Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and "Item 1A. Risk Factors" in this report, as well as the consolidated financial statements and related notes thereto, "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Except to the extent that differences among operating segments are material to an understanding of our business taken as a whole, we present the discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis. Overview We are one of the largest automotive retailers inthe United States (the "U.S.") (as measured by total revenue). As a result of the way we manage our business, we had two reportable segments as ofJune 30, 2020 : (1) the Franchised Dealerships Segment and (2) the EchoPark Segment. For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into "stores." As ofJune 30, 2020 , we operated 85 stores in the Franchised Dealerships Segment and 10 stores in the EchoPark Segment. The Franchised Dealerships Segment consists of 98 new vehicle franchises (representing 21 different brands of cars and light trucks) and 15 collision repair centers in 12 states. The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, "Fixed Operations"); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, "finance and insurance" or "F&I") for our customers. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our customers in pre-owned vehicle specialty retail locations. Our EchoPark business operates independently from our franchised dealerships business. As ofJune 30, 2020 , we had three EchoPark stores in operation inColorado , four inTexas , one inNorth Carolina , one inCalifornia and one inFlorida . By the end of 2020, we expect to open three additional EchoPark stores. We believe that the continued expansion of our EchoPark business will provide long-term benefits to the Company, our stockholders and our guests. The COVID-19 pandemic negatively impacted the global economy beginning in the first quarter of 2020. During the first half of 2020, the impact on the economy affected both consumer demand and supply of manufactured goods as many countries around the world and states in theU.S. mandated restrictions on citizen movements (i.e., shelter-in-place or stay-at-home orders) or on retail trade or manufacturing activities at physical locations. As a result, many businesses curtailed operations and furloughed or terminated many positions. Our management team took various actions in an attempt to mitigate the financial impact of COVID-19 on our business during the first half of 2020. We placed approximately 1,700 teammates on unpaid leave (most of whom have returned to work), terminated an additional 1,200 teammates and implemented additional compensation expense reductions. We also took actions to reduce our advertising expenses and other spending, and postponed certain capital expenditures. We also took steps to improve our liquidity position as we navigated the early stages of the COVID-19 pandemic. All of our store operations have been impacted by the crisis to varying degrees. As ofMarch 31, 2020 , the majority of our stores were not permitted to conduct retail sales of new and used vehicles at our physical locations. Those locations could offer virtual sales transactions with "contactless" delivery to customers. As ofJune 30, 2020 , most of such restrictions have been relaxed; however, our stores remain subject to certain health and safety policies and practices that may affect the way we sell vehicles and interact with our guests. Due to the critical nature of automotive repair, our fixed operations were deemed "essential" by governmental agencies and have been able to continue to conduct business throughout the pandemic to date, but must maintain certain local standards for social distancing to promote the health and safety of our teammates and guests. As a result of these restrictions and their effect on consumer behavior, in the last several weeks ofMarch 2020 , we experienced 30%-50% declines in unit sales of new and used vehicles (as compared to the prior year period) and 15%-30% reductions in repair order activity in fixed operations. The entire month ofApril 2020 was more severely impacted, with new and used vehicle same store unit sales volume 30%-40% below the prior year period and fixed operations same store gross profit approximately 45% below the prior year period. Beginning inMay 2020 , new and used vehicle unit sales volume and fixed operations repair activity began to improve as state and local jurisdictions relaxed their shelter-in-place or stay-at-home orders and consumer activity began to recover. For the month ofJune 2020 , new vehicle same store unit sales volume was down approximately 15%, used vehicle same store unit sales volume was up approximately 9%, and fixed operations same store gross profit was down approximately 2% compared to the prior year period. 24 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The effects of the COVID-19 pandemic continue to evolve. While we currently expect to see continued recovery in the second half of 2020, the outbreak may cause changes in customer behaviors, including a potential reduction in consumer spending for vehicles and automotive repairs. We have begun to see shortages of new vehicle inventory at the end of June and lack of supply of these vehicles may impact our operations in the third quarter. If there is a second wave of shutdowns in the second half of the year due to the continuous outbreak of COVID-19, we would again expect to face headwinds on the demand side of our business. In addition, uncertainties in the global economy may negatively impact our suppliers and other business partners, which may interrupt our supply chain and require other changes to our operations. These and other factors may adversely impact our revenues, operating income and earnings per share financial measures. Executive Summary TheU.S. retail automotive industry's total new vehicle (retail and fleet combined) seasonally adjusted annual rate of sales ("SAAR") decreased 33.5% and 22.9%, to 11.3 million and 13.1 million vehicles, in the three and six months endedJune 30, 2020 , respectively, compared to 17.0 million vehicles in both the three and six months endedJune 30, 2019 , according to data fromBloomberg Finance L.P. , provided byStephens Inc. Prior to COVID-19, analysts' industry expectation for the total new vehicle SAAR in 2020 ranged from 16.0 million to 17.0 million vehicles. It is difficult to anticipate what the total new vehicle SAAR may be in 2020 and beyond due to the rapidly evolving circumstances around the COVID-19 pandemic and related economic impact. Further changes in consumer confidence, unemployment levels, availability of consumer financing, manufacturer inventory production levels or incentive levels from automotive manufacturers or government programs could cause actual 2020 total new vehicle SAAR to vary. Many factors, including brand and geographic concentrations as well as the industry sales mix between retail and fleet new vehicle unit sales volume, have caused our past results to differ from the industry's overall trend. Since we do not participate in any material manner in fleet sales, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle SAAR (which excludes fleet new vehicle sales). According to thePower Information Network ("PIN") fromJ.D. Power , retail new vehicle SAAR was 10.4 million vehicles for the three months endedJune 30, 2020 , a decrease of 23.0% from 13.5 million vehicles in the prior year period, and 11.0 million vehicles for the six months endedJune 30, 2020 , a decrease of 16.0% from 13.1 million vehicles in the prior year period. As a result of the disposition, termination or closure of several franchised dealerships and EchoPark stores during and since the period endedJune 30, 2019 , the change in consolidated reported amounts from period to period may not be indicative of the actual operational or financial performance of our current group of operating stores. Please refer to the same store tables and discussion on the following pages for more meaningful comparison and discussion of financial results on a comparable store basis. Unless otherwise noted, all discussion of increases or decreases are for the three and six months endedJune 30, 2020 and are compared to the same prior year period, as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net are on a same store basis, except where otherwise noted. All currently operating stores (both our franchised dealerships and EchoPark stores) are included within the same store group in the first full month following the first anniversary of the store's opening or acquisition. See the "Future Liquidity Outlook" section for further discussion related to actions taken to preserve and increase liquidity. Franchised Dealerships Segment New vehicle revenue decreased 21.8% and 13.8% during the three and six months endedJune 30, 2020 , respectively, primarily driven by a 24.6% and 15.9% decrease in new vehicle unit sales volume, respectively. New vehicle gross profit decreased 18.1% and 15.1% during the three and six months endedJune 30, 2020 , respectively, despite an 8.6% and 0.9% increase in new vehicle gross profit per unit, respectively. New vehicle gross profit per unit increased$176 per unit, or 8.6%, to$2,218 per unit in the three months endedJune 30, 2020 , and increased$20 per unit, or 0.9%, to$2,153 per unit in the six months endedJune 30, 2020 , due primarily to inventory shortages in certain makes and models as a result of vehicle manufacturer supply chain and production delays as a result of the COVID-19 pandemic, which generally increases the average selling price of such vehicles. Retail used vehicle revenue decreased 12.2% and 7.1% during the three and six months endedJune 30, 2020 , respectively, primarily driven by an 11.7% and 5.2% decrease in retail used vehicle unit sales volume, respectively. Retail used vehicle gross profit decreased 23.6% and 12.5% during the three and six months endedJune 30, 2020 , respectively, primarily driven by a decrease in retail used vehicle gross profit per unit during both the three and six months endedJune 30, 2020 . Retail used vehicle gross profit per unit decreased$176 per unit, or 13.6%, to$1,122 per unit in the three months endedJune 30, 2020 , and decreased$100 per unit, or 7.8%, to$1,186 per unit in the six months endedJune 30, 2020 , as a result of strategic vehicle pricing decisions made in March throughJune 2020 to address lower demand as a result of the COVID-19 pandemic. Wholesale vehicle gross loss decreased approximately$0.1 million , or 24.7%, during the three months endedJune 30, 2020 . 25 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wholesale vehicle gross loss per unit was flat during the three months endedJune 30, 2020 . Wholesale vehicle gross loss decreased approximately$1.0 million , or 73.6%, during the six months endedJune 30, 2020 , primarily driven by a decrease in wholesale vehicle gross loss per unit of$71 , or 68.9%. We generally focus on maintaining used vehicle inventory days' supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. On a trailing quarter vehicle cost of sales basis, our reported franchised dealerships used vehicle inventory days' supply was approximately 25 and 27 days as ofJune 30, 2020 and 2019, respectively. Fixed Operations revenue decreased 24.5% and 11.9% during the three and six months endedJune 30, 2020 , respectively, driven primarily by lower consumer demand for repairs as a result of shelter-in-place or stay-at-home orders related to the COVID-19 pandemic. Fixed Operations gross profit decreased 24.4% during the three months endedJune 30, 2020 , driven primarily by a 16.0% decrease in customer pay (as hereinafter defined) gross profit. Fixed Operations gross profit decreased 11.6% during the six months endedJune 30, 2020 , driven primarily by a 5.6% decrease in customer pay gross profit. Fixed Operations gross margin was flat during the three months endedJune 30, 2020 . Fixed Operations gross margin increased 10 basis points, to 48.9%, during the six months endedJune 30, 2020 , driven primarily by an increase in customer pay gross margin. F&I revenue decreased 8.3% and 1.1% during the three and six months endedJune 30, 2020 , respectively, driven primarily by a 17.6% and 10.5% decrease in retail unit sales volume during the three and six months endedJune 30, 2020 , respectively. F&I gross profit per retail unit increased$176 per unit, or 11.3%, to$1,730 per unit, in the three months endedJune 30, 2020 . F&I gross profit per retail unit increased$161 per unit, or 10.5%, to$1,699 per unit, in the six months endedJune 30, 2020 . We believe that our proprietary software applications, playbook processes and customer-centric selling approach enable us to optimize F&I gross profit and penetration rates (the number of F&I products sold per vehicle) across our F&I product lines. We believe that we will continue to increase revenue in this area as we refine our processes, train our teammates and continue to sell a high volume of retail new and used vehicles at our stores. EchoPark Segment Retail used vehicle revenue decreased 2.2% during the three months endedJune 30, 2020 , driven primarily by a 6.9% decrease in retail used vehicle unit sales volume. Retail used vehicle revenue increased 9.3% during the six months endedJune 30, 2020 , driven primarily by a 4.8% increase in retail used vehicle unit sales volume. Combined retail used vehicle and F&I gross profit per unit decreased$109 per unit, or 5.2%, to$1,968 per unit during the three months endedJune 30, 2020 . Combined retail used vehicle and F&I gross profit per unit decrease$104 per unit, or 4.8%, to$2,076 per unit during the six months endedJune 30, 2020 . The decrease in combined retail used vehicle and F&I gross profit per unit was a result of strategic vehicle pricing decisions made in March throughJune 2020 to address lower demand as a result of the COVID-19 pandemic. We believe the EchoPark Segment experienced less significant vehicle unit sales volume decreases than the Franchised Dealerships Segment's retail used vehicle business due to the below-market pricing and "nearly-new" vehicle offerings provided by the EchoPark model, which appealed to more consumers during this period of economic uncertainty. Wholesale vehicle gross loss was flat for both the three and six months endedJune 30, 2020 . We generally focus on maintaining used vehicle inventory days' supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. On a trailing quarter vehicle cost of sales basis, our used vehicle inventory days' supply at our EchoPark stores was approximately 38 and 31 days as ofJune 30, 2020 and 2019, respectively, above our target range as ofJune 30, 2020 due to lower than typical vehicle unit sales volume in April andMay 2020 and our newTampa, Florida store which opened inApril 2020 . Results of Operations - Consolidated The following tables list other items of interest that affected reported amounts in the accompanying unaudited condensed consolidated statements of operations:
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