America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2019, compared with the periods ended January 31, 2018. The filing is dated March 8, 2019. Dollar amounts below are in millions unless stated otherwise.
Business context
The company sells used vehicles and finances substantially all customer purchases, primarily for customers with limited or impaired credit histories. It operated 143 dealerships, principally in the South-Central United States. Its results depend on vehicle sales, interest income on customer receivables, and the collection and recovery of those receivables.
Financial results and key metrics
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $161.1 | $147.2 | $492.2 | $442.8 |
| Pretax income | $14.3 | $5.8 | $41.5 | $25.2 |
| Net income | $10.9 | $13.4 | $33.1 | $26.3 |
| Diluted EPS | $1.55 | $1.82 | $4.66 | $3.48 |
- Quarterly revenue rose 9.4%; sales rose 9.1% and interest and other income rose 11.6%. Nine-month revenue increased 11.2%.
- Quarterly pretax income improved substantially, but net income fell because the prior-year quarter included a $7.6 million income-tax benefit, while the current quarter recorded $3.4 million of tax expense. For the nine months, net income increased 25.5%; the prior-year period included an $8.1 million tax benefit related to the Tax Act.
- Gross margin was 41.5% of sales for the quarter and 41.6% for the nine months, broadly unchanged year over year. SG&A declined as a share of sales to 18.9% for the quarter and 18.4% for the nine months.
- Credit-loss provision was $35.6 million for the quarter and $111.6 million for the nine months. As a share of sales, it declined to 25.4% and 25.9%, respectively, from 29.5% and 28.6%.
- Interest expense increased 42.4% for the quarter and 48.2% for the nine months, reflecting higher average borrowings and interest rates.
- Operating cash flow was $4.8 million for the nine months, compared with cash used of $5.1 million in the prior-year period. Investing cash outflow was $3.0 million; financing cash outflow was $1.2 million. Ending cash was $1.6 million.
- At January 31, 2019, net finance receivables were $414.9 million, up from $383.6 million at April 30, 2018; inventory was $38.8 million, up from $33.6 million.
- Total debt facilities were $170.7 million, compared with $152.4 million at April 30, 2018. Cash was $1.6 million, and the company reported approximately $44 million of additional revolving-credit availability. It was in compliance with debt covenants.
Material changes and management commentary
- Nine-month retail units sold increased 5.6%; same-store revenue rose 10.5%. Average retail selling price increased 5.5% to $11,062. Management attributed growth to higher sales volumes and selling prices, interest income growth, and modestly eased competitive pressure.
- More effective collections, lower delinquencies, a slightly shorter average originating contract term, and fewer modifications contributed to improved credit results. Net charge-offs as a percentage of average finance receivables declined to 19.2% for the nine months from 21.2% a year earlier. Accounts more than 30 days past due were 3.2%, versus 4.1% at January 31, 2018.
- The allowance for credit losses was $128.0 million, approximately 25% of the stated principal balance net of unearned payment-protection and service-contract revenue. Management cautioned that actual losses could differ materially from estimates; a 1% change in the allowance as a percentage of receivables would imply an approximately $5.1 million pretax adjustment.
- Management expects gross margin to remain within its historical range in the near term. It expects tight vehicle supply and modest further increases in purchase costs, while noting that elevated industry credit availability may intensify competition and pressure down payments, loan terms, collections, and losses.
- The company expects credit losses to remain elevated near term versus historical ranges. It plans to fund receivables growth, approximately $4.6 million of property and equipment purchases over the next 12 months, and potential share repurchases through operating cash flow and borrowings; management believes liquidity will be adequate for the foreseeable future.
- A December 2018 credit-facility amendment extended maturity to December 2021, raised total permitted borrowings to $215 million, and set the applicable rate at LIBOR plus 2.25% through May 31, 2019. The rate was 4.76% at January 31, 2019. A 1% rate increase on revolving debt outstanding would add approximately $1.7 million in annual interest expense.
- The company repurchased 347,155 shares for $24.1 million during the nine months. Debt agreements restrict distributions and require availability and borrowing-base conditions to be met.
Risks, contingencies, and unusual items
- Credit risk is central to the business: substantially all financed customers have impaired or limited credit histories, and the receivables portfolio is exposed to delinquency, repossession, and loss severity. Vehicle collateral values and economic pressures on customers may affect recoveries.
- Management identifies competition for vehicles and financing, vehicle purchase costs, interest rates, unemployment, inflation in essential goods, and execution of underwriting and collection procedures as key risks.
- Car-Mart of Arkansas’s receivable sales to its affiliated finance subsidiary support a tax deduction and reduce the company’s state effective tax rate by approximately 234 basis points. If the company’s tax interpretation were not sustained, tax expense and the timing of tax payments could increase.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. The company reported a $250,000 standby letter of credit and no other material off-balance-sheet arrangements apart from operating leases and that letter of credit.
- Quarterly sales are seasonal: November through January is historically the slowest selling period; the first and fourth fiscal quarters are generally busier. Management noted that disruption in key selling quarters could disproportionately affect annual results.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether improved delinquency and charge-off trends persist, and whether the $128.0 million allowance adequately reflects expected portfolio losses.
- Whether selling-price and vehicle acquisition-cost trends preserve the reported gross margin while keeping customer payments affordable.
- Current borrowing-base availability, covenant headroom, and the impact of future variable-rate changes on interest expense.
- Whether receivables growth, share repurchases, and planned capital spending remain supportable by operating cash flow and available credit.
- Whether the tax treatment of intercompany receivable sales remains supportable under applicable tax rules.