Sonic Automotive, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Comparisons are with the corresponding 2020 periods, which were significantly affected by the initial COVID-19 disruption. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Business context and results
Sonic operates franchised automotive dealerships and EchoPark used-vehicle stores. At quarter-end it had 84 franchised dealership stores and 25 EchoPark stores. The company reported strong year-over-year growth, reflecting recovered demand, higher vehicle prices and the weak prior-year comparison.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3,352.2m | $2,111.9m | $6,139.0m | $4,419.9m |
| Gross profit | $510.8m | $307.4m | $911.7m | $658.0m |
| Operating income (loss) | $165.4m | $53.5m | $253.3m | $(168.3)m |
| Income (loss) from continuing operations | $114.0m | $31.0m | $167.7m | $(168.1)m |
| Net income (loss) | $113.8m | $30.8m | $168.1m | $(168.5)m |
| Diluted EPS | $2.63 | $0.71 | $3.87 | $(3.94) |
Q2 revenue increased 58.7%; six-month revenue increased 38.9%. Q2 and year-to-date results benefited from higher unit sales and gross profit, while the first-half comparison also reflects a $268.0m goodwill impairment recorded in 2020. Q2 gross margin was approximately 15.2%, versus 14.6% a year earlier. Six-month operating cash flow was negative $34.7m, compared with positive $227.7m in 2020; investing cash outflow was $129.1m and financing cash inflow was $233.1m.
Drivers and material changes
- Franchised dealership segment income before taxes and impairment was $165.4m in Q2 and $236.0m for the first half. New-vehicle same-store gross profit per unit rose 71.5% in Q2 to $3,827; new-vehicle supply constraints helped lift prices, but days’ supply fell to 15 days from 64 a year earlier.
- Franchised same-store used-vehicle gross profit per unit rose 63.3% in Q2 to $1,844. Fixed Operations same-store revenue grew 39.0% in Q2 and gross margin reached 50.6%. Franchised F&I gross profit per retail unit increased 14.9% to $1,984.
- EchoPark revenue grew 88.9% in Q2, but the segment recorded a $14.4m pretax loss, versus $2.6m income a year earlier. Its combined used-vehicle and F&I gross profit per unit declined 25.6% to $1,539, as wholesale acquisition costs rose.
- Consolidated SG&A increased 39.2% in Q2 to $320.6m, but declined to 62.8% of gross profit from 74.9% in the prior-year quarter.
Financial position, liquidity and capital allocation
- At June 30, cash was $239.6m, total assets $3,656.3m and stockholders’ equity $946.4m. Current assets were $1,719.4m and current liabilities $1,635.8m.
- Long-term debt, including current maturities, was $686.4m; floor-plan notes payable totaled $1,086.1m. The company reported $609.8m of available liquidity, including cash, revolver and other facility availability, and floor-plan deposits.
- The revolving credit facility had no borrowings and $224.3m available. The company said it was in compliance with debt covenants; actual ratios exceeded required thresholds at quarter-end.
- Six-month capital expenditures were $105.1m, and the company acquired two EchoPark businesses for approximately $28.6m. It repurchased approximately 1.0m shares for $42.2m; remaining authorization was $277.3m. A $0.12-per-share dividend was declared for Q2 and a further $0.12 dividend was approved after quarter-end.
Outlook, risks and contingencies
- Management estimated 2021 total new-vehicle industry SAAR of 15.5m–16.0m vehicles and expected economic recovery to continue. It expected new-vehicle inventory to improve in the second half of 2021, while warning that shortages could persist or worsen and pressure sales volumes and results.
- The company’s EchoPark plan targets 25 additional store openings annually from 2021 through 2025, with a planned network of more than 140 locations reaching 90% of the U.S. population. This expansion requires funding and execution and EchoPark was loss-making in the reported periods.
- Management cautioned that current wholesale vehicle prices and related gross profit were not expected to be sustainable long term. COVID-19 and variants, semiconductor and parts shortages, consumer demand and credit availability, interest rates, manufacturer relationships, competition, acquisitions and legal matters could affect results.
- Variable-rate debt exposure was approximately $997.1m after interest-rate caps; a 100-basis-point increase would have raised first-half interest expense by approximately $14.8m. The company disclosed ordinary-course legal proceedings, with recorded reserves described as immaterial; it could not estimate a reasonably possible loss range for pending matters beyond accrued amounts.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether constrained vehicle and parts supply, especially new-vehicle inventory, improves as management expected and how it affects unit sales and per-unit gross profit.
- Whether unusually high new-, used- and wholesale-vehicle prices and margins normalize, and the resulting effect on franchised dealership profitability.
- Whether EchoPark can improve unit economics and reduce segment losses while funding its planned expansion.
- How operating cash flow develops after accounting for changes in trade and non-trade floor-plan financing; the filing notes that classifying all floor-plan changes as operating would yield first-half operating cash flow of $279.6m.
- Liquidity, covenant headroom, variable-rate exposure, capital spending, share repurchases and dividend capacity as the company pursues growth and returns capital.