Sonic Automotive (SAH) Tops Q1 EPS by 18c, Revenues Beat

Sonic Automotive (NYSE: SAH) reported Q1 EPS of $0.40, $0.18 better than the analyst estimate of $0.22. Revenue for the quarter came in at $2.31 billion versus the consensus estimate of $2.27 billion.

First Quarter Highlights

• Adjusted earnings per diluted share from continuing operations* of $0.40 for the first quarter of 2020, compared to $0.39 for the first quarter of 2019
• SG&A expenses as a percentage of gross profit were 80.5% for the first quarter of 2020, compared to 68.8% for the first quarter of 2019 (adjusted SG&A expenses as a percentage of gross profit* were 80.5% for the first quarter of 2020 and 80.1% for the first quarter of 2019)
• Total Sonic consolidated first quarter 2020 revenues of $2.3 billion and gross profit of $350.6 million
• Record quarterly EchoPark revenues of $331.7 million, up 33% from the first quarter of 2019
• Record quarterly EchoPark retail sales volume of 13,986 units, up 27% from the first quarter of 2019
• EchoPark segment income of $2.1 million, in-line with the first quarter of 2019
• Total available liquidity of $418.4 million as of April 28, 2020, an increase from $311.5 million as of March 31, 2020, and $280.0 million as of December 31, 2019
• Same store Franchised Dealerships Segment operating results for the first quarter of 2020, compared to the first quarter of 2019:
  • Revenues down 2.7%, gross profit up 0.8%
  • New vehicle unit volume down 6.1%; new vehicle gross profit per unit down 6.5%, to $2,093 per unit
  • Retail used vehicle unit volume up 1.5%; retail used vehicle gross profit per unit down 2.5%, to $1,240 per unit
  • Parts, service and collision repair (“Fixed Operations”) gross profit up 2.0%; customer pay gross profit up 5.3%
  • Finance and insurance (“F&I”) gross profit up 6.9% (all-time record quarterly F&I gross profit per retail unit of $1,885 on a total Sonic consolidated basis)

Commentary

David Smith, Sonic’s and EchoPark’s Chief Executive Officer, commented, “Our exceptional 2019 momentum carried over into the first quarter of 2020, where we saw strong operational performance prior to the impact of the COVID-19 pandemic on our business in the last three weeks of March. Through the first two months of 2020, same store total revenues increased 17% versus the comparable two-month period in 2019, driven by an 11% increase in new vehicle unit sales volume, a 27% increase in used vehicle unit sales volume and an 8% increase in Fixed Operations revenues. In mid-March, we began to see the sudden and severe impact of the COVID-19 pandemic, as many state and local governments across the nation enacted stay-at-home orders. As essential businesses, our stores have remained open as permitted by governmental orders, however we have experienced a significant reduction in customer foot traffic in both our service and sales businesses.”

Mr. Smith continued, “During this challenging time, our primary concern remains the health and safety of our teammates and guests. We have taken extensive actions to ensure that first responders and other essential workers have safe, reliable access to transportation so they can continue to supply critical needs in our communities. In addition to implementing CDC-recommended social distancing protocols and enhanced sanitization procedures at our dealerships, we are also providing no-contact vehicle pick-up and delivery services for both vehicle sales and vehicle service, ensuring stability and continuity for our guests, our teammates and our business partners.”

Jeff Dyke, Sonic’s and EchoPark’s President, commented, “Looking to the longer term, we continue to take appropriate steps to strengthen our balance sheet and fortify the business. This includes continuing to enhance our liquidity outlook by lowering operating costs, postponing certain capital expenditures and working with our manufacturer and lending partners to access additional sources of liquidity. I would like to thank all of our teammates and manufacturer partners for their dedication and commitment during this difficult time. Due to their efforts, we believe that we have the operating procedures and financial resources in place to manage the current economic climate and to quickly recover when consumer and commercial activity resumes.”

Heath Byrd, Sonic’s and EchoPark’s Chief Financial Officer, commented, “The one-time, non-cash goodwill impairment charge was related to our franchised dealerships only and was triggered by the decrease in our stock market value from the time period between the official announcement of the COVID-19 pandemic on March 11, 2020 and the end of the first quarter, March 31, 2020. While there continues to be near-term disruption from the COVID-19 pandemic, our liquidity is strong and our long-term outlook and prospects for Sonic and EchoPark have not changed. We believe that our current liquidity position, coupled with the actions taken to improve efficiencies during this pandemic, position us well for the recovery and will make us a stronger company into the future.”

COVID-19 Update

During the global COVID-19 pandemic, certain automotive dealership operations have been deemed essential businesses to support the continuity of people’s daily lives and ensure the transportation needs of our nation’s first responders and essential workers. Presently, all Sonic stores remain open, with full service operations and various levels of vehicle sales as stipulated by individual state and local orders. Sonic is committed to ensuring the safety of its guests and teammates by limiting the spread of COVID-19 while maintaining the continuity of its operations to the best of our ability.

Since the onset of the COVID-19 pandemic in the United States, Sonic has implemented a number of initiatives nationwide to protect the health and safety of its guests and teammates in response to the COVID-19 pandemic, notably:

• As an essential business, all of the Company’s service departments remain open to facilitate reliable transportation for consumers for purposes permitted under state and local government orders (such as shopping for groceries or receiving medical care), as well as first responders, medical professionals and other essential workers requiring transportation to their workplaces;
• The Company’s vehicle sales departments have begun to offer a no-contact purchase experience, allowing 90% of a vehicle transaction to be completed on Sonic’s website or by phone and delivered to the guest with a safe, no-contact home delivery;
• To further reduce the need for unnecessary travel, Sonic has provided delivery and pickup of vehicles from its guests’ places of residence, for those utilizing both the Company’s sales and service departments; and
• For all of the Company’s dealership locations, the Company is adhering to CDC-recommended social distancing protocols and has introduced stringent sanitization procedures, including providing enhanced disinfection of vehicles brought in for service, used for loaner service, used for test drives, or delivered to guests at home.

The COVID-19 pandemic is having a widespread effect on worldwide commerce, including the automotive industry. The positive momentum Sonic experienced during fiscal 2019, including increased revenues, higher overall vehicle sales volumes, and increased levels of profit, continued in early fiscal 2020 through the beginning of March. Since mid-March, Sonic has experienced a significant decrease in overall vehicle sales volumes and service department revenue compared to the prior year, mainly due to lower consumer demand related to the COVID-19 pandemic and related government-imposed restrictions and uncertainty around the overall economic outlook.

Financial Position

Sonic continues to have considerable financial resources and access to diversified funding sources. In response to the COVID-19 pandemic, the Company continues to opportunistically assess all available funding options to further strengthen its balance sheet and increase liquidity to maximize its financial flexibility. Sonic has also taken proactive measures to bolster its liquidity position and provide additional financial flexibility, including drawing down $210 million of additional cash from its revolving credit facility prior to March 31, 2020.

As of April 28, 2020, Sonic’s total available liquidity had increased to approximately $418.4 million, up from $311.5 million as of March 31, 2020 and $280.0 million as of December 31, 2019. Sonic’s liquidity at April 28, 2020 consists of $304.0 million of cash and cash equivalents on hand, $90.0 million of floor plan deposit balances and $24.4 million of availability under our existing credit facilities. All of the additional liquidity generated since December 31, 2019 was a result of maximizing availability under pre-existing agreements and cash from operations. Sonic may have additional opportunities to further increase its liquidity position using unfinanced real estate and other sources, if necessary. From a debt perspective, Sonic has no significant near-term debt maturities.

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