants at quarter-end. Actual covenant ratios included a 1.15 minimum liquidity ratio (1.05 required), 2.32 fixed-charge coverage ratio (1.20 required), and 2.47 lease-adjusted leverage ratio (5.75 maximum).
Outlook, risks and notable developments
- Management estimated 2021 U.S. total new-vehicle SAAR of 15.5 million to 16.0 million, while warning that the pandemic, consumer confidence and financing, manufacturer production and inventory, and other factors could affect results. No earnings-per-share or revenue guidance was provided in the filing.
- Management expected economic recovery to continue during 2021 and anticipated Fixed Operations activity moving toward pre-pandemic levels in the latter half of the year. It also said the pandemic could still affect demand, suppliers, inventory availability, earnings and asset valuations.
- Vehicle and parts supply disruptions contributed to new-vehicle pricing and higher used-vehicle acquisition costs. Sonic also noted that Texas stores were affected by February 2021 extreme winter weather and power outages.
- On April 14, 2021, Sonic replaced the 2016 Credit Facilities with a new agreement maturing April 14, 2025, providing initial limits of $250 million for the revolving facility and $1.6 billion for floor-plan facilities.
- After quarter-end, the board raised the quarterly dividend from $0.10 to $0.12 per share and increased the share-repurchase authorization by $250 million. Q1 repurchases totaled approximately 957,000 shares for $42.2 million.
- Pending legal proceedings are ordinary-course matters; recorded reserves were described as immaterial, and the company could not estimate a reasonably possible loss range. Maximum general indemnification exposure was approximately $25 million; the joint-venture floor-plan guarantee was approximately $4.3 million.
- A 100-basis-point increase in interest rates would have changed quarterly interest expense by approximately $8.6 million, including about $8.0 million from floor-plan facilities. Management said it expected to remain covenant-compliant for at least 12 months, but liquidity and performance remain exposed to operating and financing conditions.
Important facts for investors to verify
- Whether vehicle and parts supply constraints persist, and how they affect new-vehicle margins and used-vehicle acquisition costs.
- Whether EchoPark expansion delivers improving segment profitability and inventory efficiency; its reported inventory supply was approximately 40 days, above Sonic’s typical 30–35-day range.
- How cash generation and liquidity evolve after elevated Q1 capital expenditures, repurchases and the increased dividend, including compliance with debt covenants.
- The terms and practical borrowing availability under the April 2021 credit agreement, and how variable-rate exposure responds to interest-rate changes.
- Whether pandemic-related demand and service activity recover as management expected, and whether any supply, weather, legal or asset-valuation risks become material.