CHARLOTTE, N.C. — F&I, used retail sales, and fixed ops helped dampen the year-over-year declines in volume and gross profit per unit (GPU) retailed for Sonic Automotive during the third quarter.
The year-over-year improvements coming from those segments helped offset the negative impacts of stop-sale vehicles, weak BMW brand performance, and weakness in one of the group's most profitable markets, with total gross profit declining 0.3% from a year ago to $359 million.
“As many of our competitors have already explained, the third quarter was operationally challenging, given the GPU pressures in both new and used vehicles,” said Scott Smith, CEO and co-founder of Sonic Automotive. “Record performances in pre-owned, fixed ops, and F&I areas served to lessen the effect of lower gross generated from the front-end of our business.”
The group's F&I operations averaged $1,341 per copy on a same-store basis during the period, a 5.1% increase from a year ago. Despite a year-over-year decline in new-vehicle volume, the growth in F&I profit per vehicle retailed (PVR) was substantial enough to produce $88.6 million in total F&I gross profit, a 4.2% increase over the same time last year.
New-vehicle sales lagged by 3.2% from a year ago, with 35,957 new vehicles sold during the third quarter. The average selling price increased 4.2% from a year ago to $38,173, however, the difference was not enough to offset the 1.5% reduction — $1,719 compared to $1,745 in the year-ago period — in gross profit per unit. Overall, the segment generated $61.8 million on a same-store basis, a 4.7% decline from the prior-year period.
The same was true for overall gross profit generated by the group's used-vehicle operations. Total gross profit from used vehicles amounted to $39.9 million, 4.5% less than the year before. Gross profit per-unit was also down, falling 5.6% from a year ago to $1,310 per used vehicle sold. The group did post a 1.3% same-store increase in used-vehicle sales, which totaled 30,433 units during the period. However, that growth in volume was not enough to offset the decline in gross profit per used-vehicle sold.
“We believe the impact of stop-sales vehicles affecting both new and used vehicles, continued weakness in our Houston market and overall BMW brand performance negatively impacted earnings during the quarter,” Smith said. “We are cautiously optimistic about the fourth quarter, as our luxury mix historically has made the last quarter of the year much more profitable than the other quarters.”
In 2015, Houston accounted for 21% of the dealer group’s revenue. It’s a vital part of the dealer group’s business, so trouble in that part of the country can have big effects on the group’s overall performance. In the third quarter, the market presented particularly difficult challenges due to it being in an energy-dependent state and because it houses the group's valuable BMW stores.
“There's no question that, for us, Houston's a big double whammy because you not only have the energy sector issues that are going on there, but also we've got a lot of highline stores there, ... two big, big BMW stores that generate a lot of profitability for us ...,” said Jeff Dyke, executive vice president of operations.” “And so, when you add on the amount of volume that they do, the stop-sale cars ... Houston was a bit of a train wreck for us for the quarter.”
Dyke added that the difficulties with BMW sales mostly stemmed from the lack of incentives coming from the manufacturer since June. “So goes BMW, so goes Sonic Automotive,” he said, adding that the new stair-step incentives the automaker typically rolls out during the holiday season should boost BMW sales in Houston and for the group overall.
The executive also touched on the group's EchoPark stores, noting that the group's two new locations in the Denver market were cash-flow positive during the quarter. Those stores, which employ a one-touch sales and F&I process, also increased F&I PVR by 16.3% from a year ago to $1,078.
Unit sales also increased for those stores, rising 58.5% from a year ago 1,458 units sold. Gross profit was also up, increasing 44.8% from a year ago to $4.2 million. However, gross profit on a per-unit basis declined 31.2% from a year ago to $1,011.
Dyke defended that per-unit decline, stating that it’s a balancing act to move units. Although their profits coming from the vehicles themselves might have been down, the F&I per-copy increase essentially kept profits flat from a year ago, he noted.
“It's just our pricing system saying, listen, in order to generate the most volume and the most gross, you're going to need to adjust your pricing down,” Dyke said. “It's our system adjusting the pricing on its own. Our system's doing that. And so, it's keeping our gross and our volume where it needs to be. And we're filing the data. The data is telling us out of the system where we need to price.”
Originally posted on F&I and Showroom