America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, the three months ended July 31, 2015, compared with the three months ended July 31, 2014. Balance-sheet comparisons are with April 30, 2015. Dollar figures below are in millions unless noted.
Business context
The company sells older-model used vehicles and finances substantially all customer purchases, serving mainly customers with limited credit histories or financial resources. It operated 142 dealerships, primarily in the South-Central United States, at quarter-end.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Total revenue | $142.7 | $127.4 | Up 12.0% |
| Sales | $127.6 | $113.5 | Up 12.5%; retail units sold rose 6.6% |
| Interest and other income | $15.1 | $13.9 | Up 8.5% |
| Gross margin on sales | 41.2% | 42.3% | Lower, mainly from repossession-related wholesale volume and prices |
| Provision for credit losses | $35.3 | $27.9 | Up 26.8%; 27.7% of sales versus 24.6% |
| Income before taxes | $7.4 | $11.6 | Down 36.6% |
| Net income | $4.6 | $7.3 | Down 36.4% |
| Diluted EPS | $0.52 | $0.79 | Down 34.2% |
| Operating cash flow | $0.04 | $4.1 | Near break-even, versus positive cash flow |
Net charge-offs were 7.8% of average finance receivables, compared with 6.3% a year earlier. The allowance for credit losses was $95.6 million, stated as 23.8% of the relevant receivables balance. Accounts more than 30 days past due improved to 3.8% of the portfolio from 4.7% a year earlier.
At July 31, net finance receivables were $332.3 million, inventory was $38.3 million, and cash was $0.7 million. Revolving borrowings were $105.4 million under a $145 million facility; the company reported approximately $38 million of additional availability and compliance with debt covenants. The facility matures in October 2017. Total assets were $411.7 million and total liabilities were $178.7 million.
Finance receivables, net, increased $8.2 million from April 30. Inventory rose $4.1 million, or 11.8%, during the quarter. The company repurchased 46,000 shares for $2.3 million.
Material changes and management commentary
- Revenue growth reflected 6.6% more retail units sold, a 5.3% increase in average retail selling price to $9,965, new dealerships, and 8.9% same-store revenue growth.
- Credit losses rose because of increased loss frequency and greater severity, which management attributed partly to collection-execution issues at certain dealerships and lower wholesale values on repossessions. Management cautioned that continued elevated charge-offs could require a higher reserve.
- Average originating contract term increased to 28.2 months from 27.2 months; the portfolio’s weighted-average term, including modifications, was 30.4 months versus 29.6 months. Management expected receivables growth to exceed revenue growth, partly due to longer terms.
- Management expects credit losses to remain above historical ranges and gross margins to remain under pressure in the near term. It cited competitive pressures, challenging conditions for customers, and tight used-vehicle supply and higher purchase costs. Collection initiatives include credit reporting, GPS installation, training, and closer oversight.
- No specific earnings or revenue guidance was provided. Management said it expected adequate liquidity for foreseeable needs and approximately $5 million of property and equipment spending over the next 12 months.
Risks, contingencies, and unusual items
- Credit quality and collections are central risks: the customer base has higher delinquency and default risk, and management’s allowance estimate is sensitive to charge-off trends and recovery values. A 1% change in the allowance as a percentage of finance receivables would change pretax results by approximately $4.0 million, according to the filing.
- The company relies on variable-rate revolving debt. It estimated that a 1 percentage-point rate increase on quarter-end debt would add approximately $1 million to annual interest expense.
- Management disclosed a tax contingency relating to intercompany finance-receivable sales. If the company’s tax treatment were not sustained, deductions and the timing of tax payments could be affected, and its effective state tax rate could increase.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. The company also reported a $1 million standby letter of credit and operating leases for approximately 85% of dealership properties.
- Stock-based compensation expense increased to approximately $0.7 million from $0.3 million. The quarter included 238,750 option grants, with a reported grant-date fair value of $4.3 million, compared with 20,000 grants and $0.2 million in the prior-year quarter. Shareholders approved amended stock plans on August 5, 2015.
Important facts for investors to verify
- Whether elevated charge-offs persist, the allowance remains adequate, and collection improvements reverse the increase in credit-loss expense.
- Whether lower repossession values and vehicle acquisition costs continue to pressure gross margins.
- Whether longer contract terms and portfolio growth affect collections, liquidity, and future losses.
- Available borrowing-base capacity, covenant headroom, and refinancing plans ahead of the October 2017 facility maturity.
- The status and potential financial effect of the intercompany receivables tax treatment, and the dilution and compensation impact of recent option grants and plan amendments.