Debt payoff costs hit Sonic Auto's 2Q net income

Sonic Automotive 2Q earnings fall on debt payoff costs, no-haggle model squeezes profit margin

Associated Press

CHARLOTTE, N.C. (AP) -- Sonic Automotive Inc., which owns over 100 auto dealerships across the country, said Tuesday that its net income sank in the second quarter as it took big charges to pay off some debt and it struggled to boost profit margins with its new no-haggle pricing model.

The company booked $29 million in costs to pay off its 9 percent senior notes that came due in 2018 early, to eliminate future interest payments on that debt. During the quarter Sonic instead secured $300 million in financing at a lower interest rate of 5 percent. Revenue rose nearly 4 percent on sales of new vehicles but Sonic said its profit margins faced "challenges with our True Price process execution."

Shares of Sonic Automotive slipped 41 cents, or about 2 percent, to $22.32 in afternoon trading.

"Training on True Price and the development of our customer experience model and related technologies continued in the second quarter. We are learning a great deal," said Jeff Dyke, executive vice president of operations, in a statement. He did note that some dealerships' brand lines are showing "substantial growth" as they get more experience executing the no-haggle policy. The transition to using new paperless technologies and having salespeople handle each transaction from start to finish is expected to continue for the next 18 months but Dyke said that Sonic's confident that the changes will generate growth opportunities and provide dealerships with a big competitive advantage.

Net income fell to $8.9 million, or 17 cents per share, from $28.2 million, or 47 cents per share, in the year-ago period. The company said it earned 50 cents per share if one-time costs and gains are excluded, up from 44 cents per share a year ago. Revenue rose to $2.20 billion from $2.12 billion, as sales from new vehicles increased 5 percent to $1.25 billion. The Charlotte, N.C., company said revenue from parts, service, collision repair, and finance and insurance also improved, but wholesale revenue slightly declined.

The results missed the expectations of analysts, who had expected net income of 52 cents per share and $2.29 billion in revenue, according to FactSet. However, Sonic reaffirmed its outlook for full-year adjusted earnings of $1.93 to $2.03 per share. Analysts have forecast earnings of $2.01 per share, on average.

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