America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2012 (the first quarter of fiscal 2013; unaudited). Comparisons are with the three months ended July 31, 2011 unless otherwise noted. Dollar amounts below are in millions except per-share data.
Business context
The company sells older-model used vehicles and finances substantially all customer purchases, serving primarily customers with limited or impaired credit histories. At quarter-end it operated 116 dealerships, principally in the South-Central United States, and reported as one operating segment.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change / context |
|---|---|---|---|
| Total revenue | $110.0 | $100.5 | Up 9.4% |
| Sales | $98.3 | $90.3 | Up 8.8% |
| Interest income | $11.7 | $10.2 | Up 14.7% |
| Income before taxes | $13.0 | $13.3 | Down 2.0%; pretax margin on total revenue was 11.8%, versus 13.2% |
| Net income | $8.1 | $8.3 | Down 2.0% |
| EPS, basic / diluted | $0.87 / $0.83 | $0.81 / $0.78 | Higher despite lower net income, with fewer weighted-average shares |
| Gross margin on sales | 42.8% | 42.9% | Nearly flat |
| Provision for credit losses | $21.7 | $18.5 | Up 16.9%; 22.0% of sales versus 20.5% |
| Operating cash flow | $1.2 | $1.2 | Cash flow from operations remained modest |
Balance sheet and liquidity at July 31, 2012: Total assets were $320.6 million. Net finance receivables were $261.4 million, versus $251.1 million at April 30; the related principal balance was $329.9 million and the allowance for credit losses was $68.5 million, or 21.5% of principal less unearned payment protection plan revenue. Cash was $0.2 million. Revolving borrowings were $85.2 million, up from $77.9 million at April 30; the $125 million facility had $39.8 million of additional availability, subject to eligible collateral. The facility matures in March 2015, and the company reported covenant compliance.
Net cash used in investing activities was $0.9 million, primarily for property and equipment. The company repurchased 215,846 shares for $9.4 million during the quarter. Average borrowings were $82.1 million, compared with $53.8 million in the prior-year quarter; interest expense rose to $0.7 million from $0.4 million.
Material changes versus prior year
- Revenue growth reflected 7.8% more retail units sold, a 1.5% increase in average retail selling price, higher interest income, and dealership additions. Same-store revenue increased 5.5%.
- Net income declined even as revenue grew: the credit-loss provision increased, SG&A rose 10.2% to $17.9 million, and interest expense increased. Credit losses as a percentage of sales rose to 22.0% from 20.5%.
- Net charge-offs as a percentage of average finance receivables increased to 5.9% from 5.6%. Collections as a percentage of average receivables fell to 14.9% from 15.9%; receivables more than 30 days past due remained 4.0% of the portfolio.
- EPS increased while net income decreased, alongside a reduction in basic weighted-average shares to 9.3 million from 10.3 million. The company’s quarterly share repurchases were a significant use of cash.
Outlook, commentary, and risks
- Management expected near-term gross margins to remain around 42%–43% and said credit losses were expected to remain within historical ranges, while cautioning that adverse economic conditions could produce different results. No specific revenue or earnings guidance was provided.
- Management anticipated approximately $4 million of property and equipment purchases over the next 12 months for dealership additions, refurbishments, and expansion. It expected liquidity to be adequate for foreseeable needs and cited operating income and revolving facilities as principal funding sources.
- Key risks include the ability to underwrite and collect subprime receivables, rising vehicle acquisition costs and constrained vehicle supply, fuel and staple-price inflation, unemployment, competition, changes in financing laws, and access to credit facilities. The allowance for credit losses is a significant estimate; management disclosed that a one-percentage-point change in the allowance as a percentage of receivables would change pretax results by approximately $3.2 million.
- Subsequent to quarter-end, the company received a proposed IRS settlement concerning fiscal 2008–2009 returns. It would involve an additional tax payment and a corresponding fiscal 2010 deduction and refund, plus an immaterial amount of interest; final IRS approval was pending. The IRS was also auditing fiscal 2010 and 2011 returns.
- The company’s variable-rate debt creates interest-rate exposure: a one-percentage-point increase applied to quarter-end debt would raise annual interest expense by approximately $0.9 million. The company had no interest-rate swap in effect.
- Seasonality affects sales, and the company noted that shifts in the timing of customer tax refunds could affect results. Approximately 79% of dealership and office properties were leased.
Important facts for investors to verify
- Whether the higher credit-loss provision, charge-offs, and weaker collection ratio persist, and how they affect the allowance and net income.
- Whether receivables growth and share repurchases can be funded while maintaining adequate borrowing-base availability and compliance with credit-facility covenants.
- Whether the proposed IRS settlement receives final approval, and the outcome of the fiscal 2010–2011 tax audits.
- Whether vehicle sourcing costs, affordability, and dealership growth support management’s expected 42%–43% gross-margin range and credit-loss outlook.