Sonic Automotive (SAH, Financial), a new and used car retailer, saw a sharp increase in its stock after reporting mixed Q2 results. The company faced a $0.64/share hit to its GAAP earnings due to a CDK software outage in June. Additional charges related to storm and hail damage and a real estate impairment further impacted the results. However, on an adjusted basis, SAH reported an adjusted EPS of $1.47, surpassing expectations, with record adjusted EBITDA of $7.2 million in its EchoPark segment.
- The EchoPark segment, which operates through an eCommerce channel and targets the 1-4 year old pre-owned vehicle market, saw a 14% revenue decline to $517.3 million. However, on a same-store basis, EchoPark retail unit sales volumes increased by 23% in Q2, with revenue and gross profit rising by 10% and 81%, respectively.
- In 1Q23, the company reduced its store footprint, allowing for more effective inventory distribution across the platform. This led to higher unit sales volume, improved variable gross profit per unit (GPU), and the second consecutive quarter of positive adjusted EBITDA for EchoPark.
In the Franchised Dealership segment, the outlook is less optimistic.
- Same-store revenue decreased by 3%, and same-store gross profit dropped by 9%. SAH noted that new vehicle inventory levels are rising due to slower sales in the last twelve days of the quarter, ending Q2 with a 59-day supply compared to 50 days at the end of Q1.
- As new vehicle prices decline amid high-interest rates creating affordability issues, SAH expects GPU to continue falling in 2024, exiting Q4 in the low $3,000 range. GPU dropped by 29% in Q2 to $3,590.
- Despite these challenges, SAH reaffirmed its limited guidance for FY24. The company anticipates improved results in the EchoPark segment, including a return to positive adjusted EBITDA for the full year, which will partially offset lower earnings in the franchise dealership segment.
- The CDK outage negatively affected the company's adjusted results due to limited functionality of CDK's lead generation platform and inventory management applications. However, SAH has regained access to these systems.
The main takeaway is that while SAH is not yet performing at its best, it delivered better-than-expected results, driven by accelerating momentum in its EchoPark segment.
