America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Quarter ended January 31, 2018, with nine-month results for the period then ended; comparisons are to the corresponding prior-year periods. Although the request metadata says “2017 Q3,” the filing covers fiscal 2018 third quarter. The company operates 140 used-car dealerships, primarily in the South-Central U.S., and finances substantially all vehicle sales.
Financial results and position
| Metric | Three months ended Jan. 31, 2018 | Prior year | Nine months ended Jan. 31, 2018 | Prior year |
|---|---|---|---|---|
| Total revenue | $147.2 million | $138.8 million | $442.8 million | $434.8 million |
| Sales | $128.2 million | $121.3 million | $386.9 million | $384.1 million |
| Interest and other income | $19.0 million | $17.5 million | $55.9 million | $50.7 million |
| Income before taxes | $5.8 million | $4.5 million | $25.2 million | $23.9 million |
| Net income | $13.4 million | $2.8 million | $26.3 million | $15.0 million |
| Diluted EPS | $1.82 | $0.35 | $3.48 | $1.83 |
- Third-quarter sales rose 5.7% and total revenue rose 6.1%; nine-month sales rose 0.7% and total revenue rose 1.8%. Nine-month growth reflected a 10.2% increase in interest income, while retail units sold increased 0.6%.
- Gross margin on sales was 41.5% in the quarter versus 40.8%; for nine months it was 41.6% versus 41.3%. Better inventory management and repair practices contributed. Management said margins may remain under pressure.
- Credit-loss provision was $37.9 million for the quarter and $110.8 million year to date. As a percentage of sales, it eased to 29.5% from 31.0% in the quarter and to 28.6% from 28.8% year to date. SG&A rose 14.5% in the quarter and 7.4% year to date; the filing cites a $1.1 million one-time retirement bonus and increased spending on recruitment, training, collections support and marketing.
- Reported earnings include a material tax-law benefit: the Tax Act prompted an estimated $8.1 million discrete deferred-tax benefit in the quarter. The nine-month effective tax rate was negative 4.3%, versus 37.3% in the prior-year period. The company said its Tax Act accounting remained incomplete.
- Operating cash flow was negative $5.1 million for the nine months, compared with negative $8.6 million. Investing cash flow was negative $1.3 million; financing cash flow was positive $6.5 million. Ending cash was $0.5 million.
- At January 31, 2018, net finance receivables were $380.4 million, inventory $38.1 million, and total assets $456.3 million. Finance receivables grew 6.9% from April 30, 2017; inventory increased $8.0 million.
- Total debt and notes payable were $148.2 million, up from $117.9 million at April 30, 2017. Revolver borrowings were $147.2 million, at a stated rate of LIBOR plus 2.35% (3.91% at quarter-end); the facilities mature in December 2019. The company reported approximately $52 million of additional borrowing availability and compliance with covenants.
Material changes, outlook and risks
- Credit quality indicators were mixed: receivables 30 or more days past due declined to 4.1% from 4.7% a year earlier, while collections as a percentage of average receivables fell to 37.2% from 37.9%. Net charge-offs as a percentage of average receivables improved to 21.2% from 21.8% year to date.
- The allowance for credit losses was $117.3 million, approximately 25% of the stated principal balance net of deferred product revenue. Management notes that a 1-percentage-point change in the allowance as a percentage of receivables would change pretax results by approximately $4.7 million. Longer contract terms and competitive pressure on down payments may weigh on collections and losses.
- Management expects receivables growth generally to exceed revenue growth modestly, partly due to longer terms. It expects vehicle supply to remain tight and purchase costs to rise modestly; it also expects credit losses to remain elevated near term. The filing provides no specific earnings or revenue target. Management expects approximately $3.2 million of property and equipment purchases over the next 12 months and believes liquidity is adequate for the foreseeable future.
- Key exposures include subprime customer credit risk, vehicle purchase costs, competition and funding availability, economic conditions affecting customers, and variable-rate debt. A 1-percentage-point increase in rates on quarter-end revolver debt would increase annual interest expense by approximately $1.5 million before tax.
- Other items: the company repurchased $26.3 million of stock in the first nine months; credit facilities limit distributions and impose availability requirements. It had a $1 million standby letter of credit and ordinary-course legal proceedings not expected to have a material adverse effect. Management identified a potential tax risk around its intercompany receivables-sale structure; an adverse tax interpretation could increase its effective tax rate and affect tax-payment timing.
Important facts for investors to verify
- How much of the quarter’s net income and EPS improvement reflects the one-time Tax Act deferred-tax benefit, and how estimates may change.
- Whether delinquency and charge-off improvements persist as longer contract terms, lower collections rates and elevated competitive pressures affect the portfolio.
- The adequacy and sensitivity of the $117.3 million credit-loss allowance, including assumptions about future repossessions, charge-offs and collateral recoveries.
- Liquidity and borrowing-base availability after receivables growth, inventory investment and continued share repurchases; confirm compliance with lending covenants.
- Progress on gross margins and vehicle sourcing costs, and whether the anticipated $3.2 million capital spending and operating investments deliver expected results.