Sonic says profit margins are rising after Q2 net income jumps 32%

Vehicle profit margins at Sonic Automotive Inc. dealerships are already bouncing back after declines in the second quarter.

"Margins were a little bit more difficult in the quarter than what we would have hoped for," Sonic President Scott Smith told Automotive News today after Sonic reported a 32 percent gain in second-quarter net income. "It was more product mix than anything."

But margins are up for July, Smith said. Sonic, the nation's third-largest dealership group, slightly raised its 2012 earnings forecast and said it expects industry sales to fall in the low 14-million-unit range for the full year. Earlier in the year, Sonic had forecast industry sales anywhere from the high 13-million range up to 14 million vehicles.

"The overall market just feels stronger to me," Smith said. "I think margins will continue to go up."

During the second quarter, Sonic reported gross profit of $2,039 per new vehicle, down 13 percent or $308 from a year ago. New-car margins are down throughout the industry from year-ago levels when higher prices resulted from the post-earthquake inventory shortage.

Sonic is heavily weighted to Honda and BMW, Sonic executives said, each of which have lagged their closest rivals during the first half of the year. Honda's sales rose 15 percent through June versus Toyota's gain of 29 percent. During the same period, BMW's sales increased 11 percent versus 17 percent for Mercedes.

Sonic's used-car margins dipped in the second quarter. Gross profit per used vehicle was $1,339, down 8 percent or $122. Sonic started the quarter with a lot of current-model-year and one-year-old Honda and Toyota used vehicles, and heavy incentives on new vehicles put pressure on used-vehicle pricing, said Jeff Dyke, Sonic executive vice president of operations.

Dyke said he expects used-car gross profits to bounce back to around the $1,400 mark. That number is already up $75 to $100 per vehicle in July, he said. "It was just a little bit of a blip there for us," he said.

Good numbers

Despite the lower margins per vehicle in the recent quarter, Sonic said net income during the quarter was $28.2 million, or 47 cents per share, up from $21.4 million, or 35 cents per share, a year earlier.

Revenue rose 12.3 percent to $2.19 billion, the company said in its report.

Sonic sold 34,396 new vehicles in the quarter, up from 28,125 a year earlier. Used-vehicle sales rose to 27,528 from 26,799.

Excluding one-time items, Sonic's earnings were 43 cents per share. Analysts on average were expecting 41 cents, according to Thomson Reuters.

After the second quarter ended, Sonic's board approved an additional $100 million for the company's program to repurchase Class A common stock, bringing the total available to about $130 million.

Sonic ranks No. 3 on the Automotive News list of the top 125 U.S. dealership groups with new-vehicle sales of 114,132 in 2011.

Reuters contributed to this report.