Business context and reporting period
America’s Car-Mart, Inc. filed this unaudited Form 10-Q for the quarter ended October 31, 2011, the second quarter of fiscal 2012, and the six months then ended. The company operates an integrated used-car sales and finance business, primarily serving customers with limited or impaired credit histories. It had 111 dealerships at quarter-end.
Financial performance and position
| Metric | Three months ended October 31, 2011 | Six months ended October 31, 2011 |
|---|---|---|
| Total revenue | $110.8 million, up 20.7% year over year | $211.3 million, up 15.3% |
| Net income | $7.8 million, versus $6.2 million | $16.0 million, versus $14.2 million |
| Diluted EPS | $0.77, versus $0.56 | $1.55, versus $1.25 |
| Provision for credit losses | $22.6 million; 22.6% of sales | $41.2 million; 21.6% of sales |
| Operating cash flow | Not presented separately for the quarter | Negative $1.1 million, versus positive $1.1 million |
- Quarterly sales were $100.1 million and interest income was $10.7 million. Retail units sold increased 17.6% to 9,919; same-store revenue rose 13.7%. Six-month retail units sold increased to 18,968.
- Cost of sales was 57.7% of sales in the quarter and 57.4% for six months. The resulting sales gross margin was approximately 42.3% and 42.6%, respectively. SG&A was 16.7% of sales for the quarter and 17.3% for six months.
- At October 31, net finance receivables were $243.5 million, including a $65.9 million credit-loss allowance; inventory was $27.7 million. Cash was $0.3 million.
- Revolving debt was $76.4 million, up $28.9 million from April 30. The $105 million credit facility had $29 million of additional availability and matures in November 2013. The company reported compliance with its covenants.
- For the six months, investing cash use was $2.0 million, mainly property and equipment purchases. Financing cash provided was $3.3 million, including net revolving borrowings of $28.9 million, offset substantially by $26.4 million of share repurchases.
Material changes versus comparable periods
- Revenue and earnings increased year over year, supported by higher unit sales, higher average retail prices, new dealerships and increased interest income. For the quarter, same-store revenue growth accelerated to 13.7% from 8.1%.
- Six-month credit-loss provision rose 17.9% in dollars and increased to 21.6% of sales from 21.1%. Net charge-offs as a percentage of average receivables increased to 12.0% from 11.6%; collections as a percentage of average receivables declined to 31.6% from 32.5%.
- At October 31, 83.62% of receivable principal was current, compared with 86.12% at April 30. Balances over 90 days past due were $0.7 million, versus $0.2 million at April 30; accounts at least 30 days past due were 3.9%, unchanged from October 2010.
- Operating cash flow turned negative as finance receivable originations and portfolio growth absorbed cash. Finance receivables, net, increased $21.2 million from April 30.
- The company repurchased 904,162 shares for $26.4 million during the six months. On November 17, 2011, the board authorized repurchases of up to an additional one million shares.
Outlook, risks and unusual items
- Management expected near-term gross margins to remain generally in the 42%–43% range and annual credit losses to be in the 20%–22% range of sales; adverse economic conditions could cause results to differ.
- Management anticipated approximately $4 million of property and equipment purchases over the next 12 months for dealership refurbishments and openings. It expected to fund growth with operating income and revolving borrowings and stated it believed liquidity would be adequate for the foreseeable future.
- Management cited rising vehicle acquisition costs and tight supply as pressures on pricing, affordability and margins. Inflation in fuel and essential goods, unemployment, customer collection performance, underwriting, and access to credit facilities are key risks. The company’s customers generally have limited financial resources, and its receivables are subprime auto contracts.
- The revolving facilities carry variable rates. A 1% rate increase on October 31 debt would add approximately $764,000 to annual interest expense before tax. The company had no interest-rate swap in effect.
- An IRS dispute concerns the tax timing of payment-protection-plan revenue and related receivable-sale losses for fiscal 2008 and 2009. The company is contesting proposed adjustments; the filing says the issue affects timing of tax payments, not the overall tax provision. No accrued penalties or interest were reported.
- The company’s credit-loss allowance is a significant estimate: management reported that a 1% change in the allowance as a percentage of receivables would result in an approximately $3.0 million pretax charge. Management also noted customary seasonality, with the third fiscal quarter historically slower, though tax-refund-related sales can support that quarter.
Important facts for investors to verify
- Whether receivable delinquencies, collections and net charge-offs stabilize as the portfolio grows, and whether the $65.9 million allowance remains adequate.
- Whether vehicle purchase costs, wholesale volumes and customer affordability affect the targeted gross-margin and credit-loss ranges.
- Available borrowing capacity, covenant compliance, variable-rate exposure and the company’s ability to refinance facilities maturing in November 2013.
- The outcome and potential cash-tax timing effects of the IRS dispute, and the actual pace and funding of share repurchases and dealership investment.
- Management’s outlook is forward-looking; the filing states interim results are not necessarily indicative of full-year fiscal 2012 performance.