Sonic Automotive, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Comparisons are with the corresponding 2020 periods.
Business context
Sonic operates franchised automotive dealerships and EchoPark used-vehicle stores. At quarter-end, it reported 87 franchised-dealership stores and 30 EchoPark stores. Results were shaped by strong vehicle demand and unusually constrained vehicle supply, particularly low new-vehicle inventory associated with semiconductor and other supply-chain disruptions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,072.8 | $2,548.5 | $9,211.9 | $6,968.5 |
| Gross profit | $472.0 | $376.6 | $1,383.7 | $1,034.5 |
| Operating income (loss) | $125.4 | $96.4 | $378.7 | $(71.9) |
| Income (loss) from continuing operations | $84.7 | $60.0 | $252.4 | $(108.1) |
| Net income (loss) | $84.5 | $59.8 | $252.6 | $(108.7) |
| Diluted earnings (loss) per share | $1.95 | $1.34 | $5.82 | $(2.55) |
Q3 gross margin was approximately 15.4% versus 14.8% a year earlier; operating margin was approximately 4.1% versus 3.8%. The nine-month 2020 loss included a $268.9 million impairment charge, principally related to franchised-dealership goodwill, and a related tax benefit. No impairment charges were recorded in 2021.
- Revenue and gross profit: Q3 revenue rose 20.6% and gross profit rose 25.3%. For the nine months, revenue increased 32.2% and gross profit 33.8%.
- Franchised dealerships: Q3 segment revenue increased 11.4%, while segment income rose to $145.1 million from $80.5 million. Higher vehicle selling prices and per-unit profits supported results; same-store new-vehicle unit sales fell 5.1% in Q3.
- EchoPark: Q3 revenue increased 72.3% to $663.3 million, but the segment recorded a $32.9 million loss, compared with $0.2 million income. Used-vehicle acquisition costs pressured retail gross profit. Nine-month segment loss was $45.3 million versus $4.9 million income.
- Other operating trends: Consolidated Q3 F&I revenue rose 29.4%; parts, service and collision revenue rose 10.7%. Consolidated retail used-vehicle revenue increased, but used-vehicle gross profit fell 29.7% in Q3 as higher wholesale prices raised acquisition costs.
Cash flow, balance sheet and liquidity
- Cash flow, nine months: Operating cash flow was $266.4 million versus $273.0 million. Investing cash outflow was $237.6 million, including $181.5 million of property and equipment purchases and $66.1 million for businesses. Financing cash inflow was $21.0 million. Cash increased by $49.8 million to $220.1 million.
- Capital spending: The company reported approximately $181.8 million of capital expenditures in MD&A, primarily for facilities, real estate and store assets; it said these expenditures were funded from operating cash. Construction commitments were approximately $21.8 million.
- Working capital and inventory: Inventory was $850.5 million at September 30, down from $1,247.3 million at December 31, 2020, principally reflecting new-vehicle inventory of $135.7 million versus $648.4 million. New-vehicle supply was about 10 days, compared with 46 days a year earlier.
- Debt: Long-term debt, including current maturities and net of issuance costs, totaled $691.2 million. Floor-plan notes payable totaled approximately $895.8 million: $28.6 million trade and $867.2 million non-trade. The company reported no revolving-credit borrowings at quarter-end.
- Liquidity: Reported quarter-end liquidity resources totaled $617.7 million, including cash, revolving and mortgage-facility availability, a $54.1 million availability under a line of credit, and a $100.0 million floor-plan deposit. The line of credit was terminated October 1, 2021, so this quarter-end total includes availability that did not remain afterward. Revolving-credit availability was approximately $224.0 million and mortgage-facility availability approximately $19.5 million.
- Covenants and returns of capital: Sonic reported compliance with debt covenants. It repurchased $67.0 million of shares and paid $13.3 million in dividends during the nine months. Remaining share-repurchase authorization at quarter-end was approximately $252.5 million.
Changes versus prior period
Year-to-date earnings improved markedly from the 2020 loss, but the comparison is affected by the prior-year goodwill impairment. Higher new-vehicle prices and gross profit per unit, expanded EchoPark sales, higher F&I revenue and recovering fixed operations supported 2021 results. In contrast, EchoPark’s Q3 loss widened as used-vehicle wholesale prices increased acquisition costs. Lower new-vehicle inventory constrained unit availability even as it contributed to higher selling prices and per-unit profits.
Outlook, transactions and risks
- Management estimated 2021 total U.S. new-vehicle SAAR of 14.5 million to 15.0 million, citing inventory shortages and pandemic-related uncertainty. It expected supply constraints could continue through the remainder of 2021 and into 2022; it believed inventory might improve in the first half of 2022 but cautioned that shortages could persist or worsen.
- Sonic planned to continue its EchoPark expansion, targeting 25 additional stores annually from 2021 through 2025 and an expected network of more than 140 locations by 2025. Expansion and acquisition spending require substantial funding and execution.
- On September 17, 2021, Sonic agreed to acquire RFJ Auto Partners for an estimated purchase price of approximately $964.9 million, subject to customary adjustments, with closing expected in Q4 2021. The estimate included inventory, real estate, intangible assets and assumed liabilities and could change before closing.
- After quarter-end, Sonic issued $1.15 billion of senior notes: $650 million at 4.625% due 2029 and $500 million at 4.875% due 2031. It intended to use proceeds and additional borrowings to fund the RFJ acquisition if completed, redeem existing notes and for other corporate purposes. Sonic redeemed its $250 million 6.125% notes on October 28, 2021 and expected an approximately $13.2 million pretax redemption loss in Q4.
- Key risks include prolonged vehicle and parts supply disruptions, volatility or normalization in new- and used-vehicle prices and margins, pandemic developments, consumer demand and credit availability, EchoPark expansion execution, acquisition integration, interest-rate exposure, and legal or regulatory matters. A 100-basis-point interest-rate increase was estimated to have increased nine-month 2021 interest expense by approximately $14.7 million.
- Legal matters arise in the ordinary course; recorded reserves were described as immaterial, and the company could not estimate a reasonably possible loss range beyond accrued amounts. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether RFJ Auto closed, the final purchase price and acquired liabilities, and the resulting impact on leverage and liquidity.
- Whether vehicle supply improves as management expected, and how price normalization affects new-vehicle margins, used-vehicle acquisition costs and wholesale results.
- Whether EchoPark can improve per-unit economics and reduce losses while continuing its planned expansion.
- Post-transaction debt, interest expense, borrowing capacity and covenant headroom following the senior-note issuance and redemption.
- The sustainability of operating cash generation, capital spending, dividends and share repurchases, including the distinction between reported operating cash flow and floor-plan financing cash flows.