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| SAH > SEC Filings for SAH > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Sonic Automotive, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements and the related notes thereto appearing elsewhere in this report, as well as the audited financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in our Current Report on Form 8-K filed on May 28, 2009.
Overview
We are one of the largest automotive retailers in the United States. As of June 30, 2009, we operated 154 dealership franchises, representing 31 different brands of cars and light trucks, at 131 locations and 30 collision repair centers in 15 states. Our dealerships provide comprehensive services including sales of both new and used cars and light trucks, sales of replacement parts, performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair services, and arrangement of extended service contracts, financing, insurance and other aftermarket products for our customers.
Economic Conditions
Beginning near the end of the second quarter of 2008 and continuing into and throughout the second quarter of 2009, the automobile retailing industry was severely negatively affected by prevailing economic conditions. The uncertainty that exists related to the overall economy in the United States continues through the date of this report. As discussed in the paragraphs that follow, the demand for new and used vehicles has declined significantly and has negatively impacted our results of operations. Due to the turmoil in the financial services industry, the availability of credit has declined substantially for all consumers except those with high credit scores. Our business is cyclical in nature and dependent on consumer confidence and the availability of consumer credit. Typical sources of financing, including captive finance companies associated with vehicle manufacturers, have also reduced the amount of credit available. The lack of liquidity resulting from the financial services industry crisis has also negatively affected our ability to refinance our debt obligations in 2009 and 2010. We cannot predict when an economic recovery will begin and the timing of its impact on our business.
On June 1, 2009, General Motors Corp. and certain of its subsidiaries ("General Motors") filed for Chapter 11 bankruptcy protection. As of June 30, 2009, we operated 33 General Motors franchises (under the Cadillac, Chevrolet, Hummer, Saab, Buick and Saturn nameplates) at 26 physical dealerships. Six of our General Motors dealerships, representing twelve franchises, including three Hummer franchises at multi-franchise dealerships, two Saab franchises at multi-franchise dealerships and one additional General Motors franchise at a multi-franchise dealership received letters stating that the franchise agreements between General Motors and us will not be continued by General Motors on a long-term basis. Subject to bankruptcy approval, General Motors has offered assistance with winding down the operations of these franchises in exchange for our execution of termination agreements. We executed all of the termination agreements. Assistance expected to be received from General Motors totals $3.3 million, none of which was recorded as a receivable from General Motors as of June 30, 2009 due to the uncertainty of bankruptcy court approval and certain conditions required for the payments to occur had not yet been satisfied. The termination agreements provide for the following:
• The termination of the franchise agreement no earlier than January 1, 2010 and no later than October 31, 2010;
• The assignment and assumption of the franchise agreement by the purchaser of General Motors' assets;
• The payment of financial assistance to the franchisee in installments in connection with the orderly winding down of the franchise operations;
• The waiver of any other termination assistance of any kind that may have been required under the franchise agreement;
• The release of claims against General Motors or the purchaser of General Motors' assets and their related parties;
• The continuation of franchise operations pursuant to the franchise agreement, as supplemented by the termination agreement, through the effective date of termination of the franchise agreement, except that we shall not be entitled to order any new vehicles from General Motors or the purchaser of General Motors' assets; and
• A restriction on our ability to transfer the franchise agreement to another party.
For the remaining General Motors franchises we executed "continuation agreements" which require, among other things, that existing franchise agreements will expire no later than October 31, 2010. In consideration of the execution of the "continuation agreements" General Motors will recommend to the bankruptcy court the continuation or assumption of our existing franchise agreements, as amended by the "continuation agreements". We expect our franchises which executed "continuation agreements" to be renewed after October 31, 2010.
With the exception of product liability indemnifications, amounts owed to us through incentive programs, amounts currently owed to our franchises under their open accounts with General Motors and warranty claims occurring within 90 days prior to June 1, 2009, all amounts owed to us from General Motors were extinguished as a result of the execution of the termination and continuation agreements. A motion was made by General Motors to the bankruptcy court and the motion was granted by the bankruptcy court allowing General Motors to pay the claims noted above. As a result, we have been receiving payments related to pre-bankruptcy claims and the effect of General Motor's bankruptcy filing has not had a material effect on our recorded receivable balances as of June 30, 2009.
As our operations at the affected franchises that will not be renewed wind down, we may be required to accelerate depreciation expenses and record impairment charges related to, but not limited to, lease obligations, fixed assets, franchise assets, accounts receivable and inventory.
On June 2, 2009, General Motors announced that Chinese equipment manufacturer Sichuan Tengzhong Heavy Industrial Machinery Co. ("STHIMC") will buy its Hummer brand. As of June 30, 2009, we operated three Hummer franchises at three dealership locations. It is uncertain whether STHIMC will continue supporting the Hummer brand or whether STHIMC's ownership of the Hummer brand will have a positive or negative impact on our Hummer franchises' operations.
On June 5, 2009, General Motors announced that Penske Automotive Group (PAG) will buy its Saturn brand. As of June 5, 2009, we operated one Saturn franchise at one dealership location. It is uncertain whether PAG will continue supporting the Saturn brand or whether PAG's ownership of the Saturn brand will have a positive or negative impact on our Saturn franchise's operations.
On July 10, 2009, General Motors emerged from bankruptcy as the new General Motors Company, with the former General Motors Corp. henceforth known as Motors Liquidation Company. With the exception of the sale of the Hummer and Saturn brands discussed above, the new General Motors expects to continue its current brand portfolio going forward. However, we are unable to predict what impact the discontinuation or sale of additional brands in the future will have on our operations.
On April 30, 2009, Chrysler LLC filed for bankruptcy protection and submitted a plan of reorganization. On June 10, 2009, Fiat SpA purchased a substantial portion of Chrysler's assets which include rights related to our franchise agreements. As of June 30, 2009, we owned six Chrysler franchises at two dealership locations. It is uncertain whether Fiat will continue supporting the Chrysler brand or whether Fiat's ownership of the Chrysler brand will have a positive or negative impact on our Chrysler franchises' operations. In conjunction with Chrysler's reorganization efforts in the second quarter of 2009, three franchise agreements associated with one of our dealership locations were terminated. The result of these franchise terminations was not material to our results of operations, balance sheet or cash flows for the second quarter ended June 30, 2009.
The following is a detail of our new vehicle revenues by brand for the second quarter and six-month period ended June 30, 2008 and 2009:
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Percentage of New Vehicle Revenue Percentage of New Vehicle Revenue
Second Quarter Ended June 30, Six Months Ended June 30,
2008 2009 2008 2009
Brand (1)
BMW 19.8 % 18.2 % 18.9 % 19.1 %
Honda 13.6 % 12.9 % 12.9 % 12.5 %
Toyota 12.1 % 11.8 % 12.4 % 11.8 %
Ford 9.3 % 11.1 % 9.7 % 10.7 %
General Motors (2) 8.1 % 8.6 % 8.4 % 8.1 %
Mercedes 8.7 % 6.3 % 8.4 % 7.1 %
Lexus 6.0 % 6.1 % 6.3 % 6.1 %
Other (3) 4.0 % 4.5 % 3.5 % 4.4 %
Cadillac 4.9 % 3.7 % 5.5 % 4.2 %
Audi 1.7 % 3.1 % 1.7 % 2.9 %
Volkswagen 1.9 % 2.7 % 1.8 % 2.4 %
Hyundai 1.5 % 2.0 % 1.5 % 2.1 %
Land Rover 1.3 % 1.9 % 1.5 % 1.9 %
Porsche 1.5 % 1.7 % 1.5 % 1.6 %
Volvo 1.5 % 1.9 % 1.7 % 1.5 %
Other Luxury (4) 1.2 % 1.3 % 1.2 % 1.2 %
Acura 1.1 % 0.7 % 1.2 % 0.9 %
Nissan 0.7 % 0.6 % 0.8 % 0.6 %
Infiniti 0.6 % 0.5 % 0.6 % 0.5 %
Chrysler (5) 0.5 % 0.4 % 0.5 % 0.4 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
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(1) In accordance with the provisions of SFAS No. 144, prior years' income statement data reflect reclassifications to exclude franchises sold, identified for sale, or terminated subsequent to June 30, 2008 which had not been previously included in discontinued operations. See Notes 1 and 2 to our accompanying unaudited Consolidated Financial Statements which discusses these and other factors that affect the comparability of the information for the periods presented.
(2) Includes Buick, Chevrolet and Saturn.
(3) Includes Isuzu, KIA, Mini, Mitsubishi and Subaru.
(4) Includes Hummer, Jaguar, and Saab.
(5) Includes Chrysler, Dodge and Jeep.
Results of Operations
Except where otherwise noted, the following discussions are on a same store basis.
New Vehicles
The automobile retail industry uses the Seasonally Adjusted Annual Rate (SAAR) to measure the amount of new vehicle unit sales activity within the United States market. The SAAR averages below reflect a blended average of all brands marketed or sold in the United States market. The SAAR includes brands we do not sell and markets in which we do not operate.
SAAR (in millions of vehicles)
2008 2009 % Change
Second Quarter Ended June 30, 14.2 9.6 (32.4 %)
Six Months Ended June 30, 14.7 9.6 (34.7 %)
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Our reported and same store new vehicle results are as follows:
Second Quarter Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Reported:
Revenue $ 1,059,486 $ 706,171 $ (353,315 ) (33.3 %)
Gross profit $ 71,614 $ 48,157 $ (23,457 ) (32.8 %)
Unit sales 33,248 21,896 (11,352 ) (34.1 %)
Revenue per Unit $ 31,866 $ 32,251 $ 385 1.2 %
Gross profit per unit $ 2,154 $ 2,199 $ 45 2.1 %
Gross profit as a % of revenue 6.8 % 6.8 % - bps
Six Months Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Reported:
Revenue $ 2,036,415 $ 1,344,279 $ (692,136 ) (34.0 %)
Gross profit $ 137,700 $ 91,884 $ (45,816 ) (33.3 %)
Unit sales 63,180 41,522 (21,658 ) (34.3 %)
Revenue per Unit $ 32,232 $ 32,375 $ 143 0.4 %
Gross profit per unit $ 2,179 $ 2,213 $ 34 1.6 %
Gross profit as a % of revenue 6.8 % 6.8 % - bps
Second Quarter Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Same Store:
Revenue $ 1,059,486 $ 706,171 $ (353,315 ) (33.3 %)
Gross profit $ 71,863 $ 47,451 $ (24,412 ) (34.0 %)
Unit sales 33,248 21,896 (11,352 ) (34.1 %)
Revenue per unit $ 31,866 $ 32,251 $ 385 1.2 %
Gross profit per unit $ 2,161 $ 2,167 $ 6 0.3 %
Gross profit as a % of revenue 6.8 % 6.7 % (10 ) bps
Six Months Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Same Store:
Revenue $ 2,036,415 $ 1,341,082 $ (695,333 ) (34.1 %)
Gross profit $ 138,134 $ 90,133 $ (48,001 ) (34.7 %)
Unit sales 63,180 41,469 (21,711 ) (34.4 %)
Revenue per unit $ 32,232 $ 32,339 $ 107 0.3 %
Gross profit per unit $ 2,186 $ 2,174 $ (12 ) (0.5 %)
Gross profit as a % of revenue 6.8 % 6.7 % (10 ) bps
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For the second quarter and six-month period ended June 30, 2009, new vehicle revenues declined from the same period in the prior year due primarily to lower unit volume. The decline in new unit volume we experienced was relatively consistent with the
decline in SAAR. Our import and domestic stores both experienced similar declines in new vehicle revenues for both the second quarter and six-month period ended June 30, 2009 as compared to the prior year.
New vehicle unit volume decreased at our import stores in the second quarter and six-month period ended June 30, 2009 by 34.4% and 32.9%, respectively. The decline in import new vehicle unit sales was led by our BMW, Mercedes, Honda and Toyota stores, which posted declines of 36.3%, 48.6%, 37.5% and 39.4%, respectively, during the second quarter ended June 30, 2009 and 30.9%, 39.6%, 36.2% and 38.4%, respectively, during the six-month period ended June 30, 2009. When compared to the national industry declines for the second quarter ended June 30, 2009, these brands underperformed their respective brand markets. When compared to the national industry declines for the six-month period ended June 30, 2009, BMW, Mercedes, and Honda underperformed their respective brand markets while Toyota tracked closely to the national industry decline. However, with the exception of our BMW and Mercedes brands, we believe all our remaining import brands outperformed others in their respective local markets.
New vehicle unit volume decreased at our domestic stores in the second quarter and six-month period ended June 30, 2009 by 33.3% and 38.1%, respectively. Our GM, excluding Cadillac, Ford, and Cadillac stores declined by 39.8%, 22.9% and 53.7%, respectively, during the second quarter ended June 30, 2009 and 44.6%, 28.8% and 52.2%, respectively, during the six-month period ended June 30, 2009. The decline in the new vehicle unit volume at our GM, excluding Cadillac, stores was the result of a sharp decline in fleet unit volume during the second quarter and six-month period ended June 30, 2009 which decreased 69.8% and 75.5%, respectively. While our Ford stores tracked closely to the national industry decline, our GM stores, excluding Cadillac, underperformed their brand market during the second quarter ended June 30, 2009. During the six-month period ended June 30, 2009, our Ford stores outperformed the national industry decline, while our GM, excluding Cadillac, stores underperformed its brand market. However, with the exception of our Cadillac brand, we believe all our remaining domestic brands outperformed others in their respective local markets.
New vehicle unit volume declines are concentrated primarily within our California and Houston markets, which suffered declines in new vehicle unit sales of 41.4% and 19.2%, respectively, for the second quarter ended June 30, 2009 and 35.2% and 23.3%, respectively, for the six-month period ended June 30, 2009. In the second quarter and six-month period ended June 30, 2009, approximately 47.8% and 49.4%, respectively, of our same store new vehicle unit volume was generated from our California and Houston markets. We expect the new vehicle market to continue to be challenging at least through the end of the current year.
For the second quarter and six-month period ended June 30, 2009 new vehicle revenue per unit experienced a slight increase of 1.2% and 0.3%, respectively. This increase is due primarily to the change in our sales mix. Our new truck unit volume as a percentage of total new vehicle unit volume increased in the second quarter and six-month period ended June 30, 2009 by 390 basis points and 80 basis points, respectively, as compared to the second quarter and six-month period ended June 30, 2008. We believe the increase in new truck unit volume is due primarily to lower average gas prices in the second quarter and six-month period ended June 30, 2009 as compared to the same periods in the prior year.
Decreases in same store new vehicle gross profit for the second quarter and six-month ended June 30, 2009 compared to the same period in the prior year were primarily due to the mix of vehicles retailed, specifically the decrease of import and luxury new vehicle units sold as a percentage of total new vehicle units sold.
Used Vehicles
Our reported and same store used vehicle results are as follows:
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Second Quarter Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Reported:
Revenue $ 346,650 $ 361,452 $ 14,802 4.3 %
Gross profit $ 30,717 $ 28,840 $ (1,877 ) (6.1 %)
Unit sales 17,247 19,449 2,202 12.8 %
Revenue per Unit $ 20,099 $ 18,585 $ (1,514 ) (7.5 %)
Gross profit per unit $ 1,781 $ 1,483 $ (298 ) (16.7 %)
Gross profit as a % of revenue 8.9 % 8.0 % (90 ) bps
CPO revenue $ 182,447 $ 183,476 $ 1,029 0.6 %
CPO unit sales 7,135 7,224 89 1.2 %
Six Months Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Reported:
Revenue $ 686,748 $ 668,944 $ (17,804 ) (2.6 %)
Gross profit $ 62,313 $ 57,429 $ (4,884 ) (7.8 %)
Unit sales 34,173 35,702 1,529 4.5 %
Revenue per Unit $ 20,096 $ 18,737 $ (1,359 ) (6.8 %)
Gross profit per unit $ 1,823 $ 1,609 $ (214 ) (11.7 %)
Gross profit as a % of revenue 9.1 % 8.6 % (50 ) bps
CPO revenue $ 352,919 $ 356,307 $ 3,388 1.0 %
CPO unit sales 13,714 14,239 525 3.8 %
Second Quarter Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Same Store:
Revenue $ 346,650 $ 361,452 $ 14,802 4.3 %
Gross profit $ 30,631 $ 29,369 $ (1,262 ) (4.1 %)
Unit sales 17,247 19,449 2,202 12.8 %
Revenue per unit $ 20,099 $ 18,585 $ (1,514 ) (7.5 %)
Gross profit per unit $ 1,776 $ 1,510 (266 ) (15.0 %)
Gross profit as a % of revenue 8.8 % 8.1 % (70 ) bps
CPO revenue $ 182,447 $ 183,476 $ 1,029 0.6 %
CPO unit sales 7,135 7,224 89 1.2 %
Six Months Ended June 30, Better / (Worse)
(in thousands except units and per unit data) 2008 2009 Change % Change
Same Store:
Revenue $ 686,748 $ 667,992 $ (18,756 ) (2.7 %)
Gross profit $ 61,480 $ 58,414 $ (3,066 ) (5.0 %)
Unit sales 34,173 35,657 1,484 4.3 %
Revenue per unit $ 20,096 $ 18,734 $ (1,362 ) (6.8 %)
Gross profit per unit $ 1,799 $ 1,638 (161 ) (8.9 %)
Gross profit as a % of revenue 9.0 % 8.7 % (30 ) bps
CPO revenue $ 352,919 $ 355,909 $ 2,990 0.8 %
CPO unit sales 13,714 14,223 509 3.7 %
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Used vehicle unit volume increased for the second quarter and six-month period ended June 30, 2009, as compared to the same period in the prior year, despite a significantly weaker economic environment. This increase is primarily due to the continued implementation of our standardized used vehicle merchandising process. This process allows us to price our used vehicles more competitively, market them more effectively and physically move certain used vehicles to specific dealerships within a particular region that have shown success in retailing the specific type of used vehicle.
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