MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 furnished to the SEC on August 21, 2009. Overview
We are one of the largest automotive retailers in the United States. As of September 30, 2009, we operated 153 dealership franchises, representing 31different brands of cars and light trucks, at 130 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 third 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 somewhat cyclical in nature and is dependent on consumer confidence and the availability of consumer credit. Typical sources of financing, including captive finance companies associated with vehicle manufacturers, have 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 due in 2010. We cannot predict when an economic recovery will begin and the timing of its impact on our business.
The Car Allowance Rebate System ("CARS") government program was a $3.0 billion government program intended to help consumers buy or lease more fuel-efficient vehicles. The program was designed to boost the economy and the auto industry and to place more fuel-efficient vehicles on the roads. During the program, which ran from July 27, 2009 to August 25, 2009, approximately 0.7 million vehicles were traded-in leading to the submission of approximately $2.9 billion rebate applications. The most purchased brands for all participants under CARS program included Toyota, General Motors, Ford and Honda. These four brands made up 64.4% of the vehicles purchases under the program. The following heading, New Vehicles, contains a discussion of the impact the CARS program on our new vehicles volume for the third quarter ended September 30, 2009.
On June 1, 2009, General Motors Corp. and certain of its subsidiaries ("General Motors") filed for Chapter 11 bankruptcy protection. 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 the discontinuation of the Saturn brand discussed below, the new General Motors Company announced that it 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. As of September 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. 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. Total assistance to be received from General Motors totals $3.3 million, of which $0.7 million was received as of September 30, 2009. The remaining assistance has not been recorded as a receivable from General Motors as of September 30, 2009 as 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 new General Motors Company;

• The payment of financial assistance to the franchisee in installments in connection with the orderly winding down of the franchise operations;

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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 Motors Liquidation Company or the new General Motors Company 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 Motors Liquidation Company or the new General Motors Company; 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 recommended to the bankruptcy court the continuation or assumption of our existing franchise agreements, as amended by the "continuation agreements". All of our franchises that executed "continuation agreements" were assumed by the post-bankruptcy new General Motors Company. We expect our franchises which executed "continuation agreements" to be renewed after October 31, 2010 by the new General Motors Company.
With the exception of: (1) product liability indemnifications; (2) amounts owed to us through incentive programs; (3) amounts currently owed to our franchises under their open accounts with General Motors; and (4) 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 received payments related to all pre-bankruptcy claims.
On June 2, 2009, General Motors announced that Chinese equipment manufacturer Sichuan Tengzhong Heavy Industrial Machinery Co. ("STHIMC") will buy its Hummer brand. On October 9, 2009, the two parties signed a definitive purchase agreement. As of September 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") would buy its Saturn brand. However, on September 30, 2009 General Motors announced PAG will not purchase the Saturn brand and they plan to discontinue the Saturn brand. As of September 30, 2009, we operated one Saturn franchise at one dealership location.
As our operations at the affected franchises that will not be renewed or will be discontinued 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 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. 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 third quarter ended September 30, 2009. As of September 30, 2009, we owned six Chrysler franchises at two dealership locations.
The following is a detail of our new vehicle revenues by brand for the third quarter and nine-month period ended September 30, 2008 and 2009:

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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 Third Quarter Ended September 30, Nine Months Ended September 30, 2008 2009 2008 2009 Brand (1) BMW 21.1 % 17.5 % 19.6 % 18.5 % Honda 13.2 % 13.5 % 13.0 % 12.9 % Toyota 11.6 % 13.2 % 12.1 % 12.3 % Ford 7.2 % 8.9 % 8.9 % 10.0 % General Motors (2) 9.2 % 7.6 % 8.7 % 7.9 % Mercedes 8.6 % 7.2 % 8.5 % 7.2 % Lexus 6.6 % 6.9 % 6.4 % 6.4 % Other (3) 3.8 % 5.0 % 3.6 % 4.5 % Cadillac 5.3 % 3.8 % 5.5 % 4.1 % Audi 1.7 % 2.8 % 1.7 % 2.8 % Volkswagen 2.0 % 2.3 % 1.8 % 2.4 % Hyundai 1.7 % 2.4 % 1.5 % 2.2 % Land Rover 1.2 % 2.0 % 1.4 % 1.9 % Volvo 1.2 % 1.8 % 1.6 % 1.7 % Porsche 1.5 % 1.5 % 1.5 % 1.6 % Other Luxury (4) 1.1 % 1.1 % 1.2 % 1.2 % Acura 1.2 % 0.7 % 1.2 % 0.8 % Nissan 0.7 % 0.8 % 0.7 % 0.7 % Infiniti 0.6 % 0.5 % 0.6 % 0.5 % Chrysler (5) 0.5 % 0.5 % 0.5 % 0.4 % Total 100.0 % 100.0 % 100.0 % 100.0 %

(1) In accordance with the provisions of ASC 205, "Presentation of Financial Statements", prior years' income statement data reflect reclassifications to exclude franchises sold, identified for sale, or terminated subsequent to September 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.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Third Quarter Ended September 30, 13.0 11.5 (11.5 %) Nine Months Ended September 30, 14.1 10.2 (27.7 %)

Our reported and same store new vehicle results are as follows:

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Reported: Revenue $ 942,471 $ 825,367 $ (117,104 ) (12.4 %) Gross profit $ 63,986 $ 60,251 $ (3,735 ) (5.8 %) Unit sales 28,797 26,276 (2,521 ) (8.8 %) Revenue per Unit $ 32,728 $ 31,411 $ (1,317 ) (4.0 %) Gross profit per unit $ 2,222 $ 2,293 $ 71 3.2 % Gross profit as a % of revenue 6.8 % 7.3 % 50 bps Nine Months Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Reported: Revenue $ 2,978,886 $ 2,169,646 $ (809,240 ) (27.2 %) Gross profit $ 201,685 $ 152,136 $ (49,549 ) (24.6 %) Unit sales 91,977 67,798 (24,179 ) (26.3 %) Revenue per Unit $ 32,387 $ 32,002 $ (385 ) (1.2 %) Gross profit per unit $ 2,193 $ 2,244 $ 51 2.3 % Gross profit as a % of revenue 6.8 % 7.0 % 20 bps Third Quarter Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Same Store: Revenue $ 942,471 $ 825,367 $ (117,104 ) (12.4 %) Gross profit $ 63,403 $ 58,867 $ (4,536 ) (7.2 %) Unit sales 28,797 26,276 (2,521 ) (8.8 %) Revenue per unit $ 32,728 $ 31,411 $ (1,317 ) (4.0 %) Gross profit per unit $ 2,202 $ 2,240 $ 38 1.7 % Gross profit as a % of revenue 6.7 % 7.1 % 40 bps Nine Months Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Same Store: Revenue $ 2,978,886 $ 2,166,449 $ (812,437 ) (27.3 %) Gross profit $ 201,538 $ 149,000 $ (52,538 ) (26.1 %) Unit sales 91,977 67,745 (24,232 ) (26.3 %) Revenue per unit $ 32,387 $ 31,979 $ (408 ) (1.3 %) Gross profit per unit $ 2,191 $ 2,199 $ 8 0.4 % Gross profit as a % of revenue 6.8 % 6.9 % 10 bps

For the third quarter and nine-month period ended September 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 in the third quarter and nine-month period ended September 30, 2009 was relatively consistent with the decline in SAAR for those periods. Our import and domestic stores experienced similar declines in new vehicle revenues for both the third quarter and nine-month period ended September 30, 2009 as compared to the prior year.
During the third quarter ended September 30, 2009, Sonic sold 5,896 new vehicle units, or 22.4% of our total reported new vehicle volume, under the government's CARS program which ran in July and August 2009. The brands we own that benefited the most from the CARS program were Honda, Toyota, BMW and Nissan. Furthermore, our Northern California and Texas Mid-West regions had the highest volume of new vehicles sold under the CARS program.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS New vehicle unit volume decreased at our import stores in the third quarter and nine-month period ended September 30, 2009 by 6.0% and 24.2%, respectively, when compared to the prior year period. The decline in import new vehicle unit sales was led by our BMW, Mercedes and Lexus stores, which posted declines of 18.7%, 21.4% and 8.3%, respectively, during the third quarter ended September 30, 2009 when compared to the prior year period. For the nine-month period ended September 30, 2009, the decline in import new vehicle unit sales was led by our BMW, Mercedes, Honda and Toyota stores, which posted declines of 26.7%, 33.7%, 25.8% and 27.4%, respectively. When compared to the national industry declines for the nine-month period ended September 30, 2009, BMW, Honda and Toyota tracked closely to the national industry decline while Mercedes underperformed its respective brand market.
New vehicle unit volume decreased at our domestic stores in the third quarter and nine-month period ended September 30, 2009 by 16.6% and 31.8%, respectively. Our GM, excluding Cadillac, and Cadillac stores experienced declines of 29.6% and 44.7%, respectively, while our Ford stores experienced an increase in new vehicle unit sales of 10.4% in the third quarter ended September 30, 2009. The increase at our Ford stores is primarily due to the government's CARS program which ran in July and August 2009. The decline in the new vehicle unit volume at our GM, excluding Cadillac, and Cadillac stores was the result of a sharp decline in fleet unit volume during the third quarter ended September 30, 2009 which decreased 72.1% and 90.2%, respectively, as compared to the prior year period. During the third quarter ended September 30, 2009, our GM and Cadillac stores underperformed their brand markets while our Ford stores outperformed their brand market. During the nine-month period ended September 30, 2009, our GM, excluding Cadillac, Cadillac and Ford stores experience declines in new vehicle unit sales of 39.7%, 49.8%, and 19.2%, respectively. The decline in the new vehicle unit volume at our GM, excluding Cadillac, and Cadillac stores was the result of a sharp decline in fleet unit volume during the nine-month period ended September 30, 2009 which decreased 74.3% and 92.9%, respectively. Our Ford stores outperformed their respective brand market while our GM, excluding Cadillac, and Cadillac stores underperformed their respective brand markets in the nine-month period ended September 30, 2009.
New vehicle unit volume declines were concentrated primarily within our Alabama/Tennessee, Dallas and California markets, which experienced declines in new vehicle unit sales of 10.4%, 17.3% and 7.9%, respectively, for the third quarter ended September 30, 2009. In the third quarter ended September 30, 2009, approximately 45.4% of our same store new vehicle unit volume was generated from our Alabama/Tennessee, Dallas and California markets. For the nine month period ended September 30, 2009, new vehicle unit volume declines were concentrated primarily in our Alabama/Tennessee, NC/SC/Georgia, Dallas, and California markets, which experienced declines in new vehicle unit sales of 26.1%, 28.2%, 36.3% and 26.5%, respectively. These regions comprised 53.2% our same store new vehicle unit volume in the nine-month period ended September 30, 2009. We expect the new vehicle market to continue to be challenging at least through the end of the current year.
For the third quarter and nine-month period ended September 30, 2009 new vehicle revenue per unit experienced a decrease of 4.0% and 1.3%, respectively. These decreases are due primarily to the change in our sales mix. Our new luxury unit volume as a percentage of total new vehicle unit volume decreased in the third quarter and nine-month period ended September 30, 2009 by 310 basis points and 90 basis points, respectively, as compared to the third quarter and nine-month period ended September 30, 2008. We believe the decrease in new luxury unit volume is due primarily to a shift in consumer preferences as a result of the government's CARS program and overall economic conditions experienced in 2009.
Increases in same store new vehicle gross profit for the third quarter and nine-month ended September 30, 2009 compared to the same period in the prior year were primarily due to the mix of vehicles retailed, specifically the increase of import new vehicle units sold as a percentage of total new vehicle units sold, which increased by 380 basis points in the third quarter ended September 30, 2009 and 180 basis points in the nine-month period ended September 30, 2009 as compared to the prior year period. The increase in import new vehicle units sold is primarily due to the government's CARS program which ran in July and August 2009.
Used Vehicles
Our reported and same store used vehicle results are as follows:

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Reported: Revenue $ 308,158 $ 365,501 $ 57,343 18.6 % Gross profit $ 25,883 $ 28,552 $ 2,669 10.3 % Unit sales 15,444 19,360 3,916 25.4 % Revenue per Unit $ 19,953 $ 18,879 $ (1,074 ) (5.4 %) Gross profit per unit $ 1,676 $ 1,475 $ (201 ) (12.0 %) Gross profit as a % of revenue 8.4 % 7.8 % (60 )bps CPO revenue $ 164,935 $ 172,357 $ 7,422 4.5 % CPO unit sales 6,425 6,583 158 2.5 % Nine Months Ended September 30, Better / (Worse) (in thousands except units and per unit data) 2008 2009 Change % Change Reported: Revenue $ 994,906 $ 1,034,444 $ 39,538 4.0 % Gross profit $ 88,197 $ 85,981 $ (2,216 ) (2.5 %) Unit sales 49,617 55,062 5,445 11.0 % Revenue per Unit $ 20,052 $ 18,787 $ (1,265 ) (6.3 %) . . .