Sonic looks to parts and service for higher margins

Sonic Automotive Inc., the nation’s No. 2 dealership chain, is making up for softer car sales by focusing more on parts, service and collision work.

B. Scott Smith, Sonic's president and COO, says, "Our Company has responded aggressively to the slow-down in vehicle sales and outperformed expectations for the first quarter.

“Our performance, as well as performance of other auto retailers during a quarter of cyclical declines in new vehicle sales, compares favorably to performance by auto manufacturers and auto parts manufacturers. This performance conclusively demonstrates the value of our variable cost structure and non-cyclical consumer service and parts offerings.

He says Sonic expects new-vehicle unit volumes to continue at a rate below the prior year, “and we have adjusted our operations to reflect the lower expected demand.”

Parts, service, and collision repair revenues represented 12.3% of total revenue this quarter compared to 11.3% for the first quarter last year.

Gross margin for those revenue lines was 45.3% in the current quarter compared to 44.1% for the first quarter last year, an increase of 2.7%. Finance and insurance revenues increased 7.0% and finance and insurance revenues per unit increased 7.1%.

Mr. Smith says, "Despite a more challenging operating environment we were able to post solid operating results this quarter. As expected, we saw slight declines in new-vehicle gross margins as we reduced inventories.

“However, we were able to increase margins in the higher margin parts and service segments of our business. We did exactly what we promised at the end of the fourth quarter -- we reduced our inventory levels and controlled our variable costs. We believe the inventory correction stage of this vehicle sales cycle is behind us at Sonic."

Sonic saw net income of $13.5 million, or 33 centers per diluted share, for the first quarter ended March 31, exceeding consensus estimates of 23 cents a share.

This compares to net income of $17.4 million, or 39 cents per diluted share for the quarter ended March 31, 2000. Net income before goodwill amortization expense for the quarter was 40 cents per diluted share. Under proposed accounting guidance which is expected to be finalized in the second half of 2001, net income will no longer be reduced by goodwill amortization expense.

Given the current quarter's results, Sonic is raising expectations and targeting earnings per share for the year ending December 31, 2001 of $1.55 to $1.59 and earnings per share for the second quarter of 2001 of $0.42 to $0.45.

Total revenues for the quarter were $1.5 billion, a 5.2% increase from the first quarter of last year and a 6.6% increase from the fourth quarter of last year.

Mr. Smith says there was a marked differentiation between the performance of domestic and import brands -- particularly Toyota, Lexus and BMW.

Sonic’s brand portfolio, with an emphasis on luxury brands, was a major factor in the consolidator’s ability to sustain above-average industry profit margins in the quarter, says Mr. Smith.

“Although our California markets were not as strong as some other regions, our emphasis on luxury and import brands in these markets was reflected in our performance,” says Jeffrey C. Rachor, Sonic’s executive v.p. of retail operations.