Thinner new-car margins drag down Sonic Q2 earnings

Sonic Automotive Inc.’s net income tumbled 47 percent to $12.1 million in the second quarter, the publicly traded dealership group said Friday.

Squeezed new-vehicle margins were largely to blame, executives said, due to competitive pricing pressure, automakers’ trying to limit incentives and a glut of nearly new off-lease cars. An ongoing economic slump in the oil patch states, such as Texas, didn’t help. Nor did weaker new-vehicle sales overall.

“Used vehicles, fixed operations, and [finance and insurance] did well,” but not new vehicles, CEO Scott Smith said in a conference call.

Revenue edged up 1 percent to $2.41 billion, but operating profit fell 26 percent to $42.2 million.

On a per-unit basis, new-vehicle retail average gross profit fell 3.3 percent to $1,886. Used retail average gross profit rose 3.9 percent to $1,311, while average F&I gross profit per retail unit was a second-quarter record $1,379, up 2.5 percent.

“The new-vehicle retail sales environment continues to be challenging in Houston and across certain brands,” Jeff Dyke, Sonic’s executive vice president of operations, said in a statement. “Our operations and financial management teams have been busy during the quarter adjusting our cost structure in various areas to compensate for increased competition that has pressured margins. We expect this highly competitive landscape to continue and possibly intensify over the next several quarters as dealers balance volume and gross per unit expectations.”


Compared with a small year-earlier base, results were way up for Sonic’s standalone used-car stores, which are branded EchoPark.

EchoPark unit sales were 2,049 for the quarter, up 80 percent. However, average gross profit per unit was down 16 percent to $875, and average F&I revenue per unit was down 8.7 percent to $1,041. The Colorado EchoPark stores were cash-flow positive in the quarter, the company said.

Sonic has six EchoPark locations open in Colorado, with an opening expected in Texas in late 2017 or early 2018. In addition, the company said it is acquiring property in the Carolinas with a goal of opening EchoPark stores in 2018.

Dyke said the company expects to have 20 EchoPark stores by the end of next year in the Carolinas, Colorado, Florida, Georgia and Texas.

The expansion comes at a cost. The latest quarter saw a net after-tax loss from operations related to EchoPark of $4.7 million, on a 66 percent rise in revenue, to $49 million, vs. a net after-tax loss of $2 million a year earlier.

New-car slowdown

On a same-store basis, new-vehicle sales fell 3 percent to 32,767 units, slightly worse than the industry’s 2.7 percent drop in the quarter in the U.S.

Overall, new-vehicle retail revenue fell 1.8 percent to $1.25 billion. Used-vehicle revenue rose 3.2 percent to $641.9 million. Revenue from parts, service and collision repair rose 2.8 percent to $361.1 million. F&I revenue gained 3.4 percent to $86.9 million.

Revenue for Sonic’s franchised dealerships was up just 0.2 percent from a year ago, to $2.36 billion. Gross profit was up 1.5 percent, to $355 million, but pretax earnings dropped 16 percent to $35 million.

Smith used the “perfect storm” metaphor to describe what’s happening to new-vehicle margins, including economic pressure on the energy sector. In 2016, Sonic got 25 percent of its revenues from Texas, second only to California’s 30 percent. “We’ve got a lot of BMW stores in Houston. That’s a big, big, issue for our [earnings per share] this quarter,” Smith said.

Dyke said the good news is, he doesn’t expect margins to get any worse. “It’s kind of flattening out,” he said. “Unless something just tragic happens, I think margins are going to be in this ballpark the next few quarters.”