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SAH > SEC Filings for SAH > Form 10-Q on 26-Jul-2013All Recent SEC Filings

Show all filings for SONIC AUTOMOTIVE INC

Form 10-Q for SONIC AUTOMOTIVE INC


26-Jul-2013

Quarterly Report


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 Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

We are one of the largest automotive retailers in the United States. As of June 30, 2013, we operated 111 dealerships in 14 states (representing 25 different brands of cars and light trucks) and 20 collision repair centers. For management and operational reporting purposes, we group certain dealerships together that share management and inventory (principally used vehicles) into "stores." As of June 30, 2013, we operated 100 stores. As a result of the way we manage our business, we have a single operating segment for purposes of reporting financial condition and results of operations. Our dealerships provide comprehensive services including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts, performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair services (collectively, "Fixed Operations"); and (3) arrangement of extended service contracts, financing, insurance and other aftermarket products (collectively, "F&I") for our customers.


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                    SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS



The following is a detail of our new vehicle revenues by brand for the second
quarter and six-month periods ended June 30, 2013 and 2012:



                                          Percentage of New Vehicle Revenue (1)                    Percentage of New Vehicle Revenue (1)
                                              Second Quarter Ended June 30,                              Six Months Ended June 30,
Brand                                      2013                          2012                       2013                          2012
Luxury
BMW                                               19.2 %                        17.5 %                     19.6 %                        17.3 %
Mercedes                                           7.9 %                         8.4 %                      8.1 %                         8.5 %
Lexus                                              4.5 %                         4.8 %                      4.5 %                         4.7 %
Audi                                               4.4 %                         3.9 %                      4.1 %                         4.0 %
Cadillac                                           4.3 %                         4.2 %                      4.4 %                         4.5 %
Mini                                               2.8 %                         3.0 %                      2.6 %                         2.9 %
Land Rover                                         2.2 %                         2.1 %                      2.3 %                         2.2 %
Porsche                                            2.0 %                         1.8 %                      2.1 %                         1.6 %
Volvo                                              0.9 %                         1.2 %                      0.9 %                         1.1 %
Infiniti                                           0.9 %                         1.2 %                      0.9 %                         1.1 %
Acura                                              0.7 %                         0.9 %                      0.7 %                         0.9 %
Jaguar                                             0.7 %                         0.7 %                      0.6 %                         0.8 %

Total Luxury                                      50.5 %                        49.7 %                     50.8 %                        49.6 %
Mid-line Import
Honda                                             16.2 %                        16.5 %                     15.7 %                        16.2 %
Toyota                                            10.4 %                        10.7 %                     10.2 %                        10.4 %
Volkswagen                                         2.6 %                         3.2 %                      2.7 %                         3.2 %
Hyundai                                            2.0 %                         2.3 %                      2.0 %                         2.3 %
Other (2)                                          1.6 %                         1.8 %                      1.6 %                         1.9 %
Nissan                                             1.1 %                         0.8 %                      1.1 %                         0.9 %

Total Mid-line Import                             33.9 %                        35.3 %                     33.3 %                        34.9 %
Domestic
Ford                                               8.9 %                         7.6 %                      8.9 %                         7.9 %
General Motors (3)                                 6.7 %                         7.4 %                      7.0 %                         7.6 %

Total Domestic                                    15.6 %                        15.0 %                     15.9 %                        15.5 %

Total                                            100.0 %                       100.0 %                    100.0 %                       100.0 %

(1) In accordance with the provisions of "Presentation of Financial Statements" in the Accounting Standards Codification (the "ASC"), prior period income statement data reflects reclassifications to (i) exclude franchises sold, identified for sale, or terminated subsequent to June 30, 2012 that had not been included in discontinued operations as of that date or (ii) include franchises previously held for sale that subsequently were reclassified to held and used. See Note 1 to our accompanying Unaudited Condensed Consolidated Financial Statements for a discussion of these and other factors that affect the comparability of the information for the periods presented.

(2) Includes Kia, Scion and Subaru.

(3) Includes Buick, Chevrolet and GMC.

Results of Operations

The following discussions are based on reported figures. Same store amounts do not vary significantly from reported totals since we have not made any significant dealership acquisitions since March 31, 2008. All discussion of increases or decreases for the second quarter or six-month periods ended June 30, 2013 is compared to the appropriate second quarter or six-month period ended June 30, 2012, unless otherwise noted.

New Vehicles

The automobile retail industry uses the Seasonally Adjusted Annual Rate ("SAAR") to measure the annual amount of expected 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, therefore, our new vehicle sales may not trend directly with the SAAR.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Second Quarter Ended June 30, Six Months Ended June 30,
(in millions of vehicles) 2013 2012 % Change 2013 2012 % Change SAAR 15.3 14.1 8.5 % 15.3 14.1 8.5 %

Source: Bloomberg Financial Markets, via Stephens Inc.

New vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues can be influenced by manufacturer incentives for consumers, which vary from cash-back incentives to low interest rate financing. New vehicle revenues are also dependent on manufacturers providing adequate vehicle allocations to our dealerships to meet customer demands and the availability of consumer credit. Our reported new vehicle (including fleet) results are as follows:

                                          Second Quarter Ended June 30,                Better / (Worse)
                                            2013                  2012             Change           % Change
                                                   (In thousands, except units and per unit data)
Revenue                                $     1,247,161         $ 1,185,654        $  61,507               5.2 %
Gross profit                           $        67,790         $    69,939        $  (2,149 )            (3.1 %)
Unit sales                                      35,402              34,723              679               2.0 %
Revenue per unit                       $        35,229         $    34,146        $   1,083               3.2 %
Gross profit per unit                  $         1,915         $     2,014        $     (99 )            (4.9 %)
Gross profit as a % of revenue                     5.4 %               5.9 %            (50 )         bps




                                           Six Months Ended June 30,                 Better / (Worse)
                                            2013                2012             Change           % Change
                                                  (In thousands, except units and per unit data)
Revenue                                 $   2,390,217        $ 2,217,044        $ 173,173               7.8 %
Gross profit                            $     134,259        $   133,657        $     602               0.5 %
Unit sales                                     67,485             64,896            2,589               4.0 %
Revenue per unit                        $      35,418        $    34,163        $   1,255               3.7 %
Gross profit per unit                   $       1,989        $     2,060        $     (71 )            (3.4 %)
Gross profit as a % of revenue                    5.6 %              6.0 %            (40 )         bps

The increases in new vehicle revenue during the second quarter and six-month periods ended June 30, 2013, were primarily driven by new unit sales volume increases of 2.0% and 4.0%, respectively, and new vehicle price per unit increases of 3.2% and 3.7% during the second quarter and six-month periods ended June 30, 2013, respectively. Excluding fleet volume, our retail new unit sales volume increased 1.7% and 4.3% during the second quarter and six-month periods ended June 30, 2013, respectively.

The incremental new vehicle unit sales volume growth experienced in the second quarter and six-month periods ended June 30, 2013 contributed to additional F&I gross profit, discussed under the heading "Finance, Insurance and Other ("F&I")" below.

Our Ford, BMW and Audi dealerships led our new unit sales volume growth with increases of 20.6%, 17.1% and 12.1%, respectively, in the second quarter ended June 30, 2013. For the six-month period ended June 30, 2013, our Ford, BMW and Audi dealerships experienced new unit sales volume increases of 16.5%, 24.1% and 9.7%, respectively. Combined, these dealerships contributed $1.8 million and $4.4 million of additional new vehicle gross profit for the second quarter and six-month periods ended June 30, 2013, respectively.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Total new vehicle gross profit dollars decreased $2.1 million, or 3.1%, during the second quarter ended June 30, 2013 and increased $0.6 million, or 0.5%, in the six-month period ended June 30, 2013. Gross profit per new unit decreased 4.9% and 3.4% in the second quarter and six-month periods ended June 30, 2013, respectively, primarily due to declines in gross profit per new unit at our Honda and Lexus dealerships. Our Honda and Lexus dealerships experienced higher gross profit per unit in the second quarter and six-month periods ended June 30, 2012 due to a lack of available inventory as a result of the natural disasters in Japan during 2011. Since new vehicle inventory returned to normal levels in these brands, gross profit per unit returned to normal levels resulting in the decrease in our gross profit per new unit during the second quarter and six-month periods ended June 30, 2013.

Implementation of our True Price strategy continued during the second quarter of 2013. True Price provides consumers with market-based pricing to create transparency and limit negotiation. This strategy requires different processes to be followed in order to price our vehicles to increase our retail vehicle unit volume and gross profit. We believe that the initial transition to this new strategy contributed to lower retail vehicle unit sales volume and gross profit (as compared to the industry results) in the second quarter and six-month periods ended June 30, 2013.

Our luxury dealerships (which include Cadillac) experienced new vehicle revenue increases of 6.8% and 10.6% in the second quarter and six-month periods ended June 30, 2013, respectively, primarily due to new unit sales volume increases of 4.5% and 8.4% in the second quarter and six-month periods ended June 30, 2013, respectively. Luxury dealership new vehicle gross profit increased 2.6% and 6.3%, primarily due to new unit sales volume increases at our BMW, Audi and Cadillac dealerships. Luxury dealership gross profit per new unit decreased 1.8% and 2.0% in the second quarter and six-month periods ended June 30, 2013, respectively, driven primarily by decreases in gross profit per new unit at our Lexus and BMW dealerships.

Our mid-line import dealerships experienced new vehicle revenue increases of 0.9% and 2.4% in the second quarter and six-month periods ended June 30, 2013, respectively, despite a 1.8% and 0.4% decrease in new unit volume for the second quarter and six-month periods ended June 30, 2013, respectively. The new vehicle revenue increase was driven primarily by a 2.8% increase in revenue per new unit in both the second quarter and six-month periods ended June 30, 2013, driven primarily by new vehicle model mix and price levels at our Honda dealerships. Mid-line import gross profit per new unit decreased 13.2% and 13.0% during the second quarter and six-month periods ended June 30, 2013, respectively, and total mid-line import new vehicle gross profit decreased 14.8% and 13.4% in the second quarter and six-month periods ended June 30, 2013, respectively. These decreases were due in part to higher gross profit per unit in the prior year periods due to reduced inventory availability in our Japanese brands, resulting in comparative declines in the second quarter and six-month periods ended June 30, 2013.

Including fleet sales, our domestic dealerships experienced new vehicle revenue increases of 9.9% and 11.2% in the second quarter and six-month periods ended June 30, 2013, respectively, driven by new unit sales volume increases of 7.8% and 7.5% in the second quarter and six-month periods ended June 30, 2013, respectively. Domestic fleet unit sales volume increased 15.7% and 2.5% in the second quarter and six month periods ended June 30, 2013, respectively, driving total fleet revenue increases of 8.0% and 0.1% in the second quarter and six-month periods ended June 30, 2013, respectively.

Excluding fleet sales, our domestic dealerships experienced new retail vehicle revenue increases of 7.8% and 13.5% in the second quarter and six-month periods ended June 30, 2013, respectively, driven by new retail unit sales volume increases of 5.0% and 9.5%, respectively. Our domestic dealerships experienced a 3.2% decrease in new retail vehicle gross profit for the second quarter ended June 30, 2013 and a 2.7% increase in new retail vehicle gross profit for the six-month period ended June 30, 2013. New retail unit sales volume at our Ford dealerships increased 19.6% and 20.9% during the second quarter and six-month periods ended June 30, 2013, respectively, driving new vehicle gross profit increases at our Ford dealerships of 19.9% and 19.6% during the second quarter and six-month periods ended June 30, 2013, respectively. Our GM dealerships (excluding Cadillac) experienced decreases of 10.0% and 2.3% in new retail unit sales volume during the second quarter and six-month periods ended June 30, 2013, respectively, contributing to decreases of 23.3% and 12.5% in new retail vehicle gross profit during the second quarter and six-month periods ended June 30, 2013, respectively.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Used Vehicles

Used vehicle revenues are directly affected by a number of factors including the
level of manufacturer incentives on new vehicles, the number and quality of
trade-ins and lease turn-ins, the availability and pricing of used vehicles
acquired at auction and the availability of consumer credit. Following is
information related to our used vehicle sales:



                                             Second Quarter Ended June 30,                  Better / (Worse)
                                              2013                    2012               Change          % Change
                                                      (In thousands, except units and per unit data)

Revenue                                  $      538,977          $      534,637        $    4,340              0.8 %
Gross profit                             $       37,609          $       35,719        $    1,890              5.3 %
Unit sales                                       26,599                  26,525                74              0.3 %
Revenue per unit                         $       20,263          $       20,156        $      107              0.5 %
Gross profit per unit                    $        1,414          $        1,347        $       67              5.0 %
Gross profit as a % of revenue                      7.0 %                   6.7 %              30           bps




                                            Six Months Ended June 30,                 Better / (Worse)
                                             2013                2012             Change           % Change
                                                   (In thousands, except units and per unit data)

Revenue                                  $   1,065,158        $ 1,036,501        $  28,657               2.8 %
Gross profit                             $      75,639        $    75,117        $     522               0.7 %
Unit sales                                      53,068             52,003            1,065               2.0 %
Revenue per unit                         $      20,072        $    19,932        $     140               0.7 %
Gross profit per unit                    $       1,425        $     1,444        $     (19 )            (1.3 %)
Gross profit as a % of revenue                     7.1 %              7.2 %            (10 )         bps

In the second quarter and six-month periods ended June 30, 2013, our used vehicle unit volume increased 0.3% and 2.0%, respectively. Gross profit per used unit increased 5.0% in the second quarter ended June 30, 2013, while gross profit per used unit decreased 1.3% in the six-month period ended June 30, 2013. Used vehicle gross profit per unit was higher in the six-month period ended June 30, 2012 as a result of supply shortages resulting from the natural disasters in Japan during 2011, the effects of which continued to impact used vehicle pricing through the first quarter of 2012.

Implementation of our True Price strategy continued during the second quarter of 2013. True Price provides consumers with market-based pricing to create transparency and limit negotiation. This strategy requires different processes to be followed in order to price our vehicles to increase our retail vehicle unit volume and gross profit. We believe that the initial transition to this new strategy contributed to lower retail vehicle unit sales volume and gross profit (as compared to the industry results) in the second quarter and six-month periods ended June 30, 2013.

Although we experienced a decline in used vehicle gross profit per unit for the six-month period ended June 30, 2013, the incremental used vehicle unit sales volume contributed to higher gross profit in our F&I and Fixed Operations business.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Wholesale Vehicles

Wholesale vehicle revenues are highly correlated with new and used vehicle
retail sales and the associated trade-in volume and are also significantly
affected by our corporate inventory management policies, which are designed to
optimize our total used vehicle inventory. Following is information related to
wholesale vehicle sales:



                                              Second Quarter Ended June 30,                  Better / (Worse)
                                              2013                    2012               Change          % Change
                                                       (In thousands, except units and per unit data)

Revenue                                   $      40,032           $      42,552         $ (2,520 )            (5.9 %)
Gross profit (loss)                       $      (1,943 )         $      (1,239 )       $   (704 )           (56.8 %)
Unit sales                                        7,257                   7,630             (373 )            (4.9 %)
Revenue per unit                          $       5,516           $       5,577         $    (61 )            (1.1 %)
Gross profit (loss) per unit              $        (268 )         $        (162 )       $   (106 )           (65.4 %)
Gross profit (loss) as a % of revenue              (4.9 %)                 (2.9 %)          (200 )         bps




                                             Six Months Ended June 30,                Better / (Worse)
                                              2013                 2012            Change         % Change
                                                   (In thousands, except units and per unit data)

Revenue                                   $     91,825           $ 86,225         $  5,600              6.5 %
Gross profit (loss)                       $     (3,145 )         $ (1,006 )       $ (2,139 )         (212.6 %)
Unit sales                                      15,650             14,805              845              5.7 %
Revenue per unit                          $      5,867           $  5,824         $     43              0.7 %
Gross profit (loss) per unit              $       (201 )         $    (68 )       $   (133 )         (195.6 %)
Gross profit (loss) as a % of revenue             (3.4 %)            (1.2 %)          (220 )         bps

Wholesale vehicle revenue and unit sales fluctuations are typically a result of new and used retail vehicle unit volumes that generate additional trade-in vehicle volume that we are not always able to sell as retail used vehicles and choose to sell at auction. Wholesale vehicle revenue and unit sales volume decreased in the second quarter ended June 30, 2013, while gross loss on wholesale vehicles increased as a result of a $106 per unit increase in gross loss per wholesale unit. Wholesale vehicle revenue, unit sales volume and gross loss increased in the six-month period ended June 30, 2013 due to higher levels of new and used retail sales activity in the second quarter and six-month periods ended June 30, 2013. Gross loss per unit was lower than historical levels during the second quarter and six-month periods ended June 30, 2012 as a result of the impact of Japanese inventory shortages on the new, used retail and wholesale markets.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Parts, Service and Collision Repair ("Fixed Operations")

Parts and service revenue consists of customer requested repairs ("customer pay"), warranty repairs, retail parts, wholesale parts and collision repairs. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, customer loyalty and manufacturer warranty programs. Our reported Fixed Operations results are as follows:

                                           Second Quarter Ended June 30,                  Better / (Worse)
                                            2013                    2012              Change           % Change
                                                                    (In thousands)
Revenue
Parts                                  $      160,536          $      156,170        $   4,366               2.8 %
Service                                       134,838                 126,672            8,166               6.4 %
Collision repair                               11,672                  12,498             (826 )            (6.6 %)

Total                                  $      307,046          $      295,340        $  11,706               4.0 %

Gross profit
Parts                                  $       51,388          $       50,319        $   1,069               2.1 %
Service                                        93,320                  87,453            5,867               6.7 %
Collision repair                                6,422                   6,898             (476 )            (6.9 %)

Total                                  $      151,130          $      144,670        $   6,460               4.5 %

Gross profit as a % of revenue
Parts                                            32.0 %                  32.2 %            (20 )             bps
Service                                          69.2 %                  69.0 %             20               bps
Collision repair                                 55.0 %                  55.2 %            (20 )             bps

Total                                            49.2 %                  49.0 %             20               bps

                                             Six Months Ended June 30,                    Better / (Worse)
. . .
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