America’s Car-Mart, Inc. — Form 10-Q Summary
Business context and period: The filing covers the fiscal third quarter and nine months ended January 31, 2017; comparisons are with the same periods of fiscal 2016. America’s Car-Mart sells older-model used vehicles and finances substantially all customers, many of whom have limited credit histories. It operated 143 dealerships, primarily in the South-Central United States.
Financial performance and position
| Metric | Three months ended Jan. 31, 2017 | Three months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2017 | Nine months ended Jan. 31, 2016 |
|---|---|---|---|---|
| Total revenue | $138.8 million | $137.5 million | $434.8 million | $413.2 million |
| Net income | $2.8 million | $4.1 million | $15.0 million | $8.2 million |
| Diluted EPS | $0.35 | $0.47 | $1.83 | $0.93 |
| Gross margin as % of vehicle sales | 40.8% | 40.3% | 41.3% | 40.2% |
| Credit-loss provision as % of sales | 31.0% | 26.9% | 28.8% | 28.9% |
- Revenue drivers: Nine-month revenue grew 5.2%, reflecting 2.5% more units sold, a 2.3% increase in average selling price to $10,500, and 10.0% growth in interest income. Nine-month same-store revenue increased 4.2%.
- Profitability: Third-quarter revenue rose 1.0%, but net income fell as the credit-loss provision increased 14.8% and interest expense increased 27.6%. For the nine-month period, net income improved substantially versus the prior year; the prior-year comparison included a $3 million after-tax allowance increase. Nine-month SG&A was $68.5 million, down 0.7%.
- Credit performance: Nine-month net charge-offs were 21.8% of average finance receivables, versus 22.2% a year earlier. At January 31, 4.7% of receivables were more than 30 days past due, compared with 5.0% a year earlier; however, receivables 3–29 days past due increased to 17.23% of the portfolio from 12.82% at January 31, 2016. The allowance was $111.8 million, or 25% of the stated adjusted principal balance.
- Cash flow: Nine-month operating cash flow was negative $8.6 million, versus negative $5.3 million. Investing cash flow was negative $0.5 million; financing cash flow was positive $8.8 million. Cash declined $0.35 million to $0.25 million.
- Debt and liquidity: Debt facilities and notes payable totaled $118.8 million at January 31, 2017, up from $107.9 million at April 30, 2016. The revolving facility commitment was increased to $200 million and extended to December 2019; the rate was generally LIBOR plus 2.375%. The company reported about $78 million of additional availability and compliance with its covenants.
- Balance sheet: Total assets were $434.7 million, including $363.5 million of net finance receivables and $32.3 million of inventory. Stockholders’ equity was $239.2 million.
Material changes and management outlook
- In May 2016, the company raised its retail installment contract rate from 15.0% to 16.5% in response to elevated credit losses. The portfolio’s weighted-average rate was approximately 15.7%.
- Management cited lower repair costs and improved inventory quality and turns as supporting gross margins. It expects gross margin percentages to remain under pressure in the near term, in part because vehicle purchase costs are high.
- Management expects near-term credit losses to remain above historical ranges, citing challenging customer economics and increased competition. It identified collections execution and underwriting as key determinants of long-term credit results and described ongoing operational efforts to improve them.
- Management expects finance-receivable growth to be slightly higher than revenue growth over time, partly due to longer terms. Average originating contract term was 29.3 months for the nine-month period; the portfolio’s weighted-average term, including modifications, was 31.9 months.
- The company expects approximately $3.7 million of property and equipment purchases over the next 12 months for dealership refurbishment and additions. It stated that it expects adequate liquidity for foreseeable needs. No specific earnings or revenue guidance was provided.
- Sales are seasonal: the third fiscal quarter is historically the slowest, while the first and fourth quarters are generally busier. Management noted tax-refund-related sales and collections have tended to occur primarily in the fourth quarter.
Risks, contingencies, and unusual items
- Credit-loss estimates are a significant accounting judgment. Management stated that a 1% change in the allowance as a percentage of finance receivables would produce an approximately $4.8 million pretax adjustment. Roughly half of expected future charge-offs were expected within 10–11 months after the balance-sheet date.
- Customer affordability, unemployment, inflation in necessities, used-vehicle supply and pricing, and competition for subprime auto financing may affect collections, credit losses, margins, and liquidity. A 1 percentage-point rise in rates on outstanding revolving borrowings would increase annual interest expense by about $1.2 million.
- The company’s related-finance-company tax treatment reduces its effective state tax rate by approximately 300 basis points; an adverse tax interpretation could increase taxes and alter payment timing.
- The company disclosed a $1 million standby letter of credit related to an insurance policy and ordinary-course legal proceedings that it did not expect to have a material adverse effect. It reported no material changes to previously disclosed risk factors.
- Share repurchases totaled $8.2 million in the first nine months. Credit-facility terms limit repurchases and other shareholder distributions; only 3,145 shares were repurchased during the reported quarter.
Investor verification priorities
- Track early-stage delinquencies, charge-offs, and the adequacy of the $111.8 million credit-loss allowance as receivables grow.
- Assess whether collections improve despite longer contract terms, lower down payments, and competitive pressure.
- Monitor cash generation, revolving-facility availability, borrowing-base eligibility, and compliance with debt covenants.
- Verify whether vehicle acquisition costs and repair expenses continue to pressure gross margins and customer affordability.
- Review the potential tax exposure tied to intercompany receivable sales and the future effect of new accounting standards, including credit-loss and lease guidance.