sah-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________

FORM 10-Q

______________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13395

______________________________________

SONIC AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

______________________________________


Delaware						56-2010790
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

4401 Colwick Road

28211

Charlotte,

North Carolina

(Address of principal executive offices)

(Zip Code)

(704) 566-2400

(Registrant’s telephone number, including area code)

______________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, par value $0.01 per share

SAH

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 29, 2020, there were 30,582,890 shares of the registrant’s Class A Common Stock and 12,029,375 shares of the registrant’s Class B Common Stock outstanding.

UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

This Quarterly Report on Form 10-Q contains, and written or oral statements made from time to time by us or by our authorized officers may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our future objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, results and events, and can generally be identified by words such as “may,” “will,” “should,” “could,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee” and other similar words or phrases.

These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and in “Item 1A. Risk Factors” of this report and elsewhere herein, as well as:

•the number of new and used vehicles sold in the United States as compared to our expectations and the expectations of the market;

•our ability to generate sufficient cash flows or to obtain additional financing to fund our EchoPark expansion, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities;

•our business and growth strategies, including, but not limited to, our EchoPark store operations;

•the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives vehicle manufacturers offer and their ability to design, manufacture, deliver and market their vehicles successfully;

•our relationships with manufacturers, which may affect our ability to obtain desirable new vehicle models in inventory or to complete additional acquisitions or dispositions;

•the adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or EchoPark stores;

•changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements and environmental laws;

•changes in vehicle and parts import quotas, duties, tariffs or other restrictions;

•general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level of consumer spending and consumer credit availability;

•high levels of competition in the retail automotive industry, which not only create pricing pressures on the products and services we offer, but also on businesses we may seek to acquire;

•our ability to successfully integrate potential future acquisitions;

•the rate and timing of overall economic expansion or contraction; and

•the severity and duration of the COVID-19 pandemic and the actions taken by governmental authorities, businesses or consumers in response to the pandemic.

These forward-looking statements speak only as of the date of this report or when made, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission.

SONIC AUTOMOTIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

TABLE OF CONTENTS


			Page
PART I – FINANCIAL INFORMATION			1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Operations	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	72
PART II – OTHER INFORMATION			73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 6.	Exhibits	76
SIGNATURES			78

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars and shares in thousands, except per share amounts)
Revenues:
New vehicles	$	900,003	$	1,204,754	$	1,859,492	$	2,271,088
Used vehicles	808,877		885,627		1,658,930		1,705,992
Wholesale vehicles	33,175		50,039		81,718		104,810
Total vehicles	1,742,055		2,140,420		3,600,140		4,081,890
Parts, service and collision repair	259,058		355,312		593,738		696,742
Finance, insurance and other, net	110,773		118,349		226,064		224,587
Total revenues	2,111,886		2,614,081		4,419,942		5,003,219
Cost of Sales:
New vehicles	(854,617)		(1,148,354)		(1,768,690)		(2,160,892)
Used vehicles	(781,506)		(848,898)		(1,599,428)		(1,632,256)
Wholesale vehicles	(33,601)		(50,752)		(82,303)		(106,789)
Total vehicles	(1,669,724)		(2,048,004)		(3,450,421)		(3,899,937)
Parts, service and collision repair	(134,779)		(184,766)		(311,560)		(362,960)
Total cost of sales	(1,804,503)		(2,232,770)		(3,761,981)		(4,262,897)
Gross profit	307,383		381,311		657,961		740,322
Selling, general and administrative expenses	(230,359)		(294,532)		(512,515)		(541,626)
Impairment charges	(833)		—		(268,833)		(1,952)
Depreciation and amortization	(22,647)		(23,806)		(44,944)		(46,456)
Operating income (loss)	53,544		62,973		(168,331)		150,288
Other income (expense):
Interest expense, floor plan	(6,314)		(12,518)		(16,822)		(25,744)
Interest expense, other, net	(9,797)		(13,628)		(20,762)		(26,481)
Other income (expense), net	—		(5)		100		95
Total other income (expense)	(16,111)		(26,151)		(37,484)		(52,130)
Income (loss) from continuing operations before taxes	37,433		36,822		(205,815)		98,158
Provision for income taxes for continuing operations - benefit (expense)	(6,437)		(10,071)		37,680		(29,058)
Income (loss) from continuing operations	30,996		26,751		(168,135)		69,100
Discontinued operations:
Income (loss) from discontinued operations before taxes	(289)		(213)		(573)		(393)
Provision for income taxes for discontinued operations - benefit (expense)	84		61		166		114
Income (loss) from discontinued operations	(205)		(152)		(407)		(279)
Net income (loss)	$	30,791	$	26,599	$	(168,542)	$	68,821
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	0.72	$	0.62	$	(3.93)	$	1.61
Earnings (loss) per share from discontinued operations	—		—		(0.01)		(0.01)
Earnings (loss) per common share	$	0.72	$	0.62	$	(3.94)	$	1.60
Weighted-average common shares outstanding	42,940		43,066		42,779		42,953
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	0.71	$	0.62	$	(3.93)	$	1.60
Earnings (loss) per share from discontinued operations	—		(0.01)		(0.01)		—
Earnings (loss) per common share	$	0.71	$	0.61	$	(3.94)	$	1.60
Weighted-average common shares outstanding	43,575		43,230		42,779		43,060

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Net income (loss)	$	30,791	$	26,599	$	(168,542)	$	68,821
Other comprehensive income (loss) before taxes:
Change in fair value of interest rate swap and interest rate cap agreements	419		(1,400)		780		(3,748)
Amortization of terminated interest rate swap agreements	(835)		(632)		(1,632)		(921)
Total other comprehensive income (loss) before taxes	(416)		(2,032)		(852)		(4,669)
Provision for income tax benefit (expense) related to components of other comprehensive income (loss)	161		620		325		1,396
Other comprehensive income (loss)	(255)		(1,412)		(527)		(3,273)
Comprehensive income (loss)	$	30,536	$	25,187	$	(169,069)	$	65,548

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30, 2020		December 31, 2019
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	115,724	$	29,103
Receivables, net	322,703		432,742
Inventories	1,176,506		1,517,875
Other current assets	124,170		37,890
Total current assets	1,739,103		2,017,610
Property and Equipment, net	1,112,873		1,097,247
Goodwill	207,791		475,791
Other Intangible Assets, net	64,300		64,300
Operating Right-of-Use Lease Assets	341,410		337,842
Finance Right-of-Use Lease Assets	38,513		34,691
Other Assets	91,435		43,554
Total Assets	$	3,595,425	$	4,071,035

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable - floor plan - trade	$	603,211	$	860,871
Notes payable - floor plan - non-trade	614,102		678,223
Trade accounts payable	105,784		135,217
Operating short-term lease liabilities	44,739		43,332
Finance short-term lease liabilities	1,243		1,564
Accrued interest	13,341		10,830
Other accrued liabilities	293,714		266,211
Current maturities of long-term debt	72,043		69,908
Total current liabilities	1,748,177		2,066,156
Long-Term Debt	677,488		636,978
Other Long-Term Liabilities	75,344		73,746
Operating Long-Term Lease Liabilities	307,528		304,151
Finance Long-Term Lease Liabilities	40,274		36,313
Deferred Income Taxes	1,912		8,927
Commitments and Contingencies
Stockholders’ Equity:
Class A Convertible Preferred Stock, none issued	—		—
Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 65,603,746 shares issued and 30,965,255 shares outstanding at June 30, 2020; 64,733,667 shares issued and 31,105,000 shares outstanding at December 31, 2019	656		647
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at June 30, 2020 and December 31, 2019	121		121
Paid-in capital	761,293		755,904
Retained earnings	613,033		790,158
Accumulated other comprehensive income (loss)	(2,589)		(2,062)
Treasury stock, at cost; 34,638,491 Class A Common Stock shares held at June 30, 2020 and 33,628,667 Class A Common Stock shares held at December 31, 2019	(627,812)		(600,004)
Total Stockholders’ Equity	744,702		944,764
Total Liabilities and Stockholders’ Equity	$	3,595,425	$	4,071,035

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Class A Common Stock				Class A Treasury Stock					Class B Common Stock						Paid-In Capital		Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
	(Dollars and shares in thousands, except per share amounts)
Balance at March 31, 2019	64,677	$	647	(33,625)	$	(599,956)	12,029	$	121	$	747,920	$	701,182	$	2,372	$	852,286
Shares awarded under stock compensation plans	51	—		—	—		—	—		—		—		—		—
Purchases of treasury stock	—	—		(4)	(48)		—	—		—		—		—		(48)
Effect of cash flow hedge instruments, net of tax benefit of $620	—	—		—	—		—	—		—		—		(1,412)		(1,412)
Restricted stock amortization	—	—		—	—		—	—		2,612		—		—		2,612
Net income (loss)	—	—		—	—		—	—		—		26,599		—		26,599

Class A dividends declared ($0.10)	—	—		—	—		—	—		—		(3,109)		—		(3,109)
Class B dividends declared ($0.10)	—	—		—	—		—	—		—		(1,203)		—		(1,203)
Balance at June 30, 2019	64,728	$	647	(33,629)	$	(600,004)	12,029	$	121	$	750,532	$	723,469	$	960	$	875,725


	Class A Common Stock				Class A Treasury Stock					Class B Common Stock						Paid-In Capital		Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
	(Dollars and shares in thousands, except per share amounts)
Balance at March 31, 2020	65,199	$	652	(34,364)	$	(621,290)	12,029	$	121	$	758,327	$	586,511	$	(2,334)	$	721,987
Shares awarded under stock compensation plans	405	4		—	—		—	—		(5)		—		—		(1)
Purchases of treasury stock	—	—		(274)	(6,522)		—	—		—		—		—		(6,522)
Effect of cash flow hedge instruments, net of tax benefit of $161	—	—		—	—		—	—		—		—		(255)		(255)
Restricted stock and option amortization	—	—		—	—		—	—		2,971		—		—		2,971
Net income (loss)	—	—		—	—		—	—		—		30,791		—		30,791

Class A dividends declared ($0.10)	—	—		—	—		—	—		—		(3,066)		—		(3,066)
Class B dividends declared ($0.10)	—	—		—	—		—	—		—		(1,203)		—		(1,203)
Balance at June 30, 2020	65,604	$	656	(34,638)	$	(627,812)	12,029	$	121	$	761,293	$	613,033	$	(2,589)	$	744,702

SONIC AUTOMOTIVE, INC.

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)



	Class A Common Stock				Class A Treasury Stock					Class B Common Stock						Paid-In Capital		Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
	(Dollars and shares in thousands, except per share amounts)
Balance at December 31, 2018	64,197	$	642	(33,476)	$	(597,623)	12,029	$	121	$	745,052	$	670,691	$	4,233	$	823,116
Shares awarded under stock compensation plans	531	5		—	—		—	—		54		—		—		59
Purchases of treasury stock	—	—		(153)	(2,381)		—	—		—		—		—		(2,381)
Effect of cash flow hedge instruments, net of tax benefit of $1,396	—	—		—	—		—	—		—		—		(3,273)		(3,273)
Restricted stock amortization	—	—		—	—		—	—		5,426		—		—		5,426
Net income (loss)	—	—		—	—		—	—		—		68,821		—		68,821
Cumulative effect of change in accounting principle (1)	—	—		—	—		—	—		—		(7,428)		—		(7,428)
Class A dividends declared ($0.20)	—	—		—	—		—	—		—		(6,209)		—		(6,209)
Class B dividends declared ($0.20)	—	—		—	—		—	—		—		(2,406)		—		(2,406)
Balance at June 30, 2019	64,728	$	647	(33,629)	$	(600,004)	12,029	$	121	$	750,532	$	723,469	$	960	$	875,725



	Class A Common Stock				Class A Treasury Stock					Class B Common Stock						Paid-In Capital		Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
	(Dollars and shares in thousands, except per share amounts)
Balance at December 31, 2019	64,734	$	647	(33,629)	$	(600,004)	12,029	$	121	$	755,904	$	790,158	$	(2,062)	$	944,764
Shares awarded under stock compensation plans	870	9		—	—		—	—		(8)		—		—		1
Purchases of treasury stock	—	—		(1,009)	(27,808)		—	—		—		—		—		(27,808)
Effect of cash flow hedge instruments, net of tax benefit of $325	—	—		—	—		—	—		—		—		(527)		(527)
Restricted stock and option amortization	—	—		—	—		—	—		5,397		—		—		5,397
Net income (loss)	—	—		—	—		—	—		—		(168,542)		—		(168,542)

Class A dividends declared ($0.20)	—	—		—	—		—	—		—		(6,177)		—		(6,177)
Class B dividends declared ($0.20)	—	—		—	—		—	—		—		(2,406)		—		(2,406)
Balance at June 30, 2020	65,604	$	656	(34,638)	$	(627,812)	12,029	$	121	$	761,293	$	613,033	$	(2,589)	$	744,702

(1)See Note 1, “Summary of Significant Accounting Policies,” for further discussion.

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2020		2019
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(168,542)	$	68,821
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	43,462		44,884
Provision for bad debt expense	345		205

Debt issuance cost amortization	1,182		1,189

Stock-based compensation expense	5,397		5,426
Deferred income taxes	(60,035)		(5,560)
Net distributions from equity investee	465		205
Asset impairment charges	268,833		1,952
Loss (gain) on disposal of dealerships and property and equipment	2,364		(46,065)
Loss (gain) on exit of leased dealerships	—		(170)

Changes in assets and liabilities that relate to operations:
Receivables	139,305		82,537
Inventories	341,340		(31,566)
Other assets	(45,013)		(65,637)
Notes payable - floor plan - trade	(257,660)		(67,835)
Trade accounts payable and other liabilities	(43,695)		(45,245)
Total adjustments	396,290		(125,680)
Net cash provided by (used in) operating activities	227,748		(56,859)
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of land, property and equipment	(61,733)		(51,234)
Proceeds from sales of property and equipment	163		2,301
Proceeds from sales of dealerships	(886)		121,337
Net cash provided by (used in) investing activities	(62,456)		72,404
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable - floor plan - non-trade	(64,121)		1,643
Borrowings on revolving credit facilities	460,916		303,235
Repayments on revolving credit facilities	(460,916)		(303,235)
Proceeds from issuance of long-term debt	53,135		—
Debt issuance costs	(1,252)		2
Principal payments and repurchase of long-term debt	(10,423)		(11,715)
Principal payments of long-term lease liabilities	(19,620)		—
Purchases of treasury stock	(27,808)		(2,381)

Issuance of shares under stock compensation plans	1		59
Dividends paid	(8,583)		(6,867)
Net cash provided by (used in) financing activities	(78,671)		(19,259)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	86,621		(3,714)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	29,103		5,854
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	115,724	$	2,140

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Effect of cash flow hedge instruments (net of tax benefit of $325 and $1,396 in the six months ended June 30, 2020 and 2019, respectively)	$	(527)	$	(3,273)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, including amount capitalized	$	34,939	$	53,143
Income taxes	$	79	$	41,305

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements of Sonic Automotive, Inc. and its wholly owned subsidiaries (“Sonic,” the “Company,” “we,” “us” or “our”) for the three and six months ended June 30, 2020 and 2019 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all material normal, recurring adjustments necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The operating results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year or future interim periods, because the first quarter historically has contributed less operating profit than the second and third quarters, while the fourth quarter historically has contributed the highest operating profit of any quarter. Additionally, the ongoing COVID-19 pandemic could impact earnings for the remainder of 2020 and beyond. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019.

COVID 19 – 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 the United States (the "U.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. In the U.S., the government passed several measures through the legislature that were signed by the President and enacted into law. Those measures include the Coronavirus Aid, Relief, and Economic Security Act and the Families First Coronavirus Response Act. Both such acts attempt to provide short-term relief to families and businesses as a result of the economic impacts of the COVID-19 pandemic.

As a result of the pandemic and related shelter-in-place or stay-at-home orders, we have transitioned many of our teammates to remote work arrangements. In situations where a teammate's role does not permit remote work (i.e., service repair technicians), we have implemented staggered work hours and other social distancing measures to promote the health and safety of our teammates and guests. As a result of the systems and infrastructure we had in place prior to the pandemic, we have been able to effectively maintain our back-office operations, financial reporting and internal control processes with minimal disruption.

All of our store operations have been impacted by the crisis to varying degrees. As of March 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 of June 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 of March 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 of April 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 in May 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 of June 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%, in each case when compared to the prior year period.

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. This may lead to increased asset recovery and valuation risks, such as impairment of additional long-lived assets. 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.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Based on the events and circumstances around the COVID-19 pandemic, during the first quarter of 2020, we evaluated our long-lived assets for impairment. This evaluation included reviews of fixed assets and related right-of-use assets, franchise assets and goodwill. As a result of this evaluation, we determined the carrying values of all long-lived assets to be recoverable at March 31, 2020 with the exception of goodwill related to our franchised dealership reporting unit, resulting in a non-cash goodwill impairment charge of $268.0 million. One of the primary factors which contributed to the conclusion that goodwill was impaired was the decline in the market value of Sonic's stock between the announcement date of the pandemic on March 11, 2020 to March 31, 2020. See Note 5 for further discussion.

Recent Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendment in this update replaced the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019. We adopted this ASU as of January 1, 2020 and the effects of this ASU did not materially impact our unaudited condensed consolidated financial statements.

Principles of Consolidation – All of our dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanying unaudited condensed consolidated financial statements, except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

Revenue Recognition – Revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. ASC Topic 606, “Revenue from Contracts with Customers,” applies a five-step model that includes: (1) identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4) allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We do not include the cost of obtaining contracts within the related revenue streams since we elected the practical expedient to expense the costs to obtain a contract when incurred.

Management has evaluated our established business processes, revenue transaction streams and accounting policies, and identified our material revenue streams to be: (1) the sale of new vehicles; (2) the sale of used vehicles to retail customers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service, warranty and other insurance contracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance has occurred, or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components as payments are typically received within a short period of time following completion of the performance obligation(s). Certain retrospective finance and insurance revenue is earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”).

F&I retro revenues are recognized when the product contract has been executed with the end customer and are estimated each reporting period based on the expected value method using historical and projected data, which results in the acceleration of revenue recognition. F&I retro revenues, which represent variable consideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We record revenue when vehicles are delivered to customers, when vehicle service work is performed and when parts are delivered. Conditions for completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonably expected to be collected.

Receivables, net in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 include approximately $4.6 million and $5.1 million, respectively, related to work in process and contract assets related to F&I retro revenues of approximately $8.5 million and $12.9 million, respectively. Changes in contract assets from December 31, 2019 to June 30, 2020 were primarily due to ordinary business activity, including the receipt of cash for amounts earned and recognized in prior periods. Please refer to Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of our revenue recognition policies and processes.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes – The overall effective tax rate from continuing operations was 17.2% and 18.3% for the three and six months ended June 30, 2020, respectively, and 27.4% and 29.6% for the three and six months ended June 30, 2019, respectively. Income tax benefit for the three months ended June 30, 2020 includes a $3.4 million discrete benefit related to the favorable resolution of certain tax matters and other adjustments, offset partially by a $0.3 million discrete charge related to vested or exercised stock compensation awards. Income tax benefit for the six months ended June 30, 2020 includes a $55.8 million benefit, including the effect of non-deductible amounts, related to the $268.0 million goodwill impairment charge, a $0.2 million discrete benefit related to vested or exercised stock compensation awards, and a $0.2 million discrete benefit related to the favorable resolution of certain tax matters, offset partially by a $1.4 million discrete charge related to changes in uncertain tax positions and other adjustments. Income tax expense for the three months ended June 30, 2019 includes a $0.4 million discrete benefit related to the favorable resolution of certain tax matters. Income tax expense for the six months ended June 30, 2019 includes a $1.5 million discrete charge for non-deductible executive officer compensation related to executive transition costs, a $0.2 million discrete charge related to changes in uncertain tax positions and a $0.2 million discrete charge related to vested or exercised stock compensation awards, offset partially by a $0.4 million discrete benefit related to the favorable resolution of certain tax matters. Sonic’s effective tax rate varies from year to year based on the level of taxable income, the distribution of taxable income between states in which the Company operates and other tax adjustments.

Earnings Per Share – The calculation of diluted earnings per share considers the potential dilutive effect of restricted stock units, restricted stock awards and stock options granted under Sonic’s stock compensation plans (and any non-forfeitable dividends paid on such awards).

2. Business Dispositions

We did not dispose of any dealerships during the six months ended June 30, 2020. We terminated one luxury franchised dealership during the six months ended June 30, 2020. We disposed of one luxury franchised dealership and three mid-line import franchised dealerships during the six months ended June 30, 2019 that generated net cash of approximately $121.3 million. The results of operations of each of these terminated or disposed dealerships remain in continuing operations in the accompanying unaudited condensed consolidated statements of operations.

Revenues and other activities associated with terminated or disposed franchised dealerships that remain in continuing operations were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Income (loss) from operations	$	(1,038)	$	225	$	(1,317)	$	(2,200)
Gain (loss) on disposal	(1,117)		(356)		(1,115)		46,394
Lease exit accrual adjustments and charges	—		—		—		170
Pre-tax income (loss)	$	(2,155)	$	(131)	$	(2,432)	$	44,364
Total revenues	$	—	$	100,597	$	6,615	$	216,110

Revenues and other activities associated with terminated or disposed franchised dealerships classified as discontinued operations were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Income (loss) from operations	$	(289)	$	(213)	$	(573)	$	(393)
Pre-tax income (loss)	$	(289)	$	(213)	$	(573)	$	(393)
Total revenues	$	—	$	—	$	—	$	—

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Inventories

Inventories consist of the following:


	June 30, 2020		December 31, 2019
	(In thousands)
New vehicles	$	699,760	$	983,123
Used vehicles	297,931		319,791
Service loaners	127,018		152,278
Parts, accessories and other	51,797		62,683
Net inventories	$	1,176,506	$	1,517,875

4. Property and Equipment

Property and equipment, net consists of the following:


	June 30, 2020		December 31, 2019
	(In thousands)
Land	$	389,467	$	373,301
Building and improvements	1,012,537		969,609
Furniture, fixtures and equipment	357,129		346,260
Construction in progress	31,122		50,928
Total, at cost	1,790,255		1,740,098
Less accumulated depreciation	(651,142)		(616,611)
Subtotal	1,139,113		1,123,487
Less assets held for sale (1)	(26,240)		(26,240)
Property and equipment, net	$	1,112,873	$	1,097,247

(1)Classified in other current assets in the accompanying unaudited condensed consolidated balance sheets.

In the three and six months ended June 30, 2020, capital expenditures were approximately $41.9 million and $61.7 million, respectively, and in the three and six months ended June 30, 2019, capital expenditures were approximately $20.6 million and $51.2 million, respectively. Capital expenditures in all periods were primarily related to real estate acquisitions, construction of new franchised dealerships and EchoPark stores, building improvements and equipment purchased for use in our franchised dealerships and EchoPark stores. Assets held for sale as of June 30, 2020 and December 31, 2019 consists of real property not currently used in operations that we expect to dispose of in the next 12 months.

Impairment charges for the six months ended June 30, 2020, were approximately $0.8 million, related to the abandonment of certain construction projects. Impairment charges for the six months ended June 30, 2019, were approximately $2.0 million, related to fair value adjustments of real estate at former EchoPark locations classified as held for sale.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Goodwill and Intangible Assets

Pursuant to the applicable accounting pronouncements, we were required to evaluate the recoverability of our long-lived assets during the first quarter of 2020 as a result of the effects of the COVID-19 pandemic on our operations and market value. Based on this evaluation, we determined the carrying value of our franchised dealership reporting unit goodwill was greater than the fair value of the reporting unit. Accordingly, we recorded a non-cash goodwill impairment charge of $268.0 million and a corresponding income tax benefit of $55.8 million to reduce the carrying value to fair value as of March 31, 2020. We utilized the Discounted Cash Flows ("DCF") method, using unobservable inputs (Level 3) to estimate Sonic's enterprise value as of March 31, 2020 and reconciled the discounted cash flows to Sonic's market capitalization, using quoted market price inputs (Level 1). The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs), control premium factors and residual growth rates. Based on the improvement in our business operations and market value during the second quarter of 2020, as well as our future forecast expectations, no further impairment assessment was required.

The carrying amount of goodwill was approximately $207.8 million and $475.8 million as of June 30, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our franchised dealership reporting unit was $147.8 million and $415.8 million as of June 30, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our EchoPark reporting unit was $60.0 million as of both June 30, 2020 and December 31, 2019. The total carrying amount of goodwill is net of accumulated impairment losses of approximately $1.1 billion and $797.6 million as of June 30, 2020 and December 31, 2019, respectively. The carrying amount of franchise assets was approximately $64.3 million as of both June 30, 2020 and December 31, 2019.

6. Long-Term Debt

Long-term debt consists of the following:


	June 30, 2020		December 31, 2019
	(In thousands)
2016 Revolving Credit Facility (1)	$	—	$	—

6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)	250,000		250,000
2019 Mortgage Facility (2)	109,088		109,088
Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03%	224,929		194,535
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR	173,667		161,345


Subtotal	$	757,684	$	714,968
Debt issuance costs	(8,153)		(8,082)
Total debt	749,531		706,886
Less current maturities	(72,043)		(69,908)
Long-term debt	$	677,488	$	636,978

(1)The interest rate on the 2016 Revolving Credit Facility (as defined below) was 150 basis points above the London Inter-bank Offered Rate ("LIBOR") at both June 30, 2020 and December 31, 2019.

(2)The interest rate on the 2019 Mortgage Facility (as defined below) was 150 and 200 basis points above LIBOR at June 30, 2020 and December 31, 2019, respectively.

2016 Credit Facilities

On November 30, 2016, we entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 Revolving Credit Facility, the “2016 Credit Facilities”), which are scheduled to mature on November 30, 2021. The amendment and restatement of the 2016 Credit Facilities extended the scheduled maturity date, increased availability under the 2016 Revolving Credit Facility by $25.0 million and increased availability under the 2016 Floor Plan Facilities by $215.0 million, among other things.

Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving Borrowing Base”). The 2016 Revolving Credit Facility may be increased at our

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

option up to $300.0 million upon satisfaction of certain conditions. As of June 30, 2020, the 2016 Revolving Borrowing Base was approximately $196.4 million based on balances as of such date which will go into effect upon filing of this Form 10-Q for the period ended June 30, 2020. As of June 30, 2020, we had no outstanding borrowings and approximately $13.0 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in $183.4 million remaining borrowing availability under the 2016 Revolving Credit Facility.

The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (as amended, the “2016 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (as amended, the “2016 Used Vehicle Floor Plan Facility”), in a combined amount of up to $966.0 million. We may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.216 billion, which shall be allocated between the 2016 New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as we request, with no more than 40% of the aggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility. During the second quarter of 2020, we amended the 2016 Floor Plan Facilities to convert the 2016 Used Vehicle Floor Plan Facility from a borrowing base calculation of availability to a VIN-specific floor plan borrowing and payoff process, which provides additional borrowing flexibility. Outstanding obligations under the 2016 Floor Plan Facilities are guaranteed by us and certain of our subsidiaries and are secured by a pledge of substantially all of our and our subsidiaries’ assets. The amounts outstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.

We agreed under the 2016 Credit Facilities not to pledge any assets to any third parties (other than those explicitly allowed to be pledged by the amended terms of the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2016 Credit Facilities permit cash dividends on our Class A and Class B Common Stock so long as no Event of Default (as defined in the 2016 Credit Facilities) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2016 Credit Facilities.

6.125% Notes

On March 10, 2017, we issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes which mature on March 15, 2027. The 6.125% Notes were issued at a price of 100.0% of the principal amount thereof. Balances outstanding under the 6.125% Notes are guaranteed by all of our domestic operating subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic operating subsidiary that is not a guarantor is considered to be minor. Interest on the 6.125% Notes is payable semi-annually in arrears on March 15 and September 15 of each year.

We may redeem the 6.125% Notes, in whole or in part, at any time on or after March 15, 2022 at the following redemption prices, which are expressed as percentages of the principal amount:


	Redemption Price
Beginning on March 15, 2022	103.063	%
Beginning on March 15, 2023	102.042	%
Beginning on March 15, 2024	101.021	%
Beginning on March 15, 2025 and thereafter	100.000	%

Before March 15, 2022, we may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the aggregate principal amount of the 6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and accrued and unpaid interest, if any, to the redemption date. The indenture governing the 6.125% Notes also provides that holders of the 6.125% Notes may require us to repurchase the 6.125% Notes at a purchase price equal to 101.0% of the aggregate principal amount of the 6.125% Notes, plus accrued and unpaid interest, if any, to the date of purchase if we undergo a Change of Control (as defined in the indenture governing the 6.125% Notes).

The indenture governing the 6.125% Notes contains certain specified restrictive covenants. We have agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 6.125% Notes limits our ability to pay quarterly cash dividends on our Class A and Class B

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Common Stock in excess of $0.12 per share. We may only pay quarterly cash dividends on our Class A and Class B Common Stock if we comply with the terms of the indenture governing the 6.125% Notes. We were in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as of June 30, 2020.

Our obligations under the 6.125% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 6.125% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of our covenants under the 6.125% Notes; and (3) certain defaults under other agreements under which we or our subsidiaries have outstanding indebtedness in excess of $50.0 million.

2019 Mortgage Facility

On November 22, 2019, we entered into a delayed draw-term loan credit agreement which is scheduled to mature on November 22, 2024 (the “2019 Mortgage Facility”).

Under the 2019 Mortgage Facility, Sonic has a maximum borrowing limit of $112.2 million, which varies based on the value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraisal value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. As of June 30, 2020, we had approximately $109.1 million of outstanding borrowings under the 2019 Mortgage Facility, resulting in total remaining borrowing availability of approximately $3.1 million under the 2019 Mortgage Facility.

Amounts outstanding under the 2019 Mortgage Facility bear interest at (1) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to 2.75% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of the last day of the immediately preceding fiscal quarter (the “Performance Grid”); or (2) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid. Interest on the 2019 Mortgage Facility is paid monthly in arrears calculated using the Base Rate plus the Applicable Rate (as defined in the 2019 Mortgage Facility) according to the Performance Grid. Repayment of principal is paid quarterly commencing on March 31, 2020 through September 30, 2024 at a rate of 2.50% of the aggregate initial principal amount. A balloon payment of the remaining balance will be due at the November 22, 2024 maturity date. Prior to the November 22, 2024 maturity date, the Company reserves the right to prepay the principal amount outstanding at any time without premium or penalty provided the prepayment amount exceeds $0.5 million.

The 2019 Mortgage Facility contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2019 Mortgage Facility permits quarterly cash dividends on our Class A and Class B Common Stock up to $0.10 per share so long as no Event of Default (as defined in the 2019 Mortgage Facility) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2019 Mortgage Facility.

Mortgage Notes to Finance Companies

As of June 30, 2020, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 3.56% and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $398.6 million. These mortgage notes require monthly payments of principal and interest through their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2020 and 2033.

2020 Line of Credit Facility

On June 23, 2020, we entered into a line of credit agreement which is scheduled to mature on June 22, 2021 (the "2020 Line of Credit Facility").

The 2020 Line of Credit Facility has borrowing availability of up to $69.0 million which can be used for general corporate purposes. The amount available for borrowing under the 2020 Line of Credit Facility is directly tied to the appraisal value of certain real estate properties of the Company which are used as collateral for any funds drawn under the 2020 Line of Credit Facility. As of June 30, 2020, we had no outstanding borrowings under the 2020 Line of Credit Facility, resulting in $69.0 million remaining borrowing availability under the 2020 Line of Credit Facility.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The 2020 Line of Credit Facility contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2020 Line of Credit Facility permits quarterly cash dividends on our Class A and Class B Common Stock up to $0.10 per share so long as no Event of Default (as defined in the 2020 Line of Credit Facility) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2020 Line of Credit Facility.

Covenants

We agreed under the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility not to pledge any assets to any third parties (other than those explicitly allowed to be pledged by the amended terms of the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions.

We were in compliance with the financial covenants under the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility as of June 30, 2020. Financial covenants include required specified ratios (as each is defined in the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility) of:


	Covenant
	Minimum Consolidated Liquidity Ratio	Minimum Consolidated Fixed Charge Coverage Ratio	Maximum Consolidated Total Lease Adjusted Leverage Ratio
Required ratio	1.05	1.20	5.75
June 30, 2020 actual	1.13	2.10	3.23

The 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility contain events of default, including cross defaults to other material indebtedness, change of control events and other events of default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, we could be required to immediately repay all outstanding amounts under the 2016 Credit Facilities the 2019 Mortgage Facility, and the 2020 Line of Credit Facility.

After giving effect to the applicable restrictions on the payment of dividends under our debt agreements, as of June 30, 2020, we had approximately $284.9 million of net income and retained earnings free of such restrictions. We were in compliance with all restrictive covenants under our debt agreements as of June 30, 2020.

In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2016 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility with the exception of one additional financial covenant related to the ratio of EBTDAR to Rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of June 30, 2020, the ratio was 5.88 to 1.00.

Derivative Instruments and Hedging Activities

Prior to March 9, 2018, we had outstanding interest rate cash flow swap agreements to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. These interest rate cash flow swap agreements were terminated on March 9, 2018 with a net $4.8 million payment to us from the counterparties, which is being amortized into income as a reduction of interest expense, other, net in the accompanying unaudited condensed consolidated statements of operations on a ratable basis over the original term of these agreements (through July 1, 2020). As of both June 30, 2020 and December 31, 2019, we had interest rate cap agreements to limit our exposure to increases in LIBOR rates above certain levels. Under the terms of these interest rate cap agreements, interest rates reset monthly. We paid cash premiums of approximately $2.5 million and $2.8 million in the years ended December 31, 2019 and 2018, respectively, upon entering into new interest rate cap agreements, and the cash premiums were reflected in operating cash flows for the period in which the premiums were paid. The total unamortized premium amounts related to the outstanding interest rate caps were approximately $2.9 million and $3.7 million as of June 30, 2020 and December 31, 2019, respectively, and will be amortized into interest expense, other, net in the accompanying unaudited condensed consolidated statements of operations over the remaining term of the interest rate cap agreements. The fair value of the outstanding interest rate cap positions at June 30, 2020 was an asset of approximately $0.1 million, included in other assets in the accompanying unaudited condensed consolidated balance sheet as of such date. The fair

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

value of the outstanding interest rate cap positions at December 31, 2019 was a net asset of approximately $0.1 million, included in other assets in the accompanying unaudited condensed consolidated balance sheet as of such date.

Under the terms of the interest rate cap agreements, to the extent that the stated receive rate exceeds the stated cap rate, we will receive interest based on the following:


Notional Amount		Cap Rate (1)	Receive Rate (1) (2)	Start Date	End Date
(In millions)
$	312.5	2.000%	one-month LIBOR	July 1, 2019	June 30, 2020
$	250.0	3.000%	one-month LIBOR	July 1, 2019	June 30, 2020
$	225.0	3.000%	one-month LIBOR	July 1, 2020	June 30, 2021
$	150.0	2.000%	one-month LIBOR	July 1, 2020	July 1, 2021
$	250.0	3.000%	one-month LIBOR	July 1, 2021	July 1, 2022

(1)Under these interest rate caps, no payment from the counterparty will occur unless the stated receive rate exceeds the stated cap rate, in which case a net payment to us from the counterparty, based on the spread between the receive rate and the cap rate, will be recognized as a reduction of interest expense, other, net in the accompanying unaudited condensed consolidated statements of operations.

(2)The one-month LIBOR rate was approximately 0.162% at June 30, 2020.

The interest rate caps are designated as cash flow hedges, and the changes in the fair value of these instruments are recorded in other comprehensive income (loss) in the accompanying unaudited condensed consolidated statements of comprehensive operations and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying unaudited condensed consolidated statements of cash flows. There was no incremental interest income (the excess of interest received over interest paid) related to the interest rate caps for the three and six months ended June 30, 2020. The incremental interest income (the excess of interest received over interest paid) related to the interest rate caps for the three and six months ended June 30, 2019 was approximately $0.5 million and $0.9 million, respectively, and is included as a reduction of interest expense, other, net in the accompanying unaudited condensed consolidated statements of operations, and the interest amount is disclosed in the supplemental disclosures of cash flow information in the accompanying unaudited condensed consolidated statements of cash flows. The estimated net benefit expected to be reclassified out of accumulated other comprehensive income (loss) into results of operations during the next 12 months is approximately $0.2 million.

7. Commitments and Contingencies

Legal and Other Proceedings

Sonic is involved, and expects to continue to be involved, in various legal and administrative proceedings arising out of the conduct of its business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of Sonic’s business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects.

Included in other accrued liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020 was approximately $0.3 million and $0.2 million, respectively, in reserves that Sonic was holding for pending proceedings. Included in other accrued liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2019 was approximately $1.2 million and $0.3 million, respectively, for such reserves. Except as reflected in such reserves, Sonic is currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings.

Guarantees and Indemnification Obligations

In accordance with the terms of Sonic’s operating lease agreements, Sonic’s dealership subsidiaries, acting as lessees, generally agree to indemnify the lessor from certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upon termination of the lease. In addition, Sonic has generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with dealership dispositions and facility relocations, certain of Sonic’s subsidiaries have assigned or sublet to the buyer their interests in real property leases associated with such dealerships or facilities. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases, including rent payments and repairs to leased property upon termination of the lease, to the extent that the assignee or sublessee does not perform. In the event an assignee or a sublessee does not perform its obligations, Sonic remains liable for such obligations.

In accordance with the terms of agreements entered into for the sale of Sonic’s dealerships, Sonic generally agrees to indemnify the buyer from certain liabilities and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the agreements. While Sonic’s exposure with respect to environmental remediation and repairs is difficult to quantify, Sonic’s maximum exposure associated with these general indemnifications was approximately $42.0 million and $46.5 million at June 30, 2020 and December 31, 2019, respectively. These indemnifications typically expire within a period of one to three years following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for this contingency was not significant at June 30, 2020.

Sonic also guarantees the floor plan commitments of its 50%-owned joint venture, the amount of which was approximately $4.3 million at both June 30, 2020 and December 31, 2019.

8. Fair Value Measurements

In determining fair value, Sonic uses various valuation approaches, including market, income and/or cost approaches. “Fair Value Measurements and Disclosures” in the ASC establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of Sonic. Unobservable inputs are inputs that reflect Sonic’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that Sonic has the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded, including Sonic’s stock or public bonds.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments and deferred compensation plan balances.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, those used in assessing impairment of right-of-use assets ("ROU assets"), property, plant and equipment and other intangibles and those used in the reporting unit valuation in the goodwill impairment evaluation.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required by Sonic in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input (Level 3 being the lowest level) that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, Sonic’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. Sonic uses inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that may or may not be within Sonic’s control.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets and liabilities recorded at fair value in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 are as follows:


	Fair Value Based on Significant Other Observable Inputs (Level 2)
	June 30, 2020		December 31, 2019
	(In thousands)
Assets:
Cash surrender value of life insurance policies (1)	$	32,805	$	32,799
Interest rate caps designated as hedges (2)	53		97
Total assets	$	32,858	$	32,896

Liabilities:


Deferred compensation plan (3)	$	18,107	$	17,890
Total liabilities	$	18,107	$	17,890

(1)Included in other assets in the accompanying unaudited condensed consolidated balance sheets.

(2)As of both June 30, 2020 and December 31, 2019, approximately $0.1 million was included in other assets in the accompanying unaudited condensed consolidated balance sheet as of each such date.

(3)Included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.

There were $268.8 million of impairment charges related to indefinite and long-lived assets assessed during the six months ended June 30, 2020 which required a fair value measurement of assets ordinarily measured at fair value on a non-recurring basis. Goodwill and property and equipment, net balances have been adjusted for fair value through impairment charges using Level 1 and Level 3 fair value inputs as discussed in Note 4, "Property and Equipment," and Note 5, "Goodwill and Intangible Assets." Remaining intangible and long-lived assets will be evaluated as of the annual valuation assessment date of October 1, 2020 or as events or changes in circumstances require.

As of June 30, 2020 and December 31, 2019, the fair values of Sonic’s financial instruments, including receivables, notes receivable from finance contracts, notes payable – floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes, approximated their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.

At June 30, 2020 and December 31, 2019, the fair value and carrying value of Sonic’s significant fixed rate long-term debt were as follows:


	June 30, 2020						December 31, 2019
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)


6.125% Notes (1)	$	247,500	$	250,000	$	261,250	$	250,000
Mortgage Notes (2)	$	230,669	$	224,929	$	195,962	$	194,535

(1)As determined by market quotations as of June 30, 2020 and December 31, 2019, respectively (Level 1).

(2)As determined by discounted cash flows (Level 3) based on estimated current market interest rates for comparable instruments.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2020 are as follows:


	Gains and (Losses) on Cash Flow Hedges		Defined Benefit Pension Plan		Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance at December 31, 2019	$	(1,326)	$	(736)	$	(2,062)
Other comprehensive income (loss) before reclassifications (1)	632		—		632
Amounts reclassified out of accumulated other comprehensive income (loss) (2)	(1,159)		—		(1,159)
Net current-period other comprehensive income (loss)	(527)		—		(527)
Balance at June 30, 2020	$	(1,853)	$	(736)	$	(2,589)

(1)Net of tax expense of $148 related to cash flow hedges.

(2)Net of tax benefit of $473 related to cash flow hedges.

See the heading “Derivative Instruments and Hedging Activities” in Note 6, “Long-Term Debt,” for further discussion of Sonic’s cash flow hedges. For further discussion of Sonic’s defined benefit pension plan, see Note 10, “Employee Benefit Plans,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019.

10. Segment Information

As of June 30, 2020, Sonic had two operating segments comprised of: (1) retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repair and maintenance services, and arrange finance and insurance products (the “Franchised Dealerships Segment”); and (2) pre-owned vehicle specialty retail locations that provide customers an opportunity to search our nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell their current vehicle to us (the “EchoPark Segment”). Sonic has determined that its operating segments also represent its reportable segments.

The reportable segments identified above are the business activities of Sonic for which discrete financial information is available and for which operating results are regularly reviewed by Sonic's chief operating decision maker to assess operating performance and allocate resources. Sonic’s chief operating decision maker is a group of three individuals consisting of: (1) the Company’s Chief Executive Officer; (2) the Company’s President; and (3) the Company’s Chief Financial Officer.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reportable segment financial information for the three and six months ended June 30, 2020 and 2019 are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Segment Revenues:
Franchised Dealerships Segment revenues:
New vehicles	$	900,003	$	1,204,754	$	1,859,492	$	2,271,088
Used vehicles	535,699		637,090		1,102,587		1,241,039
Wholesale vehicles	28,509		43,720		70,948		96,253
Parts, service and collision repair	251,998		347,337		576,499		683,563
Finance, insurance and other, net	80,401		89,507		163,429		170,028
Franchised Dealerships Segment revenues	$	1,796,610	$	2,322,408	$	3,772,955	$	4,461,971

EchoPark Segment revenues:
Used vehicles	$	273,178	$	248,537	$	556,343	$	464,953
Wholesale vehicles	4,666		6,319		10,770		8,557
Parts, service and collision repair	7,060		7,975		17,239		13,179
Finance, insurance and other, net	30,372		28,842		62,635		54,559
EchoPark Segment revenues	$	315,276	$	291,673	$	646,987	$	541,248

Total consolidated revenues	$	2,111,886	$	2,614,081	$	4,419,942	$	5,003,219


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands, except unit data)
Segment Income (Loss) (1):
Franchised Dealerships Segment (2)	$	35,689	$	35,129	$	58,346	$	96,310
EchoPark Segment	2,577		1,693		4,672		3,800
Total segment income (loss)	$	38,266	$	36,822	$	63,018	$	100,110
Impairment charges (3)	(833)		—		(268,833)		(1,952)
Income (loss) from continuing operations before taxes	$	37,433	$	36,822	$	(205,815)	$	98,158

Retail New and Used Vehicle Unit Sales Volume:
Franchised Dealerships Segment	43,864		57,067		91,626		109,676
EchoPark Segment	13,207		12,587		27,193		23,638
Total retail new and used vehicle unit sales volume	57,071		69,654		118,819		133,314

(1)Segment income (loss) for each segment is defined as income (loss) from continuing operations before taxes and impairment charges.

(2)For the six months ended June 30, 2019, the above amount includes a pre-tax net gain on the disposal of franchised dealerships of approximately $46.7 million, offset partially by approximately $6.3 million of pre-tax executive transition costs.

(3)For the three months ended June 30, 2020, the above amount includes a pre-tax impairment charge of approximately $0.8 million related to the abandonment of certain construction projects. For the six months ended June 30, 2020, the above amount includes a pre-tax impairment charge of approximately $268.0 million related to adjustments in fair value of goodwill for the Franchised Dealerships Segment as a result of the economic disruptions due to the worldwide spread of

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COVID-19 which has adversely affected our business, as well as a pre-tax impairment charge of approximately $0.8 million related to the abandonment of certain construction projects. For the six months ended June 30, 2019, the above amount includes approximately $1.9 million of pre-tax fair value adjustments to real estate at former EchoPark locations classified as held for sale.


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Impairment Charges:
Franchised Dealerships Segment	$	833	$	—	$	268,833	$	26
EchoPark Segment	—		—		—		1,926
Total impairment charges	$	833	$	—	$	268,833	$	1,952


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Depreciation and Amortization:
Franchised Dealerships Segment	$	19,895	$	21,144	$	39,484	$	41,381
EchoPark Segment	2,752		2,662		5,460		5,075
Total depreciation and amortization	$	22,647	$	23,806	$	44,944	$	46,456


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Floor Plan Interest Expense:
Franchised Dealerships Segment	$	5,675	$	11,597	$	15,283	$	24,102
EchoPark Segment	639		921		1,539		1,642
Total floor plan interest expense	$	6,314	$	12,518	$	16,822	$	25,744


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Interest Expense, Other, Net:
Franchised Dealerships Segment	$	9,557	$	13,192	$	20,156	$	25,606
EchoPark Segment	240		436		606		875
Total interest expense, other, net	$	9,797	$	13,628	$	20,762	$	26,481


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Capital Expenditures:
Franchised Dealerships Segment	$	35,388	$	16,449	$	52,637	$	41,678
EchoPark Segment	6,540		4,165		9,096		9,556
Total capital expenditures	$	41,928	$	20,614	$	61,733	$	51,234

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	June 30, 2020		December 31, 2019
	(In thousands)
Assets:
Franchised Dealerships Segment assets	$	3,072,380	$	3,797,878
EchoPark Segment assets	407,321		244,054
Corporate and other:
Cash and cash equivalents	115,724		29,103



Total assets	$	3,595,425	$	4,071,035

11. Lease Accounting

The majority of our leases are related to dealership properties that are subject to long-term lease arrangements. In addition, we have certain equipment leases and contracts containing embedded leased assets that have been evaluated and included in the recorded ROU asset and lease liabilities as appropriate.

As a result of the adoption of ASC 842, “Leases,” on January 1, 2019, we are required to recognize a ROU asset and a lease liability in the accompanying unaudited condensed consolidated balance sheets at the lease commencement date. For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases and is subsequently measured at reduced cost using the effective interest method.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred or previously recognized favorable lease assets, less any lease incentives received or previously recognized lease exit accruals. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance leases, the ROU asset is reduced using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to us or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is reduced over the expected useful life of the underlying asset. Expense related to the reduction of the ROU asset is recognized and presented separately from interest expense on the lease liability.

Variable lease payments associated with our leases are recognized when the event, activity or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expense in our unaudited condensed consolidated statements of operations in the same line item as expense arising from fixed lease payments (operating leases) or expense related to the reduction of the ROU asset (finance leases).

ROU assets for operating and finance leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC 360, “Property, Plant, and Equipment,” to determine whether the ROU asset is impaired and, if so, the amount of the impairment loss to recognize.

We regularly monitor events or changes in circumstances that may require a reassessment of one of our leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

Key estimates and judgments related to the measurement and recording of ROU assets and lease liabilities include how we determine: (1) the discount rate used to discount the unpaid lease payments to present value; and (2) the expected lease term, including any extension options.

ASC 842, “Leases,” requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we generally use our incremental borrowing rate as the discount rate for the lease. We determined the discount rate for our leases based on the risk-free rate as of the measurement date for varying maturities corresponding to the remaining lease term, adjusted for the risk-premium attributed to Sonic’s corporate credit rating for a secured or collateralized instrument.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Many of our lease arrangements have one or more existing renewal options to extend the lease term (typically in five- to ten-year increments), which were considered in the calculation of the ROU assets and lease liabilities if we determined that it was reasonably certain that an extension option would be exercised. The lease term for all the Company’s leases includes the non-cancelable period of the lease plus any additional periods covered by our option to extend the lease that we are reasonably certain to exercise. We determined the probability of the exercise of a lease extension option based on our long-term strategic business outlook and the condition and remaining useful life of the fixed assets at the location subject to the lease agreement, among other factors.

The majority of our lease agreements require fixed monthly payments (subject to either specific or index-based escalations in future periods) while other agreements require variable lease payments based on changes in LIBOR or any replacement thereof. Lease payments included in the measurement of the lease liability comprise the: (1) fixed lease payments, including in-substance fixed payments, owed over the lease term, which include termination penalties we would owe if the estimated lease term assumes that we would be likely to exercise a termination option prior to the earliest expiration date; (2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and (3) the exercise price of our option to purchase the underlying asset if we are reasonably certain to exercise the option. Our leases do not typically contain residual value guarantees.

In certain situations, we have entered into sublease agreements whereby we sublease all or a portion of a leased real estate asset to a third party. To the extent that we have a sublease related to a lease agreement for an asset that we are no longer using in operations, we have reduced the ROU asset by any applicable net deficiency in expected cash flows from that sublease (either due to partial monthly sublease proceeds or a sublease term less than the remaining master lease term).

Following is information related to changes in our ROU asset and lease liability balances and other financial information for the six months ended June 30, 2020:


	December 31, 2019		New Leases		Modifications (1)		Reduction / Amortization		June 30, 2020
	(In thousands)
ROU Assets:
Finance Leases	$	34,691	$	—	$	5,305	$	(1,483)	$	38,513
Operating Leases	337,842		23		25,293		(21,748)		341,410
Total ROU Assets	$	372,533	$	23	$	30,598	$	(23,231)	$	379,923

Current Lease Liabilities:
Finance Leases	$	1,564	$	—	$	18,566	$	(18,887)	$	1,243
Operating Leases	43,332		70		1,504		(167)		44,739
Total Current Lease Liabilities	$	44,896	$	70	$	20,070	$	(19,054)	$	45,982

Long-Term Lease Liabilities:
Finance Leases	$	36,313	$	—	$	4,694	$	(733)	$	40,274
Operating Leases	304,151		—		24,604		(21,227)		307,528
Total Long-Term Lease Liabilities	$	340,464	$	—	$	29,298	$	(21,960)	$	347,802

(1)Includes the impact of remeasurements related to lease terminations and changes in assumptions around the probability of exercise of extension options.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Lease Expense:
Finance lease expense:
Reduction of ROU assets	$	727	$	862	$	1,483	$	1,572
Interest on lease liabilities	1,337		1,339		2,681		2,515
Operating lease expense (1)	16,546		17,057		33,156		35,054
Short-term lease expense (1)	337		473		757		900
Variable lease expense	244		683		962		797
Sublease income	(3,074)		(3,806)		(6,174)		(7,384)
Total	$	16,117	$	16,608	$	32,865	$	33,454

(1)Included in operating cash flows in the accompanying unaudited condensed consolidated statement of cash flows as of June 30, 2020.


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Other Information:

Cash paid for amounts included in the measurement of lease liabilities
Financing cash flows for finance leases	$	19,283	$	502	$	19,620	$	782
Operating cash flows for finance leases	$	1,337	$	1,339	$	2,681	$	2,515
Operating cash flows for operating leases	$	16,049	$	18,315	$	32,801	$	36,784
ROU assets obtained in exchange for lease liabilities
Finance leases	$	7,359	$	9,290	$	14,088	$	19,273
Operating leases (1)	$	8,172	$	1,541	$	35,397	$	(9,170)

(1)Includes the impact of reclassification of ROU assets from operating leases to finance leases due to remeasurement.


	June 30, 2020		June 30, 2019
Other Information:
Weighted-average remaining lease term (in years)
Finance leases	11.5		11.2
Operating leases	9.4		9.7
Weighted-average discount rate
Finance leases	17.57	%	18.33	%
Operating leases	6.59	%	6.87	%


	Undiscounted Lease Cash Flows Under ASC 842 as of June 30, 2020
	Finance		Operating		Receipts from Subleases
Year Ending December 31,	(In thousands)
Remainder of 2020	$	3,469	$	33,143	$	(6,036)
2021	7,069		62,679		(8,811)
2022	7,077		56,081		(6,103)
2023	7,138		54,206		(6,103)
2024	7,257		48,783		(5,042)
Thereafter	49,430		225,538		(4,270)
Total	$	81,440	$	480,430	$	(36,365)

Less: Present value discount	(39,923)		(128,163)
Lease liabilities	$	41,517	$	352,267

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ended December 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 in the 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 of June 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 of June 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 of June 30, 2020, we had three EchoPark stores in operation in Colorado, four in Texas, one in North Carolina, one in California and one in Florida. 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 the U.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.

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

The U.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 ended June 30, 2020, respectively, compared to 17.0 million vehicles in both the three and six months ended June 30, 2019, according to data from Bloomberg Finance L.P., provided by Stephens 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 the Power Information Network (“PIN”) from J.D. Power, retail new vehicle SAAR was 10.4 million vehicles for the three months ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2020, and increased $20 per unit, or 0.9%, to $2,153 per unit in the six months ended June 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 ended June 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 ended June 30, 2020, respectively, primarily driven by a decrease in retail used vehicle gross profit per unit during both the three and six months ended June 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 ended June 30, 2020, and decreased $100 per unit, or 7.8%, to $1,186 per unit in the six months ended June 30, 2020, as a result of strategic vehicle pricing decisions made in March through June 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 ended June 30, 2020.

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 ended June 30, 2020. Wholesale vehicle gross loss decreased approximately $1.0 million, or 73.6%, during the six months ended June 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 of June 30, 2020 and 2019, respectively.

Fixed Operations revenue decreased 24.5% and 11.9% during the three and six months ended June 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 ended June 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 ended June 30, 2020, driven primarily by a 5.6% decrease in customer pay gross profit. Fixed Operations gross margin was flat during the three months ended June 30, 2020. Fixed Operations gross margin increased 10 basis points, to 48.9%, during the six months ended June 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 ended June 30, 2020, respectively, driven primarily by a 17.6% and 10.5% decrease in retail unit sales volume during the three and six months ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 through June 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 ended June 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 of June 30, 2020 and 2019, respectively, above our target range as of June 30, 2020 due to lower than typical vehicle unit sales volume in April and May 2020 and our new Tampa, Florida store which opened in April 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:


	Three Months Ended June 30, 2020										Three Months Ended June 30, 2019
(Amounts are before the effect of income taxes, except tax items)	Franchised Dealerships Segment		EchoPark Segment		Total		Franchised Dealerships Segment		EchoPark Segment		Total		Income Statement Line Impacted
	(In thousands)



Impairment charges	$	(833)	$	—	$	(833)	$	—	$	—	$	—	Impairment charges

Non-recurring tax benefit	3,175		—		3,175		—		—		—		Income taxes

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30, 2020										Six Months Ended June 30, 2019
(Amounts are before the effect of income taxes, except tax items)	Franchised Dealerships Segment		EchoPark Segment		Total		Franchised Dealerships Segment		EchoPark Segment		Total		Income Statement Line Impacted
	(In thousands)
Gain (loss) on franchise disposals	$	—	$	—	$	—	$	46,680	$	—	$	46,680	SG&A expenses
Executive transition costs	—		—		—		(6,264)		—		(6,264)		SG&A expenses

Impairment charges	(268,833)		—		(268,833)		—		(1,926)		(1,926)		Impairment charges

Non-recurring tax benefit	3,175		—		3,175		—		—		—		Income taxes

The following table depicts the breakdown of our new vehicle revenues from continuing operations by brand for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended June 30,						Six Months Ended June 30,
Brand	2020		2019		2020		2019
Luxury:
BMW	21.9	%	24.0	%	23.6	%	22.7	%
Mercedes	13.3	%	12.0	%	13.3	%	12.1	%
Audi	6.4	%	6.9	%	6.2	%	6.8	%
Land Rover	6.1	%	4.1	%	5.2	%	4.5	%
Lexus	4.1	%	4.6	%	4.4	%	4.8	%
Porsche	3.5	%	2.6	%	3.2	%	2.9	%
Cadillac	2.1	%	2.4	%	2.2	%	2.3	%
MINI	1.0	%	1.1	%	1.0	%	1.1	%
Other luxury (1)	3.0	%	2.8	%	2.7	%	2.8	%
Total Luxury	61.4	%	60.5	%	61.8	%	60.0	%
Mid-line Import:
Honda	14.3	%	16.5	%	14.6	%	16.5	%
Toyota	8.7	%	9.4	%	8.7	%	9.4	%
Hyundai	1.2	%	1.6	%	1.1	%	1.6	%
Volkswagen	1.1	%	1.6	%	1.1	%	1.6	%
Other imports (2)	0.5	%	0.8	%	0.4	%	1.4	%
Total Mid-line Import	25.8	%	29.9	%	25.9	%	30.5	%
Domestic:
Ford	6.9	%	5.0	%	6.4	%	4.9	%
General Motors (3)	5.9	%	4.6	%	5.9	%	4.6	%
Total Domestic	12.8	%	9.6	%	12.3	%	9.5	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1)Includes Acura, Infiniti, Jaguar and Volvo.

(2)Includes Kia, Nissan, Scion and Subaru.

(3)Includes Buick, Chevrolet and GMC.

Results of Operations

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations – Consolidated

New Vehicles – Consolidated

The retail automotive industry uses the total new vehicle SAAR to measure the annual amount of expected new vehicle unit sales activity (both retail and fleet sales) within the U.S. The total and retail new vehicle SAAR below reflect all brands marketed or sold in the U.S. The total and retail new vehicle SAAR include brands we do not sell and markets in which we do not operate; therefore, our new vehicle sales may not trend directly in line with the total and retail new vehicle SAAR. We believe that the retail new vehicle SAAR is a more meaningful metric for comparing our new vehicle unit sales volume to the industry due to our minimal fleet vehicle business. Beginning in the middle of March 2020, COVID-19 began to adversely impact the retail automotive industry and consequentially also our business operations by severely impacting the demand portion of our business. State and local governmental authorities in all of the markets in which we currently operate began to put in place various levels of shelter-in-place or stay-at-home orders in the middle of March 2020, which in many cases significantly restricted our business operations and suppressed consumer activity, in particular related to our vehicle sales activities.


	Three Months Ended June 30,				Better / (Worse)	Six Months Ended June 30,			Better / (Worse)
	2020	2019	% Change		2020	2019	% Change
	(In millions of vehicles)
Retail new vehicle SAAR (1)	10.4	13.5	(23.0)	%	11.0	13.1	(16.0)	%
Fleet new vehicle SAAR	0.9	3.5	(74.3)	%	2.1	3.9	(46.2)	%
Total new vehicle SAAR (2)	11.3	17.0	(33.5)	%	13.1	17.0	(22.9)	%

(1)Source: PIN from J.D. Power

(2)Source: Bloomberg Finance L.P., provided by Stephens Inc.

The following tables provide a reconciliation of consolidated reported basis and same store basis for total new vehicles (combined retail and fleet data):


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total new vehicle revenue:
Same store	$	899,655	$	1,150,601	$	(250,946)	(21.8)	%
Acquisitions, open points and dispositions	348		54,153		(53,805)		NM
Total as reported	$	900,003	$	1,204,754	$	(304,751)	(25.3)	%

Total new vehicle gross profit:
Same store	$	44,111	$	53,834	$	(9,723)	(18.1)	%
Acquisitions, open points and dispositions	1,275		2,566		(1,291)		NM
Total as reported	$	45,386	$	56,400	$	(11,014)	(19.5)	%

Total new vehicle unit sales:
Same store	19,884		26,359		(6,475)		(24.6)	%
Acquisitions, open points and dispositions	7		1,837		(1,830)		NM
Total as reported	19,891		28,196		(8,305)		(29.5)	%

NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total new vehicle revenue:
Same store	$	1,857,489	$	2,155,333	$	(297,844)	(13.8)	%
Acquisitions, open points and dispositions	2,003		115,755		(113,752)		NM
Total as reported	$	1,859,492	$	2,271,088	$	(411,596)	(18.1)	%

Total new vehicle gross profit:
Same store	$	89,519	$	105,455	$	(15,936)	(15.1)	%
Acquisitions, open points and dispositions	1,283		4,741		(3,458)		NM
Total as reported	$	90,802	$	110,196	$	(19,394)	(17.6)	%

Total new vehicle unit sales:
Same store	41,575		49,450		(7,875)		(15.9)	%
Acquisitions, open points and dispositions	40		3,943		(3,903)		NM
Total as reported	41,615		53,393		(11,778)		(22.1)	%
NM = Not Meaningful

Our consolidated reported new vehicle results (combined retail and fleet data) are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue	$	900,003		$	1,204,754		$	(304,751)	(25.3)	%
Gross profit	$	45,386		$	56,400		$	(11,014)	(19.5)	%
Unit sales	19,891			28,196			(8,305)		(29.5)	%
Revenue per unit	$	45,247		$	42,728		$	2,519	5.9	%
Gross profit per unit	$	2,282		$	2,000		$	282	14.1	%
Gross profit as a % of revenue	5.0		%	4.7		%	30		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue	$	1,859,492		$	2,271,088		$	(411,596)	(18.1)	%
Gross profit	$	90,802		$	110,196		$	(19,394)	(17.6)	%
Unit sales	41,615			53,393			(11,778)		(22.1)	%
Revenue per unit	$	44,683		$	42,535		$	2,148	5.0	%
Gross profit per unit	$	2,182		$	2,064		$	118	5.7	%
Gross profit as a % of revenue	4.9		%	4.9		%	—		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our consolidated same store new vehicle results (combined retail and fleet data) are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue	$	899,655		$	1,150,601		$	(250,946)	(21.8)	%
Gross profit	$	44,111		$	53,834		$	(9,723)	(18.1)	%
Unit sales	19,884			26,359			(6,475)		(24.6)	%
Revenue per unit	$	45,245		$	43,651		$	1,594	3.7	%
Gross profit per unit	$	2,218		$	2,042		$	176	8.6	%
Gross profit as a % of revenue	4.9		%	4.7		%	20		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue	$	1,857,489		$	2,155,333		$	(297,844)	(13.8)	%
Gross profit	$	89,519		$	105,455		$	(15,936)	(15.1)	%
Unit sales	41,575			49,450			(7,875)		(15.9)	%
Revenue per unit	$	44,678		$	43,586		$	1,092	2.5	%
Gross profit per unit	$	2,153		$	2,133		$	20	0.9	%
Gross profit as a % of revenue	4.8		%	4.9		%	(10)		bps

For further analysis of new vehicle results, see the tables and discussion under the heading “New Vehicles – Franchised Dealerships Segment” in the Franchised Dealerships Segment section below.

Used Vehicles – Consolidated

Used vehicle revenues are directly affected by a number of factors, including the pricing and level of manufacturer incentives on new vehicles, the number and quality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and the availability of consumer credit. As with new vehicles, COVID-19 began to adversely impact the retail automotive industry and consequentially also our business operations beginning in the middle of March 2020, by severely impacting the demand portion of our business. State and local governmental authorities in all of the markets in which we currently operate began to put in place various levels of shelter-in-place or stay-at-home orders in the middle of March 2020, which in many cases significantly restricted our business operations and suppressed consumer activity, in particular related to our vehicle sales activities.

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a reconciliation of consolidated reported basis and same store basis for retail used vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	778,295	$	858,103	$	(79,808)	(9.3)	%
Acquisitions, open points and dispositions	30,582		27,524		3,058		NM
Total as reported	$	808,877	$	885,627	$	(76,750)	(8.7)	%

Total used vehicle gross profit:
Same store	$	22,886	$	32,718	$	(9,832)	(30.1)	%
Acquisitions, open points and dispositions	4,485		4,011		474		NM
Total as reported	$	27,371	$	36,729	$	(9,358)	(25.5)	%

Total used vehicle unit sales:
Same store	35,665		39,697		(4,032)		(10.2)	%
Acquisitions, open points and dispositions	1,515		1,761		(246)		NM
Total as reported	37,180		41,458		(4,278)		(10.3)	%

NM = Not Meaningful


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	1,608,195	$	1,648,232	$	(40,037)	(2.4)	%
Acquisitions, open points and dispositions	50,735		57,760		(7,025)		NM
Total as reported	$	1,658,930	$	1,705,992	$	(47,062)	(2.8)	%

Total used vehicle gross profit:
Same store	$	53,321	$	64,919	$	(11,598)	(17.9)	%
Acquisitions, open points and dispositions	6,181		8,817		(2,636)		NM
Total as reported	$	59,502	$	73,736	$	(14,234)	(19.3)	%

Total used vehicle unit sales:
Same store	74,654		76,239		(1,585)		(2.1)	%
Acquisitions, open points and dispositions	2,550		3,682		(1,132)		NM
Total as reported	77,204		79,921		(2,717)		(3.4)	%
NM = Not Meaningful

Our consolidated reported retail used vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue	$	808,877		$	885,627		$	(76,750)	(8.7)	%
Gross profit	$	27,371		$	36,729		$	(9,358)	(25.5)	%
Unit sales	37,180			41,458			(4,278)		(10.3)	%
Revenue per unit	$	21,756		$	21,362		$	394	1.8	%
Gross profit per unit	$	736		$	886		$	(150)	(16.9)	%
Gross profit as a % of revenue	3.4		%	4.1		%	(70)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue	$	1,658,930		$	1,705,992		$	(47,062)	(2.8)	%
Gross profit	$	59,502		$	73,736		$	(14,234)	(19.3)	%
Unit sales	77,204			79,921			(2,717)		(3.4)	%
Revenue per unit	$	21,488		$	21,346		$	142	0.7	%
Gross profit per unit	$	771		$	923		$	(152)	(16.5)	%
Gross profit as a % of revenue	3.6		%	4.3		%	(70)		bps

Our consolidated same store retail used vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle:
Revenue	$	778,295		$	858,103		$	(79,808)	(9.3)	%
Gross profit	$	22,886		$	32,718		$	(9,832)	(30.1)	%
Unit sales	35,665			39,697			(4,032)		(10.2)	%
Revenue per unit	$	21,822		$	21,616		$	206	1.0	%
Gross profit per unit	$	642		$	824		$	(182)	(22.1)	%
Gross profit as a % of revenue	2.9		%	3.8		%	(90)		bps


	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle:
Revenue	$	1,608,195		$	1,648,232		$	(40,037)	(2.4)	%
Gross profit	$	53,321		$	64,919		$	(11,598)	(17.9)	%
Unit sales	74,654			76,239			(1,585)		(2.1)	%
Revenue per unit	$	21,542		$	21,619		$	(77)	(0.4)	%
Gross profit per unit	$	714		$	852		$	(138)	(16.2)	%
Gross profit as a % of revenue	3.3		%	3.9		%	(60)		bps

For further analysis of used vehicle results, see the tables and discussion under the headings “Used Vehicles – Franchised Dealerships Segment” and “Used Vehicles and F&I – EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

Wholesale Vehicles – Consolidated

Wholesale vehicle revenues are affected by retail new and used vehicle unit sales volume and the associated trade-in volume. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicle inventory and minimize inventory carrying risks.

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a reconciliation of consolidated reported basis and same store basis for wholesale vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	32,757	$	48,114	$	(15,357)	(31.9)	%
Acquisitions, open points and dispositions	418		1,925		(1,507)		NM
Total as reported	$	33,175	$	50,039	$	(16,864)	(33.7)	%

Total wholesale vehicle gross profit (loss):
Same store	$	(386)	$	(463)	$	77	16.6	%
Acquisitions, open points and dispositions	(40)		(250)		210		NM
Total as reported	$	(426)	$	(713)	$	287	40.3	%

Total wholesale vehicle unit sales:
Same store	6,130		8,048		(1,918)		(23.8)	%
Acquisitions, open points and dispositions	151		598		(447)		NM
Total as reported	6,281		8,646		(2,365)		(27.4)	%

NM = Not Meaningful


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	80,943	$	99,939	$	(18,996)	(19.0)	%
Acquisitions, open points and dispositions	775		4,871		(4,096)		NM
Total as reported	$	81,718	$	104,810	$	(23,092)	(22.0)	%

Total wholesale vehicle gross profit (loss):
Same store	$	(515)	$	(1,526)	$	1,011	66.3	%
Acquisitions, open points and dispositions	(70)		(453)		383		NM
Total as reported	$	(585)	$	(1,979)	$	1,394	70.4	%

Total wholesale vehicle unit sales:
Same store	14,698		15,992		(1,294)		(8.1)	%
Acquisitions, open points and dispositions	258		1,301		(1,043)		NM
Total as reported	14,956		17,293		(2,337)		(13.5)	%
NM = Not Meaningful

Our consolidated reported wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	33,175		$	50,039		$	(16,864)	(33.7)	%
Gross profit (loss)	$	(426)		$	(713)		$	287	40.3	%
Unit sales	6,281			8,646			(2,365)		(27.4)	%
Revenue per unit	$	5,282		$	5,788		$	(506)	(8.7)	%
Gross profit (loss) per unit	$	(68)		$	(82)		$	14	17.1	%
Gross profit (loss) as a % of revenue	(1.3)		%	(1.4)		%	10		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	81,718		$	104,810		$	(23,092)	(22.0)	%
Gross profit (loss)	$	(585)		$	(1,979)		$	1,394	70.4	%
Unit sales	14,956			17,293			(2,337)		(13.5)	%
Revenue per unit	$	5,464		$	6,061		$	(597)	(9.8)	%
Gross profit (loss) per unit	$	(39)		$	(114)		$	75	65.8	%
Gross profit (loss) as a % of revenue	(0.7)		%	(1.9)		%	120		bps

Our consolidated same store wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	32,757		$	48,114		$	(15,357)	(31.9)	%
Gross profit (loss)	$	(386)		$	(463)		$	77	16.6	%
Unit sales	6,130			8,048			(1,918)		(23.8)	%
Revenue per unit	$	5,344		$	5,978		$	(634)	(10.6)	%
Gross profit (loss) per unit	$	(63)		$	(58)		$	(5)	(8.6)	%
Gross profit (loss) as a % of revenue	(1.2)		%	(1.0)		%	(20)		bps


	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	80,943		$	99,939		$	(18,996)	(19.0)	%
Gross profit (loss)	$	(515)		$	(1,526)		$	1,011	66.3	%
Unit sales	14,698			15,992			(1,294)		(8.1)	%
Revenue per unit	$	5,507		$	6,249		$	(742)	(11.9)	%
Gross profit (loss) per unit	$	(35)		$	(95)		$	60	63.2	%
Gross profit (loss) as a % of revenue	(0.6)		%	(1.5)		%	90		bps

For further analysis of wholesale vehicle results, see the tables and discussion under the headings “Wholesale Vehicles – Franchised Dealerships Segment” and “Wholesale Vehicles – EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

Fixed Operations – Consolidated

Parts, service and collision repair revenues consist of customer requested repair orders (“customer pay”), warranty repairs, wholesale parts and internal, sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, manufacturer recalls, customer loyalty and prepaid or manufacturer-paid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles that are later sold to customers. When that work is performed by one of our dealerships or stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.

We believe that, over time, vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualified technicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that, over the long term, we have the ability to continue to add service capacity at our dealerships and stores to further increase Fixed Operations revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitate long-term growth in our parts and service business. Barriers to long-term growth may include reductions in the rate paid by

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

manufacturers to dealers for warranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future customer pay or warranty-related revenues.

The following tables provide a reconciliation of consolidated reported basis and same store basis for Fixed Operations:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	258,607	$	342,274	$	(83,667)	(24.4)	%
Acquisitions, open points and dispositions	451		13,038		(12,587)		NM
Total as reported	$	259,058	$	355,312	$	(96,254)	(27.1)	%

Total Fixed Operations gross profit:
Same store	$	123,878	$	163,920	$	(40,042)	(24.4)	%
Acquisitions, open points and dispositions	401		6,626		(6,225)		NM
Total as reported	$	124,279	$	170,546	$	(46,267)	(27.1)	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	592,149	$	667,069	$	(74,920)	(11.2)	%
Acquisitions, open points and dispositions	1,589		29,673		(28,084)		NM
Total as reported	$	593,738	$	696,742	$	(103,004)	(14.8)	%

Total Fixed Operations gross profit:
Same store	$	281,504	$	318,423	$	(36,919)	(11.6)	%
Acquisitions, open points and dispositions	674		15,359		(14,685)		NM
Total as reported	$	282,178	$	333,782	$	(51,604)	(15.5)	%
NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our consolidated reported Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Reported Fixed Operations:
Revenue
Customer pay	$	110,600		$	142,113		$	(31,513)	(22.2)	%
Warranty	49,326			69,809			(20,483)		(29.3)	%
Wholesale parts	26,352			40,027			(13,675)		(34.2)	%
Internal, sublet and other	72,780			103,363			(30,583)		(29.6)	%
Total revenue	$	259,058		$	355,312		$	(96,254)	(27.1)	%

Gross profit
Customer pay	$	62,467		$	77,652		$	(15,185)	(19.6)	%
Warranty	27,720			39,039			(11,319)		(29.0)	%
Wholesale parts	4,506			6,872			(2,366)		(34.4)	%
Internal, sublet and other	29,586			46,983			(17,397)		(37.0)	%
Total gross profit	$	124,279		$	170,546		$	(46,267)	(27.1)	%

Gross profit as a % of revenue
Customer pay	56.5		%	54.6		%	190		bps
Warranty	56.2		%	55.9		%	30		bps
Wholesale parts	17.1		%	17.2		%	(10)		bps
Internal, sublet and other	40.7		%	45.5		%	(480)		bps
Total gross profit as a % of revenue	48.0		%	48.0		%	—		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Reported Fixed Operations:
Revenue
Customer pay	$	245,656		$	279,834		$	(34,178)	(12.2)	%
Warranty	110,086			138,782			(28,696)		(20.7)	%
Wholesale parts	65,058			79,325			(14,267)		(18.0)	%
Internal, sublet and other	172,938			198,801			(25,863)		(13.0)	%
Total revenue	$	593,738		$	696,742		$	(103,004)	(14.8)	%

Gross profit
Customer pay	$	137,061		$	151,978		$	(14,917)	(9.8)	%
Warranty	61,466			77,447			(15,981)		(20.6)	%
Wholesale parts	11,173			13,668			(2,495)		(18.3)	%
Internal, sublet and other	72,478			90,689			(18,211)		(20.1)	%
Total gross profit	$	282,178		$	333,782		$	(51,604)	(15.5)	%

Gross profit as a % of revenue
Customer pay	55.8		%	54.3		%	150		bps
Warranty	55.8		%	55.8		%	—		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	41.9		%	45.6		%	(370)		bps
Total gross profit as a % of revenue	47.5		%	47.9		%	(40)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our consolidated same store Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Same store Fixed Operations:
Revenue
Customer pay	$	111,550		$	135,890		$	(24,340)	(17.9)	%
Warranty	48,672			68,095			(19,423)		(28.5)	%
Wholesale parts	26,207			39,522			(13,315)		(33.7)	%
Internal, sublet and other	72,178			98,767			(26,589)		(26.9)	%
Total revenue	$	258,607		$	342,274		$	(83,667)	(24.4)	%

Gross profit
Customer pay	$	62,543		$	74,410		$	(11,867)	(15.9)	%
Warranty	27,331			38,047			(10,716)		(28.2)	%
Wholesale parts	4,505			6,780			(2,275)		(33.6)	%
Internal, sublet and other	29,499			44,683			(15,184)		(34.0)	%
Total gross profit	$	123,878		$	163,920		$	(40,042)	(24.4)	%

Gross profit as a % of revenue
Customer pay	56.1		%	54.8		%	130		bps
Warranty	56.2		%	55.9		%	30		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	40.9		%	45.2		%	(430)		bps
Total gross profit as a % of revenue	47.9		%	47.9		%	—		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Same store Fixed Operations:
Revenue
Customer pay	$	246,245		$	267,095		$	(20,850)	(7.8)	%
Warranty	109,804			133,383			(23,579)		(17.7)	%
Wholesale parts	64,894			77,663			(12,769)		(16.4)	%
Internal, sublet and other	171,206			188,928			(17,722)		(9.4)	%
Total revenue	$	592,149		$	667,069		$	(74,920)	(11.2)	%

Gross profit
Customer pay	$	137,176		$	145,378		$	(8,202)	(5.6)	%
Warranty	61,142			74,470			(13,328)		(17.9)	%
Wholesale parts	11,169			13,342			(2,173)		(16.3)	%
Internal, sublet and other	72,017			85,233			(13,216)		(15.5)	%
Total gross profit	$	281,504		$	318,423		$	(36,919)	(11.6)	%

Gross profit as a % of revenue
Customer pay	55.7		%	54.4		%	130		bps
Warranty	55.7		%	55.8		%	(10)		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	42.1		%	45.1		%	(300)		bps
Total gross profit as a % of revenue	47.5		%	47.7		%	(20)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For further analysis of Fixed Operations results, see the tables and discussion under the headings “Fixed Operations – Franchised Dealerships Segment” and “Fixed Operations – EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

F&I – Consolidated

Finance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties and service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&I revenues are affected by the level of new and used vehicle unit sales, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.

The following tables provide a reconciliation of consolidated reported basis and same store basis for F&I:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Total F&I revenue:
Same store	$	102,607	$	111,004	$	(8,397)	(7.6)	%
Acquisitions, open points and dispositions	8,166		7,345		821		NM
Total as reported	$	110,773	$	118,349	$	(7,576)	(6.4)	%

Total F&I gross profit per retail unit (excludes fleet):
Same store	$	1,852	$	1,692	$	160	9.5	%
Reported	$	1,946	$	1,710	$	236	13.8	%

Total combined new and used retail unit sales:
Same store	55,399		65,615		(10,216)		(15.6)	%
Acquisitions, open points and dispositions	1,522		3,598		(2,076)		NM
Total as reported	56,921		69,213		(12,292)		(17.8)	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Total F&I revenue:
Same store	$	211,422	$	210,071	$	1,351	0.6	%
Acquisitions, open points and dispositions	14,642		14,516		126		NM
Total as reported	$	226,064	$	224,587	$	1,477	0.7	%

Total F&I gross profit per retail unit (excludes fleet):
Same store	$	1,831	$	1,681	$	150	8.9	%
Reported	$	1,914	$	1,694	$	220	13.0	%

Total combined new and used retail unit sales:
Same store	115,494		124,969		(9,475)		(7.6)	%
Acquisitions, open points and dispositions	2,590		7,625		(5,035)		(66.0)	%
Total as reported	118,084		132,594		(14,510)		(10.9)	%

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NM = Not Meaningful

Our consolidated reported F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported F&I:
Revenue	$	110,773	$	118,349	$	(7,576)	(6.4)	%
Unit sales	56,921		69,213		(12,292)		(17.8)	%
Gross profit per retail unit (excludes fleet)	$	1,946	$	1,710	$	236	13.8	%


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported F&I:
Revenue	$	226,064	$	224,587	$	1,477	0.7	%
Unit sales	118,084		132,594		(14,510)		(10.9)	%
Gross profit per retail unit (excludes fleet)	$	1,914	$	1,694	$	220	13.0	%

Our consolidated same store F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store F&I:
Revenue	$	102,607	$	111,004	$	(8,397)	(7.6)	%
Unit sales	55,399		65,615		(10,216)		(15.6)	%
Gross profit per retail unit (excludes fleet)	$	1,852	$	1,692	$	160	9.5	%


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store F&I:
Revenue	$	211,422	$	210,071	$	1,351	0.6	%
Unit sales	115,494		124,969		(9,475)		(7.6)	%
Gross profit per retail unit (excludes fleet)	$	1,831	$	1,681	$	150	8.9	%

For further analysis of F&I results, see the tables and discussion under the headings “F&I – Franchised Dealerships Segment” and “Used Vehicles and F&I – EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

Results of Operations – Franchised Dealerships Segment

As a result of the disposition, termination or closure of several franchised dealerships during and since the period ended June 30, 2019, the change in 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 ended June 30, 2020 and are compared to the same prior year periods as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a same store basis, except where otherwise noted. All currently operating stores are included within the same store group in the first full month following the first anniversary of the store’s opening or acquisition.

New Vehicles – Franchised Dealerships Segment

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues and gross profit can be influenced by vehicle manufacturer incentives to consumers (which vary from cash-back incentives to low interest rate financing, among other things), the availability of consumer credit and the level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventory allocations to our dealerships to meet customer demands. The automobile manufacturing industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand, both within specific brands and in the industry as a whole. As an automotive retailer, we seek to mitigate the effects of this sales cycle by maintaining a diverse brand mix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower-priced/economy vehicles to luxury vehicles.

The following tables provide a reconciliation of Franchised Dealerships Segment reported basis and same store basis for total new vehicles (combined retail and fleet data):


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total new vehicle revenue:
Same store	$	899,655	$	1,150,601	$	(250,946)	(21.8)	%
Acquisitions, open points and dispositions	348		54,153		(53,805)		NM
Total as reported	$	900,003	$	1,204,754	$	(304,751)	(25.3)	%

Total new vehicle gross profit:
Same store	$	44,111	$	53,834	$	(9,723)	(18.1)	%
Acquisitions, open points and dispositions	1,275		2,566		(1,291)		NM
Total as reported	$	45,386	$	56,400	$	(11,014)	(19.5)	%

Total new vehicle unit sales:
Same store	19,884		26,359		(6,475)		(24.6)	%
Acquisitions, open points and dispositions	7		1,837		(1,830)		NM
Total as reported	19,891		28,196		(8,305)		(29.5)	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total new vehicle revenue:
Same store	$	1,857,489	$	2,155,333	$	(297,844)	(13.8)	%
Acquisitions, open points and dispositions	2,003		115,755		(113,752)		NM
Total as reported	$	1,859,492	$	2,271,088	$	(411,596)	(18.1)	%

Total new vehicle gross profit:
Same store	$	89,519	$	105,455	$	(15,936)	(15.1)	%
Acquisitions, open points and dispositions	1,283		4,741		(3,458)		NM
Total as reported	$	90,802	$	110,196	$	(19,394)	(17.6)	%

Total new vehicle unit sales:
Same store	41,575		49,450		(7,875)		(15.9)	%
Acquisitions, open points and dispositions	40		3,943		(3,903)		NM
Total as reported	41,615		53,393		(11,778)		(22.1)	%
NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment reported new vehicle results (combined retail and fleet data) are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue	$	900,003		$	1,204,754		$	(304,751)	(25.3)	%
Gross profit	$	45,386		$	56,400		$	(11,014)	(19.5)	%
Unit sales	19,891			28,196			(8,305)		(29.5)	%
Revenue per unit	$	45,247		$	42,728		$	2,519	5.9	%
Gross profit per unit	$	2,282		$	2,000		$	282	14.1	%
Gross profit as a % of revenue	5.0		%	4.7		%	30		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue	$	1,859,492		$	2,271,088		$	(411,596)	(18.1)	%
Gross profit	$	90,802		$	110,196		$	(19,394)	(17.6)	%
Unit sales	41,615			53,393			(11,778)		(22.1)	%
Revenue per unit	$	44,683		$	42,535		$	2,148	5.0	%
Gross profit per unit	$	2,182		$	2,064		$	118	5.7	%
Gross profit as a % of revenue	4.9		%	4.9		%	—		bps

Our Franchised Dealerships Segment same store new vehicle results (combined retail and fleet data) are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue	$	899,655		$	1,150,601		$	(250,946)	(21.8)	%
Gross profit	$	44,111		$	53,834		$	(9,723)	(18.1)	%
Unit sales	19,884			26,359			(6,475)		(24.6)	%
Revenue per unit	$	45,245		$	43,651		$	1,594	3.7	%
Gross profit per unit	$	2,218		$	2,042		$	176	8.6	%
Gross profit as a % of revenue	4.9		%	4.7		%	20		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue	$	1,857,489		$	2,155,333		$	(297,844)	(13.8)	%
Gross profit	$	89,519		$	105,455		$	(15,936)	(15.1)	%
Unit sales	41,575			49,450			(7,875)		(15.9)	%
Revenue per unit	$	44,678		$	43,586		$	1,092	2.5	%
Gross profit per unit	$	2,153		$	2,133		$	20	0.9	%
Gross profit as a % of revenue	4.8		%	4.9		%	(10)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Same Store Franchised Dealerships Segment New Vehicles – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

New vehicle revenue decreased 21.8% and new vehicle unit sales volume decreased 24.6%, driven by decreases in new vehicle unit sales volume in each of our markets as a result of governmental orders that restricted vehicle sales activity and disrupted consumer behavior during the second quarter of 2020 due to the COVID-19 pandemic. Such impact was particularly meaningful in our California stores, which represented over 50% of the decrease in new vehicle unit sales volume compared to the prior year period. New vehicle gross profit decreased approximately $9.7 million, or 18.1%. New vehicle gross profit per unit increased $176 per unit, or 8.6%, to $2,218 per unit, due primarily to inventory shortages in certain makes and models as a result of vehicle manufacturers supply chain and production delays as a result of the COVID-19 pandemic, which generally increases the average selling price of such vehicles. We anticipate that new vehicle inventory shortages may continue into the third quarter of 2020, potentially negatively affecting new vehicle unit sales volume while continuing to benefit new vehicle gross profit per unit.

Same Store Franchised Dealerships Segment New Vehicles – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

New vehicle revenue decreased 13.8% and new vehicle unit sales volume decreased 15.9%, driven by decreases in new vehicle unit sales volume in each of our markets as a result of governmental orders that restricted vehicle sales activity and disrupted consumer behavior during March through June 2020 due to the COVID-19 pandemic. Such impact was particularly meaningful in our California stores, which represented over 50% of the decrease in new vehicle unit sales volume compared to the prior year period. New vehicle gross profit decreased approximately $15.9 million, or 15.1%. New vehicle gross profit per unit increased $20 per unit, or 0.9%, to $2,153 per unit, 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.

Used Vehicles – Franchised Dealerships Segment

The following tables provide a reconciliation of Franchised Dealerships Segment reported basis and same store basis for retail used vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	535,252	$	609,567	$	(74,315)	(12.2)	%
Acquisitions, open points and dispositions	447		27,523		(27,076)		NM
Total as reported	$	535,699	$	637,090	$	(101,391)	(15.9)	%

Total used vehicle gross profit:
Same store	$	26,874	$	35,182	$	(8,308)	(23.6)	%
Acquisitions, open points and dispositions	3,542		2,272		1,270		NM
Total as reported	$	30,416	$	37,454	$	(7,038)	(18.8)	%

Total used vehicle unit sales:
Same store	23,949		27,110		(3,161)		(11.7)	%
Acquisitions, open points and dispositions	24		1,761		(1,737)		NM
Total as reported	23,973		28,871		(4,898)		(17.0)	%

NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	1,099,852	$	1,183,279	$	(83,427)	(7.1)	%
Acquisitions, open points and dispositions	2,735		57,760		(55,025)		NM
Total as reported	$	1,102,587	$	1,241,039	$	(138,452)	(11.2)	%

Total used vehicle gross profit:
Same store	$	59,153	$	67,640	$	(8,487)	(12.5)	%
Acquisitions, open points and dispositions	3,577		6,551		(2,974)		NM
Total as reported	$	62,730	$	74,191	$	(11,461)	(15.4)	%

Total used vehicle unit sales:
Same store	49,871		52,601		(2,730)		(5.2)	%
Acquisitions, open points and dispositions	140		3,682		(3,542)		NM
Total as reported	50,011		56,283		(6,272)		(11.1)	%
NM = Not Meaningful

Our Franchised Dealerships Segment reported retail used vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue	$	535,699		$	637,090		$	(101,391)	(15.9)	%
Gross profit	$	30,416		$	37,454		$	(7,038)	(18.8)	%
Unit sales	23,973			28,871			(4,898)		(17.0)	%
Revenue per unit	$	22,346		$	22,067		$	279	1.3	%
Gross profit per unit	$	1,269		$	1,297		$	(28)	(2.2)	%
Gross profit as a % of revenue	5.7		%	5.9		%	(20)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue	$	1,102,587		$	1,241,039		$	(138,452)	(11.2)	%
Gross profit	$	62,730		$	74,191		$	(11,461)	(15.4)	%
Unit sales	50,011			56,283			(6,272)		(11.1)	%
Revenue per unit	$	22,047		$	22,050		$	(3)	—	%
Gross profit per unit	$	1,254		$	1,318		$	(64)	(4.9)	%
Gross profit as a % of revenue	5.7		%	6.0		%	(30)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Franchised Dealerships Segment same store retail used vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle:
Revenue	$	535,252		$	609,567		$	(74,315)	(12.2)	%
Gross profit	$	26,874		$	35,182		$	(8,308)	(23.6)	%
Unit sales	23,949			27,110			(3,161)		(11.7)	%
Revenue per unit	$	22,350		$	22,485		$	(135)	(0.6)	%
Gross profit per unit	$	1,122		$	1,298		$	(176)	(13.6)	%
Gross profit as a % of revenue	5.0		%	5.8		%	(80)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle:
Revenue	$	1,099,852		$	1,183,279		$	(83,427)	(7.1)	%
Gross profit	$	59,153		$	67,640		$	(8,487)	(12.5)	%
Unit sales	49,871			52,601			(2,730)		(5.2)	%
Revenue per unit	$	22,054		$	22,495		$	(441)	(2.0)	%
Gross profit per unit	$	1,186		$	1,286		$	(100)	(7.8)	%
Gross profit as a % of revenue	5.4		%	5.7		%	(30)		bps

Same Store Franchised Dealerships Segment Used Vehicles – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Retail used vehicle revenue decreased 12.2% and retail used vehicle unit sales volume decreased 11.7%, driven by decreases in retail used vehicle unit sales volume in the majority of our markets as a result of governmental orders that restricted vehicle sales activity and disrupted consumer behavior during the second quarter of 2020 due to the COVID-19 pandemic. Such impact was particularly meaningful in our California stores, which represented over 70% of the decrease in retail used vehicle unit sales volume compared to the prior year period. Retail used vehicle gross profit decreased approximately $8.3 million, or 23.6%, driven primarily by a decrease in retail used vehicle unit sales volume as well a decrease in retail used vehicle gross profit per unit of approximately $176 per unit, or 13.6%, as a result of strategic pricing decisions we made in April 2020 to drive incremental sales volume and turn our pre-pandemic used vehicle inventory.

Same Store Franchised Dealerships Segment Used Vehicles – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Retail used vehicle revenue decreased 7.1% and retail used vehicle unit sales volume decreased 5.2%, driven by decreases in retail used vehicle unit sales volume in the majority of our markets as a result of governmental orders that restricted vehicle sales activity and disrupted consumer behavior during March and April 2020 due to the COVID-19 pandemic. Such impact was particularly meaningful in our California stores, which represented 100% of the decrease in retail used vehicle unit sales volume compared to the prior year period. Retail used vehicle gross profit decreased approximately $8.5 million, or 12.5%, driven primarily by a decrease in retail used vehicle unit sales volume as well as a decrease in retail used vehicle gross profit per unit of approximately $100 per unit, or 7.8%, as a result of strategic pricing decisions we made in April 2020 to drive incremental sales volume and turn our pre-pandemic used vehicle inventory.

Wholesale Vehicles – Franchised Dealerships Segment

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a reconciliation of Franchised Dealerships Segment reported basis and same store basis for wholesale vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	28,407	$	41,795	$	(13,388)	(32.0)	%
Acquisitions, open points and dispositions	102		1,925		(1,823)		NM
Total as reported	$	28,509	$	43,720	$	(15,211)	(34.8)	%

Total wholesale vehicle gross profit (loss):
Same store	$	(317)	$	(421)	$	104	24.7	%
Acquisitions, open points and dispositions	(40)		(249)		209		NM
Total as reported	$	(357)	$	(670)	$	313	46.7	%

Total wholesale vehicle unit sales:
Same store	4,811		6,362		(1,551)		(24.4)	%
Acquisitions, open points and dispositions	16		598		(582)		NM
Total as reported	4,827		6,960		(2,133)		(30.6)	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	70,720	$	91,383	$	(20,663)	(22.6)	%
Acquisitions, open points and dispositions	228		4,870		(4,642)		NM
Total as reported	$	70,948	$	96,253	$	(25,305)	(26.3)	%

Total wholesale vehicle gross profit (loss):
Same store	$	(375)	$	(1,421)	$	1,046	73.6	%
Acquisitions, open points and dispositions	(65)		(453)		388		NM
Total as reported	$	(440)	$	(1,874)	$	1,434	76.5	%

Total wholesale vehicle unit sales:
Same store	11,703		13,807		(2,104)		(15.2)	%
Acquisitions, open points and dispositions	34		1,301		(1,267)		NM
Total as reported	11,737		15,108		(3,371)		(22.3)	%
NM = Not Meaningful

Our Franchised Dealerships Segment reported wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	28,509		$	43,720		$	(15,211)	(34.8)	%
Gross profit (loss)	$	(357)		$	(670)		$	313	46.7	%
Unit sales	4,827			6,960			(2,133)		(30.6)	%
Revenue per unit	$	5,906		$	6,282		$	(376)	(6.0)	%
Gross profit (loss) per unit	$	(74)		$	(96)		$	22	22.9	%
Gross profit (loss) as a % of revenue	(1.3)		%	(1.5)		%	20		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	70,948		$	96,253		$	(25,305)	(26.3)	%
Gross profit (loss)	$	(440)		$	(1,874)		$	1,434	76.5	%
Unit sales	11,737			15,108			(3,371)		(22.3)	%
Revenue per unit	$	6,045		$	6,371		$	(326)	(5.1)	%
Gross profit (loss) per unit	$	(37)		$	(124)		$	87	70.2	%
Gross profit (loss) as a % of revenue	(0.6)		%	(1.9)		%	130		bps

Our Franchised Dealerships Segment same store wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	28,407		$	41,795		$	(13,388)	(32.0)	%
Gross profit (loss)	$	(317)		$	(421)		$	104	24.7	%
Unit sales	4,811			6,362			(1,551)		(24.4)	%
Revenue per unit	$	5,905		$	6,569		$	(664)	(10.1)	%
Gross profit (loss) per unit	$	(66)		$	(66)		$	—	—	%
Gross profit (loss) as a % of revenue	(1.1)		%	(1.0)		%	(10)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	70,720		$	91,383		$	(20,663)	(22.6)	%
Gross profit (loss)	$	(375)		$	(1,421)		$	1,046	73.6	%
Unit sales	11,703			13,807			(2,104)		(15.2)	%
Revenue per unit	$	6,043		$	6,619		$	(576)	(8.7)	%
Gross profit (loss) per unit	$	(32)		$	(103)		$	71	68.9	%
Gross profit (loss) as a % of revenue	(0.5)		%	(1.6)		%	110		bps

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 of June 30, 2020 and 2019, respectively. Wholesale vehicle revenue and wholesale vehicle unit sales volume fluctuations are typically a result of retail new and used vehicle unit sales volumes that generate additional trade-in vehicle volume that we are not always able to sell as retail used vehicles and choose to sell at auction. Whenever possible, we prefer to sell a used vehicle through retail channels rather than wholesaling the vehicle at auction due to the opportunity to sell F&I products and to avoid auction and transportation fees.

Same Store Franchised Dealerships Segment Wholesale Vehicles – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Wholesale vehicle revenue decreased 32.0%, driven primarily by a 24.4% decrease in wholesale vehicle unit sales volume, as well as a 10.1% decrease in wholesale vehicle revenue per unit. The decrease in wholesale vehicle revenue is due in part to a reduction in wholesale auction activity due to the economic shutdown caused by the outbreak of COVID-19. Wholesale vehicle gross loss decreased 24.7%, primarily due to lower wholesale vehicle unit sales volume and flat wholesale vehicle gross loss per unit as a result of significant reductions in wholesale auction availability and transaction volume due to the COVID-19 pandemic.

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Same Store Franchised Dealerships Segment Wholesale Vehicles – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Wholesale vehicle revenue decreased 22.6%, driven primarily by a 15.2% decrease in wholesale vehicle unit sales volume, as well as an 8.7% decrease in wholesale vehicle revenue per unit. The decrease in wholesale vehicle revenue is due in part to a reduction in wholesale auction activity due to the economic shutdown caused by the outbreak of COVID-19. Wholesale vehicle gross loss and wholesale vehicle gross loss per unit decreased 73.6% and 68.9%, respectively, as a result of significant reductions in wholesale auction availability and transaction volume due to the COVID-19 pandemic.

Fixed Operations – Franchised Dealerships Segment

Parts, service and collision repair revenues consist of customer pay repairs, warranty repairs, wholesale parts and internal, sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, manufacturer recalls, customer loyalty and prepaid or manufacturer-paid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles that are later sold to customers. When that work is performed by one of our dealerships, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.

We believe that, over time, vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualified technicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that, over the long term, we have the ability to continue to add service capacity at our dealerships to further increase Fixed Operations revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitate long-term growth in our parts and service business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future customer pay or warranty-related revenues.

The following tables provide a reconciliation of Franchised Dealerships Segment reported basis and same store basis for Fixed Operations:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	252,330	$	334,300	$	(81,970)	(24.5)	%
Acquisitions, open points and dispositions	(332)		13,037		(13,369)		NM
Total as reported	$	251,998	$	347,337	$	(95,339)	(27.4)	%

Total Fixed Operations gross profit:
Same store	$	124,019	$	164,061	$	(40,042)	(24.4)	%
Acquisitions, open points and dispositions	446		6,647		(6,201)		NM
Total as reported	$	124,465	$	170,708	$	(46,243)	(27.1)	%

NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	576,297	$	653,890	$	(77,593)	(11.9)	%
Acquisitions, open points and dispositions	202		29,673		(29,471)		NM
Total as reported	$	576,499	$	683,563	$	(107,064)	(15.7)	%

Total Fixed Operations gross profit:
Same store	$	281,803	$	318,774	$	(36,971)	(11.6)	%
Acquisitions, open points and dispositions	758		15,380		(14,622)		NM
Total as reported	$	282,561	$	334,154	$	(51,593)	(15.4)	%
NM = Not Meaningful

Our Franchised Dealerships Segment reported Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Reported Fixed Operations:
Revenue
Customer pay	$	110,444		$	141,944		$	(31,500)	(22.2)	%
Warranty	49,326			69,809			(20,483)		(29.3)	%
Wholesale parts	26,352			40,027			(13,675)		(34.2)	%
Internal, sublet and other	65,876			95,557			(29,681)		(31.1)	%
Total revenue	$	251,998		$	347,337		$	(95,339)	(27.4)	%

Gross profit
Customer pay	$	62,461		$	77,653		$	(15,192)	(19.6)	%
Warranty	27,720			39,039			(11,319)		(29.0)	%
Wholesale parts	4,506			6,872			(2,366)		(34.4)	%
Internal, sublet and other	29,778			47,144			(17,366)		(36.8)	%
Total gross profit	$	124,465		$	170,708		$	(46,243)	(27.1)	%

Gross profit as a % of revenue
Customer pay	56.6		%	54.7		%	190		bps
Warranty	56.2		%	55.9		%	30		bps
Wholesale parts	17.1		%	17.2		%	(10)		bps
Internal, sublet and other	45.2		%	49.3		%	(410)		bps
Total gross profit as a % of revenue	49.4		%	49.1		%	30		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Reported Fixed Operations:
Revenue
Customer pay	$	245,242		$	279,513		$	(34,271)	(12.3)	%
Warranty	110,086			138,782			(28,696)		(20.7)	%
Wholesale parts	65,058			79,325			(14,267)		(18.0)	%
Internal, sublet and other	156,113			185,943			(29,830)		(16.0)	%
Total revenue	$	576,499		$	683,563		$	(107,064)	(15.7)	%

Gross profit
Customer pay	$	137,054		$	151,977		$	(14,923)	(9.8)	%
Warranty	61,466			77,447			(15,981)		(20.6)	%
Wholesale parts	11,173			13,668			(2,495)		(18.3)	%
Internal, sublet and other	72,868			91,062			(18,194)		(20.0)	%
Total gross profit	$	282,561		$	334,154		$	(51,593)	(15.4)	%

Gross profit as a % of revenue
Customer pay	55.9		%	54.4		%	150		bps
Warranty	55.8		%	55.8		%	—		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	46.7		%	49.0		%	(230)		bps
Total gross profit as a % of revenue	49.0		%	48.9		%	10		bps

Our Franchised Dealerships Segment same store Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Same store Fixed Operations:
Revenue
Customer pay	$	111,421		$	135,721		$	(24,300)	(17.9)	%
Warranty	48,672			68,095			(19,423)		(28.5)	%
Wholesale parts	26,207			39,522			(13,315)		(33.7)	%
Internal, sublet and other	66,030			90,962			(24,932)		(27.4)	%
Total revenue	$	252,330		$	334,300		$	(81,970)	(24.5)	%

Gross profit
Customer pay	$	62,538		$	74,411		$	(11,873)	(16.0)	%
Warranty	27,331			38,047			(10,716)		(28.2)	%
Wholesale parts	4,505			6,780			(2,275)		(33.6)	%
Internal, sublet and other	29,645			44,823			(15,178)		(33.9)	%
Total gross profit	$	124,019		$	164,061		$	(40,042)	(24.4)	%

Gross profit as a % of revenue
Customer pay	56.1		%	54.8		%	130		bps
Warranty	56.2		%	55.9		%	30		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	44.9		%	49.3		%	(440)		bps
Total gross profit as a % of revenue	49.1		%	49.1		%	—		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Same store Fixed Operations:
Revenue
Customer pay	$	245,883		$	266,774		$	(20,891)	(7.8)	%
Warranty	109,804			133,383			(23,579)		(17.7)	%
Wholesale parts	64,894			77,663			(12,769)		(16.4)	%
Internal, sublet and other	155,716			176,070			(20,354)		(11.6)	%
Total revenue	$	576,297		$	653,890		$	(77,593)	(11.9)	%

Gross profit
Customer pay	$	137,169		$	145,377		$	(8,208)	(5.6)	%
Warranty	61,142			74,470			(13,328)		(17.9)	%
Wholesale parts	11,169			13,342			(2,173)		(16.3)	%
Internal, sublet and other	72,323			85,585			(13,262)		(15.5)	%
Total gross profit	$	281,803		$	318,774		$	(36,971)	(11.6)	%

Gross profit as a % of revenue
Customer pay	55.8		%	54.5		%	130		bps
Warranty	55.7		%	55.8		%	(10)		bps
Wholesale parts	17.2		%	17.2		%	—		bps
Internal, sublet and other	46.4		%	48.6		%	(220)		bps
Total gross profit as a % of revenue	48.9		%	48.8		%	10		bps

Same Store Franchised Dealerships Segment Fixed Operations – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Fixed Operations revenue decreased approximately $82.0 million, or 24.5%, and Fixed Operations gross profit decreased approximately $40.0 million, or 24.4%. Customer pay gross profit decreased approximately $11.9 million, or 16.0%, warranty gross profit decreased approximately $10.7 million, or 28.2%, wholesale parts gross profit decreased approximately $2.3 million, or 33.6%, and internal, sublet and other gross profit decreased approximately $15.2 million, or 33.9%. While our Fixed Operations business was not restricted by state and local shelter-in-place or stay-at-home orders, consumer behavior was disrupted by such orders beginning in March 2020 and we experienced lower levels of Fixed Operations activity in the second quarter of 2020.

Same Store Franchised Dealerships Segment Fixed Operations – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Fixed Operations revenue decreased approximately $77.6 million, or 11.9%, and Fixed Operations gross profit decreased approximately $37.0 million, or 11.6%. Customer pay gross profit decreased approximately $8.2 million, or 5.6%, warranty gross profit decreased approximately $13.3 million, or 17.9%, wholesale parts gross profit decreased approximately $2.2 million, or 16.3%, and internal, sublet and other gross profit decreased approximately $13.3 million, or 15.5%. While our Fixed Operations business was not restricted by state and local shelter-in-place or stay-at-home orders, consumer behavior was disrupted by such orders beginning in March 2020 and we experienced lower levels of Fixed Operations activity in the second quarter of 2020.

F&I – Franchised Dealerships Segment

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.

The following tables provide a reconciliation of Franchised Dealerships Segment reported basis and same store basis for F&I:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Total F&I revenue:
Same store	$	75,558	$	82,399	$	(6,841)	(8.3)	%
Acquisitions, open points and dispositions	4,843		7,108		(2,265)		NM
Total as reported	$	80,401	$	89,507	$	(9,106)	(10.2)	%

Total F&I gross profit per retail unit (excludes fleet):
Same store	$	1,730	$	1,554	$	176	11.3	%
Reported	$	1,839	$	1,581	$	258	16.3	%

Total combined new and used retail unit sales:
Same store	43,683		53,028		(9,345)		(17.6)	%
Acquisitions, open points and dispositions	31		3,598		(3,567)		NM
Total as reported	43,714		56,626		(12,912)		(22.8)	%

NM = Not Meaningful




	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Total F&I revenue:
Same store	$	154,149	$	155,819	$	(1,670)	(1.1)	%
Acquisitions, open points and dispositions	9,280		14,209		(4,929)		NM
Total as reported	$	163,429	$	170,028	$	(6,599)	(3.9)	%

Total F&I gross profit per retail unit (excludes fleet):
Same store	$	1,699	$	1,538	$	161	10.5	%
Reported	$	1,798	$	1,561	$	237	15.2	%

Total combined new and used retail unit sales:
Same store	90,711		101,331		(10,620)		(10.5)	%
Acquisitions, open points and dispositions	180		7,625		(7,445)		NM
Total as reported	90,891		108,956		(18,065)		(16.6)	%

NM = Not Meaningful

Our Franchised Dealerships Segment reported F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported F&I:
Revenue	$	80,401	$	89,507	$	(9,106)	(10.2)	%
Unit sales	43,714		56,626		(12,912)		(22.8)	%
Gross profit per retail unit (excludes fleet)	$	1,839	$	1,581	$	258	16.3	%

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported F&I:
Revenue	$	163,429	$	170,028	$	(6,599)	(3.9)	%
Unit sales	90,891		108,956		(18,065)		(16.6)	%
Gross profit per retail unit (excludes fleet)	$	1,798	$	1,561	$	237	15.2	%

Our Franchised Dealerships Segment same store F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store F&I:
Revenue	$	75,558	$	82,399	$	(6,841)	(8.3)	%
Unit sales	43,683		53,028		(9,345)		(17.6)	%
Gross profit per retail unit (excludes fleet)	$	1,730	$	1,554	$	176	11.3	%


	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store F&I:
Revenue	$	154,149	$	155,819	$	(1,670)	(1.1)	%
Unit sales	90,711		101,331		(10,620)		(10.5)	%
Gross profit per retail unit (excludes fleet)	$	1,699	$	1,538	$	161	10.5	%

Same Store Franchised Dealerships Segment F&I – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

F&I revenues decreased approximately $6.8 million, or 8.3%, due to a 17.6% decrease in retail new and used vehicle unit sales volume, offset partially by an increase in F&I gross profit per retail unit. F&I gross profit per retail unit increased $176 per unit, or 11.3%, to $1,730 per unit, primarily due to increases in finance contract and service contract penetration rates.

Finance contract revenue decreased 16.6%, primarily due to a 13.9% decrease in finance contract volume as a result of lower retail new and used vehicle unit sales volume, and a 3.1% decrease in gross profit per finance contract, partially offset by a 350 basis point increase in the finance contract penetration rate. Service contract revenue decreased 4.8%, primarily due to a 6.4% decrease in service contract volume as a result of lower retail new and used vehicle unit sales volume, partially offset by a 1.8% increase in gross profit per service contract and a 450 basis point increase in the service contract penetration rate. Other aftermarket contract revenue decreased 18.1%, primarily due to a 17.8% decrease in other aftermarket contact volume and a 0.4% decrease in gross profit per other aftermarket contract. The other aftermarket contract penetration rate decreased 30 basis points. Consistent with other revenue and gross profit streams, F&I revenue and gross profit were adversely impacted by the effect of lower retail new and used vehicle sales as a result of the COVID-19 pandemic in the second quarter of 2020.

Same Store Franchised Dealerships Segment F&I – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

F&I revenues decreased approximately $1.7 million, or 1.1%, due to a 10.5% decrease in retail new and used vehicle unit sales volume, offset partially by an increase in F&I gross profit per retail unit. F&I gross profit per retail unit increased $161 per unit, or 10.5%, to $1,699 per unit, primarily due to increases in finance contract and service contract penetration rates.

Finance contract revenue decreased 7.1%, primarily due to a 9.0% decrease in finance contract volume as a result of lower retail new and used vehicle unit sales volume, partially offset by a 2.0% increase in gross profit per finance contract and a 130 basis point increase in the finance contract penetration rate. Service contract revenue decreased 0.4%, primarily due to a 0.7% decrease in service contract volume as a result of lower retail new and used vehicle unit sales volume, partially offset by a 0.2% increase in gross profit per service contract and a 370 basis point increase in the service contract penetration rate. Other aftermarket contract revenue decreased 9.5%, primarily due to an 8.4% decrease in other aftermarket contract volume and a 1.2% decrease in gross profit per other aftermarket contract. The other aftermarket contract penetration rate increased 320 basis

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

points. Consistent with other revenue and gross profit streams, F&I revenue and gross profit were adversely impacted by the effect of lower retail new and used vehicle sales as a result of the COVID-19 pandemic in the first half of 2020.

Results of Operations – EchoPark Segment

Unless otherwise noted, all discussion of increases or decreases are for the three and six months ended June 30, 2020 and are compared to the same prior year period, as applicable. The following discussion of used vehicles and F&I, wholesale vehicles, and parts, service and collision repair are on a same store basis, except where otherwise noted. All currently operating stores are included within the same store group in the first full month following the first anniversary of the store’s opening or acquisition.

The EchoPark Segment same store results consist of the results of eight EchoPark stores, four in Texas, three in Colorado and one in North Carolina, for the three and six months ended June 30, 2020 compared to the same prior year period, as applicable. Due to the ongoing expansion of our EchoPark Segment, same store results may vary significantly from reported results due to stores that began operations in the last 12 months.

Used Vehicles and F&I – EchoPark Segment

Based on the way we manage the EchoPark Segment, our operating strategy focuses on maximizing total used vehicle-related gross profit (based on a combination of retail used vehicle unit sales volume, front-end retail used vehicle gross profit per unit and F&I gross profit per unit) rather than realizing traditional levels of front-end retail used vehicle gross profit per unit. As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is a combined total gross profit per unit, which includes both front-end retail used vehicle gross profit and F&I gross profit per unit sold.

See the discussion in Franchised Dealerships Segment Results of Operations for a discussion of the macro drivers of used vehicle revenues and F&I revenues.

The following tables provide a reconciliation of EchoPark Segment reported basis and same store basis for retail used vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	243,043	$	248,536	$	(5,493)	(2.2)	%
Acquisitions, open points and closures	30,135		1		30,134		NM
Total as reported	$	273,178	$	248,537	$	24,641	9.9	%

Total used vehicle gross profit (loss):
Same store	$	(3,988)	$	(2,464)	$	(1,524)	(61.9)	%
Acquisitions, open points and closures	943		1,739		(796)		NM
Total as reported	$	(3,045)	$	(725)	$	(2,320)	(320.0)	%

Total used vehicle unit sales:
Same store	11,716		12,587		(871)		(6.9)	%
Acquisitions, open points and closures	1,491		—		1,491		NM
Total as reported	13,207		12,587		620		4.9	%

NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total used vehicle revenue:
Same store	$	508,343	$	464,953	$	43,390	9.3	%
Acquisitions, open points and closures	48,000		—		48,000		NM
Total as reported	$	556,343	$	464,953	$	91,390	19.7	%

Total used vehicle gross profit:
Same store	$	(5,832)	$	(2,721)	$	(3,111)	(114.3)	%
Acquisitions, open points and closures	2,604		2,266		338		NM
Total as reported	$	(3,228)	$	(455)	$	(2,773)	(609.5)	%

Total used vehicle unit sales:
Same store	24,783		23,638		1,145		4.8	%
Acquisitions, open points and closures	2,410		—		2,410		NM
Total as reported	27,193		23,638		3,555		15.0	%
NM = Not Meaningful

The following tables provide a reconciliation of EchoPark Segment reported basis and same store basis for F&I:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total F&I revenue:
Same store	$	27,049	$	28,605	$	(1,556)	(5.4)	%
Acquisitions, open points and closures	3,323		237		3,086		NM
Total as reported	$	30,372	$	28,842	$	1,530	5.3	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total F&I revenue:
Same store	$	57,273	$	54,252	$	3,021	5.6	%
Acquisitions, open points and closures	5,362		307		5,055		NM
Total as reported	$	62,635	$	54,559	$	8,076	14.8	%
NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our EchoPark Segment reported retail used vehicle and F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle and F&I:
Used vehicle revenue	$	273,178	$	248,537	$	24,641	9.9	%
Used vehicle gross profit (loss)	$	(3,045)	$	(725)	$	(2,320)	(320.0)	%
Used vehicle unit sales	13,207		12,587		620		4.9	%
Used vehicle revenue per unit	$	20,684	$	19,746	$	938	4.8	%
F&I revenue	$	30,372	$	28,842	$	1,530	5.3	%
Combined used vehicle gross profit and F&I revenue	$	27,327	$	28,117	$	(790)	(2.8)	%
Total used vehicle and F&I gross profit per unit	$	2,069	$	2,234	$	(165)	(7.4)	%



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Reported used vehicle and F&I:
Used vehicle revenue	$	556,343	$	464,953	$	91,390	19.7	%
Used vehicle gross profit (loss)	$	(3,228)	$	(455)	$	(2,773)	(609.5)	%
Used vehicle unit sales	27,193		23,638		3,555		15.0	%
Used vehicle revenue per unit	$	20,459	$	19,670	$	789	4.0	%
F&I revenue	$	62,635	$	54,559	$	8,076	14.8	%
Combined used vehicle gross profit and F&I revenue	$	59,407	$	54,104	$	5,303	9.8	%
Total used vehicle and F&I gross profit per unit	$	2,185	$	2,289	$	(104)	(4.5)	%

Our EchoPark Segment same store retail used vehicle and F&I results are as follows:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle and F&I:
Used vehicle revenue	$	243,043	$	248,536	$	(5,493)	(2.2)	%
Used vehicle gross profit (loss)	$	(3,988)	$	(2,464)	$	(1,524)	(61.9)	%
Used vehicle unit sales	11,716		12,587		(871)		(6.9)	%
Used vehicle revenue per unit	$	20,745	$	19,745	$	1,000	5.1	%
F&I revenue	$	27,049	$	28,605	$	(1,556)	(5.4)	%
Combined used vehicle gross profit and F&I revenue	$	23,061	$	26,141	$	(3,080)	(11.8)	%
Total used vehicle and F&I gross profit per unit	$	1,968	$	2,077	$	(109)	(5.2)	%

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit and per unit data)
Same store used vehicle and F&I:
Used vehicle revenue	$	508,343	$	464,953	$	43,390	9.3	%
Used vehicle gross profit (loss)	$	(5,832)	$	(2,721)	$	(3,111)	(114.3)	%
Used vehicle unit sales	24,783		23,638		1,145		4.8	%
Used vehicle revenue per unit	$	20,512	$	19,670	$	842	4.3	%
F&I revenue	$	57,273	$	54,252	$	3,021	5.6	%
Combined used vehicle gross profit and F&I revenue	$	51,441	$	51,531	$	(90)	(0.2)	%
Total used vehicle and F&I gross profit per unit	$	2,076	$	2,180	$	(104)	(4.8)	%

Same Store EchoPark Segment Used Vehicles and F&I – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Retail used vehicle revenue decreased approximately $5.5 million, or 2.2%, driven primarily by a 6.9% decrease in retail used vehicle unit sales volume as a result of decreased consumer demand due to the COVID-19 pandemic, offset partially by a $1,000 per unit, or 5.1%, increase in retail used vehicle revenue per unit. Combined used vehicle gross profit and F&I revenue decreased approximately $3.1 million, or 11.8%, driven by lower retail used vehicle unit sales volume and a $109 per unit, or 5.2%, decreased in total used vehicle and F&I gross profit per unit as a result of strategic pricing reductions that were made in April 2020 to drive additional sales volume and turn pre-pandemic inventory. Finance contract gross profit decreased approximately $1.3 million, or 6.5%, due to lower retail used vehicle unit sales volume, offset partially by a 220-basis point increase in the finance contract penetration rate. Service contract gross profit decreased approximately $0.9 million, or 5.1%, due to lower retail used vehicle unit sales volume, offset partially by a 260-basis point increase in the service contract penetration rate. Other aftermarket product gross profit decreased approximately $4.4 million, or 14.6%, due primarily to a 14.4% decrease in total aftermarket contracts.

Same Store EchoPark Segment Used Vehicles and F&I – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Retail used vehicle revenue increased approximately $43.4 million, or 9.3%, driven primarily by a 4.8% increase in retail used vehicle unit sales volume and an 4.3%, increase in retail used vehicle revenue per unit. Strength in retail used vehicle unit sales volume in the first quarter of 2020 more than offset the challenges we faced in the second quarter of 2020 as a result of the COVID-19 pandemic, demonstrating the strength of the EchoPark model. Combined used vehicle gross profit and F&I revenue decreased approximately $0.1 million, or 0.2%, driven by a $104 per unit, or 4.8% decrease in total used vehicle and F&I gross profit per unit as a result of strategic pricing reductions that were made in April 2020 to drive additional sales volume and turn pre-pandemic inventory, offset partially by higher retail used vehicle unit sales volume. Finance contract gross profit increased approximately $0.2 million, or 0.5%, due to higher retail used vehicle unit sales volume and a 100-basis point increase in the finance contract penetration rate. Service contract gross profit increased approximately 0.4 million, or 1.1%, due to a higher retail used vehicle unit sales volume and a 250-basis point increase in the service contract penetration rate. Other aftermarket product gross profit decreased approximately $3.1 million, or 5.5%, due primarily to a 4.3% decrease in total aftermarket contracts.

Wholesale Vehicles – EchoPark Segment

See the discussion in Franchised Dealerships Segment Results of Operations for a discussion of the macro drivers of wholesale vehicle revenues.

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a reconciliation of EchoPark Segment reported basis and same store basis for wholesale vehicles:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	4,349	$	6,320	$	(1,971)	(31.2)	%
Acquisitions, open points and closures	317		(1)		318		NM
Total as reported	$	4,666	$	6,319	$	(1,653)	(26.2)	%

Total wholesale vehicle gross profit (loss):
Same store	$	(69)	$	(42)	$	(27)	(64.3)	%
Acquisitions, open points and closures	—		(1)		1		NM
Total as reported	$	(69)	$	(43)	$	(26)	(60.5)	%

Total wholesale vehicle unit sales:
Same store	1,319		1,686		(367)		(21.8)	%
Acquisitions, open points and closures	135		—		135		NM
Total as reported	1,454		1,686		(232)		(13.8)	%

NM = Not Meaningful



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store	$	10,223	$	8,556	$	1,667	19.5	%
Acquisitions, open points and closures	547		1		546		NM
Total as reported	$	10,770	$	8,557	$	2,213	25.9	%

Total wholesale vehicle gross profit (loss):
Same store	$	(139)	$	(105)	$	(34)	(32.4)	%
Acquisitions, open points and closures	(6)		—		(6)		NM
Total as reported	$	(145)	$	(105)	$	(40)	(38.1)	%

Total wholesale vehicle unit sales:
Same store	2,995		2,185		810		37.1	%
Acquisitions, open points and closures	224		—		224		NM
Total as reported	3,219		2,185		1,034		47.3	%
NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our EchoPark Segment reported wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	4,666		$	6,319		$	(1,653)	(26.2)	%
Gross profit (loss)	$	(69)		$	(43)		$	(26)	(60.5)	%
Unit sales	1,454			1,686			(232)		(13.8)	%
Revenue per unit	$	3,209		$	3,748		$	(539)	(14.4)	%
Gross profit (loss) per unit	$	(47)		$	(26)		$	(21)	(80.8)	%
Gross profit (loss) as a % of revenue	(1.5)		%	(0.7)		%	(80)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue	$	10,770		$	8,557		$	2,213	25.9	%
Gross profit (loss)	$	(145)		$	(105)		$	(40)	(38.1)	%
Unit sales	3,219			2,185			1,034		47.3	%
Revenue per unit	$	3,346		$	3,916		$	(570)	(14.6)	%
Gross profit (loss) per unit	$	(45)		$	(48)		$	3	6.3	%
Gross profit (loss) as a % of revenue	(1.3)		%	(1.2)		%	(10)		bps

Our EchoPark Segment same store wholesale vehicle results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	4,349		$	6,320		$	(1,971)	(31.2)	%
Gross profit (loss)	$	(69)		$	(42)		$	(27)	(64.3)	%
Unit sales	1,319			1,686			(367)		(21.8)	%
Revenue per unit	$	3,297		$	3,749		$	(452)	(12.1)	%
Gross profit (loss) per unit	$	(52)		$	(25)		$	(27)	(108.0)	%
Gross profit (loss) as a % of revenue	(1.6)		%	(0.7)		%	(90)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue	$	10,223		$	8,556		$	1,667	19.5	%
Gross profit (loss)	$	(139)		$	(105)		$	(34)	(32.4)	%
Unit sales	2,995			2,185			810		37.1	%
Revenue per unit	$	3,413		$	3,916		$	(503)	(12.8)	%
Gross profit (loss) per unit	$	(46)		$	(48)		$	2	4.2	%
Gross profit (loss) as a % of revenue	(1.4)		%	(1.2)		%	(20)		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Same Store EchoPark Segment Wholesale Vehicles – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Wholesale vehicle revenue decreased, due to decreases in wholesale vehicle unit sales volume and wholesale vehicle revenue per unit. Wholesale vehicle gross loss was flat. Given EchoPark’s retail inventory mix, the majority of vehicles acquired from customers on trade-ins cannot be sold as retail at our EchoPark stores and are subsequently sold at auction, affecting our wholesale vehicle gross profit (loss). However, a successful acquisition of a customer’s trade-in vehicle often facilitates a retail used vehicle sale transaction that otherwise may not have occurred, driving higher overall gross profit. Our overall EchoPark inventory acquisition and pricing strategy reduces the risk of aged inventory that must be sold at auction (which would typically have a higher wholesale vehicle gross loss per unit) and increases the volume of trade-ins that we obtain from customers. 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 out 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 of June 30, 2020 and 2019, respectively, above our target range as of June 30, 2020 due to lower than typical vehicle unit sales volume in April and May 2020 and our new Tampa, Florida store which opened in April 2020.

Same Store EchoPark Segment Wholesale Vehicles – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Wholesale vehicle revenue increased, due to increased wholesale vehicle unit sales volume as a result of a shift in our inventory acquisition and pricing strategy at our EchoPark stores during the second quarter of 2018. Prior to this, EchoPark inventory was subject to increased risk of aging and wholesale vehicle gross loss, which drove higher wholesale transaction volumes. Wholesale vehicle gross loss increased as a result of the evolution of our customer trade-in vehicle appraisal strategy, which has enabled us to trade for more customer vehicles. Given EchoPark’s retail inventory mix, the majority of vehicles acquired from customers on trade-ins cannot be sold as retail at our EchoPark stores and are subsequently sold at auction, affecting our wholesale vehicle gross profit (loss). However, a successful acquisition of a customer’s trade-in vehicle often facilitates a retail used vehicle sale transaction that otherwise may not have occurred, driving higher overall gross profit. Our overall EchoPark inventory acquisition and pricing strategy reduces the risk of aged inventory that must be sold at auction (which would typically have a higher wholesale vehicle gross loss per unit) and increases the volume of trade-ins that we obtain from customers.

Fixed Operations – EchoPark Segment

Parts, service and collision repair revenues primarily consist of internal, sublet and other work related to inventory preparation and reconditioning performed on vehicles that are later sold to customers. When that work is performed by one of our stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet. Our EchoPark stores do not currently perform warranty or customer pay repairs or maintenance work.

The following tables provide a reconciliation of EchoPark Segment reported basis and same store basis for Fixed Operations:


	Three Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	6,277	$	7,974	$	(1,697)	(21.3)	%
Acquisitions, open points and closures	783		1		782		NM
Total as reported	$	7,060	$	7,975	$	(915)	(11.5)	%

Total Fixed Operations gross profit (loss):
Same store	$	(141)	$	(141)	$	—	—	%
Acquisitions, open points and closures	(45)		(21)		(24)		NM
Total as reported	$	(186)	$	(162)	$	(24)	(14.8)	%

NM = Not Meaningful

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



	Six Months Ended June 30,						Better / (Worse)
	2020		2019		Change		% Change
	(In thousands)
Total Fixed Operations revenue:
Same store	$	15,852	$	13,179	$	2,673	20.3	%
Acquisitions, open points and closures	1,387		—		1,387		100.0	%
Total as reported	$	17,239	$	13,179	$	4,060	30.8	%

Total Fixed Operations gross profit (loss):
Same store	$	(299)	$	(351)	$	52	14.8	%
Acquisitions, open points and closures	(84)		(21)		(63)		(300.0)	%
Total as reported	$	(383)	$	(372)	$	(11)	(3.0)	%

Our EchoPark Segment reported Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Total reported Fixed Operations:
Revenue	$	7,060		$	7,975		$	(915)	(11.5)	%
Gross profit (loss)	$	(186)		$	(162)		$	(24)	(14.8)	%
Gross profit (loss) as a % of revenue	(2.6)		%	(2.0)		%	(60)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Total reported Fixed Operations:
Revenue	$	17,239		$	13,179		$	4,060	30.8	%
Gross profit (loss)	$	(383)		$	(372)		$	(11)	(3.0)	%
Gross profit (loss) as a % of revenue	(2.2)		%	(2.8)		%	60		bps

Our EchoPark Segment same store Fixed Operations results are as follows:


	Three Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Total same store Fixed Operations:
Revenue	$	6,277		$	7,974		$	(1,697)	(21.3)	%
Gross profit (loss)	$	(141)		$	(141)		$	—	—	%
Gross profit (loss) as a % of revenue	(2.2)		%	(1.8)		%	(40)		bps



	Six Months Ended June 30,								Better / (Worse)
	2020			2019			Change		% Change
	(In thousands)
Total same store Fixed Operations:
Revenue	$	15,852		$	13,179		$	2,673	20.3	%
Gross profit (loss)	$	(299)		$	(351)		$	52	14.8	%
Gross profit (loss) as a % of revenue	(1.9)		%	(2.7)		%	80		bps

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Same Store EchoPark Segment Fixed Operations – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Fixed Operations revenue decreased approximately $1.7 million, or 21.3%, primarily due to lower vehicle unit sales volume (and resulting inventory reconditioning requirements).

Same Store EchoPark Segment Fixed Operations – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Fixed Operations revenue increased approximately $2.7 million, or 20.3%, primarily due to higher vehicle unit sales volume (and resulting inventory reconditioning requirements).

Segment Results Summary

In the following tables of financial data, total segment income of the reportable segments is reconciled to consolidated income (loss) from continuing operations before taxes and impairment charges. See above for tables and discussion of results by reportable segment.


	Three Months Ended June 30,						Better / Worse
	2020		2019		Change		% Change
	(In thousands)
Segment Revenues:
Franchised Dealerships Segment revenues:
New vehicles	$	900,003	$	1,204,754	$	(304,751)	(25.3)	%
Used vehicles	535,699		637,090		(101,391)		(15.9)	%
Wholesale vehicles	28,509		43,720