Why Sonic Automotive expects to report higher Q3 earnings

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Sonic Automotive Inc. said pretax income for July and August surged significantly over the same months a year earlier.

The gains came despite a continued slowdown in new-vehicle sales hampered by limited inventory, as well as slightly lower parts and service gross profit.

Despite low new-vehicle inventories and a dip in August used-vehicle sales, Sonic nonetheless benefited from higher gross profits on the vehicles it is selling and has lowered expenses in the past several months amid the pandemic, helping to drive net income higher.

The nation’s sixth-largest new-vehicle retailer, which has been providing financial updates amid the coronavirus pandemic, said Tuesday it expects to report third-quarter earnings per share from continuing operations between $1.08 and $1.15. That would be an increase of 64 to 74 percent from the same period in 2019.

“We are very pleased with our operating performance in the third quarter to date, continuing our recovery from the challenges our industry faced earlier this year,” Sonic CEO David Smith said in a statement.

“Consumer demand for new and used vehicles and parts and service repair work has continued to improve steadily in recent weeks, particularly when factoring in the timing of this year’s Labor Day weekend sales compared to the prior year.

“Additionally, our commitment to increasing operating efficiency at both our franchised and EchoPark stores continues to drive enhanced profitability.”

Sonic said pretax income in July surged 135 percent from the same month a year earlier, while August’s pretax income jumped 69 percent.

Same-store new-vehicle sales tumbled 17 percent in July and fell 21 percent in August, Sonic said, adding that month-to-date sales in September dropped 9 percent. The company said it faces ongoing inventory issues with some makes and models, which has limited sales volume but has benefited gross profit per vehicle in the third quarter.

At its franchised dealerships, used-vehicle sales slipped 5 percent in July and 9 percent in August. Month to date in September, used sales are up 6 percent.

Parts and service gross profit slipped 4 percent in July and 10 percent in August, but it has gained 2 percent month to date in September. The company said it expects parts and service gross profit to return to pre-COVID-19 levels by early 2021.

At its used-vehicle-only EchoPark stores that can be compared on a same-store basis, sales rose 3 percent in July, fell 10 percent in August and have improved 13 percent so far in September. When including all EchoPark stores, sales increased 19 percent in July and 4 percent in August and have surged 36 percent in September, month to date.

The company said its August used-vehicle sales were lower than forecast at franchised and EchoPark stores. Sonic said it faced a “rare disconnect between wholesale and retail market pricing in August,” and that led to a “temporary slowdown in inventory turns and retail volume.”

Sonic shares rose 1.8 percent to $42.09 in morning trading on Wall Street.

Sonic, of Charlotte, N.C., ranks No. 6 on Automotive News’ list of the top 150 dealership groups based in the U.S., retailing 114,131 new vehicles in 2019. It retailed 162,149 used vehicles for the same period, ranking it No. 6 on Automotive News’ list of the top 100 retailers ranked by used-vehicle sales.

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