America’s Car-Mart, Inc. — Q1 Fiscal 2017 Form 10-Q
Reporting period: Three months ended July 31, 2016, compared with the three months ended July 31, 2015, unless otherwise noted. The company sells older-model used vehicles and finances substantially all customer purchases; it operated 143 dealerships, primarily in the South-Central United States.
Financial and operating performance
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Total revenue | $145.8 million (+2.2%) | $142.7 million |
| Net income | $7.1 million | $4.6 million |
| Diluted EPS | $0.87 | $0.52 |
| Gross margin on sales | 41.8% | 41.2% |
| Credit-loss provision / sales | 25.7% | 27.7% |
| Net cash from operating activities | $(4.3) million | $0.04 million |
- Sales were $129.7 million, up 1.6%; interest and other income was $16.2 million, up 7.0%. Retail units sold declined 2.3% to 11,957, while average retail selling price rose 4.3% to $10,393. Same-store revenue increased 0.5%.
- Net charge-offs were 6.2% of average finance receivables, down from 7.8%. The provision for credit losses fell 5.6% to $33.4 million. However, receivables more than 30 days past due rose to 4.4% from 3.8% year over year.
- At July 31, net finance receivables were $352.5 million, up from $334.8 million at April 30. The $108.0 million credit-loss allowance equaled 25% of the stated principal balance net of deferred protection-plan and service-contract revenue.
- Cash was $0.37 million. Revolving credit facilities and notes payable totaled $117.5 million, up from $107.9 million at April 30. The $172.5 million revolving facilities had approximately $52.8 million available; the stated rate was generally LIBOR plus 2.375% (2.86% at July 31). The facilities mature October 2017.
- Operating cash flow was negative despite higher net income, principally reflecting finance-receivable originations and other working-capital needs. Investing cash outflow was $0.5 million; financing cash inflow was $4.6 million, including $7.2 million of share repurchases. The company repurchased 273,092 shares at an average $26.23.
Material changes and management commentary
- Revenue growth reflected higher interest income, a higher average selling price and contributions from newer dealerships; lower retail unit volume partly offset growth. The average finance-receivable balance increased by approximately $26 million year over year.
- Management attributed the improved quarter’s gross margin and credit-loss measures to lower wholesale volumes and repair costs and a lower frequency of credit losses. Delinquencies over 30 days were nevertheless higher year over year, and collections as a percentage of average receivables declined to 13.0% from 14.0%.
- In May 2016, the company raised the interest rate on new retail installment contracts from 15.0% to 16.5%, citing continued high credit losses. Existing portfolio contracts retain their origination rates.
- Management expects gross margins to remain under pressure and near-term credit losses to exceed historical ranges, citing competitive pressures, customers’ economic challenges and vehicle costs. It expects finance-receivable growth to generally run slightly ahead of revenue growth, partly due to longer contract terms.
Outlook, risks and unusual items
- The company expects to spend approximately $3.4 million on property and equipment over the next 12 months. It expects to renew or refinance its revolving facilities by their October 2017 maturity and stated it believes liquidity will be adequate for foreseeable needs; these are expectations, not guarantees.
- Key risks include subprime customer delinquency and default, the adequacy of the credit-loss allowance, competition for customers and financing, tight used-vehicle supply and higher purchase costs, macroeconomic pressure on customers, and access to credit facilities. A 1% change in the allowance as a percentage of receivables would imply an approximately $4.3 million pretax adjustment. A 1% rise in interest rates on stated debt would add approximately $1.2 million in annual interest expense.
- Credit facilities restrict dividends and repurchases, although repurchases are permitted subject to specified limits and availability conditions. The company reported covenant compliance at July 31, 2016.
- The company disclosed a $1 million standby letter of credit and ordinary-course legal proceedings that management did not expect to have a material adverse effect. A tax structure involving intercompany receivable sales reduces the effective state tax rate by approximately 300 basis points; an adverse tax interpretation could increase taxes and alter payment timing. No material change in risk factors was reported.
- Reported results include a $0.4 million loss on disposal of property and equipment, versus none in the prior-year quarter. The quarter is seasonally one of the company’s busier sales periods and is not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether delinquencies, collections and net charge-offs continue to improve, and whether the $108.0 million allowance remains adequate as the portfolio grows and contract terms lengthen.
- Whether higher contract rates offset funding costs and customer-credit deterioration, and how competition and vehicle acquisition costs affect sales volume and gross margins.
- Actual revolver availability, covenant headroom, refinancing progress before October 2017 and liquidity needs from receivables growth and repurchases.
- Whether the company’s tax treatment of intercompany receivable sales remains supportable and whether any tax authority challenge changes its effective tax rate or cash taxes.