Sonic Automotive, Inc.
Q4 2007 Earnings Call Transcript

Published: 4 Mar 2008

[Operator:]

Good morning and welcome to the Sonic Automotive fourth quarter 2007 earnings conference call. All Lines has been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. (Operator Instructions) As a reminder, ladies and gentlemen this call is being recorded today Tuesday, February 26, 2008. Presentation materials which management will be reviewing on the conference call can be accessed on the company’s website at www.SonicAutomotive.com by clicking on the for investors tab and choosing webcast and presentations on the left side of the monitor. At this I would like to refer to the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. During this conference call management may discuss financial projections, information, or expectations about the company’s products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission thank you. I would like to now introduce Mr. Scott Smith, President of Sonic Automotive. Mr. Smith you may begin your conference.

[B. Scott Smith:]

Good morning ladies and gentlemen. This is Scott Smith, President and Chief Strategic Officer as co-founder; it is an honor and privilege to be leading our company and this call today. Welcome to Sonic Automotive’s fourth quarter 2007 conference call. Joining me on the call today are the company’s Vice Chairman and Chief Financial Officer, Mr. Dave Cosper, our Divisional Chief Operating officers, Mr. Jeff Dyke and Jim Evans, Rachel Richard our Vice President of Retail Strategy , and Mr. Greg Young our Vice President of Investor Relations. The presentation material for this call today is posted to our website www.sonicautomotive.com and can be accessed by clicking on the for investors tab and choosing webcast and presentations on the left side of your screen. Our comments today will be linked to the slides on this site. If you will please turn to Slide Number One. Discussion topics for today call will include some color from me on our corporate culture, our people, our vision, our strategy and motion, a look back at 2007 accomplishments, our 2008 strategic focus and a review of our fourth quarter performance. We’ll then open the call for questions and we’ll wrap the call up with some closing comments. If you’ll please turn to Slide Two. This Slide is a little bit busy but I think its import for our fellow shareholders to get a better understanding of who we are, what we believe, and how we do it. It’s our corporate culture, our values, our beliefs. On the left of the Slide is a copy of the Sonic Creed Card, while this may be the recipe for success, the secret sauce is really woven into fabric of our culture. Let me call our promises, it’s ASI+GSI+MSI=ROI, this really isn’t rocket science, simply put associate Satisfaction plus guest satisfaction plus our manufacturing satisfaction equals our return on investment or our shareholder satisfaction. Please note that our formula for success all begins with our associates. You’re going to hear us talk a lot about our associates here today. On the right hand side of the Slide we listed some things that are very strong views on the way that we do business. Buildings don’t sell cars, people do. If we take our people our out our buildings, what do we have left? Nothing except empty buildings. We need our people much more than they need us and Bruton and I believe that our people are our greatest assets, and we’re gonna invest in them heavily. We’re investing more in training and development that ever before. We feel strongly that we need to provide our associates with an objective and clear career path for them to be able to map out their entire careers regardless of what position that they’re in our company. We must provide them with the tools and education to enable their success. This is why we’re investing more money than we have before on our people. We like to invest where we make money, and again that begins with our people. We believe it’s essential for us to develop and promote from within. In fact this past year, roughly 75% of the open positions within our company were filled with promotions internally. We also believe that first and foremost, we’re a sales organization and nothing happen until we sell a car. Our 75% sales and 25% cost control means that we focus 75% of our time on generating sales. Closing the books really doesn’t account for any revenue. 25% of the time we’re dedicated to cost control of which we’re the best in our peer group with the lowest SG& A. And all the while we’re committed to taking the high road which simply means we do the right thing all the time. Please turn to Slide Number Three, this is our strategy in motion. I presented this Slide during our first quarter call, the Slide laid out our strategy for 2007 and I’m thrilled to report today that our dedication to the execution of our strategic initiative resulted in Sonic hitting our full year EPS target. Used Vehicles; we completed our champion process and rolled out this process across all our dealerships and began the implementation of our trade desk concept in our fourth quarter. The result; huge retailed volume record in our used, up 6% year-over-year. Our Standard F&I Menu; we rolled out our standard F&I menu across all of our dealerships this past year. The menu allows transparencies to our customers and also all knows our F&I managers to easily sell our products. The results; record F&I retail performance of 9.7% year-over-year. Fixed Ops - Our focus on customer satisfaction, standard sales processes in investment and capacity at key dealerships resulted in all time fixed ops gross profits record up 3.3 % year-over-year. Our DMS; t the end of October our last set of dealerships converted to ADP. While this conversion companywide to ADP was enormous, it’s just the foundation to a much bigger vision and we’ll share more here in a little while. Digital Marketing; approximately 88% of our customers began their car shopping experience online, and we’re investing more than ever before in our infrastructure to enable digital marketing. Growth; we’ve stated all year that we wouldn’t overpay for dealerships and that we’d only acquire dealerships that met our strict return hurdles. The results, four fantastic acquisitions that contributed significantly to our bottom line. Land Rover and Jaguar, Houston north sells BMW Mini, Mercedes of Calabasas and Long Beach BMW and Mini. Combined these stores generated $528 million in revenue last year. While we had more acquisition opportunities we found the market a bit expensive and wouldn’t allow ourselves to stray from our spending principals. As a result we didn’t meet our internal acquisition target but invested instead in an area that the yield was much higher. We invested in ourselves our own stock. Customer satisfaction and associate satisfaction; I’m very passionate about these subjects and last year our motto was turnover is public enemy number one. Focusing on the drivers of turnovers allowed us to adjust our behavior and the result our all time ever low turnover. Our associates are responsible for our success and therefore we don’t view our associates as an expense but rather as an investment and in 2008 we plan to invest in our most valuable assets, our associates I touched on earlier but last week at our annual meeting we unveiled our plans to roll out a comprehensive training program for every Sonic associate from our porters on down to me. This training program will be the stepping stone to a career planning path. As I stated, we want to develop our talent. We feel that this will differentiate us from our peers over time and that we’ll be the employer of choice among the automotive consolidators. If you’ll please turn to Slide Number Four. This Slide is a good visualization of our overall strategy for 2008. It’s pretty basic, if you think about it, it could clearly apply to almost any successful business. Let’s take a look at it. The inside circle are four key items that we need to do well, or let’s just say flawlessly and it all begins with our associates, we need to develop our associates. Without well trained valued associates our company will not meet our goals and you’ll see in subsequent Slides the invest we’re about to make in training and development. Next, well run operations. We have to be the best. The tools and processes that we have developed for us to sell more cars and trucks and institutionalize them across our stores. By doing this we’ll leverage a competitive advantage and have scale, 169 dealerships. We’ll launch improved technology and processes to support our traffic management, CRM, ecommerce, service business, advertising, etc. Third valued customers; we’ll treat our valued customers well. This year with the input of many of our associates we plan to develop an industry leading customer experience that will differentiate us from our competition. Fourth, but definitely not least, is growing the business. We’ll do that in two ways, through organic growth and through growth via strategic acquisition. We’ve entered into asset purchase agreements to purchase the Thoroughbred Motorcars in Nashville adding Audi, Jaguar, Porsche, SAAB to our BMW, Cadillac, Hyundai, Hummer and Mercedes platform. In Charlotte we’ve entered into an asset purchase agreement to purchase the assets of Beck Imports bringing a Mercedes Benz franchise into our hometown portfolio representing two Cadillac franchises, two Ford franchises, Infinity and Toyota. These acquisition as subject to customary manufacturer approval and we expect them to close by the end of Q2 08. We continue to be focused on adding dealerships that are premium brands and other dealerships that meet our investment quality standards. If you’ll please turn to Slide Number Five. Now for the quarter in review. I’m proud to report that in the slower economic climate, Sonic was able to deliver an operating margin of 3.7% for the quarter. Our EPS was up 6.3%, our total revenue was up 7.6% driven by an increase in used vehicle volume, improved F&I PUR performance and increased service customer pay. While those numbers are strong I’m very pleased to report that due to our team’s constant focus on control our SG&A percent was just 74.8, best in the peer group. I’ll now turn the call over to our vice chairman and chief financial officer, Mr. Dave Cosper to review our performance in detail. Dave.

[David P. Cosper:]

Good morning everyone. As you can see on this Slide, total revenue for the quarter was up 7.6% from prior year to over $2.1 billion. Although gross profit was up 5.7% gross margin slipped 20 basis points from the prior year to 15.3% reflecting primarily increased competition in a soft market. New retail margins were 7.2% down 40 basis points from last year. Used retail margins were 8.2% down 90 basis points. Fixed Operations margins were 50.3%, down 20 basis point from last year. Operating profit for the quarter was $77 million an increase of 4% from 2006. Our margin was 3.7% down only 10 basis point from last year. Our strong focus on cost control and cost reduction helped us offset a large part of the deterioration in gross margin. Total income from continuing ops was $29.4 million an increase of 1.7% from last year and EPS from continuing operations was $0.68 up 6.3% from 2006. Please turn to the next Slide. Let’s take a look at the full year 2007. As Scott mentioned, we delivered on all the commitments we made to you despite many challenges. For the year revenue was $8.3 million up 4.4%. Gross profit for the year was up 5.2% and gross margin improved by 10 basis points to 15.5%. Operating profit for the year was up 13.1% driven by higher gross and 190 basis points reduction in SG&A. Operating margin was a strong 3.6% up 30 basis points from 2006. Continuing EPS for the year was $2.54 right where we projected and total EPS was $2.13 up from $1.85 in 2006 a 15.1% improvement. Please turn to the next Slide. Let me review our same store sales performance. Overall, same store revenue increased 1.3% for the quarter. Excluding our wholesale business same store revenue was up 2%. Same store new revenue was down 2.6 with new retail revenue down 3%, fleet sales increased 3.8% for the quarter. Used vehicle retail revenue was up a hefty 9.3% roughly two thirds of this growth came from a 13.2% increase in volume, the balance came from a 5.3% increase in prices. We had very strong sales of CPO vehicles, unit sales of CPO were up 18%, and of course CPO sales typically have higher per unit prices. Same store F&I revenue was up almost 9%. Our electronic menu is fully rolled out and is helping our sales. F&I per unit hit 1,027 for the quarter up from 967 in 2006. Continued focus on customer satisfaction, our standard sales process and increased capacity are driving improvements in our fixed ops. Total same store total fixed operations revenue increased 2.3% and gross profit was up nearly 2%. Customer pay revenue and gross were up 3.7% and 3.2 % respectively, driving the overall increase. Fixed absorption was a very strong 91.3% for the quarter. Next Slide please. Our great story on cost performance continued throughout 2007. For the year SG&A as a percent of gross was 74.9% down from 76.8% in 2006. Our team is consistently focused on costs that we can control. Excluding rent, SG&A as a percent of grow in the fourth quarter was up 65.5% down 20 basis points from the prior year. Even though the market was soft our variable cost structure and focus on cost reductions helped improve our performance. Our total SG&A as a percent of gross for the fourth quarter was 73.8%, we believe the best in the sector. Next Slide please. We ended the year with a debt to capital ratio of 42.4% excluding the $46 million of recently added mortgage financing our debt to capital ratio was 40.7% which just above our target level. We continue to see the benefit of owning our real estate from both the financing and operational perspective. During 2008 we expect to add another $90 plus million in new mortgage financing. We remain committed to our debt to capital target of 35 to 40% but it’s clear that in the near term mortgage financing will pressure our ability to achieve this. Nonetheless I believe, owning our real estate is the right thing to do. During 2007 we repurchased $50 million of our stock, most of which were funded by the sale of our finance subsidiary Cornerstone Acceptance and so far this year we’ve repurchased another $12 million of our stock and have an additional $21 million of remaining authority. Frankly, given the price of our stock, we believe it’s one of the best uses of our capital at this time. Next Slide please. We ended the inventory with a good inventory position for 2008. We’ve maintained our inventory discipline throughout the fourth quarter and on December 31 had an overall new vehicle day’s supply of just over 48 days, this compares with the industry average of 59 and with 48 days that we had at the end of 2006. Used vehicle inventory at the end of the quarter was slightly over 36 days’ supply, right in line with our internal targets. Next Slide please. This Slide talks about our earnings outlook for 2008 and compares the outlook with earnings for 2007. As you can see we’re projecting EPS at $2.35 to $2.50 for 2008. This compares with an adjusted EPS for 2007 of $2.45. Let me first talk about the $0.09 adjustment for changes in dealerships held-for-sale. We’re considering changes to the group of stores held-for-sale including the potential sale of a number of profitable stores that did not fit our business model, some of which are stores that required capital expenditures that frankly just don’t pencil for us. Obviously, this reduces our profit from continuing operations. We’ve talked a lot about improved capital allocation at Sonic and this is a reflection of just that. We feel our capital can be deployed better elsewhere. Now, let me walk you through the rest of the Slide. 2008 is going to be challenging for everyone, especially on the new vehicle front and frankly that’s not new news. However, we’ll continue to do what has made us successful, a strong focus on all our operations, especially a higher margin used, fixed operations, and F&I segments. All in, we believe our store level earnings for 2008 will be about flat to up slightly compared with 2007. We’ve not included any acquisitions in the outlook for 2008. Included in the operations line above is a fairly substantial investment of $4 million to $5 million for training, for our people and supporting IT infrastructure and this is consistent with what Scott mentioned in his opening remarks. We’re building for success over the long haul. Other interest is up $0.14 year-to-year this reflects interest on our mortgages and swap impacts that are not included in our operating income and more on this on the next Slide. Lower share count primarily from our repurchases increased EPS by $0.12. Our assumption of a 40% tax rate up from 39.3% for 07 reduces EPS by $0.02. On my last Slide is some key assumptions included in our 2008 projections. As I mentioned, other interest is up 14% year-to-year. This increase reflects interest expense from our mortgages for $0.06 and the impact of interest rate swaps. The swap impact is a partial impart to a projected $0.16 reduction in floor plan cost for 2008. We’re projecting LIBOR to be flat at 3.5% through June and then increasing to 4.5% for the balance of the year as economic conditions improve in the second half. As I mentioned a tax rate of 40% is projected for 2008, the increase from 07 primarily reflects higher state income taxes and is principally mixed of where income is earned. With that I would like to turn the call back over to Scott.

[B. Scott Smith:]

In summary on Slide 14, while I’m thrilled with our 2007 performance, I’m even more excited about our future. As co-founder I’ve seen our company in every stage of our company’s history and I can tell you that I’ve never seen it in such great shape and we’ve never been so poised for success as we are today. We’re expecting that 2008 is going to be a challenging year however, we’re not building a company for the short term we’re building a company for the long haul. I’m pleased to announce that our dividend will remain unchanged at $0.12 per share payable on April 15, 2008 for shareholders of record as of March 15, 2008. And before we open the call and take your questions I’d like to take time to thank our manufacturer partners and the many Sonic Automotive associates without whom these accomplishments would not have been possible. Nothing happens until we sell a car and we’re committed to taking the high road, it’s our compass. At this time we’d like to open the call and take your questions.

[Operator:]

(Operator Instructions) Your first question comes from Edward Yruma with JP Morgan.

[Edward Yruma:]

Your discontinued ops line continues to grow, and I’m not just necessarily referring to the $0.09, but the amount you have on right now. How long will it take you to divest those dealerships in that group?

[David P. Cosper:]

We made great progress in fact, 67% of that loss is now gone. We sold the stores, we really ramped up the activity in the fourth quarter that sold successfully seven or eight franchises so the lion’s share of that is behind us.

[Edward Yruma:]

On your fixed to floating, how much of your debt to you have swapped right now?

[David P. Cosper:]

We’re a little over 50% fixed.

[Edward Yruma:]

The final question I have, I know that you guided that you’d like to get back from to kind of a 35 to 40% debt to cap level. What’s the timeframe around that?

[David P. Cosper:]

I’m gonna call that longer term. With the mortgages basically all we’re doing is taking off balance sheet financing that exists and putting it on our balance sheet. It is pressuring us, the nice thing about mortgages though is you make payments every month and they go down and over time it’s just like owning your house, it’s gonna be yours. So we’re convinced it’s the right thing to do and we’re going to keep pressure on it, but I am going to call it our as a separate item so you can see what it is that we’re doing with the business. It’s going much faster than I thought it would and I think it’s a long term recipe for success for Sonic.

[Operator:]

Your next question comes from Rick Nelson with Stephens.

[Rick Nelson:]

Can you talk about the profitable dealers that you’re contemplating bringing into dis ops and how much revenue, how many dealerships, and possibly what the proceeds might look like for these?

[David P. Cosper:]

Let me talk in general terms about that Rick, I don’t want to get specific, but I tell you this, it’s a little different way of thinking for us. There’s a lot of expenditures that are often required by manufacturers and we’re reviewing whether or not those make sense for us. Sometimes in the past I think we may have just invested the money and moved on, but as we look at some of these stores where you’ve got to spend $5, $7 million and we don’t see revenue increase, we’re thinking, “Geese it probably doesn’t pencil for us and we might be better letting the store go.” Avoid spending that money, free up some capital; invest somewhere else where we can earn higher returns. We’re close on a Toyota store, I can tell you that but beyond that I don’t wanna give you a lot a detail. It’s not a huge number but there’s several stores that we’re contemplating.

[Rick Nelson:]

Are they import stores or domestics as well?

[David P. Cosper:]

Both but I think probably for the first time we’re considering import stores.

[Rick Nelson:]

Your SG&A to gross as you point is already the lowest in the peer group. What do you think is the potential there as we move forward?

[David P. Cosper:]

I think in 08 it’s going to be tough to see a lot of improvement there given the gross environment and the fact that we’re gonna be ramping up our spending, particularly on the training front. I was pleased to see that in absolute dollars our fixed comp and our other fixed overhead were flat in 2007 in dollar terms versus 2006. That always helps and we’ll just keep whacking at it wherever we can but I don’t see huge improvement given the environment we have.

[Rick Nelson:]

Finally, on acquisition multiples are you seeing those are a contracted at all given the overall environment? And the tradeoff I guess between acquisition and buybacks still favoring buybacks?

[B. Scott Smith:]

The stock buyback is not a long term growth strategy for us but when we look out there at the current prices I think there is a lot of unrealistic expectations by the private dealers as to what their dealerships are worth and I don’t see a whole lot of transactions happening this year. The transactions that we talked about earlier were deals that we’ve been working on for many, many months. In case of Beck Imports years, and it was just a matter of timing. But as we look when we can buy our stock at 6, 7, 8 times after tax, it doesn’t make any sense to pay the 6 times, 7 times pretax for acquisitions.

[Operator:]

Your next question comes from Rich Kwas with Wachovia

[Richard Kwas:]

I have a question on grosses on the luxury side, are you seeing any deterioration on that on the new vehicle front?

[David P. Cosper:]

We saw grosses soften a little bit in fourth quarter on luxury domestic and imports as well. Interestingly, I would say that from a regional perspective they held up reasonably well in California and Florida and most of the deterioration was in other parts of the country, including Texas.

[Frank J. Dyke:]

Some of that compression is coming out of truck and luxury, maybe a little bit of that on BMW 3 Series, but other than that nothing, no more.

[Richard Kwas:]

What’s factored into the guidance? Do you see it stabilizing where it is now, or do you see further deterioration at all?

[David P. Cosper:]

It’s pretty much factored in steady state there may be a little bit of improvement in used going forward, I’m hoping to see that. But we’re not assuming any huge deterioration from today’s levels.

[Richard Kwas:]

On the California exposure, Dave can you just walk us through what happened on the new vehicle front and used vehicle front? In that market it seemed like the fourth quarter it’s been a tough market but incrementally things got worse.

[David P. Cosper:]

I’ll turn it over to Jim in a second, but as I mentioned, overall new car margins were down a tenth of a point from 06 which is good. We grew used handsomely on the West coast, fixed ops improved as did F&I. New cars were soft and Jim can give you couple bits of color on that.

[James D. Evans:]

After Dave’s comments, we did see some continued softening in the new vehicle market in California. But one of the encouraging thing is the stabilization of the gross profit on the new car side, we saw that finally hit near the bottom we believe. At the same time almost 14% growth and used cars good growth and customer pay and F&I up 5%. So we outperformed the market with our major brands, despite the continued softness and gross compression in California.

[Richard Kwas:]

And on the used vehicle front, you’re gonna start to face some pretty difficult comps in the second half of the year, are you kind of expecting first half to be up nicely given the initiatives you have in place and that second half softens? Or, what’s the current thought there?

[Frank J. Dyke:]

Yes, we’re continuing to see some nice growth on into the beginning of the year. But you got to remember we’re also rolling out our second phase of our used vehicle process which is going to help us. We just completed our first region; we’ll roll out Texas here in a few weeks and then the rest of the country sometime between now and the end of the year and maybe the first quarter of 09. We won’t see the full benefit of all that though towards the end of maybe 09.

[David P. Cosper:]

In that stage with the trade desk, it’s really about getting more margin than volume. It’s putting the right vehicle in the right place to maximize margin. Fourth quarter was huge for us on used cars up 19%, in total continuing ops is up 25% in revenue. BMW CPO sales were up 86%. So there were some really terrific numbers and obviously you can’t repeat that but we’ll maintain it and improve from there.

[Richard Kwas:]

And then finally Dave, on the LIBOR assumptions there, it looks like back half you’re assuming an increase? What’s kind of the thought there?

[David P. Cosper:]

Well, who knows where the market’s going. We’ve seen a number of different economic forecast and we’re hoping with some of the other economists out there that things start to turn around in the second half and at that the time rates would tick up. If they didn’t tick up, if you want to do the math, if they were 3.5% for the whole year it’s somewhere around $0.03 of good news for us given our variable exposure.

[Operator:]

Your next questions comes from Colin Langan with UBS

[Colin Langan:]

I noticed you did talk about the mortgage being slightly up, did you have a significant change or a notable change in the number of dealers that you lease versus own?

[David P. Cosper:]

Well we’re starting to move the ball. We’ve got four stores presently with mortgages, another two that we’re about to close on and another five that I’m hoping within the next two months we can close on. We’re getting close to maybe 10% owning our property, which I think is big. It’s going a little faster than I would have thought, but that’s okay, it’s a financial benefit for us.

[Colin Langan:]

Part of that, I mean when the mortgage interest is higher that’s due to owning more mortgages, some of the recent moves that you’ve made? Is that correct or is it a market factor?

[David P. Cosper:]

You’re thinking about it exactly right, we had zero mortgage property previously. We now have 46 and we’re headed to $140 to $150 million of unbalance sheet mortgage financing.

[Colin Langan:]

So that year-over-year headwind, that includes properties that you anticipate on maybe buying next year or is that not in there?

[David P. Cosper:]

It does. We’ve got $46 million on the books, we’re looking for another $90, a total of $130, $140.

[Colin Langan:]

I think you mention in terms of parts and services, customer pay was up 3.7. How is warranty looking? Is that stabilizing at all? Or is that down? I guess it must be down a little bit?

[David P. Cosper:]

Down 1.7%. Mercedes had been the biggest driver of that as its warranty cost fell, but I see that kind of stabilizing now so I view it probably as flat going forward.

[Frank J. Dyke:]

And Colin, we’ve seen that stabilizing over the last couple of quarters.

[Colin Langan:]

Okay. So, excluding maybe Mercedes, do you expect parts and services to be up? Is that anticipated in your guidance? I mean there’s no reason to - is there anything out there that we should be thinking about?

[David P. Cosper:]

We’ll continue to improve in fixed operations, absolutely. We’re adding some stall capacity and our sales processes are still benefiting us in the units and operations out there for our luxury vehicles continue to grow so we’ll be up. And really if you think about the guidance, new cars are gonna be soft, we gonna grow in used, we’re gonna grow in fixed ops and F&I maybe a little bit of upside but not much from where we ended the year.

[Frank J. Dyke:]

To qualify that a little bit, Mercedes Benz warranty was down 23% for the quarter, so that’s what’s dragging that number down.

[Colin Langan:]

Okay. And just, I wanted to clarify something, you mentioned that you’re going to have some assets that you bought closing in Q2. Are those mortgage properties that you bought? Or are they new dealerships? And, if they’re new dealerships what is the revenue on those?

[David P. Cosper:]

They’re new dealerships and I don’t have the revenue numbers handy on those.

[Colin Langan:]

Okay. Just one last question, in your guidance for the repurchase, earnings share repurchase earnings benefit, is that from what you’ve done already? Or do you anticipating dong more? Is that baked in there or no? Seems like it’s just what you’ve done already looking at the numbers but.

[David P. Cosper:]

It’s really a combination of both and the timing. We had a pretty hefty repurchase last year of $50 million. We’ve got $12 million done and that $0.12 is really both years impact.

[Greg D Young:]

We did a lot of our share repurchases in 07 starting around late third quarter so we’ll get the full year impact of that in 2008. Plus we did bake in some additional share repurchase in 08 for [inaudible].

[David P. Cosper:]

That’s exactly right.

[Colin Langan:]

Okay so the bulk of it though is what was done already as of last year and as of what you’ve done so far this year?

[Greg D. Young:]

That’s correct.

[Operator:]

Your next question comes from Scott Stember with Sidoti & Company. .

[Scott Stember:]

On the fixed ops side it looks like the gross margin was off 20 basis points. Can you talk about that a little?

[David P. Cosper:]

I was looking at that this morning actually. There’s a couple things we think may be driving that. First, I don’t think it’s a huge significant issue, but tire sales are actually up 10% year-to-year and tires have a lower margin in percentage term but fairly good gross overall. Also we’ve got a pretty big initiative to ramp up our quick lube business at all of our stores to get people in and comfortable with our dealerships and our shops, and that not our highest margin business either. So I guess I’m ok with 20 basis points slip in the margin if the total dollars are more and that’s a strategy that’s working for us.

[Scott Stember:]

And you said customer pay was up 3.7%, right?

[David P Cosper:]

Yes.

[Scott Stember:]

Can you just, the buyback information for the quarter and what you did so for this year, I missed that?

[David P. Cosper:]

$12 million.

[Scott Stember:]

That was in the first quarter?

[David P. Cosper:]

In the first quarter as of yesterday.

[Scott Stember:]

And what did you do in the fourth quarter?

[David P. Cosper:]

The fourth, $14 million. A total of $50 for the year and $14 million for the quarter.

[Scott Stember:]

And how much do you have left currently right now? $21 million of board authorization. Last year I think we got $60 of authorization of authorization throughout the year.

[Scott Stember:]

Can you comment on in January early February what we’re seeing as far as trends?

[David P. Cosper:]

In general terms January was not a very good month, February was a little better. Let me give Jeff a chance to give you more color.

[Frank J. Dyke:]

Absolutely, if you look at January it was a difficult month, although in our initiative categories fixed operations used cars, we continue to perform and then in February a little better, but not much.

[Operator:]

(Operator Instructions) Your next question comes from Doug Carson with Banc of America Securities.

[Doug Carson:]

I had a quick questions about funding, how’s the availability for financing the floor plan, kind of how’s the tightness of credit if there is any based on what’s going on at some of the finance companies? And the separately the perception of the consumer, how’s the availability for credit for the consumer coming in to buy a vehicle? Then, I have a separate question on the used car market.

[David P. Cosper:]

First on floor plan financing, we have a fantastic relationship with our banking syndicate group and with the captives and that’s just not an issue at all. I mean it’s a four year facility and it’s in place, great rates and super support, so in terms of flooring our vehicles absolutely not an issue. In terms of the market out there clearly some of the subprime lenders are tightening up, we’re seeing that. We haven’t seen it have a material effect on our sales yet which is a good thing and frankly a little surprising. We’ll keep an eye on that but we’ve got a preferred lender group that we do business with and their very strong with us, Jim and Jeff are you see anything that I’m not?

[James D. Evans:]

We haven’t seen any direct linkage between the mortgage issues and the subprime retail lending, there’s plenty of capital still there and the lenders are staying aggressive for the most part. And subprime only represents 15% of our overall used car business at any rate so we don’t see any gap there at the moment, it remains steady.

[David P. Cosper:]

I would tell you as you know we spun off Cornerstone last year, and they’re up and running as American Credit Acceptance and doing a great job in growing their business and being very supportive of Sonic. And while I’ve got people here, I’ve checked the revenue on those two acquisitions, combined it would be about $120 million in new revenue for the Mercedes and the Thoroughbred stores.

[Doug Carson:]

Thanks for that answer, it was a good answer. The implementation of this merchandising strategy program for the used vehicles, did it surprise you guys internally with the 19% year-over-year growth? Because, that seems very high to me and great number relative to what others have been dong in the used car market. I’m just trying to understand that better.

[Frank J. Dyke:]

We appreciate that, it was a great quarter for used cars. But quite honestly that’s sort of been a building trend over the last two years. We’ve been working on sort of phase one in controlling our merchandising inventory and pricing it right for the last two years so this is not something that we just woke up and started doing. It’s been something that we’ve been working on very, very hard and executing at the store level and we’re starting to finally reap the benefit of all of our hard work.

[Operator:]

There are no further questions at this time, I will turn the call back over to Mr. Smith for any closing remarks.

[B. Scott Smith:]

I’d just like to thank everyone again for being on the call today. Thanks so much we’ll let you go.