Morningstar | Sonic's Second Quarter Not a Surprise Given July 17 Guidance Cut but EchoPark Turning a Corner
Sonic Automotive announced second-quarter results on July 17, so there were not many surprises in its official July 27 earnings release, and we are leaving our fair value estimate in place. Adjusted diluted EPS from continuing operations came in at $0.35, within the July 17 guidance of between $0.32 and $0.36. Full-year guidance was maintained from July 17 guidance of $1.90-$2.00 versus previous guidance of $2.21-$2.45. As discussed in our July 18 note, Sonic experienced a major shortfall in factory-to-dealer incentives from Honda (mostly for the Accord) and from BMW. These are Sonic's two largest automaker partners, together making up nearly 40% of new-vehicle revenue. The Accord shortfall on a per-vehicle basis was at times as much as $2,000, while BMW's shortfall varied by vehicle and was about $575 to $600 per unit. Management does not expect these margin pressures to significantly abate in the third quarter. But it does expect help from new BMW models launching in the fourth quarter and also expects Honda to eventually increase payouts to help Accord against the better-selling Toyota Camry.Management provided interesting commentary on the stand-alone used-vehicle business EchoPark. The seven-store business is going to lose about $15 million this year but is profitable at the store level. Management expects about a $30 million favorable swing in 2019 to a $15 million profit. EchoPark currently has seven stores across Colorado and Texas but will open four more by the end of 2019. We were pleased to hear management state on the call that they are going to systemically grow EchoPark to be more profitable rather than quickly open a lot of stores knowing they will lose money for a long time.
When management first announced EchoPark in October 2013, we assumed there'd be a lot of capital outlay with returns far off in the future, but it looks like Sonic will finally soon see the start of a new profit center next year. Moving into used vehicles makes sense because it is a highly fragmented space and dealers have traditionally not effectively managed inventory and pricing, resulting in auctioning off used vehicles that should be retailed at stores.
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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