Business Context and Reporting Period
Company: America's Car-Mart, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2010
Business Overview: The Company is the largest publicly held automotive retailer in the U.S. focused exclusively on the "Integrated Auto Sales and Finance" segment of the used car market. As of October 31, 2010, it operated 101 dealerships primarily in the South-Central United States, selling older model used vehicles and providing financing to customers with limited credit histories.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2010 | Six Months Ended Oct 31, 2010 |
|---|---|---|
| Total Revenues | $91,835 | $183,295 |
| Net Income | $6,189 | $14,154 |
| Net Income Attributable to Common Stockholders | $6,179 | $14,134 |
| Diluted Earnings Per Share | $0.56 | $1.25 |
| Net Cash Provided by Operating Activities | N/A | $1,146 |
| Finance Receivables, Net | $217,988 | $217,988 |
| Total Debt (Revolving & Note Payable) | $51,212 | $51,212 |
| Cash and Cash Equivalents | $226 | $226 |
Margins (Six Months Ended Oct 31, 2010):
- Gross Margin (Sales less Cost of Sales): Approximately 43.3%
- Provision for Credit Losses as % of Sales: 21.1%
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11.2% for the three months and 10.2% for the six months ended October 31, 2010, compared to the prior year periods. This was driven by a 4.7% increase in retail units sold, a 2.1% increase in average retail sales price, and a 28.6% increase in interest income.
- Profitability: Net income decreased slightly by 2.0% for the three-month period ($6,189 vs. $6,312) but increased by 6.1% for the six-month period ($14,154 vs. $13,340).
- Credit Losses: The provision for credit losses increased significantly, rising 23.9% for the quarter and 15.6% for the six-month period. As a percentage of sales, credit losses rose to 22.7% (quarter) and 21.1% (six months) from 20.1% and 19.8% in the prior year, respectively. Management attributed this to a lack of execution at the lot level regarding collections.
- Debt Levels: Revolving credit facilities and notes payable increased from $38.766 million at April 30, 2010, to $51.212 million at October 31, 2010, to fund receivables growth and capital expenditures.
- Stock Repurchases: The Company purchased 485,916 shares of common stock for $11.0 million during the first six months of fiscal 2011, compared to no repurchases in the same period of the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects gross margin percentages to remain in the 43% range. Credit losses are anticipated to be in the 20-22% of sales range going forward, though macro-economic factors could cause deviations.
- Liquidity: On November 4, 2010, the Company entered into a new $90 million revolving credit facility expiring in November 2013, replacing previous facilities. As of October 31, 2010, the Company had $226,000 in cash and an estimated $38.8 million in additional availability under the new facilities.
- Tax Contingency: The IRS concluded examinations of fiscal years 2008 and 2009, proposing adjustments regarding the timing of deferred payment protection plan revenue and deductions. The Company filed an administrative protest and intends to vigorously defend its position. The issue affects the timing of tax payments but not the overall tax provision.
- Market Risks: The Company faces risks related to interest rate fluctuations (mitigated partially by a $20 million interest rate swap), vehicle supply shortages driving up purchase costs, and macro-economic conditions affecting customer ability to repay loans.
- Seasonality: Historically, the third fiscal quarter (Nov-Jan) is the slowest, though tax refund anticipation sales have recently increased activity during this period.
Investor Verification Checklist
- Credit Loss Trends: Verify the sustainability of the 21.1% credit loss rate and management's ability to improve lot-level collection execution.
- IRS Dispute Resolution: Monitor the status of the administrative protest regarding the 2008-2009 tax examinations and potential cash flow impacts from timing adjustments.
- Vehicle Acquisition Costs: Assess the impact of rising used vehicle purchase prices on gross margins and the Company's ability to maintain affordability for its customer base.
- Debt Covenants: Confirm continued compliance with the new $90 million credit facility covenants, particularly regarding financial ratios and dividend restrictions.
- Stock Repurchase Program: Track the remaining capacity under the repurchase program (831,770 shares remaining as of Oct 31, 2010) and future buyback activity.