CHARLOTTE, N.C. -

Thanks to gains in retail revenue — especially for used vehicles — Sonic Automotive posted an uptick in third-quarter adjusted earnings from continuing operations.

Company executives reported Tuesday the earnings climbed to 27 cents per diluted share, up from 26 cents during the same quarter last year.

“Our total revenues were up approximately 9 percent over a prior year quarter that included the positive effects of the Cash for Clunkers program,” stated company president Scott Smith.

How Sonic arrived at that overall revenue growth level was through a 20-percent rise in used-vehicle retail revenue and a 4-percent climb in new-vehicle retail revenue.

Jeff Dyke, Sonic’s executive vice president of operations, went into great detail about how crucial used vehicles are to the company’s financial bottom line.

“Our 20-percent growth in used-vehicle revenue was fueled by 15-percent volume growth along with a 5-percent increase in the average selling price,” explained

“Every quarter we move closer to our near-term goal of 100 used vehicles per store per month,” he continued. “We have seen our average grow by approximately 30 vehicles per dealership since we started this process.

“Increasing that average at each dealership by another 25 vehicles per month would add over $600 million in annual revenue based on this quarter’s average selling price,” Dyke went on to say. “That’s why we remain convinced that our focus on portfolio maximization and internal growth is the right strategy at this point in our company’s evolution."

After the used-vehicle discussion, Dyke also touched on how Sonic compiled gains on new units.

“We are pleased with the growth in our new vehicle revenue given that our strong import and luxury brand mix benefited in such a big way from the Cash for Clunkers program last year,” Dyke noted.

Service Revenue Growth Continues in Key Profit Center

Sonic calculated that its service, parts and body shop revenue for the third quarter was up nearly 6 percent compared to the prior-year quarter.

“Our customer pay business was up 4 percent, and we saw some stabilization in our warranty repair business,” Dyke highlighted.

“We have seen steady growth in this high margin piece of our business all year and, if these trends continue, our current group of stores is on track to deliver their highest annual fixed operations gross profit,” he added. “We have several exciting pilot programs underway to drive more customer traffic in this key area of our business.”

Update on Cash and Debt

During the third quarter, Sonic said it completed the redemption of $20 million of its 8.625-percent senior subordinated notes. The company also recently announced the planned redemption of the remaining $16 million of its 4.25-percent convertible notes.

“The $49 million of debt repurchases which we will have completed this year will save us $3.5 million in annual cash interest expense,” Smith insisted.

“We expect to use our excess cash flow from operations to further reduce our non-mortgage debt over the next several years,” Smith continued. “At the same time, we expect to continue to replace our leased dealerships with mortgaged properties as the opportunity arises.

“With the internal growth opportunities we see in our portfolio maximization strategy, we expect to drive future revenue and profit growth without the risk and capital commitment associated with dealership acquisitions,” he went on to add.

Future Outlook

Smith shed some light on Sonic’s strategy to build upon the financial performance the company enjoyed in the third quarter.

“Our strategy of portfolio maximization is built on utilizing predictable, repeatable and sustainable processes at our dealerships through our operating playbooks,” Smith explained. These playbooks, coupled with the lowest associate turnover rate in our company’s history, are driving our current operating performance. As we increase revenue in a challenging yet improving economic environment, we continue to take steps to control expenses.

We expect to see the results of some recent activity on this front as we progress through the fourth quarter and head into next year,” he concluded.