Sonic Automotive, Inc. (NYSE:SAH) is one of the largest automotive retailers in the United States, with a diversified business model spanning franchised dealerships, pre-owned vehicle specialty retail, and powersports retail. The company's strategic focus on adapting to changing market dynamics and leveraging its multi-segment platform has positioned it to navigate the evolving automotive retail landscape.
Business Overview
Sonic Automotive operates through three reportable segments: Franchised Dealerships, EchoPark, and Powersports. The Franchised Dealerships segment sells new and used vehicles, provides parts and service, and arranges finance and insurance products. The EchoPark segment focuses on pre-owned vehicle specialty retail, while the Powersports segment offers new and used powersports vehicle sales, parts and service, and finance and insurance services.As of March 31, 2024, Sonic Automotive operated 108 stores in the Franchised Dealerships segment, 18 stores in the EchoPark segment, and 13 stores in the Powersports segment, spanning 18 states. The company's diversified brand portfolio includes 26 different brands of cars and light trucks, providing exposure to a wide range of consumer preferences and market segments.
Financials
For the fiscal year ended December 31, 2023, Sonic Automotive reported annual revenue of $14,372.4 million and net income of $178.2 million. The company's annual operating cash flow was -$52.9 million, and its annual free cash flow was -$256.5 million.In the first quarter of 2024, the company reported total revenues of $3.4 billion, a 3% decrease from the prior-year period. GAAP earnings per share (EPS) for the quarter was $1.20, which included the effect of certain charges. Excluding these items, adjusted EPS was $1.36, a 2% increase year-over-year.
Franchised Dealerships Segment
The Franchised Dealerships segment continued to see expansion of new vehicle inventory levels, ending the first quarter of 2024 with a 50-day supply of inventory, up from 31 days at the end of the prior-year period. This increase in inventory, combined with higher inventory invoice costs, led to a 32% decline in retail new vehicle gross profit per unit to $3,716 during the quarter.In the used vehicle market, the Franchised Dealerships segment experienced a 3% decrease in retail used vehicle gross profit per unit to $1,585 due to higher inventory acquisition costs and increased price competition. However, the segment's fixed operations, which include parts, service, and collision repair, reported a 6% increase in gross profit on a same-store basis, driven by growth in customer pay and warranty revenue.
EchoPark Segment
The EchoPark segment, Sonic Automotive's pre-owned vehicle specialty retail business, reported a significant turnaround in its financial performance. In the first quarter of 2024, the EchoPark segment reported revenues of $559 million, down 14% from the prior-year period, but gross profit increased 34% to $52.6 million.Excluding the impact of closed stores, the EchoPark segment's same-market total revenues increased 12%, and same-market total gross profit increased 79% during the quarter. This improvement was driven by a 150% increase in retail used vehicle gross profit per unit to $294, as well as a 6% increase in finance and insurance (F&I) gross profit per unit.
The EchoPark segment returned to positive adjusted EBITDA of $7.3 million in the first quarter, exceeding the company's previously stated target of breakeven adjusted EBITDA. Sonic Automotive's management team attributed the segment's turnaround to strategic adjustments made over the past few quarters, including the closure of underperforming locations, which allowed for better inventory allocation and improved variable gross profit per unit.
Powersports Segment
Sonic Automotive's Powersports segment reported revenues of $27.7 million and a segment adjusted loss of $0.8 million in the first quarter of 2024. The segment's performance was in line with the company's expectations, given the seasonal variability in the powersports industry and the segment's geographic presence in the Sturgis, South Dakota area.Liquidity
As of March 31, 2024, Sonic Automotive had $847 million in available liquidity, which included $335 million in combined cash and floor plan deposits. During the first quarter, the company repurchased approximately 0.5 million shares of its common stock for $27 million.The company's Board of Directors also approved a quarterly cash dividend of $0.30 per share, payable on July 15, 2024, to all stockholders of record on June 14, 2024.
Outlook
Sonic Automotive is reaffirming its limited financial guidance for 2024 following the first quarter results. The company expects lower franchise dealership segment earnings to be partially offset by significant improvement in the EchoPark segment, which is expected to return to positive adjusted EBITDA for the full year, as well as a moderate increase in Powersports segment income year-over-year.The company's management team remains focused on near-term execution and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long-term returns. Sonic Automotive believes its diversified business model provides significant earnings growth opportunities in the EchoPark and Powersports segments, which may help offset industry-driven margin headwinds in the franchise business.
Risks and Challenges
Sonic Automotive's business is subject to various risks and challenges, including:1. Dependence on manufacturer relationships and brand concentration: The company's performance is heavily dependent on its relationships with vehicle manufacturers and the success of the brands it represents.
2. Competitive landscape: The retail automotive industry is highly competitive, which can impact pricing, sales volumes, and profitability.
3. Macroeconomic and industry conditions: The company's performance is influenced by factors such as consumer confidence, interest rates, and the availability of consumer financing.
4. Regulatory environment: Sonic Automotive's operations are subject to various federal, state, and local laws and regulations, which can change over time.
5. Integration of acquisitions: The company's growth strategy includes acquisitions, which can present integration and operational challenges.