Business context and reporting period
America’s Car-Mart, Inc. filed this unaudited Form 10-Q for the three months ended July 31, 2019, its first quarter of fiscal 2020. The company sells used vehicles and finances substantially all customers, many of whom have limited or impaired credit histories. It operated 145 dealerships, primarily in the South-Central United States. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
- Revenue: $171.9, up 4.8% year over year. Vehicle and related sales were $150.1, up 4.1%; interest and other income was $21.8, up 9.5%. Growth included higher average retail prices and increased average finance receivables.
- Profit: Net income was $15.5 versus $10.9; diluted EPS was $2.21 versus $1.53. Pretax income rose to $19.8 from $13.1.
- Margins and expenses: Gross margin was approximately 40.8% of sales versus 41.6%. SG&A rose 8.7% to $28.7 and was 19.1% of sales versus 18.3%. Credit-loss provision fell 16.2% to $31.5, or 21.0% of sales versus 26.1%.
- Credit portfolio: Net finance receivables were $431.6 at July 31, versus $415.5 at April 30. The allowance was $129.5, or 24.5% of the specified adjusted principal balance. Net charge-offs were 5.4% of average receivables versus 6.4%; receivables more than 30 days past due rose to 3.8% from 3.5% a year earlier.
- Cash flow: Operating activities used $2.1, compared with providing $0.4 in the prior-year quarter. Investing activities used $1.0, chiefly for property and equipment. Cash declined $0.1 to $1.6.
- Debt and liquidity: Debt facilities were $158.7, up from $152.9 at April 30; revolving borrowings were $158.3. The company reported about $56 of additional revolver availability and covenant compliance. The facilities mature in December 2021; the stated current borrowing rate was 4.59%.
- Other balance-sheet items: Inventory increased to $44.7 from $37.5. Total assets were $548.8. Adoption of the lease standard added a $34.5 right-of-use asset and $36.5 lease liability; the filing says income and cash-flow statements were not materially affected.
Material changes versus the prior comparable period
- Revenue grew 4.8%, while net income increased about 42.5%; diluted EPS increased from $1.53 to $2.21.
- Retail units sold were nearly flat at 12,523 versus 12,533. Average retail selling price rose 3.6% to $11,410; same-store revenue growth slowed to 3.3% from 12.1%.
- Credit-loss results improved, and management reduced its allowance rate from 25% to 24.5%. The resulting $2.6 provision credit increased net income by about $2.0, or $0.29 per diluted share.
- Share repurchases were $4.7 for 55,507 shares, at an average $84.94 per share, versus $7.4 in the prior-year quarter.
Outlook, commentary, risks and unusual items
- The filing gives no formal earnings or revenue guidance. Management expects near-term vehicle supply to remain tight, with modest further increases in purchase costs, and expects gross margin percentage to remain in its historical range over the near term.
- Management expects credit losses to remain elevated near term relative to historical ranges, despite recent improvement, and emphasizes collections and underwriting execution. It cited inflation in essentials, unemployment, competition, longer terms and lower down payments as potential pressures.
- The company expects about $6.5 of property-and-equipment purchases over the next 12 months for dealership refurbishments and openings. It believes liquidity will be adequate for growth and capital needs.
- Risks include the subprime customer base and credit-loss estimation, variable-rate debt, used-vehicle availability and cost, competition, consumer-finance regulation, staffing and seasonality. A 1 percentage-point change in the allowance rate would imply an estimated $5.3 pretax adjustment, according to the filing.
- The company disclosed a tax contingency related to intercompany receivables sales between subsidiaries. It believes its tax treatment complies with applicable rules; an adverse determination could increase the effective tax rate and change tax-payment timing. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether improved collections and lower charge-offs persist, and whether the allowance remains adequate as delinquencies and the portfolio grow.
- How much reported earnings benefited from the $2.6 allowance-rate reduction, and how results would look without that benefit.
- Whether higher vehicle acquisition costs pressure gross margin, affordability, contract terms and future credit performance.
- Actual availability under the borrowing base, compliance with credit-facility covenants, and exposure to variable interest rates.
- The outcome or developments in the intercompany tax position, and the pace and funding of planned capital spending and share repurchases.