MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion a
nd Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Sonic Automotive, Inc. condensed consolidated financial statements and related notes thereto appearing elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto, “Item 1A: Risk Factors” and “Item 7: 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, 2015.
Except to the extent that differences among operating segments are material to an understanding of our business taken as a whole, we present the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis.
Overview
We are one of the largest automotive retailers in the United States (as measured by total revenue). As of March 31, 2016, we operated 114 franchises in 13 states (representing 25 different brands of cars and light trucks) and 18 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 March 31, 2016, we operated 102 franchised dealership stores and three EchoPark
®
stores.
As a result of the way we manage our business, as of March 31, 2016, we had two operating segments: Franchised Dealerships and EchoPark
®
. Our franchised dealerships provide comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and 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. EchoPark
®
provides the same services (excluding new vehicle sales) in unique stand-alone specialty retail locations. Our EchoPark
®
business operates independently from our franchised new and used dealership sales operations. Sales operations in our first EchoPark
®
market in Denver, Colorado began in the fourth quarter of 2014. As of March 31, 2016, we had three EchoPark
®
stores in operation, and we expect to open two additional stores in Colorado during the second quarter of 2016 and another by the end of the year. During the second quarter of 2016, we announced that we have begun the process of expanding EchoPark
®
operations into additional markets in North Carolina, South Carolina and Texas with operations expected to begin in 2017. We believe that our EchoPark
®
business will provide long-term benefits to Sonic, its stockholders and customers. However, in the short term, this initiative may negatively impact our overall operating results as we allocate management and capital resources to this business.
Although vehicle sales and sales of associated finance, insurance and other aftermarket products are cyclical and are affected by many factors, including overall economic conditions, consumer confidence, levels of discretionary personal income, interest rates and available credit, our parts, service and collision repair services are not closely tied to vehicle sales and are not as dependent upon near-term sales volume. However, significant changes to the level of manufacturer recall and warranty activity could negatively impact our Fixed Operations results.
In the fourth quarter of 2013, we announced a new customer experience initiative known as “One Sonic-One Experience.” This initiative includes several new processes and proprietary technologies from inventory management, electronic desking and pricing tools to a fully developed “customer-centric” Customer Relationship Management tool. We believe that the development of these processes and technologies 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 utilize these processes and technologies to allow our guests to complete a new or pre-owned vehicle sales transaction in less than an hour. During the latter half of 2014 and throughout 2015, we rolled out the One Sonic-One Experience initiative at our dealerships in Charlotte, North Carolina. During the first quarter of 2016, we began to roll out certain components of the One Sonic-One Experience initiative in additional markets. We believe that our One Sonic-One Experience initiative will provide long-term benefits to Sonic, its stockholders and customers. However, in the short term, this initiative may negatively impact our overall operating results as we allocate management and capital resources to this initiative.
17
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
The U.S. retail automotive industry’s new vehicle seasonally adjusted annual rate (“SAAR”) of sales increased 3.0%, to 17.1 million vehicles, in the three months ended March 31, 2016, from 16.6 million vehicles in the three months ended March 31, 2015, according to Bloomberg Financial Markets. For the year ending December 31, 2016, certain analysts’ average industry expectation for the new vehicle SAAR is approximately 17.7 million vehicles. We estimate the 2016 new vehicle SAAR will be between 17.3 million and 17.6 million vehicles. Changes in consumer confidence, availability of consumer financing or changes in the financial stability of the automotive manufacturers could cause the actual 2016 new vehicle SAAR to vary from expectations. Many factors such as brand and geographic concentrations have caused our past results to differ from the industry’s overall trend, as well as the industry sales mix between retail and fleet new vehicle sales volume.
Our same store retail new vehicle unit volume decreased 2.8% during the three months ended March 31, 2016, driving a 2.4% decrease in retail new vehicle revenue. Retail new vehicle gross profit decreased 6.8% and gross profit per unit decreased $83 per unit, or 4.1%, to $1,935 per unit in the three months ended March 31, 2016. We believe our retail new vehicle volume metrics were lower than overall industry metrics due to a variety of factors. These factors include our franchised dealer brand mix, our geographic concentration, the effect of fleet sales in the industry metric (our fleet operations are not significant), our internal inventory mix between cars and truck/SUVs and the effect of holding certain vehicles in our inventory resulting from certain manufacturer safety recalls. We believe that lower gross margins on retail new vehicles are a result of downward pressure on pricing due to increased competition for sales between similar branded dealerships and higher overall inventory levels. We anticipate that this trend may continue to impact new vehicle gross margins throughout 2016.
Our same store retail used vehicle revenue increased 2.3% during the three months ended March 31, 2016, driven primarily by a 5.9% increase in our retail used vehicle unit volume. Retail used vehicle gross profit decreased 0.8% and gross profit per unit decreased $94 per unit, or 6.3%, to $1,387 per unit in the three months ended March 31, 2016. Our same store wholesale vehicle gross loss increased $0.9 million during the three months ended March 31, 2016, while wholesale vehicle unit volume increased 9.5%. The Manheim used vehicle price index remains near multi-year highs, which results in higher costs of acquiring used vehicle inventory either by trade-in or at auction. We focus on maintaining used vehicle inventory days’ supply in the 30 to 35 day range in order to limit our exposure to market pricing volatility.
Our same store Fixed Operations revenue increased 9.1% during the three months ended March 31, 2016, driving a 7.9% increase in Fixed Operations gross profit. During the three months ended March 31, 2016, our total Fixed Operations internal, sublet and other revenue increased 11.7%, customer pay revenue increased 9.5% and warranty revenue increased 9.2%. During the three months ended March 31, 2016, internal, sublet and other gross profit increased 9.3%, customer pay gross profit increased 8.5% and warranty gross profit increased 6.8%.
Our same store F&I revenue increased 9.7% and F&I gross profit per unit increased $104 per unit, or 8.3%, to $1,359 per unit during the three months ended March 31, 2016. We believe our proprietary software applications and playbook processes drove increases in gross profit per F&I contract and penetration rates (the number of F&I products sold per vehicle). We believe we will continue to improve in this area as we refine our processes, train our associates and continue to sell high levels of retail new and used vehicles at our stores.
Our new and used vehicle inventories were elevated during the three months ended March 31, 2016 due to the significant number of vehicles held in inventory as a result of open safety recalls on certain models where the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale” vehicles increased our inventory on-hand and associated floor plan interest expense and may continue to affect our dealerships’ results of operations until replacement parts become available.
We repurchased approximately 4.1 million shares of our Class A common stock for $74.4 million during the three months ended March 31, 2016. This reduced our outstanding Class A share count as of March 31, 2016 by approximately 9.9% compared to the outstanding Class A share count at December 31, 2015.
18
SONIC AUTOMOTIVE, INC.
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 three months ended March 31, 2016 and 2015:
|
|
Percentage of New Vehicle Revenue
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Brand
|
|
2016
|
|
|
2015
|
|
|
Luxury:
|
|
|
|
|
|
|
|
|
|
BMW
|
|
|
20.7
|
%
|
|
|
22.2
|
%
|
|
Mercedes
|
|
|
10.1
|
%
|
|
|
9.7
|
%
|
|
Lexus
|
|
|
5.9
|
%
|
|
|
5.8
|
%
|
|
Audi
|
|
|
4.8
|
%
|
|
|
4.5
|
%
|
|
Land Rover
|
|
|
4.0
|
%
|
|
|
4.5
|
%
|
|
Cadillac
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
|
Porsche
|
|
|
1.9
|
%
|
|
|
2.3
|
%
|
|
MINI
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
|
Other luxury (1)
|
|
|
2.5
|
%
|
|
|
3.0
|
%
|
|
Total Luxury
|
|
|
54.9
|
%
|
|
|
57.2
|
%
|
|
Mid-line Import:
|
|
|
|
|
|
|
|
|
|
Honda
|
|
|
17.3
|
%
|
|
|
15.3
|
%
|
|
Toyota
|
|
|
11.6
|
%
|
|
|
10.7
|
%
|
|
Volkswagen
|
|
|
1.4
|
%
|
|
|
1.7
|
%
|
|
Hyundai
|
|
|
1.2
|
%
|
|
|
1.4
|
%
|
|
Other imports (2)
|
|
|
1.7
|
%
|
|
|
1.7
|
%
|
|
Total Mid-line Import
|
|
|
33.2
|
%
|
|
|
30.8
|
%
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
Ford
|
|
|
6.5
|
%
|
|
|
6.7
|
%
|
|
General Motors (3)
|
|
|
5.4
|
%
|
|
|
5.3
|
%
|
|
Total Domestic
|
|
|
11.9
|
%
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
(1)
|
Includes Volvo, Acura, Infiniti, Jaguar and Smart.
|
(2)
|
Includes Nissan, Kia, Scion and Subaru.
|
(3) Includes Buick, Chevrolet and GMC.
Results of Operations
Unless otherwise noted, all discussion of increases or decreases for the three months ended March 31, 2016 are compared to the same prior year period, as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other 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. There were no franchise acquisitions or awards during the three months ended March 31, 2016 and 2015.
19
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Vehicles
The automobile retail industry uses the new vehicle SAAR to measure the annual amount of expected new vehicle unit sales activity (both retail and fleet sales) within the United States. The SAAR below reflects all brands marketed or sold in the United States. 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 in line with the SAAR.
|
Three Months Ended March 31,
|
|
|
|
|
|
(in millions of vehicles)
|
2016
|
|
|
2015
|
|
|
% Change
|
|
U.S. industry volume
|
|
17.1
|
|
|
|
16.6
|
|
|
|
3.0
|
%
|
Source: Bloomberg Financial Markets
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.
The following discussion of new vehicles is on a same store basis, except where otherwise noted. The tables below provide a reconciliation of same store basis and reported basis.
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except unit data)
|
|
Total new vehicle revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
1,164,570
|
|
|
$
|
1,189,495
|
|
|
$
|
(24,925
|
)
|
|
|
(2.1
|
%)
|
Acquisitions and dispositions
|
|
|
-
|
|
|
|
12,828
|
|
|
|
(12,828
|
)
|
|
|
(100.0
|
%)
|
Total as reported
|
|
$
|
1,164,570
|
|
|
$
|
1,202,323
|
|
|
$
|
(37,753
|
)
|
|
|
(3.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new vehicle gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
58,375
|
|
|
$
|
62,498
|
|
|
|
(4,123
|
)
|
|
|
(6.6
|
%)
|
Acquisitions and dispositions
|
|
|
49
|
|
|
|
852
|
|
|
|
(803
|
)
|
|
|
(94.2
|
%)
|
Total as reported
|
|
$
|
58,424
|
|
|
$
|
63,350
|
|
|
$
|
(4,926
|
)
|
|
|
(7.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new vehicle units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
|
30,605
|
|
|
|
31,372
|
|
|
|
(767
|
)
|
|
|
(2.4
|
%)
|
Acquisitions and dispositions
|
|
|
-
|
|
|
|
317
|
|
|
|
(317
|
)
|
|
|
(100.0
|
%)
|
Total as reported
|
|
|
30,605
|
|
|
|
31,689
|
|
|
|
(1,084
|
)
|
|
|
(3.4
|
%)
|
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Reported new vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,164,570
|
|
|
$
|
1,202,323
|
|
|
$
|
(37,753
|
)
|
|
|
(3.1
|
%)
|
Gross profit
|
|
$
|
58,424
|
|
|
$
|
63,350
|
|
|
$
|
(4,926
|
)
|
|
|
(7.8
|
%)
|
Unit sales
|
|
|
30,605
|
|
|
|
31,689
|
|
|
|
(1,084
|
)
|
|
|
(3.4
|
%)
|
Revenue per unit
|
|
$
|
38,052
|
|
|
$
|
37,941
|
|
|
$
|
111
|
|
|
|
0.3
|
%
|
Gross profit per unit
|
|
$
|
1,909
|
|
|
$
|
1,999
|
|
|
$
|
(90
|
)
|
|
|
(4.5
|
%)
|
Gross profit as a % of revenue
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
|
|
(30
|
)
|
|
bps
|
|
20
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Same store new vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,164,570
|
|
|
$
|
1,189,495
|
|
|
$
|
(24,925
|
)
|
|
|
(2.1
|
%)
|
Gross profit
|
|
$
|
58,375
|
|
|
$
|
62,498
|
|
|
$
|
(4,123
|
)
|
|
|
(6.6
|
%)
|
Unit sales
|
|
|
30,605
|
|
|
|
31,372
|
|
|
|
(767
|
)
|
|
|
(2.4
|
%)
|
Revenue per unit
|
|
$
|
38,052
|
|
|
$
|
37,916
|
|
|
$
|
136
|
|
|
|
0.4
|
%
|
Gross profit per unit
|
|
$
|
1,907
|
|
|
$
|
1,992
|
|
|
$
|
(85
|
)
|
|
|
(4.3
|
%)
|
Gross profit as a % of revenue
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
|
|
(30
|
)
|
|
bps
|
|
The 2.1% decrease in new vehicle revenue during the three months ended March 31, 2016 was primarily driven by a 2.4% decrease in new vehicle unit sales volume. During the three months ended March 31, 2016, excluding fleet sales (which we began to scale back in 2014), our retail new vehicle revenue decreased 2.4% and our retail new vehicle unit sales volume decreased 2.8%. Our BMW, MINI and Volkswagen dealerships were the main drivers of our retail new vehicle unit sales volume decline, with decreases of 7.5%, 21.1% and 19.4%, respectively, offset partially by a 4.8% increase in retail new vehicle unit sales volume at our Honda dealerships in the
three months
ended
March 31
, 2016. During the three months ended March 31, 2016, we believe our retail new vehicle sales volume was suppressed due to a significant number of “stop-sale” vehicles held in inventory as a result of open safety recalls on certain models where the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale” vehicles increased our inventory on-hand and associated floor plan interest expense and may continue to affect our dealerships’ results of operations until warranty replacement parts become available.
Excluding fleet sales, total retail new vehicle gross profit dollars decreased $4.2 million, or 6.8%, during the
three months
ended
March 31, 2016.
Our gross profit per retail new unit decreased $83 per unit, or 4.1%, in the three months ended March 31, 2016, primarily driven by our Land Rover, BMW and Porsche dealerships, offset partially by an increase at our Honda dealerships.
Our luxury dealerships experienced a 5.9% decrease in retail new vehicle revenue during
the three months ended March 31, 2016
, primarily due to a 6.2% decrease in retail new vehicle unit sales volume. Luxury dealership retail new vehicle gross profit decreased 10.7% during the three months ended March 31, 2016, primarily driven by gross profit decreases at our BMW, Land Rover and Porsche dealerships, offset partially by an increase at our Volvo dealerships. Luxury dealership retail new vehicle gross profit per unit decreased $168 per unit, or 4.8%, during the three months ended March 31, 2016, primarily driven by our Land Rover, BMW and Porsche dealerships. We believe these declines in retail new vehicle gross profit per unit are the result of higher supply of inventory in certain brands and pressure in the Texas market as a result of a downturn in the energy sector.
Our mid-line import dealerships experienced a 3.2% increase in retail new vehicle revenue during
the three months ended March 31, 2016
, primarily due to a 3.3% increase in retail new vehicle revenue per unit across the majority of our brands. Mid-line import dealership retail new vehicle gross profit increased 13.3% during the three months ended March 31, 2016, primarily driven by a gross profit increase at our Honda dealerships, offset partially by a decrease at our Hyundai dealerships. Mid-line import dealership retail new vehicle gross profit per unit increased $104 per unit, or 13.3%, during the three months ended March 31, 2016, primarily driven by our Honda dealerships. We believe this increase in retail new vehicle gross profit per unit is due primarily to the effect of new models and inventory availability in certain brands, which offset downward pricing pressure due to increased competition for sales between similar branded dealerships.
Our domestic dealership retail new vehicle revenue was flat during the
three months ended March 31, 2016
, in spite of a 1.9% decrease in retail new vehicle unit sales volume. Domestic dealership retail new vehicle gross profit decreased 14.9% during the three months ended March 31, 2016, driven primarily by our General Motors dealerships (excluding Cadillac). Domestic dealership retail new vehicle gross profit per unit decreased $234 per unit, or 13.2%, during the three months ended March 31, 2016,
primarily driven by a decrease at our General Motors dealerships in the Texas market
. We believe this decline in retail new vehicle gross profit per unit is the result of downward pricing pressure due to increased competition for sales between similar branded dealerships, particularly in the Texas market as a result of a downturn in the energy sector.
21
SONIC AUTOMOTIVE, INC.
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:
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except unit data)
|
|
Total used vehicle revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
598,355
|
|
|
$
|
584,987
|
|
|
$
|
13,368
|
|
|
|
2.3
|
%
|
Acquisitions and dispositions
|
|
|
-
|
|
|
|
8,755
|
|
|
|
(8,755
|
)
|
|
|
(100.0
|
%)
|
Total as reported
|
|
$
|
598,355
|
|
|
$
|
593,742
|
|
|
$
|
4,613
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total used vehicle gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
40,690
|
|
|
$
|
41,008
|
|
|
$
|
(318
|
)
|
|
|
(0.8
|
%)
|
Acquisitions and dispositions
|
|
|
(159
|
)
|
|
|
(164
|
)
|
|
|
5
|
|
|
|
(3.0
|
%)
|
Total as reported
|
|
$
|
40,531
|
|
|
$
|
40,844
|
|
|
$
|
(313
|
)
|
|
|
(0.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total used vehicle units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
|
29,333
|
|
|
|
27,687
|
|
|
|
1,646
|
|
|
|
5.9
|
%
|
Acquisitions and dispositions
|
|
|
-
|
|
|
|
448
|
|
|
|
(448
|
)
|
|
|
(100.0
|
%)
|
Total as reported
|
|
|
29,333
|
|
|
|
28,135
|
|
|
|
1,198
|
|
|
|
4.3
|
%
|
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Reported used vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
598,355
|
|
|
$
|
593,742
|
|
|
$
|
4,613
|
|
|
|
0.8
|
%
|
Gross profit
|
|
$
|
40,531
|
|
|
$
|
40,844
|
|
|
$
|
(313
|
)
|
|
|
(0.8
|
%)
|
Unit sales
|
|
|
29,333
|
|
|
|
28,135
|
|
|
|
1,198
|
|
|
|
4.3
|
%
|
Revenue per unit
|
|
$
|
20,399
|
|
|
$
|
21,103
|
|
|
$
|
(704
|
)
|
|
|
(3.3
|
%)
|
Gross profit per unit
|
|
$
|
1,382
|
|
|
$
|
1,452
|
|
|
$
|
(70
|
)
|
|
|
(4.8
|
%)
|
Gross profit as a % of revenue
|
|
|
6.8
|
%
|
|
|
6.9
|
%
|
|
|
(10
|
)
|
|
bps
|
|
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Same store used vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
598,355
|
|
|
$
|
584,987
|
|
|
$
|
13,368
|
|
|
|
2.3
|
%
|
Gross profit
|
|
$
|
40,690
|
|
|
$
|
41,008
|
|
|
$
|
(318
|
)
|
|
|
(0.8
|
%)
|
Unit sales
|
|
|
29,333
|
|
|
|
27,687
|
|
|
|
1,646
|
|
|
|
5.9
|
%
|
Revenue per unit
|
|
$
|
20,399
|
|
|
$
|
21,129
|
|
|
$
|
(730
|
)
|
|
|
(3.5
|
%)
|
Gross profit per unit
|
|
$
|
1,387
|
|
|
$
|
1,481
|
|
|
$
|
(94
|
)
|
|
|
(6.3
|
%)
|
Gross profit as a % of revenue
|
|
|
6.8
|
%
|
|
|
7.0
|
%
|
|
|
(20
|
)
|
|
bps
|
|
In the three months ended March 31, 2016, our retail used vehicle unit sales volume increased 5.9%, driven primarily by our luxury dealerships and EchoPark
®
stores. Retail used vehicle gross profit per unit decreased $94 per unit, or 6.3%, due in part to declining used car pricing as a result of an increased supply of off-lease vehicles. As we expand the One Sonic-One Experience initiative to additional stores, we believe we will have the opportunity to increase our used vehicle unit sales volume, revenue and
22
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
gross profit levels. In addition, incremental used vehicle sales volume in the three months ended March 31, 2016 contributed to additional Fixed Operations gross profit (via reconditioning) and F&I gross profit as discussed und
er the headings “Parts, Service and Collision Repair (“Fixed Operations”)” and “Finance, Insurance and Other, Net (“F&I”)” below. “Stop-sale” instructions for safety recalls on certain models increased our inventory on-hand and associated floor plan intere
st expense and may affect our dealerships’ results of operations until warranty replacement parts become available.
Wholesale Vehicles
Wholesale vehicle revenues are highly correlated with new and used vehicle retail sales and the associated trade-in volume. Wholesale revenues 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:
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except unit data)
|
|
Total wholesale vehicle revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
44,353
|
|
|
$
|
41,253
|
|
|
$
|
3,100
|
|
|
|
7.5
|
%
|
Acquisitions and dispositions
|
|
|
21
|
|
|
|
403
|
|
|
|
(382
|
)
|
|
|
(94.8
|
%)
|
Total as reported
|
|
$
|
44,374
|
|
|
$
|
41,656
|
|
|
$
|
2,718
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale vehicle gross profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
(1,076
|
)
|
|
$
|
(197
|
)
|
|
$
|
(879
|
)
|
|
|
(446.2
|
%)
|
Acquisitions and dispositions
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
11
|
|
|
|
84.6
|
%
|
Total as reported
|
|
$
|
(1,078
|
)
|
|
$
|
(210
|
)
|
|
$
|
(868
|
)
|
|
|
(413.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale vehicle units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
|
8,418
|
|
|
|
7,688
|
|
|
|
730
|
|
|
|
9.5
|
%
|
Acquisitions and dispositions
|
|
|
5
|
|
|
|
89
|
|
|
|
(84
|
)
|
|
|
(94.4
|
%)
|
Total as reported
|
|
|
8,423
|
|
|
|
7,777
|
|
|
|
646
|
|
|
|
8.3
|
%
|
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Reported wholesale vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
44,374
|
|
|
$
|
41,656
|
|
|
$
|
2,718
|
|
|
|
6.5
|
%
|
Gross profit (loss)
|
|
$
|
(1,078
|
)
|
|
$
|
(210
|
)
|
|
$
|
(868
|
)
|
|
|
(413.3
|
%)
|
Unit sales
|
|
|
8,423
|
|
|
|
7,777
|
|
|
|
646
|
|
|
|
8.3
|
%
|
Revenue per unit
|
|
$
|
5,268
|
|
|
$
|
5,356
|
|
|
$
|
(88
|
)
|
|
|
(1.6
|
%)
|
Gross profit (loss) per unit
|
|
$
|
(128
|
)
|
|
$
|
(27
|
)
|
|
$
|
(101
|
)
|
|
|
(374.1
|
%)
|
Gross profit (loss) as a % of revenue
|
|
|
(2.4
|
%)
|
|
|
(0.5
|
%)
|
|
|
(190
|
)
|
|
bps
|
|
23
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except units and per unit data)
|
|
Same store wholesale vehicle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
44,353
|
|
|
$
|
41,253
|
|
|
$
|
3,100
|
|
|
|
7.5
|
%
|
Gross profit (loss)
|
|
$
|
(1,076
|
)
|
|
$
|
(197
|
)
|
|
$
|
(879
|
)
|
|
|
(446.2
|
%)
|
Unit sales
|
|
|
8,418
|
|
|
|
7,688
|
|
|
|
730
|
|
|
|
9.5
|
%
|
Revenue per unit
|
|
$
|
5,269
|
|
|
$
|
5,366
|
|
|
$
|
(97
|
)
|
|
|
(1.8
|
%)
|
Gross profit (loss) per unit
|
|
$
|
(128
|
)
|
|
$
|
(26
|
)
|
|
$
|
(102
|
)
|
|
|
(392.3
|
%)
|
Gross profit (loss) as a % of revenue
|
|
|
(2.4
|
%)
|
|
|
(0.5
|
%)
|
|
|
(190
|
)
|
|
bps
|
|
Wholesale vehicle revenue and unit sales volume fluctuations are typically a result of retail new and used vehicle unit sales 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. Whenever possible, we prefer to sell a used vehicle through retail channels rather than wholesaling the vehicle at auction. In the three months ended March 31, 2016, wholesale unit volume as a percentage of total used unit volume (retail plus wholesale) increased 60 basis points as we managed our used inventory to the desired level.
Parts, Service and Collision Repair (“Fixed Operations”)
Parts, service and collision repair revenue consists of customer requested orders (“customer pay”), warranty repairs, wholesale parts and internal, sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, manufacturer recalls, customer loyalty and manufacturer prepaid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles that are sold to customers. When that work is performed by one of our dealerships, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.
We believe that over time, vehicle quality will improve, but vehicle complexity and the associated demand for repairs at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that over the long term we have the ability to continue to add service capacity and increase revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in the warranty coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitate long-term growth in our service and parts business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future warranty related revenues. Following is information related to our Fixed Operations:
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
Total Fixed Operations revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
346,054
|
|
|
$
|
317,273
|
|
|
$
|
28,781
|
|
|
|
9.1
|
%
|
Acquisitions and dispositions
|
|
|
-
|
|
|
|
5,921
|
|
|
|
(5,921
|
)
|
|
|
(100.0
|
%)
|
Total as reported
|
|
$
|
346,054
|
|
|
$
|
323,194
|
|
|
$
|
22,860
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Operations gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
|
$
|
165,649
|
|
|
$
|
153,503
|
|
|
$
|
12,146
|
|
|
|
7.9
|
%
|
Acquisitions and dispositions
|
|
|
351
|
|
|
|
2,872
|
|
|
|
(2,521
|
)
|
|
|
(87.8
|
%)
|
Total as reported
|
|
$
|
166,000
|
|
|
$
|
156,375
|
|
|
$
|
9,625
|
|
|
|
6.2
|
%
|
24
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
Reported Fixed Operations:
|
|
(In thousands)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
$
|
147,394
|
|
|
$
|
137,623
|
|
|
$
|
9,771
|
|
|
|
7.1
|
%
|
Warranty
|
|
|
57,559
|
|
|
|
53,498
|
|
|
|
4,061
|
|
|
|
7.6
|
%
|
Wholesale parts
|
|
|
45,309
|
|
|
|
45,012
|
|
|
|
297
|
|
|
|
0.7
|
%
|
Internal, sublet and other
|
|
|
95,792
|
|
|
|
87,061
|
|
|
|
8,731
|
|
|
|
10.0
|
%
|
Total revenue
|
|
$
|
346,054
|
|
|
$
|
323,194
|
|
|
$
|
22,860
|
|
|
|
7.1
|
%
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
$
|
80,358
|
|
|
$
|
75,678
|
|
|
$
|
4,680
|
|
|
|
6.2
|
%
|
Warranty
|
|
|
31,326
|
|
|
|
29,760
|
|
|
|
1,566
|
|
|
|
5.3
|
%
|
Wholesale parts
|
|
|
7,941
|
|
|
|
8,138
|
|
|
|
(197
|
)
|
|
|
(2.4
|
%)
|
Internal, sublet and other
|
|
|
46,375
|
|
|
|
42,799
|
|
|
|
3,576
|
|
|
|
8.4
|
%
|
Total gross profit
|
|
$
|
166,000
|
|
|
$
|
156,375
|
|
|
$
|
9,625
|
|
|
|
6.2
|
%
|
Gross profit as a % of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
|
54.5
|
%
|
|
|
55.0
|
%
|
|
|
(50
|
)
|
|
bps
|
|
Warranty
|
|
|
54.4
|
%
|
|
|
55.6
|
%
|
|
|
(120
|
)
|
|
bps
|
|
Wholesale parts
|
|
|
17.5
|
%
|
|
|
18.1
|
%
|
|
|
(60
|
)
|
|
bps
|
|
Internal, sublet and other
|
|
|
48.4
|
%
|
|
|
49.2
|
%
|
|
|
(80
|
)
|
|
bps
|
|
Total gross profit as a % of revenue
|
|
|
48.0
|
%
|
|
|
48.4
|
%
|
|
|
(40
|
)
|
|
bps
|
|
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
Same store Fixed Operations:
|
|
(In thousands)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
$
|
147,394
|
|
|
$
|
134,636
|
|
|
$
|
12,758
|
|
|
|
9.5
|
%
|
Warranty
|
|
|
57,559
|
|
|
|
52,694
|
|
|
|
4,865
|
|
|
|
9.2
|
%
|
Wholesale parts
|
|
|
45,309
|
|
|
|
44,201
|
|
|
|
1,108
|
|
|
|
2.5
|
%
|
Internal, sublet and other
|
|
|
95,792
|
|
|
|
85,742
|
|
|
|
10,050
|
|
|
|
11.7
|
%
|
Total revenue
|
|
$
|
346,054
|
|
|
$
|
317,273
|
|
|
$
|
28,781
|
|
|
|
9.1
|
%
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
$
|
80,358
|
|
|
$
|
74,050
|
|
|
$
|
6,308
|
|
|
|
8.5
|
%
|
Warranty
|
|
|
31,282
|
|
|
|
29,300
|
|
|
|
1,982
|
|
|
|
6.8
|
%
|
Wholesale parts
|
|
|
7,941
|
|
|
|
7,988
|
|
|
|
(47
|
)
|
|
|
(0.6
|
%)
|
Internal, sublet and other
|
|
|
46,068
|
|
|
|
42,165
|
|
|
|
3,903
|
|
|
|
9.3
|
%
|
Total gross profit
|
|
$
|
165,649
|
|
|
$
|
153,503
|
|
|
$
|
12,146
|
|
|
|
7.9
|
%
|
Gross profit as a % of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer pay
|
|
|
54.5
|
%
|
|
|
55.0
|
%
|
|
|
(50
|
)
|
|
bps
|
|
Warranty
|
|
|
54.3
|
%
|
|
|
55.6
|
%
|
|
|
(130
|
)
|
|
bps
|
|
Wholesale parts
|
|
|
17.5
|
%
|
|
|
18.1
|
%
|
|
|
(60
|
)
|
|
bps
|
|
Internal, sublet and other
|
|
|
48.1
|
%
|
|
|
49.2
|
%
|
|
|
(110
|
)
|
|
bps
|
|
Total gross profit as a % of revenue
|
|
|
47.9
|
%
|
|
|
48.4
|
%
|
|
|
(50
|
)
|
|
bps
|
|
During the three months ended March 31, 2016, our total Fixed Operations customer pay revenue increased 9.5%, led primarily by our BMW, Mercedes and Honda dealerships. Warranty revenue increased 9.2% during the three months ended March 31, 2016, driven primarily by increases in warranty activity, including recalls, at our Honda, Toyota and Hyundai dealerships. During the three months ended March 31, 2016, internal revenue increased 9.4% and sublet revenue increased 16.7% on higher levels of used vehicle reconditioning.
25
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2016, an increase in Fixed Operations revenue contributed approximately $13.9 million in additional gross profit, offset partially by a 50 basis point decrease in gr
oss margin rate which reduced the gross profit increase by approximately $1.8 million. The gross margin rate decreased primarily due to lower gross margin rate at our BMW, General Motors (excluding Cadillac), Lexus and Ford dealerships.
Finance, Insurance and Other, Net (“F&I”)
Finance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles and other aftermarket products. In connection with vehicle financing, extended warranties, service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts. F&I revenues are driven by the level of new and used vehicle unit sales, manufacturer financing or leasing incentives and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage. Following is information related to F&I:
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
(In thousands, except per unit data)
|
|
Total F&I revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
$
|
80,852
|
|
|
$
|
73,689
|
|
|
$
|
7,163
|
|
|
|
9.7
|
%
|
Acquisitions and dispositions
|
|
421
|
|
|
|
911
|
|
|
|
(490
|
)
|
|
|
(53.8
|
%)
|
Total as reported
|
$
|
81,273
|
|
|
$
|
74,600
|
|
|
$
|
6,673
|
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total F&I gross profit per retail unit (excludes fleet):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store
|
$
|
1,359
|
|
|
$
|
1,255
|
|
|
$
|
104
|
|
|
|
8.3
|
%
|
Acquisitions and dispositions
|
|
7
|
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
800.0
|
%
|
Total as reported
|
$
|
1,366
|
|
|
$
|
1,254
|
|
|
$
|
112
|
|
|
|
8.9
|
%
|
F&I revenues increased 9.7% and F&I gross profit per retail unit increased $104 per unit, or 8.3%, during the
three months ended March 31
, 2016, primarily due to improved penetration rates on finance and service contracts as a result of increased visibility into performance drivers provided by our proprietary internal software applications. In addition, F&I revenues improved due to increases in total new and used retail (excluding fleet) unit volume of 1.3% for the
three months ended March
31, 2016.
Finance contract gross profit increased 5.6% in the
three months ended March
31, 2016, primarily due to a 540 basis point increase in the finance contract penetration rate. Finance contract gross profit may be under pressure in future periods if manufacturers offer attractive financing rates from their captive finance affiliates because we tend to earn lower commissions under these programs. Service contract gross profit increased 18.2% in the three months ended March 31, 2016, driven primarily by a 320 basis point increase in the service contract penetration rate and a 6.4% increase in gross profit per service contract. Other aftermarket contract revenue increased 4.3% in the three months ended March 31, 2016, driven primarily by an 8.4% increase in gross profit per aftermarket contract, offset partially by a 690 basis point decrease in the other aftermarket penetration rate.
26
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Results
In the following tables of financial data, total segment income of the operating segments is reconciled to consolidated operating income.
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands, except unit data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Dealerships
|
|
$
|
2,210,586
|
|
|
$
|
2,219,830
|
|
|
$
|
(9,244
|
)
|
|
|
(0.4
|
%)
|
EchoPark
®
|
|
|
24,040
|
|
|
|
15,685
|
|
|
|
8,355
|
|
|
|
53.3
|
%
|
Total consolidated revenues
|
|
$
|
2,234,626
|
|
|
$
|
2,235,515
|
|
|
$
|
(889
|
)
|
|
|
(0.0
|
%)
|
Segment income (loss) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Dealerships
|
|
$
|
39,292
|
|
|
$
|
43,072
|
|
|
$
|
(3,780
|
)
|
|
|
(8.8
|
%)
|
EchoPark
®
|
|
|
(3,423
|
)
|
|
|
(6,354
|
)
|
|
|
2,931
|
|
|
|
46.1
|
%
|
Total segment income (loss)
|
|
|
35,869
|
|
|
|
36,718
|
|
|
|
(849
|
)
|
|
|
(2.3
|
%)
|
Interest expense, other, net
|
|
|
(12,339
|
)
|
|
|
(13,219
|
)
|
|
|
880
|
|
|
|
6.7
|
%
|
Other income (expense), net
|
|
|
104
|
|
|
|
90
|
|
|
|
14
|
|
|
|
15.6
|
%
|
Income (loss) from continuing operations before taxes
|
|
$
|
23,634
|
|
|
$
|
23,589
|
|
|
$
|
45
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail new and used vehicle unit sales volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Dealerships
|
|
|
58,548
|
|
|
|
58,809
|
|
|
|
(261
|
)
|
|
|
(0.4
|
%)
|
EchoPark
®
|
|
|
941
|
|
|
|
660
|
|
|
|
281
|
|
|
|
42.6
|
%
|
Total retail new and used vehicle unit sales volume
|
|
|
59,489
|
|
|
|
59,469
|
|
|
|
20
|
|
|
|
0.0
|
%
|
Franchised Dealerships
See the previous headings “New Vehicles,” “Used Vehicles,” “Wholesale Vehicles,” “Parts, Service and Collision Repair (“Fixed Operations”)” and “Finance, Insurance and Other, Net (“F&I”)” for further discussion of the operating results of our Franchised Dealerships segment. The previous analyses include operating results for our EchoPark
®
segment as the results for EchoPark
®
are not individually material to the combined operating results.
EchoPark
®
We opened the first two EchoPark
®
locations in November and December 2014, and we opened the third location in January 2015. Our EchoPark
®
business operates independently from our previously existing new and used dealership sales operations and offers customers an exciting shopping and buying experience. During the three months ended March 31, 2016, EchoPark
®
generated approximately $24.0 million of revenue, up $8.4 million, or 53.3%, from the prior year period, and gross profit of $3.2 million, up $1.4 million, or 78.5%, from the prior year period. EchoPark
®
retail used vehicle unit volume was 941 units, up 281 units, or 42.6%, from the prior year period, and retail used vehicle gross profit per unit was $1,390 per unit, an increase of $5 per unit, or 0.4%, from the prior year period. EchoPark
®
F&I gross profit per unit was $1,369 per unit, up $480 per unit, or 54.1%, from the prior year period, as our training and playbook processes enabled our customer experience guides to more effectively provide F&I products to our customers. EchoPark
®
incurred a $3.6 million operating loss during the three months ended March 31, 2016, compared to a $4.9 million operating loss in the prior year period, excluding the effects of a $1.4 million impairment charge in the prior year period. We expect to open two additional EchoPark
®
stores in Colorado during the second quarter of 2016 and another by the end of the year, and have begun the process of expanding into additional markets in North Carolina, South Carolina and Texas with operations in these new markets expected to begin in 2017.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses are comprised of four major groups: compensation expense, advertising expense, rent expense and other expense. Compensation expense primarily relates to dealership personnel who are paid a commission or a salary plus commission and support personnel who are paid a fixed salary. Commissions paid to dealership personnel typically vary depending on gross profits
27
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
realized and sales volume objectives. Due to the salary component for certain dealership and corporate personnel, gross profits and compens
ation expense do not change in direct proportion to one another. Advertising expense and other expense vary based on the level of actual or anticipated business activity and number of dealerships owned. Rent expense typically varies with the number of deal
erships owned, investments made for facility improvements and interest rates. Other expense includes various fixed and variable expenses, including certain customer-related costs, insurance, training, legal and IT expenses, which may not change in proporti
on to gross profit levels.
The following tables set forth information related to our reported SG&A expenses:
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
SG&A expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
169,041
|
|
|
$
|
161,858
|
|
|
$
|
(7,183
|
)
|
|
|
(4.4
|
%)
|
Advertising
|
|
|
15,347
|
|
|
|
15,332
|
|
|
|
(15
|
)
|
|
|
(0.1
|
%)
|
Rent
|
|
|
18,720
|
|
|
|
18,254
|
|
|
|
(466
|
)
|
|
|
(2.6
|
%)
|
Other
|
|
|
81,267
|
|
|
|
75,418
|
|
|
|
(5,849
|
)
|
|
|
(7.8
|
%)
|
Total SG&A expenses
|
|
$
|
284,375
|
|
|
$
|
270,862
|
|
|
$
|
(13,513
|
)
|
|
|
(5.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses as a % of gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
49.0
|
%
|
|
|
48.3
|
%
|
|
|
(70
|
)
|
|
bps
|
|
Advertising
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
|
|
20
|
|
|
bps
|
|
Rent
|
|
|
5.4
|
%
|
|
|
5.4
|
%
|
|
|
-
|
|
|
bps
|
|
Other
|
|
|
23.6
|
%
|
|
|
22.6
|
%
|
|
|
(100
|
)
|
|
bps
|
|
Total SG&A expenses as a % of gross profit
|
|
|
82.4
|
%
|
|
|
80.9
|
%
|
|
|
(150
|
)
|
|
bps
|
|
Overall SG&A expenses increased for the three months ended March 31, 2016, due in part to costs related to our EchoPark
®
, One Sonic-One Experience and other strategic initiatives, among other cost drivers as discussed below. Overall SG&A expenses as a percentage of gross profit increased 150 basis points for the three months ended March 31, 2016. Excluding the effect of EchoPark
®
expenses, total SG&A expenses as a percentage of gross profit increased 200 basis points for the three months ended March 31, 2016, compared to the prior year period. Excluding the effect of certain adjustments described below, total SG&A expenses as a percentage of gross profit were 80.6% for the three months ended March 31, 2016, flat compared to the prior year period, and franchised dealership SG&A expenses as a percentage of gross profit were 79.7%, up 50 basis points from the prior year period.
Compensation costs increased in dollar amount and as a percentage of gross profit during the three months ended March 31, 2016, due primarily to higher levels of Fixed Operations compensation and lower Fixed Operations gross margin rate. Compensation costs for the three months ended March 31, 2015 include approximately $0.9 million of severance and other adjustments.
In the three months ended March 31, 2016, advertising expense dollars were flat and advertising expense as a percentage of gross profit decreased 20 basis points as we focused on targeted advertising where we would expect the best returns for our business.
Rent expense increased in dollar amount for the three months ended March 31, 2016, while the percentage of gross profit was flat compared to the prior year period, due primarily to consumer price index-based rent increases and higher levels of gross profit.
Other SG&A expenses increased in dollar amount and as a percentage of gross profit during the three months ended March 31, 2016, primarily due to a charge of approximately $6.0 million related to hail damage in our Texas market. Excluding the effect of this adjustment, other SG&A expenses as a percentage of gross profit were 70 basis points lower than the prior year period.
28
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impairment Charges
Impairment charges decreased approximately $6.2 million during the three months ended March 31, 2016. Impairment charges for the three months ended March 31, 2015 include the write-off of certain costs associated with website and software development projects as well as the abandonment of certain construction projects.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $2.1 million, or 12.6%, during
the three months ended March
31
, 2016, due primarily to completed construction projects and purchases of fixed assets that were placed in service subsequent to March 31, 2015.
Interest Expense, Floor Plan
Interest expense, floor plan for new vehicles increased approximately $1.7 million, or 38.2%, in the three months ended March 31, 2016. The average new vehicle floor plan notes payable balance increased approximately $302.0 million in the three months ended March 31, 2016, resulting in an increase in new vehicle floor plan interest expense of approximately $1.2 million. The average new vehicle floor plan interest rate was 1.69% in the three months ended March 31, 2016, compared to 1.55% in the three months ended March 31, 2015, resulting in an increase in new vehicle floor plan interest expense of approximately $0.5 million. During the three months ended March 31, 2016, our new vehicle inventory levels were elevated due to a significant number of “stop-sale” vehicles held in inventory as a result of open safety recalls on certain models where the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale” vehicles increased our inventory on-hand and associated floor plan interest expense and may continue to affect our dealerships’ results of operations until warranty replacement parts become available.
Interest expense, floor plan for used vehicles increased approximately $0.1 million, or 4.3%, in the three months ended March 31, 2016. The average used vehicle floor plan notes payable balance increased approximately $13.0 million in the three months ended March 31, 2016, resulting in an increase in used vehicle floor plan interest expense of approximately $0.1 million. The average used vehicle floor plan interest rate was 1.70% in the three months ended March 31, 2016, compared to 1.82% in the three months ended March 31, 2015, which had minimal effect on used vehicle floor plan interest expense.
Interest Expense, Other, Net
Interest expense, other, net is summarized in the schedule below:
|
|
Three Months Ended March 31,
|
|
|
Better / (Worse)
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
Stated/coupon interest
|
|
$
|
10,969
|
|
|
$
|
10,355
|
|
|
$
|
(614
|
)
|
|
|
(5.9
|
%)
|
Discount/premium amortization
|
|
|
40
|
|
|
|
37
|
|
|
|
(3
|
)
|
|
|
(8.1
|
%)
|
Deferred loan cost amortization
|
|
|
622
|
|
|
|
618
|
|
|
|
(4
|
)
|
|
|
(0.6
|
%)
|
Cash flow swap interest
|
|
|
1,190
|
|
|
|
2,225
|
|
|
|
1,035
|
|
|
|
46.5
|
%
|
Capitalized interest
|
|
|
(636
|
)
|
|
|
(228
|
)
|
|
|
408
|
|
|
|
178.9
|
%
|
Other interest
|
|
|
154
|
|
|
|
212
|
|
|
|
58
|
|
|
|
27.4
|
%
|
Total interest expense, other, net
|
|
$
|
12,339
|
|
|
$
|
13,219
|
|
|
$
|
880
|
|
|
|
6.7
|
%
|
Interest expense, other, net decreased approximately $0.9 million during the three months ended March 31, 2016, primarily due to a decrease in cash flow swap interest payments and higher levels of interest capitalized in conjunction with construction projects, offset partially by higher stated/coupon interest related to additional mortgage notes payable.
Income Taxes
The overall effective tax rate from continuing operations was 38.8% and 39.0% for the three months ended March 31, 2016 and 2015, respectively. The effective tax rate varies from year to year based on the distribution of taxable income between states in which we operate and other tax adjustments. We expect the effective tax rate in future periods to fall within a range of 38.0% to 40.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets or unusual discrete tax adjustments.
29
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discontinued Operations
Significant components of results from discontinued operations were as follows:
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
Income (loss) from operations
|
|
$
|
(194
|
)
|
|
$
|
(335
|
)
|
|
Lease exit accrual adjustments and charges
|
|
|
455
|
|
|
|
(356
|
)
|
|
Pre-tax income (loss)
|
|
$
|
261
|
|
|
$
|
(691
|
)
|
|
Total revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Liquidity and Capital Resources
We require cash to fund debt service, operating lease obligations, working capital requirements, facility improvements and other capital improvements, dividends on our common stock and to finance acquisitions and otherwise invest in our business. We rely on cash flows from operations, borrowings under our revolving credit and floor plan borrowing arrangements, real estate mortgage financing, asset sales and offerings of debt and equity securities to meet these requirements. We closely monitor our available liquidity and projected future operating results in order to remain in compliance with restrictive covenants under the 2014 Credit Facilities and other debt obligations and lease arrangements. However, our liquidity could be negatively affected if we fail to comply with the financial covenants in our existing debt or lease arrangements. There are no restrictions under our borrowing arrangements on retained earnings or net income. Cash flows provided by our dealerships are derived from various sources. The primary sources include individual consumers, automobile manufacturers, automobile manufacturers’ captive finance subsidiaries and finance companies. Disruptions in these cash flows could have a material adverse impact on our operations and overall liquidity.
Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and our ability to service our obligations depend to a substantial degree on the cash generated from the operations of these dealership subsidiaries.
We had the following liquidity resources available as of March 31, 2016 and December 31, 2015:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
2,390
|
|
|
$
|
3,625
|
|
Availability under our revolving credit facility
|
|
|
159,568
|
|
|
|
181,058
|
|
Availability under our used vehicle floor plan facilities
|
|
|
62,867
|
|
|
|
21,192
|
|
Floor plan deposit balance
|
|
|
25,000
|
|
|
|
74,000
|
|
Total available liquidity resources
|
|
$
|
249,825
|
|
|
$
|
279,875
|
|
We participate in a program with two of our manufacturer-affiliated finance companies (the floor plan deposit balance in the table above) wherein we maintain a deposit balance with the lender that earns interest based on the agreed upon rate. This deposit balance is not designated as a pre-payment of notes payable – floor plan, nor is it our intent to use this amount to offset principal amounts owed under notes payable – floor plan in the future, although we have the right and ability to do so. The deposit balance of $25.0 million and $74.0 million as of March 31, 2016 and December 31, 2015, respectively, is classified in other current assets in the accompanying condensed consolidated balance sheets.
Floor Plan Facilities
We finance our new and certain of our used vehicle inventory through standardized floor plan facilities with manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. These floor plan facilities are due on demand and bear interest at variable rates based on either LIBOR or the prime rate. The weighted average interest rate for our new and used vehicle floor plan facilities was 1.69% and 1.58% in the three months ended March 31, 2016 and 2015, respectively.
30
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We receive floor plan assistance from certain manufacturers. Floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated invent
ory is sold. We received approximately $10.5 million and $9.1 million in floor plan assistance in the three months ended March 31, 2016 and 2015, respectively. We recognized manufacturer floor plan assistance in cost of sales for continuing operations of a
pproximately $10.1 million and $8.5 million in the three months ended March 31, 2016 and 2015, respectively. Interest payments under each of our floor plan facilities are due monthly and we are not required to make principal repayments prior to the sale of
the vehicles.
Long-Term Debt and Credit Facilities
See Note 6, “Long-Term Debt,” to the accompanying condensed consolidated financial statements for discussion of our long-term debt and credit facilities and compliance with debt covenants.
Dealership Acquisitions and Dispositions
See Note 2, “Business Acquisitions and Dispositions,” to the accompanying condensed consolidated financial statements.
Capital Expenditures
Our capital expenditures include the purchase of land and buildings, construction of new dealerships, EchoPark
®
stores and collision repair centers, building improvements and equipment purchased for use in our dealerships and EchoPark
®
stores. We selectively construct new or improve existing dealership facilities to maintain compliance with manufacturers’ image requirements. We typically finance these projects through new mortgages or, alternatively, through our credit facilities. We also fund these projects through cash flows from operations.
Capital expenditures in the
three months ended March 31
, 2016 were approximately $41.4 million. Of this amount, approximately $30.7
million
was related to facility construction projects in the
three months ended March 31
, 2016
. Real estate acquisitions accounted for approximately $4.6 million in the three months ended March 31, 2016.
Fixed assets utilized in our dealership operations accounted for the remaining $6.1 million of the capital expenditures in the
three months ended March 31
, 2016.
Of the capital expenditures in the
three months ended March 31
, 2016, approximately $33.7 million was funded through mortgage financing and approximately $7.7 million was funded through cash from operations and use of our credit facilities. As of March 31, 2016, commitments for facilities construction projects totaled approximately $55.7 million and commitments for acquisition of real estate currently subject to operating leases of approximately $22.0 million. We expect investments related to capital expenditures to be partly dependent upon our overall liquidity position and the availability of mortgage financing to fund significant capital projects.
Stock Repurchase Program
Our Board of Directors has authorized us to repurchase shares of our Class A common stock. Historically, we have used our share repurchase authorization to offset dilution caused by the exercise of stock options or the vesting of equity compensation awards and to maintain our desired capital structure. During the three months ended March 31, 2016, our Board of Directors authorized an additional $100.0 million to repurchase shares of our Class A common stock. During the
three months ended March 31
, 2016, we repurchased approximately 4.1 million shares of our Class A common stock for approximately $74.4 million, in open-market transactions at prevailing market prices, in two separate private block trades and in connection with tax withholdings on the vesting of equity compensation awards.
As of March 31, 2016, our total remaining repurchase authorization was approximately $70.6 million. Under the 2014 Credit Facilities, share repurchases are permitted to the extent that no event of default exists. See Note 12, “Subsequent Events,” to the accompanying condensed consolidated financial statements for discussion of share repurchase activity subsequent to March 31, 2016.
Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance and economic and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors and management determine our share repurchase policy in the future.
31
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Divide
nds
During the three months ended March 31, 2016, our Board of Directors approved a cash dividend of $0.05 per share on all outstanding shares of Class A and Class B common stock as of March 15, 2016 to be paid on April 15, 2016. Subsequent to March 31, 2016, our Board of Directors approved a cash dividend of $0.05 per share on all outstanding shares of Class A and Class B common stock as of June 15, 2016 to be paid on July 15, 2016. Under the 2014 Credit Facilities, dividends are permitted to the extent that no event of default exists and we are in compliance with the financial covenants contained therein. The indentures governing our outstanding 5.0% Notes and 7.0% Notes contain restrictions on our ability to pay dividends. The payment of any future dividend is subject to the business judgment of our Board of Directors, taking into consideration our historic and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, current economic environment and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors determines our future dividend policy. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” to the c
onsolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015 for a description of restrictions on the payment of dividends
.
Cash Flows
Net cash provided by operating activities in the three months ended March 31, 2016 was approximately $103.6 million. This provision of cash was comprised primarily of cash inflows related to operating profits and decreases in receivables and other assets, offset partially by a decrease in notes payable – floor plan – trade.
In the three months ended March 31, 2015, net cash provided by operating activities was approximately $44.1 million. This provision of cash was comprised primarily of cash inflows related to operating profits and decreases in receivables and inventories, offset partially by decreases in notes payable – floor plan – trade and trade accounts payable and other liabilities.
Net cash used in investing activities in the three months ended March 31, 2016 was approximately $40.2 million. This use of cash was primarily comprised of purchases of land, property and equipment.
Net cash used in investing activities in the three months ended March 31, 2015 was approximately $46.1 million. This use of cash was primarily comprised of purchases of land, property and equipment.
Net cash used in financing activities in the three months ended March 31, 2016 was approximately $64.6 million. This use of cash was comprised primarily of cash outflows related to purchases of treasury stock and a decrease in notes payable – floor plan – non-trade, offset partially by proceeds from issuance of mortgage-related long-term debt.
Net cash provided by financing activities in the three months ended March 31, 2015 was approximately $1.9 million. This provision of cash was comprised primarily of cash inflows related to proceeds from issuance of mortgage-related long-term debt, offset partially by purchases of treasury stock and a decrease in notes payable – floor plan – non-trade.
We arrange our inventory floor plan financing through both manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. Our floor plan financed with manufacturer captives is recorded as trade floor plan liabilities (with the resulting change being reflected as operating cash flows). Our dealerships that obtain floor plan financing from a syndicate of manufacturer-affiliated finance companies and commercial banks record their obligation as non-trade floor plan liabilities (with the resulting change being reflected as financing cash flows). Due to the presentation differences for changes in trade floor plan and non-trade floor plan in the condensed consolidated statements of cash flows, decisions made by us to move dealership floor plan financing arrangements from one finance source to another may cause significant variations in operating and financing cash flows without affecting our overall liquidity, working capital or cash flow. Net cash used in combined trade and non-trade floor plan financing was approximately $98.5 million and $71.2 million in the three months ended March 31, 2016 and 2015, respectively. Accordingly, if all changes in floor plan notes payable were classified as an operating activity, the result would have been net cash provided by operating activities of approximately $87.2 million and $34.9 million in the three months ended March 31, 2016 and 2015, respectively.
Guarantees and Indemnification Obligations
In connection with the operation and disposition of dealership franchises, we have entered into various guarantees and indemnification obligations. See Note 8, “Contingencies,” to the accompanying condensed consolidated financial statements. See also “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12, “Commitments and Contingencies,” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015.
32
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Futur
e Liquidity Outlook
We believe our best sources of liquidity for operations and debt service remain cash flows generated from operations combined with our availability of borrowings under our floor plan facilities (or any replacements thereof), our 2014 Credit Facilities (or any replacements thereof), real estate mortgage financing, selected dealership and other asset sales and our ability to raise funds in the capital markets through offerings of debt or equity securities. Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and our ability to service our obligations depend to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash.
Off-Balance Sheet Arrangements
See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” in our Annual Report on Form 10-K for the year ended December 31, 2015.
Seasonality
Our operations are subject to seasonal variations. The first quarter normally contributes less operating profit than the second, third and fourth quarters. Weather conditions, the timing of manufacturer incentive programs and model changeovers cause seasonality and may adversely affect vehicle demand, and, consequently, our profitability. Comparatively, parts and service demand remains stable throughout the year.
33
SONIC AUTOMOTIVE, INC.