Business context and reporting period
America’s Car-Mart, Inc. filed this Form 10-K for the fiscal year ended April 30, 2015 (FY2015), not a standalone 2014 Q4 filing. It operates used-car dealerships and finances substantially all customer purchases, primarily serving borrowers with limited or impaired credit histories. It had 141 dealerships across 10 states at year-end.
FY2015 fourth-quarter results were revenue of $137.6 million and net income of $7.3 million. The filing does not provide a direct year-over-year Q4 comparison in the supplied text.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $530.3 million | $489.2 million |
| Sales | $472.6 million | $434.5 million |
| Interest and other income | $57.8 million | $54.7 million |
| Net income | $29.5 million | $21.1 million |
| Diluted EPS | $3.25 | $2.25 |
| Operating cash flow | $12.4 million | $21.9 million |
| Capital expenditures, net | $3.9 million | $7.1 million |
| Revolving debt at year-end | $102.7 million | $97.0 million |
- Revenue grew 8.4%; retail units sold rose 9.9% to 46,760. Same-store revenue growth was 2.9%, and the average retail price declined 0.9% to $9,680.
- Gross profit was $200.1 million, equal to 42.3% of vehicle sales; cost of sales was 57.7% of sales. SG&A was 17.7% of sales, down from 18.1%.
- Provision for credit losses was $120.3 million, or 25.5% of sales, versus $119.2 million, or 27.4%, in FY2014. Net charge-offs were 27.8% of average finance receivables, compared with 28.2%.
- Net finance receivables were $324.1 million, up from $293.3 million. The allowance for credit losses was $93.2 million, or 23.8% of the stated adjusted receivables base. Accounts at least 30 days past due increased to 5.8% from 4.4%.
- Cash was $0.8 million; the company reported $38.9 million of additional borrowing availability under its $145 million revolving facilities. Total assets were $400.4 million and total equity was $229.1 million. Revolving facilities mature October 2017; the company reported covenant compliance.
- Operating cash flow declined despite higher net income, principally as finance receivables expanded. Cash increased $0.5 million during the year. The company repurchased $20.0 million of stock.
Material changes versus the prior period
- Net income increased 39.6%, reversing part of FY2014’s decline, while revenue growth accelerated from 5.3% to 8.4%. Higher unit sales and interest income contributed to growth.
- Credit-loss provision as a share of sales improved from FY2014’s 27.4%, which included a $7.7 million allowance increase; excluding that increase, FY2014 was 25.7%. FY2015 credit losses remained elevated versus the company’s historical range.
- Receivables growth was 8.4%, compared with 4.3% in FY2014. The portfolio weighted-average contract term increased to 30.2 months from 29.8 months.
- Debt increased $5.7 million, while operating cash flow fell by $9.5 million. The company attributed financing needs largely to receivables growth, inventory, capital spending and share repurchases.
Outlook, management commentary and risks
- Management expected gross margin to remain around 42% in the near term and anticipated credit losses to remain above historical levels, citing competitive pressure and difficult conditions for customers.
- The company planned selective dealership expansion in FY2016 and forecast approximately $4.8 million of property and equipment spending over the next 12 months. The filing gives different opening targets in different passages: eight dealerships in one section and ten in another, each subject to operating performance.
- Management said increased competition for subprime auto financing had pressured down payments and lengthened contract terms, potentially weakening collections and increasing credit losses. Vehicle supply and purchase costs also pose margin risks.
- Other material risks include borrower defaults, allowance-estimation uncertainty, local economic concentration (about 32% of revenue came from Arkansas), variable-rate borrowing costs, access to credit facilities, seasonality, employee retention, information-system and cybersecurity incidents, and consumer-finance regulation.
- On June 10, 2015, the CFPB issued a rule under which finance subsidiary Colonial would be subject to examination and supervision. The company said the operational and financial impact was uncertain. A 1 percentage-point increase in rates on year-end debt would raise annual interest expense by approximately $1.0 million.
- The company disclosed ordinary-course litigation that it did not expect to have a material adverse effect, while noting outcomes cannot be predicted. It also identified uncertainty around the tax treatment of intercompany receivable sales; an adverse tax determination could increase taxes and alter payment timing.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track delinquency and charge-off trends: past-due balances worsened even as the reported charge-off rate eased slightly.
- Assess whether the $93.2 million credit-loss allowance adequately covers the $417.4 million principal portfolio, given higher delinquency and management’s elevated-loss outlook.
- Reconcile the FY2016 dealership-opening targets of eight and ten, and monitor whether growth is supported by trained staff, affordable inventory and available financing.
- Review cash generation against receivables growth, debt capacity, facility covenants and the October 2017 maturity; also consider the scale of share repurchases relative to liquidity.
- Monitor CFPB supervision, the intercompany tax treatment, and any material developments in litigation or regulatory requirements.