Sonic Automotive Inc. posted its third straight quarterly profit today, and just seven months after warning of possible bankruptcy, Sonic's CFO says the dealership group can focus on business and even reconsider selling some stores.
Sonic executives have lighter hearts since the company raised about $266 million last month from a sale of stock and convertible debt notes to refinance its debt, CFO David Cosper said in an interview today.
In May, Sonic avoided bankruptcy by postponing $90 million of debt payments until 2012 in exchange for paying a higher interest rate and raising $4 million through stock offerings.
“It actually is quite an exhilarating feeling to see how quickly things can turn,” Cosper said. “The business was never really bad -- we made money all this year -- it's just that we had some unfortunate timing with that debt maturing in May.”
Investors responded by sending Sonic shares down 17 percent to $10.38, for the biggest decline among U.S. retail groups today. Sonic's conference call with analysts was dominated by questions about debt.
Sonic posted third-quarter net income of $15.6 million. That compares with a $27 million net loss in the third quarter of 2008, when the U.S. recession, after-tax costs related to closed dealerships and disruption of business at Houston-area dealerships from Hurricane Gustav pulled Sonic's results down.
Revenue slipped from $1.6 billion in the third quarter of 2008 to $1.5 billion last quarter.
New vehicle sales fell 7 percent from a year earlier to 24,305 units, while used vehicle sales rose 25 percent to 19,360 units. The government's cash-for-clunkers incentive accounted for 6,000 new-car sales, said Jeff Dyke, executive vice president of operations, in an interview. That's about 28 percent of July and August sales, he said.
Sonic's new-car share in its dealerships' markets rose each month from February through September, and last month's share was the best ever for the company, Dyke said.
Revenue from service and parts operations and finance and insurance were flat.
Not for sale
With Sonic's debt situation under control for now, the company is now reconsidering selling some stores to raise cash. Sonic had put 15 stores on the market when it was facing bankruptcy. It sold three, but now plans to leave only five or seven for sale, Cosper said.
“I think for the most part that debt drama is behind us,” he said.
Dyke said Sonic's business has also benefited from its 34 percent employee turnover rate this year, down from the usual 55 to 60 percent. CEO Scott Smith, Dyke and Cosper visited every store in the company from March to May to reassure employees that Sonic would survive.
“Just keeping everyone pumped up and letting them know that we were going to get through this, but it's going to come down to the 11th hour and the 59th minute and the 59th second,” Dyke said.
Retaining staff has been Dyke's top priority and has helped the company post its highest customer satisfaction numbers ever, he said. And the “playbooks” the company started distributing three years ago -- first for used car sales, then for e-commerce, service and parts and loss control -- are starting to sink in, he said.
“With that reduction in turnover, the training dollars are going a lot farther,” Dyke said. “All of the training and everything we're doing sticks.”
Strong new-car margins
In the third quarter, when cash for clunkers sent August light-vehicle sales to their first year-over-year increase since October 2007, Sonic's margins from new vehicle sales increased by 0.7 of a percentage point to 7.6 percent. Used-vehicle margins slipped 0.6 of a point to 7.8 percent.
Dyke said he did not foresee new-car margins declining.
“We're not seeing that in October,” he said today on a call with analysts.
On April 1, Sonic warned of possible bankruptcy if it wasn't able to restructure its debt. A few days after postponing its debt payments, Sonic ended two quarters of losses by posting a $1.7 million first-quarter profit. The group also had a $26,000 profit in the second quarter.
With the proceeds from the September stock offering, the dealership group had said it would repay at least some of the outstanding amount on its 4.25 percent debt notes due in 2015, which could be called due in November 2010. Sonic also planned to repay all its 6 percent debt notes due in 2012 and some of the amount outstanding on its credit line.
Sonic has no major debt maturities until 2013, but rather than buy more dealerships, Cosper said the company will keep working to diminish its debt.
"There's no time like the present to start whacking away at that," he said on the call with analysts.
Sonic, of Charlotte, N.C., ranks No. 4 on the Automotive News list of top U.S. 125 dealership groups, with 94,570 new retail units sold in 2008. It has 132 dealerships and 153 franchises.