Sonic Enters the Powersports Market and Ends 2022 in a Solid Position

Sonic Automotive had a good quarter to end 2022, with adjusted diluted EPS down 1.9% year over year to $2.61 but still beating the $2.22 Refinitiv consensus. We retain our fair value estimate but will revisit all modeling assumptions after the 10-K is filed. Sonic finished 2022 with $804.5 million of liquidity and throughout 2022 repurchased 14% of its outstanding shares. Total company year-over-year gross profit growth of 8.6% benefited from an 18.9% rise in service dollars and 14.9% growth in finance, the latter is a 100% gross profit business. New vehicle retail gross profit grew only 4.6% while that of used vehicle, including the EchoPark standalone stores, declined by 23.8% on continued high procurement costs for inventory. We expect used vehicle affordability to improve throughout 2023 as the chip shortage improves to increase new vehicle inventory, which in turn should grow used vehicle supply via more trade-ins. EchoPark remains unprofitable in this tough used vehicle retailing environment, losing $33.3 million pretax excluding an impairment charge. Segment used vehicle unit volume rose 11% but fell 6% on a same-store basis. Management likes the results of expanding EchoPark’s offerings to vehicles over five years old while procuring more inventory from consumers, so it expects EchoPark to have breakeven EBITDA in the first quarter of 2024. A new segment, powersports, offers long-term upside too.