Quick Thoughts From Sonic’s Investor Presentation At the Detroit Auto Show

I really didn’t hear anything new out of Sonic Automotive's (SAH) management presentation Friday. I think the company continues to move in the direction of empowering its employees with better systems and processes. “Fewer people making more” is a phrase I first heard articulated by the company’s President (Jeff Rachor) and a theme I often repeat when discussing what I think is needed in the auto retail industry.

Further, the idea of Sonic deploying its capital more efficiently, spearheaded by the recent addition of its new CFO David Cosper all look to be moving the company in the right direction. Similar to Group 1 (GPI), Mr. Cosper indicated the company is looking at all options when it comes to leasing versus owning (and using potentially a lower cost financing vehicle of mortgage financing).

Granted, I don’t want people to just get caught up in selling general and administrative (SG&A) expenses as the be all end all judge of operating efficiency. That is a dangerous game as it can reward management teams for failing to invest in the future (and therefore is often short lived). There comes a point when you can’t cost cut your way to prosperity.

BUT, given management’s efforts to transition from an aggregator to operator/integrator, I think the improvement in the company’s SG&A as a percent of gross profit ratio and fixed absorption rate (percent of gross profits generated in the service bay that would theoretically cover the entire dealerships fixed cost) speaks volumes as to just how far they have come. And so I thought I would share with you the data from a slide that illustrates said improvement. . .

SG&A as a percent of gross profits:

2003: 71.9% + 6% (rent) = 77.9% 2004: 70.9% + 6.9% (rent) = 77.8% 2005: 68.8% + 7.3% (rent) = 76.1% 2006 (first nine months) : 66.8% + 7.9% = 74.7%

Fixed absorption rate (gross profits from service and repair facilities that will cover fixed expenses of the entire dealership):

2003: 82.1% 2004: 83.8% 2005: 86.2% 2006: 89.6% (first nine months)

SAH 1-yr chart: