CHARLOTTE, N.C. — The record per-copy average Sonic Automotive’s F&I operations delivered in the first quarter added $700,000 to total F&I gross. But those gains were entirely offset by lower overall retail sales.
On a same-store basis, F&I operations increased F&I profit per unit retailed by $11 from a year ago to $1,370. But with same-store new-vehicle retail volume falling 2% from a year ago to 29,563 units sold, total same-store gross profit remained flat with a year ago at $80.9 million. On a continuing operations basis, the group’s F&I per-copy average increased $16 to $1,379, which helped drive up total F&I gross 2.2% from a year ago to a record $83.1 million.
“The first quarter started off very slowly but recovered somewhat in the month of March. In fact, we sold more new vehicles in the month of March than any other March month in the history of Sonic,” said Sonic Vice Chairman David Smith. “But the new-vehicle business continues to be challenging due to a higher level of competition for deals. We were pleased with our performance in used vehicles and those at franchise locations and at our EchoPark stores. Fixed operations also continued to grow, as did F&I.
Sonic generated $10.3 million, or 23 cents per diluted share, in adjusted net income during the quarter, down from $18.2 million, or 39 cents per diluted share, in the year-ago quarter. Smith said results were depressed for two reasons: a 21-cent loss per share related to the group’s redemption of Sonic’s 7% notes during the quarter, and a two-cent loss per share related to storm damage at Sonic’s Texas locations.
The highlight of the quarter was the expansion and performance of the group’s EchoPark concept and stores, although, collectively, they contributed a lost per share of 7 cents during the quarter compared to a five-cent loss in the year-ago period.
Sonic currently operates five EchoPark locations in the Denver market, with a store expected to open in Colorado Springs sometime in the second quarter. The group is also in the process of converting the four AutoMatch USA stores it purchase in October 2016 into EchoPark stores. The used-only stores have locations in Jackson, Ocala, and Fort Meyers, Fla., as well as Savannah, Ga.
The group is also acquiring property in the Texas and Carolina markets. More stores are expected to open in those states this year.
“We’ve already broken ground in San Antonio [and] Dallas, and the Carolinas will be just behind that. We’ll probably get the AutoMatch stores all converted this year and three or four stores opened by the end of the fourth quarter,” Dyke said, adding that the group expects to open 15 to 20 additional stores next year. “So we really made a lot of progress with real estate, a lot of progress with facility and how quickly we can open them.”
Dyke noted that the plan is to have about 400 units of sellable inventory at each converted AutoMatch store.
The executive noted that the group also rolled out the technology, including its automated used-vehicle pricing tool, driving its EchoPark locations into 14 Sonic locations, including a BMW store. He added that the group will monitor the performance of the technology through April, May and June before rolling out more of that technology to other locations.
“We’re very pleased with our CRM tool, our desking tool. We’ve got an appraisal app we’ll introduce to the public here in the coming months,” Dyke said, adding that the group is also working on a new-car pricing tool he described as a “much more complicated venture.”
“But under no circumstance are we backing off of that,” he said, adding that the group also expects to roll out a complete ecommerce site by this time next year. He said customers will be able to purchase a vehicle online, and have it delivered to their place of business, home, or wherever they want to take delivery.
As for the performance of the EchoPark stores, Dyke said it was the first time in a quarter that Sonic sold more pre-owned car than new cars. And he expects that to continue the more the group opens new EchoPark locations.
“So we just couldn't be more excited about where we are with EchoPark,” he said.
The EchoPark stores retailed 1,673 units in the first quarter, up 77.8% from the prior-year quarter. Revenue totaled $42 million, a 40% increase from a year ago. Total gross profit for the EchoPark stores came out to $5 million, a 23.4% increase from a year ago. Operating profit, however, was down 11.5%. Dyke noted the year-over-year improvement in operations for the EchoPark Denver platform was offset by costs associated with the operation and conversion of the group’s AutoMatch stores in Florida.
As for F&I performance at EchoPark stores, F&I profit per unit retail fell $85 from a year ago to $1,176, while gross profit per unit fell by $321 to $1,045.
Consolidated, Sonic posted total revenue of $2.288 billion, a 2.4% increase from a year ago. Gross profit came in at record $350 million, a 1.5% increase from a year ago.
New-vehicle revenue totaled $1.147 million, a 0.2% decline, on 29,870 units sold. Gross profit per new vehicle sold increased $22 from a year ago to $1,958. Used retail revenue totaled $634 million on 30,372 units sold. Gross profit per used unit sold fell $37 from a year ago to $1,344.
Fixed-operations gross profit increased 2% from a year ago to a record $169 million. As for the group’s record F&I performance, Dyke credited Sonic’s new partnership with JM&A. “The training program and support we’re getting from them is fantastic,” he said. “And our F&I margins with an all-time record month in March, we are pacing at an all-time record month in April.”
As for the effects of hailstorms, Dyke said its new McKinney, Texas, BMW store suffered extensive damage. A few weeks later, the group’s stores in Birmingham, Ala., were hit with weather-related damage. More than 1,300 cars also suffered hail damage in late April at the group’s Dallas locations. Dyke noted that the group is in the process of installing hail nets at all those locations as a result of those storms.
“We just had enough of it. We’ve been getting killed every year,” he said.
Dyke described the quarter as up and down, noting that things appeared to be leveling off toward the end of the quarter. Dragging down performance was the group’s energy industry-dependent Houston market, which Dyke said represented 50% to 60% of the profit decline at the store level.
“So there is no question that it is still very competitive, and we’ve got big BMW stores there that are battling with a couple of the other bigger group. And I listened to their calls and their notes, they’re saying the same things,” he said of the group’s Houston market, which he described as “certainly not as bad as it was.”
Dyke also commented on the current incentive battle, noting that things “went berserk” in March after a light January and February. “And so there’s this trend that’s building. You’re going to see a little bit of a lighter month in April and May, but in June, it’ll go berserk once again as the manufacturers try to hold on to that 17 million SAAR,” he said. “And so incentives are all over the board and it changes on the hour.
“If you look at manufacturers’ incentives, they’re inching on past 10% of our MSRP mark and that’s continuing to grow,” he added. “So we’ll see what happens in ’18. I ‘m concerned it’s going to have to get more and more competitive from the manufacturers’ incentive perspective to keep our margins sort of stabilized. I want the rest of the year to play out before I’ll make any further comments on that.”
Originally posted on F&I and Showroom