Amid concerns that 2019 will be a volatile year for new-car sales and that rising interest rates will erode profitability, Sonic Automotive reduced its employee headcount by 6 percent in the first quarter and is reining in capital expenditures, company executives said.
So far, the company has identified around $20 million of reductions in selling, general and administrative expenses — including the job cuts — and plans to slash capital expenditures by about $55 million, said Sonic chief financial officer Heath Byrd, during Sonic’s latest quarterly earnings conference call.
But despite the cautious approach for the year, executives expect Sonic’s EchoPark used-car stores to have a big year and are positioning it to help keep the company profitable when new-car sales stumble as a result of manufacturer-driven swings in new-car incentives and volume.
The company expects its used-car operations coupled with fixed operations and finance and insurance, to offset anticipated volatility in its new-car operations.
In January, EchoPark was profitable including topside expenses and is expected to be profitable in the first quarter of 2019, Sonic president Jeff Dyke said.
Sonic had a lot of projects going on but this year wants to focus on what’s most important, added chief executive David Smith.
“We’ve eliminated a lot of expense and are really focusing on our core business and growing EchoPark in our strategic goals, and that’s going to lead to much more profitability,” Smith told analysts during the Feb. 20 call.
Dyke said the company has gleaned many learnings from EchoPark, including that it can build an EchoPark store “for significantly cheaper than we build a new-car store, and then we sell about three or four times more cars out of it.”
One business strategy drawn from those learnings is that Sonic will no longer spend money on new-car facilities that don’t have a proven return on investment, he added.
“So, there’s a lot we’re learning at EchoPark that we’re trying to teach the manufacturers, and it’s been a fight; it’ll be a fight, but I can assure you that the days of us spending a lot of money in the CapEx area without return on investment, a proven return on investments, are over at this company,” Dyke said.
In the fourth quarter, Sonic’s overall revenue fell 3.5 percent to $2.6 billion, and its net income from continuing operations plunged almost two-thirds to $22 million.
The company blamed the steep declines on weaker performance at its Honda and BMW stores and comparisons to strong sales last year resulting from consumers replacing vehicles damaged by Hurricane Harvey in Texas.
For the entire year, Sonic’s revenue inched up 0.9 percent to $9.95 billion, and its net income dropped 44.3 percent to $52.4 million.
About BMW and Honda
Sonic’s BMW and Honda dealerships were responsible for 37 percent of its new-vehicle revenue from continuing operations in 2018. Profits for those brand stores combined dropped $20 million, Smith said.
For example, gross at Sonic’s BMW stores was down about $5.8 million for the fourth quarter, and volume dropped about 13 percent. December was a “difficult month” for the luxury car brand, Smith said.
“We usually have a huge December with BMW, and it made it a difficult month for us when they’re such a large part of our profitability,” Smith said. “So goes BMW, so goes this company.”
As of the quarter that ended Dec. 31, Sonic operated eight EchoPark Stores and 108 new-vehicle franchises.
Sonic “lost north of $20 million with EchoPark in 2018, but we’re not going to be anywhere near that in 2019,” Dyke said.
EchoPark stores retailed 8,762 used vehicles in the fourth quarter — a unit increase of 95 percent over the year-ago quarter.
New price strategy for used
Sonic said its retail used-vehicle gross profit per unit decreased due to a shift in inventory and pricing strategy at EchoPark stores that calls for pricing its inventory at lower levels, resulting in lower retail used-vehicle gross profit per unit.
That is designed to drive higher levels of retail used-vehicle unit sales volume, thus increasing F&I opportunity. The result is higher combined gross profit from both the retail used-vehicle sale and higher levels of F&I gross profit per retail unit, the company said in its annual report.
EchoPark’s combined front-end gross and finance and insurance per unit retailed in the fourth quarter was down 6.5 percent to $1,997.
Sonic’s EchoPark store in its hometown of Charlotte, N.C., was profitable in December and January, Dyke said. December was the Charlotte store’s second full month of operation.
The company’s Houston EchoPark store — which opened Dec. 7 — sold 266 used vehicles in the last three weeks of the year and sold 373 in January, making it the best EchoPark store opening to date, Dyke said.
“When we first opened EchoPark, it would take a year to get us profitable, and now we’ve cut that down to less than six months,” Dyke said.
“In Charlotte’s case, it was basically (profitable in) its first full month, and so we’ve figured out the formula.
“And once we have a profitable quarter of covering all expenses, then we’ll start talking about some aggressive expansion plans.”
Q4 and annual sales results
In the quarter, Sonic’s used-unit sales grew 10.7 percent to 35,135, and overall average gross profit per used vehicle dropped 13 percent to $965.
On a same-store basis, used-unit sales in the quarter increased 11.0 percent to 32,880, and average gross profit per used vehicle retailed was down 13.4 percent to $938.
For the entire year, used-unit sales rose 13.1 percent to 139,605, and average gross profit per unit dropped 18.3 percent to $1,024.
Sonic’s new-unit sales in the quarter decreased 14.2 percent to 31,331, and overall average gross profit per new unit in the quarter dipped 1.5 percent to $2,100.
On a same-store basis, new-unit sales dropped 9.0 percent to 31,314 in the quarter, and average gross profit per new unit was down 5.0 percent to $2,083.
For the entire year, new-vehicle-unit sales slid 9.5 percent to 122,717, and gross profit per unit inched up 0.8 percent to $1,968.