Sonic's Q3 profit rises 7.3% on strong used-car business

UPDATED: 10/28/15 1:54 pm ET - adds details

Sonic Automotive Inc.'s third-quarter net income rose 7.3 percent from a year earlier to $26.5 million on strong used-car sales, fixed operations and its new sales initiative called One Sonic-One Experience.

The company reported net operating income of $27.1 million, an increase of 10 percent from $24.6 million a year earlier. The operating results include pretax expenses of $3.7 million related to its used-only EchoPark stores.

Revenue during the period rose 5.9 percent to $2.49 billion from $2.36 billion.

"We continue to make progress on all fronts of our business,” Jeff Dyke, Sonic’s executive vice president of operations, said in a statement.

But Sonic saw pressure on per-vehicle profit margins as it struggled with new and used inventory issues.

One of its highest volume brands is BMW. There, Sonic had an 84-day supply, well above its target of less than a 60-day supply.

“Toyota, Honda and BMW make up about 55 percent of our overall sales,” Dyke said in an interview. “Toyota [sales] were flat, Honda was up 3 percent and BMW up 2.8 percent, so if 55 percent of your sales are up zero to 3 percent, to try to be up by 8 percent [in margins] is not a reality. We’re at the whim of those three brands.”

The company’s supply of Toyota trucks and SUVs was a mere 12 days, Dyke said.

“If you’re not selling trucks and sport utilities, you have a heavy reliance on Camry and Corolla cars, and you just don’t make money selling those cars,” Dyke said.

He praised Honda for doing a “good job” managing inventory, but added: “When you’ve got 80-plus days of BMWs on the ground, the margins are going to come down. We’ve got to do a better job at saying ‘no’ to excess inventory, and BMW has to do a better job at managing their inventory.”

Used-car sales soar

Still, Dyke said in a prepared statement, “Our core business is performing well and steps that we have taken to increase inventory levels in pre-owned and our technician count are beginning to payoff. We are gaining share across all brands in our One Sonic-One Experience stores in Charlotte and should be ready to begin phase I of our technology rollout in the first quarter of 2016.”

Dyke said Sonic continues to “make excellent progress at our EchoPark stores and are right on our forecast.”

But Sonic’s retail new-vehicle gross profit margin per unit in the quarter fell 7 percent to $1,745. And the company's used-vehicle margin fell 8.5 percent to $1,370 from a year earlier.

Dyke said that decline is in line with results from previous quarters, blaming aggressive used-car procurement resulting in high inventory, which eroded prices.

“We’re learning to manage bigger inventory,” Dyke said. “We don’t have a lot of aging vehicles.”

Sonic’s new-vehicle retail sales in the quarter rose 2 percent to 37,493 units, well below the industrywide 6.2 percent gain. But Sonic’s used-vehicle retail sales rose 11 percent to 30,467 units.

On a same-store basis for the quarter, Sonic trailed the industry, with new-vehicle retail sales of 37,147, up 2.8 percent. Its same-store used retail sales rose 8.4 percent to 29,173 units.

Cost of growth

The fifth largest U.S. dealership group also reported that its spending on operations as a share of gross profit declined slightly in the third quarter. Sonic said operations expenses were 77.7 percent of gross profit, a decrease from 79.1 percent in the year-earlier period.

The company has said many of its operating costs in recent quarters have been tied to launching new initiatives, such as the One Sonic-One Experience customer service plan and EchoPark, its dedicated used-vehicle stores in Denver.

Sonic introduced One Sonic-One Experience in the summer of 2014 at a dealership in Charlotte, N.C., and rolled it out to four more Charlotte stores in the fourth quarter. The nationwide rollout is expected to take all of this year and next, the company said.

One Sonic-One Experience features new technology to improve inventory management, pricing and customer relations. The goal of the program is to streamline the process for buying vehicles.

Electronic hang tags

Sonic announced today it has developed an electronic window hang tag that it is using in Charlotte and will roll out to all of its stores starting in the first quarter and going through next year.

The tag, which Sonic developed with a vendor, is weatherproof and hangs on the outside of a vehicle.

If Sonic changes a vehicle’s price in its computer system, it automatically changes that price on the car’s hang tag. It saves on the use of paper and eliminates an employee having to write up a new label and put it on the car.

“It has a 3-year battery life on the unit,” Dyke said. “We’ve had them in place without any issues for 90 days. We’re adding our red color to it for Sonic and green color to it for EchoPark.”

EchoPark ‘will be printing money’

The company expects to lower operating costs by gaining economies of scale as it opens more EchoPark stores around Denver.

Sonic sold 920 used vehicles at its EchoPark stores in the quarter, up about 5 percent from the second quarter, Dyke said. He expects to sell 800 to 900 used vehicles in the fourth quarter, blaming “seasonality.”

Sonic is buying property to expand EchoPark to other markets. Dyke said it takes the company six months to get a new store running and Sonic is working to cut that time to four months. He said the stores will be “printing money.”

“We’re building the neighborhood stores at a $7 [million] to $7.5 million cost structure including real estate,” Dyke said during a conference call with analysts. “With each neighborhood store we should be able to sell 125 to 150 used cars a month to generate $1 [million] to $1.5 million in net income.”

The stores will stock about 200 cars, he said, and break even at 60 to 65 cars sold a month.

“It’s a question of how many we can build,” Dyke said.

In the fourth quarter, Sonic will launch an EchoPark store in Dakota Ridge, near Denver. Another location is scheduled to launch in the Denver area during the second quarter next year. Sonic will launch two more stores there next year, for a total of seven stores in Colorado.

Sonic plans to introduce EchoPark in a second, unidentified market outside Colorado. It plans to start building in that market in early 2016 and eventually have 10 to 13 stores there.

Sonic, of Charlotte, ranks No. 5 on the Automotive News list of the top 150 U.S. dealership groups, with retail sales of 135,932 new vehicles in 2014.

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