Sonic Automotive warns on second-quarter earnings

BMW and Honda represent about 40 percent of Sonic’s store profits. Shown: Beverly Hills BMW

Sonic Automotive Inc. is warning that its yet-to-be-announced second-quarter earnings were hurt by sinking new-car profit margins at BMW and Honda stores — and it’s more than just a Sonic problem, a top executive for the retailer says.

Reduced incentives on some Honda and BMW vehicles will cut into profit margins for other retailers selling those brands, Jeff Dyke, Sonic’s executive vice president of operations, told Automotive News. If other public automotive retailers say otherwise, “that’s just total baloney,” Dyke said. Five of the six publicly traded new-car dealership groups, including Sonic, are reporting results this week.

Dyke: Accord is underperforming

Sonic’s margins were down a few hundred dollars per vehicle at Honda stores and more than $500 per vehicle at its BMW stores during the second quarter, Dyke said. The two brands represent about 40 percent of Sonic’s store profits. Sonic specifically was hurt by the mix of incentives changing at BMW and a drop in incentives on the Honda Accord, coupled with inventory pressures on that midsize sedan, Dyke said.

U.S. sales of the Accord are down 14 percent through the first half of the year, while the estimated average manufacturer incentive per vehicle dropped to $1,170 on it through the first six months of 2018 compared with $3,419 for the same period in 2017, according to Autodata Corp. The redesigned 2018 Accord went on sale in October, so year-ago figures reflect higher incentives to help sell down inventory of the outgoing version.

“The new model is not performing to expectation further adding pressure on margin,” Dyke wrote in an email to Automotive News.

His comments followed Sonic’s announcement last week that second-quarter and full-year earnings would tumble because of the unexpected drop in BMW and Honda new-vehicle gross profit per unit.

Sonic now expects earnings from continuing operations to fall to between 37 cents and 41 cents a share in the second quarter and to $1.65 to $1.75 a share for 2018. In February, Sonic had said it expected earnings per share from continuing operations to range from $2.21 to $2.45 for all of 2018. The Charlotte, N.C., retailer, which ranks No. 5 on Automotive News‘ list of the top 150 dealership groups based in the U.S. by 2017 new-vehicle retail sales, reports second-quarter earnings Friday, July 27.

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Tougher market

Sonic’s warning likely is a sign of a tougher operating environment as new-vehicle sales plateau, Glenn Chin, director of equity research for Buckingham Research Group, wrote in a note to investors last week.

“The earnings warnings could portend a difficult quarter for the auto retail group (particularly those with heavy BMW/Honda exposure),” Chin wrote.

Chin and Morningstar Inc. analyst David Whiston said Penske Automotive Inc. would have the second-highest exposure to the two brands — and could be the most vulnerable — behind Sonic.

Through the first three months this year, 22 percent of Penske’s total global automotive dealership revenue was tied to BMW and Mini, 6 percent to Honda and 1 percent to Acura, for a total of 29 percent, according to Penske. A Penske spokesman declined to comment ahead of the company’s earnings release Thursday, July 26.

Buckingham says BMW, including Mini, and Honda, including Acura, in 2017 represented 24 percent of revenue exposure for Asbury Automotive Group and Lithia Motors Inc. It was 22 percent for Group 1 Automotive Inc. and 18 percent for AutoNation. Asbury, Lithia and AutoNation have higher exposure to Honda, while Group 1 is higher with BMW.

As part of Sonic’s warning announcement, Dyke said the dealership group expects continued margin pressure on Honda and BMW sales in the third quarter.

“However, we are optimistic that support from our manufacturer partners and highly anticipated new model releases from BMW in the fourth quarter will drive consumer demand and increased profitability on new units,” Dyke said in the statement.

BMW: We’ll talk

Honda’s average incentive spending per vehicle has dropped 16 percent to $1,407 for the first half of 2018 compared with the same period in 2017, according to Autodata.

“Honda continues to maintain its disciplined approach to the market to preserve the value of the brand and the Honda products in the hands of our customers, even as competitors rely increasingly on aggressive discounting and heavy fleet sales that can have a negative impact to resale values,” Honda spokesman Steve Kinkade said in a statement to Automotive News.

BMW, in an emailed statement, said it would talk with Sonic about the situation.

“Dealer profitability is always a major priority for BMW of North America,” the company said.

BMW average incentive per vehicle rose 28 percent to $5,799 in the first six months of the year compared with the first half of 2017, according to Autodata.

Not all analysts think Sonic’s problem will spill over to the other publicly traded retailers.

Rick Nelson of Stephens Inc., in a note to investors last week, wrote: “While new vehicle margins will likely be under pressure, we think there are offsets with other brands, used cars, service/parts and stock buybacks/acquisitions.”

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