Sonic's Conference Call Shows Management's Priorities in Order

So as we turn to Sonic's (SAH) results, investors seemed uninspired with their reaction (in the stock price) over the last two days. But I could not be more encouraged. I regurgitated the figures to you Tuesday morning so I won't do anything more than remind you that despite all of the industry headwinds (discussed above), Sonic was able to post a 6.3% improvement in earnings per share from continuing operations.

However, I have emphasized that management teams should not use the external environment as an excuse for poor financial results. I don't see the external environment getting better, and if anything it is going to get worse. But the "people and process" leaders are going to gain share and emerge the winners (well beginning with the premise they have product that sells i.e. Oldsmobile).

I can only point to Pendragon, the largest car dealer in the U.K. (a market I consider ahead of the U.S. in the consolidation phase), which has seen compound earnings per share growth of 26.4% over the last five years DESPITE the overall new vehicle environment declining by 5.25% over the last four years. Pendragon also has stores in California (although 95% of the company's revenues are in the U.K)., so keep an eye on them over here too!

In any case, as you have heard me say a thousand times, it is a fragmented but relatively inefficient market (inventory and sales force productivity really hasn't changed in the last 30 years) that gives me such hope that more efficient players will emerge with an "economic event" (a.k.a. industry sales slow down). Although as I indicated above (with my comments about relative performance and Lithia), I also don't think we should be naive and ignore that the environment is difficult. Only that the difficult environment should be a rallying call for management teams to become more focused than ever on positioning themselves with the right brands and within those brands, improving the productivity of their stores (ultimately this means employees because in the dealership world they are your assets).

So while most public dealer management teams came on their conference calls and complained about California being sluggish due to the housing market (well everyone but Asbury), Sonic's management came on their call and said, yeah, California was difficult, but we buckled down (I'm paraphrasing a bit) and were able to improve our profits in that market. Let me repeat that, SONIC'S PROFITS WERE UP IN CALIFORNIA! This is what investors want to hear, not the challenges, but how management teams persevere through said challenges. I think Sonic's employees in that region should be commended.

And when the Q&A section of Sonic's conference call came up, I asked the company's President (Jeff Rachor), just as I had asked Group 1's CEO (Earl Hesterberg), what the top priorities were for 2007. Mr. Rachor launched right into a well thought out response (you could tell he had just gotten back from the company's annual General Managers meeting where he probably articulated a similar vision), that emphasized the company's "formula" (if you will) to get Sonic back on track that they have been focused on for the last two and half years. This "formula" has two primary ingredients; operational excellence, and portfolio enrichment.

I think the portfolio enrichment part is pretty self explanatory, "spend money where you make money" (if you remember). But the operational excellence is the part that I get excited about. For example, when Mr. Rachor was rattling off all of the areas they are focused on improving the company's operations, he pointed out that they haven't just been converting the company's stores to a common (hardware) dealer management system [DMS], but that along with the conversion were some 100 standard processes.

This is something I have been a huge advocate of, and frankly why it likely is taking a company like AutoNation (that is more than twice the size of Sonic) longer than investors want for the company to roll out their common DMS system. You can put the best technology in the world into stores over a pretty short order of time. But if you can't get the technology integrated into the culture, the investment dollars are an exercise of futility. I know this is why Sonic's management (in various areas) at times has actually slowed up the introduction of new technology and processes, so they can go store by store, region by region to make sure the new technology or process actually sticks.

But there is one thing that I need to emphasize. The process improvements and relatively better performance out of both Sonic and Group 1 (GPI) is eerily similar to what I observed out of AutoNation (AN) several years ago (and I similarly got excited). And I should point out it is almost the same story. Management from the manufacturer, who understands the car business comes in and puts in better processes. However, today, as you have heard me articulate over the last few months, in their endeavor for better processes, I worry a company like AutoNation lost sight of their stakeholders (notably their employees), and they need a change at the top to get them back on track.

This is the greatest risk Group 1, Sonic, and really all of the large dealership groups face in the coming years as they implement process improvements. Yes, the organizations need to change. But this remains a highly people intensive business, so at this point, change needs to come as a "win win" both for the employee and the organization. In this regard, I was encouraged to hear Jeff Rachor, in a follow up question I had on the call, say that employee per gross at Sonic has improved. And while candidly he said employee turnover is not where they want it (it was flat year over year), he said employee turnover is "public enemy number one."

The President of Delta Trends recently sent me an email discussing how improving employee retention (by every 10%) (depending on the brand) improves the gross per employee per month by several hundred dollars. So here's a request I have for all of the public dealers, going forward, please start disclosing (at least directionally as Sonic did) how your employee turnover is fairing. Because I think that will be a critical measurement tool for investors going forward.

SAH 1-yr chart: