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SAH > SEC Filings for SAH > Form 10-Q on 24-Jul-2014All Recent SEC Filings

Show all filings for SONIC AUTOMOTIVE INC

Form 10-Q for SONIC AUTOMOTIVE INC


24-Jul-2014

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 related notes thereto appearing elsewhere in this report, as well as the audited financial statements and related notes, "Risk Factors" 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, 2013.

Overview

We are one of the largest automotive retailers in the United States. As of June 30, 2014, we operated 121 franchises in 14 states (representing 25 different brands of cars and light trucks) and 19 collision repair centers. For management and operational reporting purposes, we group certain franchises together that share management and inventory (principally used vehicles) into "stores." As of June 30, 2014, we operated 102 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 warranties, service contracts, financing, insurance and other aftermarket products (collectively, "F&I") for our customers.

As we announced during the fourth quarter of 2013, we plan to augment our manufacturer-franchised dealership operations with stand-alone pre-owned specialty retail sales locations. This pre-owned business will operate independently from the existing new and used dealership sales operations and introduce customers to an exciting shopping and buying experience. The first target market is planned for Denver, Colorado, and we expect operations there to begin in late 2014.

In the fourth quarter of 2013, we also announced our customer experience initiative known as "One Sonic-One Experience." This initiative includes several new processes and proprietary technologies from inventory management and pricing tools to a fully developed "customer-centric" Customer Relationship Management ("CRM") tool. The development of these processes and tools will allow us to better serve our customers across our entire platform of stores. Our goal is to allow our guests to control the buying process and move at their pace so that once the vehicle has been selected our team can use these processes and technologies to get our guests on the road in their new vehicle in less than an hour.


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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, 2014 and 2013:



                                        Percentage of New Vehicle Revenue                    Percentage of New Vehicle Revenue (1)
                                          Second Quarter Ended June 30,                            Six Months Ended June 30,
Brand                                   2014                        2013                      2014                          2013
Luxury:
BMW                                           21.1 %                      19.2 %                     20.8 %                        19.6 %
Mercedes                                       8.7 %                       7.9 %                      9.1 %                         8.1 %
Audi                                           5.0 %                       4.4 %                      4.9 %                         4.1 %
Lexus                                          4.8 %                       4.5 %                      4.9 %                         4.5 %
Cadillac                                       4.6 %                       4.3 %                      4.5 %                         4.4 %
Land Rover                                     3.0 %                       2.2 %                      2.9 %                         2.3 %
Porsche                                        2.5 %                       2.2 %                      2.3 %                         2.1 %
Mini                                           2.3 %                       2.8 %                      2.2 %                         2.6 %
Acura                                          0.9 %                       0.7 %                      0.9 %                         0.7 %
Volvo                                          0.9 %                       0.9 %                      0.8 %                         0.9 %
Infiniti                                       0.8 %                       0.9 %                      0.8 %                         0.9 %
Jaguar                                         0.6 %                       0.7 %                      0.7 %                         0.6 %

Total Luxury                                  55.2 %                      50.7 %                     54.8 %                        50.8 %
Mid-line Import:
Honda                                         15.6 %                      16.2 %                     15.1 %                        15.7 %
Toyota                                        10.4 %                      10.4 %                     10.2 %                        10.2 %
Volkswagen                                     1.9 %                       2.6 %                      1.9 %                         2.7 %
Hyundai                                        1.8 %                       2.0 %                      1.8 %                         2.0 %
Other (1)                                      1.4 %                       1.4 %                      1.6 %                         1.6 %
Nissan                                         1.2 %                       1.1 %                      1.1 %                         1.1 %

Total Mid-line Import                         32.3 %                      33.7 %                     31.7 %                        33.3 %
Domestic:
Ford                                           7.1 %                       8.9 %                      7.9 %                         8.9 %
General Motors (2)                             5.4 %                       6.7 %                      5.6 %                         7.0 %

Total Domestic                                12.5 %                      15.6 %                     13.5 %                        15.9 %

Total                                        100.0 %                     100.0 %                    100.0 %                       100.0 %

(1) Includes Kia, Scion and Subaru.

(2) Includes Buick, Chevrolet and GMC.

Results of Operations

Unless otherwise noted, all discussion of increases or decreases for the second quarter or six-month periods ended June 30, 2014 are compared to the second quarter or six-month periods ended June 30, 2013, as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, Fixed Operations and F&I are on a same store basis, except where otherwise noted. All currently operating continuing operations stores are included within the same store group in the first full month following the first anniversary of the store's opening or acquisition. During the second quarter of 2014, we adopted the provisions of ASU 2014-08. See Note 1, "Summary of Significant Accounting Policies," to the accompanying Unaudited Condensed Consolidated Financial Statements for a discussion of the effects of our adoption of this ASU.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

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.

Second Quarter Ended June 30, Six Months Ended June 30, (in millions of vehicles) 2014 2013 % Change 2014 2013 % Change SAAR 16.5 15.3 7.8 % 16.1 15.3 5.2 %

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 results (including fleet) are as follows:

                                          Second Quarter Ended June 30,                Better / (Worse)
                                            2014                  2013              Change          % Change
                                                   (In thousands, except units and per unit data)
Reported:
Revenue                                $     1,298,777         $ 1,247,161        $    51,616             4.1 %
Gross profit                           $        74,193         $    67,790        $     6,403             9.4 %
Unit sales                                      35,405              35,402                  3             0.0 %
Revenue per unit                       $        36,683         $    35,229        $     1,454             4.1 %
Gross profit per unit                  $         2,096         $     1,915        $       181             9.5 %
Gross profit as a % of revenue                     5.7 %               5.4 %               30          bps




                                            Six Months Ended June 30,                  Better / (Worse)
                                            2014                  2013             Change           % Change
                                                   (In thousands, except units and per unit data)
Reported:
Revenue                                $     2,445,397         $ 2,390,217        $  55,180               2.3 %
Gross profit                           $       140,866         $   134,259        $   6,607               4.9 %
Unit sales                                      66,536              67,485             (949 )            (1.4 %)
Revenue per unit                       $        36,753         $    35,418        $   1,335               3.8 %
Gross profit per unit                  $         2,117         $     1,989        $     128               6.4 %
Gross profit as a % of revenue                     5.8 %               5.6 %             20           bps


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                    SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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



Our same store new vehicle results (including fleet) are as follows:



                                          Second Quarter Ended June 30,                Better / (Worse)
                                            2014                  2013             Change           % Change
                                                   (In thousands, except units and per unit data)
Same Store:
Revenue                                $     1,263,004         $ 1,235,935        $  27,069               2.2 %
Gross profit                           $        72,025         $    67,142        $   4,883               7.3 %
Unit sales                                      34,713              35,164             (451 )            (1.3 %)
Revenue per unit                       $        36,384         $    35,148        $   1,236               3.5 %
Gross profit per unit                  $         2,075         $     1,909        $     166               8.7 %
Gross profit as a % of revenue                     5.7 %               5.4 %             30           bps




                                            Six Months Ended June 30,                  Better / (Worse)
                                            2014                  2013             Change           % Change
                                                   (In thousands, except units and per unit data)
Same Store:
Revenue                                $     2,382,051         $ 2,367,467        $  14,584               0.6 %
Gross profit                           $       136,613         $   132,604        $   4,009               3.0 %
Unit sales                                      65,306              66,983           (1,677 )            (2.5 %)
Revenue per unit                       $        36,475         $    35,344        $   1,131               3.2 %
Gross profit per unit                  $         2,092         $     1,980        $     112               5.7 %
Gross profit as a % of revenue                     5.7 %               5.6 %             10           bps

During the second quarter and six-month periods ended June 30, 2014, we continued to test our new car pricing model with True Price®. As we move toward our One Sonic-One Experience launch (our new customer experience initiative), we believe we will become more aggressive in pricing as well as gain market share as customers benefit from the entire complement of our new shopping experience.

The increases in new vehicle revenue during the second quarter and six-month periods ended June 30, 2014, were primarily driven by new vehicle price per unit increases of 3.5% and 3.2%, respectively, partially offset by new unit sales volume decreases of 1.3% and 2.5%, respectively. Excluding fleet sales, our retail new revenue increased 5.0% and 2.4% for the second quarter and six-month periods ended June 30, 2014, respectively, and retail new unit sales volume increased 2.1% and remained flat during second quarter and six-month periods ended June 30, 2014, respectively. Our Audi, BMW and Honda dealerships led our new retail unit sales volume growth with increases of 22.9%, 10.8% and 3.0%, respectively, in the second quarter ended June 30, 2014.

Total new vehicle gross profit dollars increased $4.9 million, or 7.3%, during the second quarter ended June 30, 2014 and increased $4.0 million, or 3.0%, in the six-month period ended June 30, 2014. Our gross profit per new unit increase of $166 per unit in the second quarter ended June 30, 2014 was driven primarily by our BMW, Audi, Land Rover and Honda dealerships, and the increase of $112 per unit in the six-month period ended June 30, 2014 was driven primarily by our Audi, Land Rover, Mercedes and Honda dealerships.

Our luxury dealerships (which include Cadillac) experienced new vehicle revenue increases of 10.0% and 7.2% in the second quarter and six-month periods ended June 30, 2014, respectively, primarily due to new unit sales volume increases of 7.4% and 5.3% in the second quarter and six-month periods ended June 30, 2014, respectively. Luxury dealership new vehicle gross profit increased 12.1% and 8.1% during the second quarter and six-month periods ended June 30, 2014, respectively, primarily due to new unit sales volume increases at our Audi, Lexus and Land Rover dealerships and gross profit per new unit increases of 4.4% and 2.7% during the second quarter and six-month periods ended June 30, 2014, respectively, driven primarily by our Land Rover, Audi and Porsche dealerships.

Our mid-line import dealerships experienced a new vehicle revenue decrease of 1.0% in the second quarter ended June 30, 2014, primarily due to a 1.0% decrease in price per unit during the same period. Our mid-line import dealerships experienced a new vehicle revenue decrease of 2.5% in the six-month period ended June 30, 2014, primarily due to a 2.1%


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

decrease in new unit volume. The new vehicle revenue decrease was driven primarily by lower unit sales at our Volkswagen and Hyundai dealerships, which experienced a 28.0% and a 9.5% decrease in new vehicle unit sales, respectively, in the six-month period ended June 30, 2014. Mid-line import gross profit increased 4.4% and decreased 1.4% in the second quarter and six-month periods ended June 30, 2014, respectively, driven primarily by volume and gross profit per new unit decreases at our Hyundai dealerships.

Including fleet sales, our domestic dealerships experienced new vehicle revenue decreases of 15.9% and 13.4% in the second quarter and six-month periods ended June 30, 2014, respectively, driven by new unit sales volume decreases of 22.8% and 19.3% in the second quarter and six-month periods ended June 30, 2014, respectively. These unit sales volume decreases were partially offset by price per unit increases of 8.9% and 7.3% in the second quarter and six-month periods ended June 30, 2014, respectively. Domestic fleet unit sales volume decreased 67.5% and 48.3% in the second quarter and six-month periods ended June 30, 2014, respectively, driving a fleet revenue decrease of 67.2% and 44.2% in the second quarter and six-month periods ended June 30, 2014, respectively. The decreases in fleet revenue and unit sales are due to a reduced focus on fleet sales as a result of our operational decision to move away from the low margin fleet business.

Excluding fleet sales, our domestic dealerships experienced a new retail vehicle revenue increase of 2.0% in the second quarter ended June 30, 2014, driven by an increase in price per unit of 4.3% during the same period, and a new retail vehicle revenue decrease of 2.6% in the six-month period ended June 30, 2014, driven by a new retail unit sales volume decrease of 6.6% during the same period, partially offset by an increase in price per unit of 4.3%. Our domestic dealerships experienced a decrease in new retail vehicle gross profit of 2.8% and 7.1% for the second quarter and six-month periods ended June 30, 2014, respectively. Our Ford dealerships experienced decreases of 3.4% and 4.9% in new retail unit sales volume during the second quarter and six-month periods ended June 30, 2014, respectively, contributing to decreases of 12.4% and 12.9% in new retail vehicle gross profit during the second quarter and six-month periods ended June 30, 2014, respectively. New retail vehicle gross profit per unit at our General Motors dealerships (excluding Cadillac) increased 11.1% during the second quarter ended June 30, 2014, driving a new vehicle gross profit increase of 10.3% during the second quarter ended June 30, 2014. New retail vehicle gross profit was flat for our General Motors dealerships during the six-month period ended June 30, 2014.

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.

Our reported used vehicle results are as follows:

                                          Second Quarter Ended June 30,                Better / (Worse)
                                            2014                  2013             Change           % Change
                                                   (In thousands, except units and per unit data)
Reported:
Revenue                                $       603,868         $   538,977        $  64,891              12.0 %
Gross profit                           $        37,473         $    37,609        $    (136 )            (0.4 %)
Unit sales                                      28,514              26,599            1,915               7.2 %
Revenue per unit                       $        21,178         $    20,263        $     915               4.5 %
Gross profit per unit                  $         1,314         $     1,414        $    (100 )            (7.1 %)
Gross profit as a % of revenue                     6.2 %               7.0 %            (80 )         bps


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                    SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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



                                            Six Months Ended June 30,                 Better / (Worse)
                                             2014                 2013            Change          % Change
                                                  (In thousands, except units and per unit data)
Reported:
Revenue                                 $     1,163,684        $ 1,065,158       $  98,526              9.2 %
Gross profit                            $        78,167        $    75,639       $   2,528              3.3 %
Unit sales                                       56,171             53,068           3,103              5.8 %
Revenue per unit                        $        20,717        $    20,072       $     645              3.2 %
Gross profit per unit                   $         1,392        $     1,425       $     (33 )           (2.3 %)
Gross profit as a % of revenue                      6.7 %              7.1 %           (40 )        bps

Our same store used vehicle results are as follows:

                                          Second Quarter Ended June 30,               Better / (Worse)
                                             2014                 2013            Change          % Change
                                                  (In thousands, except units and per unit data)
Same Store:
Revenue                                 $       582,386        $   530,567       $  51,819              9.8 %
Gross profit                            $        36,675        $    37,711       $  (1,036 )           (2.7 %)
Unit sales                                       27,617             26,226           1,391              5.3 %
Revenue per unit                        $        21,088        $    20,231       $     857              4.2 %
Gross profit per unit                   $         1,328        $     1,438       $    (110 )           (7.6 %)
Gross profit as a % of revenue                      6.3 %              7.1 %           (80 )        bps




                                            Six Months Ended June 30,                 Better / (Worse)
                                             2014                 2013            Change          % Change
                                                  (In thousands, except units and per unit data)
Same Store:
Revenue                                 $     1,122,929        $ 1,047,365       $  75,564              7.2 %
Gross profit                            $        76,093        $    74,435       $   1,658              2.2 %
Unit sales                                       54,458             52,292           2,166              4.1 %
Revenue per unit                        $        20,620        $    20,029       $     591              3.0 %
Gross profit per unit                   $         1,397        $     1,423       $     (26 )           (1.8 %)
Gross profit as a % of revenue                      6.8 %              7.1 %           (30 )        bps

In the second quarter and six-month periods ended June 30, 2014, our used vehicle unit volume increased 9.8% and 7.2%, respectively. In the second quarter ended June 30, 2014, we sold an all-time quarterly record 28,514 pre-owned vehicles at our continuing operations stores. Gross profit per used unit decreased 7.6% and 1.8% in the second quarter and six-month periods ended June 30, 2014, respectively. As we move toward our One Sonic-One Experience launch and continue to test our used car pricing model with True Price®, we believe we will continue to experience gains in our used vehicle unit volume and used vehicle revenue levels and associated gross profit.


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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.

Our reported wholesale vehicle results are as follows:

                                             Second Quarter Ended June 30,                 Better / (Worse)
                                               2014                  2013               Change          % Change
                                                      (In thousands, except units and per unit data)
Reported:
Revenue                                   $       44,765          $    40,032         $   4,733              11.8 %
Gross profit (loss)                       $       (1,314 )        $    (1,943 )       $      629             32.4 %
Unit sales                                         7,738                7,257                481              6.6 %
Revenue per unit                          $        5,785          $     5,516         $      269              4.9 %
Gross profit (loss) per unit              $         (170 )        $      (268 )       $       98             36.6 %
Gross profit (loss) as a % of revenue               (2.9 %)              (4.9 %)             200          bps




                                               Six Months Ended June 30,                   Better / (Worse)
                                               2014                  2013              Change           % Change
                                                      (In thousands, except units and per unit data)
Reported:
Revenue                                   $       86,363          $    91,825         $  (5,462 )            (5.9 %)
Gross profit (loss)                       $       (1,409 )        $    (3,145 )       $   1,736              55.2 %
Unit sales                                        15,118               15,650              (532 )            (3.4 %)
. . .
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