Morningstar | Sonic's 4Q BMW and Honda Issues Should Not Be as Severe in 2019
Sonic Automotive's fourth-quarter results on Feb. 20 did not have major surprises, since it had already announced some results on Feb. 15. Adjusted diluted EPS from continuing operations of $0.76 was in the range provided on Feb. 15 of $0.74-$0.78, and we see no reason to change our fair value estimate. We will reassess all valuation assumptions in March when we process the latest 10-K into our model. Total revenue fell 3.5% year over year, and same-store new-vehicle revenue fell by 6.7%, while same-store used-vehicle revenue grew 9.9%.On Feb. 15, management warned that fourth-quarter business in BMW and Honda stores, which make up about 40% of volume and profits, was disappointing. BMW incentive levels were not what management expected for the holiday season. Management confirmed our theory that the rise of the Tesla Model 3 hurt BMW sales, especially in California, Sonic's largest market at 28% of full-year revenue. BMW's incentive issues may cause choppy results in early 2019, but the new X7 coming this year should do well. Honda had low supplies of Civic and incentive issues on Accord, but management feels its Honda problems are behind it.
Sonic expects new-vehicle volatility to make 2019 challenging, but is also confident that used vehicles and finance and insurance will more than offset it. The stand-alone used-vehicle stores, EchoPark, are expected to offset new-vehicle declines, as well. EchoPark contributed negative $0.34 of EPS in full-year 2018 versus a negative $0.26 in 2017. EchoPark is making progress, though, with fourth-quarter unit volume up 95% from fourth-quarter 2017, and a North Carolina store that opened in the fourth quarter was profitable by its second month. Full-year volume rose 177% to 29,437. EchoPark's full-year gross profit more than doubled to $58 million, while its operating loss was about flat at $16 million. Sonic officially expects EchoPark to narrow its loss in 2019, but President Jeff Dyke sounded optimistic on a profit.
Sonic said in its latest release that because of EchoPark expansion and expected new-vehicle volatility, it will no longer provide annual EPS guidance. The company in the first quarter of 2019 reduced its corporate and regional staff by 6% and thinks it can find more cost savings as 2019 unfolds, but no specifics were given beyond selling, general, and administrative savings of about $20 million, including the layoffs. Management also said that starting in 2019, it will only report GAAP results. AutoNation, the largest U.S. auto dealer, also only reports GAAP, and the impact for Sonic will be the inclusion of large noncash items from time to time, such as franchise impairments or gains and losses from sales of stores. Management said on the call that eliminating adjusted earnings will be easier for SEC compliance.
Sonic Automotive is an automotive retailer in the United States. The company has two reportable segments: the Franchised Dealerships Segment and the EchoPark Segment. The Franchised Dealerships segment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle maintenance, warranty and repair services, and arrange finance and insurance products. The EchoPark segment is comprised of pre-owned vehicle retail locations that provide customers an opportunity to search the company's nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell their vehicle to the company
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