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Sonic Automotive Earnings: EchoPark Closures Set Remaining Stores Up To Do Better

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Securities In This Article
Sonic Automotive Inc Class A
(SAH)

Sonic Automotive’s SAH second quarter saw all-time record quarterly sales, which were up 4.2% year over year. Adjusted diluted EPS of $1.83, though down 25.3%, beat the $1.65 Refinitiv consensus. We are raising our fair value estimate by $2 to $61 on the time value of money and slightly higher revenue to account for 2023 U.S. light vehicle sales trending higher than our prediction of as much as 14.7 million.

On June 22, the company announced it is temporarily closing eight EchoPark used vehicle stores and delivery centers due to thin supply of used vehicles in certain markets. The July 27 earnings release has the final tally at eight EchoPark stores, 14 EchoPark delivery centers, and three Northwest Motorsports stores in the EchoPark segment. The quarter saw a $75.2 million charge for the closings, which mostly was $62.6 million for an impairment and $10 million for inventory write-off. Management still expects EchoPark to return to breakeven EBITDA in first quarter next year and said it can reopen the closed stores quickly, which we think won’t be until at least second-quarter 2024. Management on the call stressed the remaining stores have sufficient inventory to operate and July inventory turns are the fastest they’ve ever been. It is also good news to hear Sonic say rental car firms left the auction lanes in March, so EchoPark is not competing with them for inventory anymore. The inventory impairment was mostly for vehicles purchased around March because they have depreciated very fast due to new vehicle inventory slowly coming back from the chip shortage.

The franchise store segment only posted a 0.6% operating income decline on less overhead expense and used, finance, and service gross profit growth mostly offsetting an 18.2% retail new vehicle decline. Retail new vehicle volume rose 12.4% but new vehicle gross profit per unit fell 27.2% to $5,003, which is still far above second-quarter 2019′s $2,000.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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