America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended October 31, 2017 (fiscal 2018); comparisons are to the periods ended October 31, 2016. Unless noted, amounts are in millions of dollars. The company operates 140 used-car dealerships and finances substantially all customer purchases.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $149.1, down 0.7% | $295.5, down 0.2% |
| Net income | $6.0, up 19% | $13.0, up 6.9% |
| Diluted EPS | $0.79 vs. $0.62 | $1.69 vs. $1.48 |
| Gross margin on vehicle sales | 42.0% vs. 41.4% | 41.7% vs. 41.6% |
| Credit-loss provision / sales | 29.7% vs. 29.6% | 28.2% vs. 27.7% |
- Revenue mix and activity: Quarterly sales were $130.4 million, down 2.1%; interest and other income was $18.7 million, up 9.7%. Retail units sold declined 1.9% for the quarter and 1.5% year to date. Year-to-date interest income rose 11%, supported by portfolio growth and the increase in the contract rate from 15.0% to 16.5% in May 2016.
- Costs and margins: Six-month SG&A rose 3.9% to $47.6 million, or 18.4% of sales, reflecting recruitment, training, collections support and marketing. Interest expense increased 26% to $2.5 million as average borrowings and rates rose. The company reported pretax income of $19.4 million and net income of $13.0 million for the six months.
- Cash flow: Six-month operating cash flow was negative $1.2 million, improved from negative $9.9 million a year earlier. Investing cash flow was negative $0.9 million, primarily for property and equipment. Financing cash flow was positive $2.0 million; it included $20.1 million of share repurchases and a $20.1 million net increase in revolving borrowings.
- Receivables and credit: Net finance receivables were $376.6 million, up from $357.2 million at April 30, 2017. The allowance was $115.9 million, or 25% of the stated principal balance after the specified deferred-revenue deductions. Net charge-offs were 13.8% of average receivables for the six months, compared with 14.0%; balances 30 or more days past due were 4.1%, versus 4.8% a year earlier. Collections as a percentage of average receivables fell to 24.6% from 25.6%.
- Debt and liquidity: Balance-sheet revolving facilities and notes payable totaled $138.0 million, versus $117.9 million at April 30. Cash was only $0.36 million; the company reported approximately $60 million of additional facility availability. Its $200 million revolving facilities mature in December 2019, and the company reported compliance with covenants at quarter-end.
Material changes and management commentary
- Year-to-date revenue was nearly flat: dealership closures reduced revenue, partly offset by growth at continuing and newer locations. In the quarter, same-store revenue increased 0.6%, compared with 11.6% in the prior-year quarter.
- Management attributed slightly improved gross margin to inventory management and repair practices, but said margin percentage is expected to remain under pressure in the near term. It expects vehicle supply to remain tight, potentially causing modest further purchase-cost increases.
- Management expects credit losses to remain elevated near term amid competitive pressure, longer contract terms, lower collections and economic challenges facing customers. It expects receivables growth generally to remain slightly above revenue growth, reflecting term increases partly offset by underwriting and collection improvements.
- The company expects approximately $3.2 million in property and equipment purchases over the next 12 months and said it believes liquidity is adequate for foreseeable needs. It provided no specific earnings or revenue forecast.
Risks, contingencies and unusual items
- Credit quality and the allowance for credit losses are key estimates. Management noted that a one-percentage-point change in the allowance as a percentage of receivables would change pretax results by approximately $4.6 million. Longer contract terms and limited-credit customer profiles heighten exposure to delinquency, default and repossession.
- Variable-rate debt creates interest-rate risk: a one-percentage-point increase would add approximately $1.4 million to annual interest expense at the reported debt level. Repurchases are subject to lender availability and covenant restrictions.
- A $784,000 tax benefit from adoption of new share-based compensation accounting reduced the six-month tax provision and affected cash-flow classification. The company also disclosed a tax-position risk relating to intercompany finance-receivable sales; an adverse interpretation could increase its effective tax rate and change the timing of tax payments.
- Operating leases cover approximately 86% of dealership properties and office facilities. A $1 million standby letter of credit relates to an insurance policy. The company said ordinary-course legal proceedings are not expected to have a material adverse effect.
- Seasonality is significant: November through January is historically the slowest vehicle-sales period, while the first and fourth fiscal quarters are generally busiest. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether lower collections and longer contract terms lead to higher delinquency, charge-offs or allowance needs.
- Whether the $60 million of stated facility availability and covenant headroom remain adequate as receivables, debt and buybacks change.
- How the $20.1 million of first-half repurchases and the November 2017 authorization for up to one million additional shares affect liquidity and share count.
- Whether vehicle acquisition costs, gross margins and the company’s near-term credit-loss outlook develop as management expects.
- Potential tax consequences if the company’s treatment of intercompany receivable sales is challenged, and the eventual effects of pending accounting standards.