America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended January 31, 2016; fiscal year ends April 30. The company sells used vehicles and finances substantially all customer purchases. It operated 147 dealerships, primarily in the South-Central United States. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Quarter ended Jan. 31, 2016 | Prior-year quarter | Nine months ended Jan. 31, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $137.5 | $131.5 | $413.2 | $392.7 |
| Income before tax | $6.5 | $11.8 | $13.1 | $35.4 |
| Net income | $4.1 | $7.5 | $8.2 | $22.2 |
| Diluted EPS | $0.47 | $0.82 | $0.93 | $2.45 |
| Cash from operating activities | Not stated separately | Not stated separately | $(5.3) | $(0.8) |
- Quarter revenue increased 4.5%; nine-month revenue increased 5.2%. For the nine-month period, management attributed growth to newer dealerships and 1.3% same-store revenue growth. Higher average selling prices and interest income were partly offset by fewer retail units sold.
- Profitability declined sharply. Nine-month gross margin was 40.2%, down from 42.7%; quarterly gross margin was 40.3%, down from 42.7%. Management cited higher repair costs and wholesale volume/losses, along with higher vehicle selling prices.
- Credit-loss provision rose to $106.2 million for nine months from $89.5 million, equal to 28.9% of sales versus 25.6% (27.6% excluding the reserve increase). Net charge-offs were 22.2% of average finance receivables versus 19.9%.
- Quarter SG&A was 19.4% of sales versus 18.2%; nine-month SG&A was 18.8% versus 17.9%. The company cited payroll, new-location and infrastructure costs.
Balance sheet, debt and liquidity
- At January 31, 2016, total assets were $424.3 million; finance receivables, net, were $339.1 million; inventory was $42.1 million; and cash was $0.6 million. Net finance receivables increased from $324.1 million at April 30, 2015.
- Principal finance receivables were $443.3 million, with a $104.2 million allowance for credit losses. The allowance was 25% of the stated adjusted receivables base; management raised the reserve rate from 23.8% during the second quarter.
- Revolving debt was $122.5 million, compared with $102.2 million at April 30, 2015. The $145 million facility carried a rate generally of LIBOR plus 2.375%; approximately $22 million was available at January 31. The company reported covenant compliance.
- On February 18, 2016, after quarter-end, the company increased revolving commitments by $27.5 million to $172.5 million. The facilities mature in October 2017; management expects renewal or refinancing.
- Operating cash flow was negative $5.3 million, investing cash flow was negative $4.2 million, and financing cash flow was positive $9.3 million for the nine months. The company funded receivables and inventory growth, capital spending and share repurchases partly through increased revolver borrowings.
Management outlook, risks and other matters
- Management expects near-term gross-margin pressure and credit losses above historical ranges, citing competition, challenging customer conditions, longer contract terms and lower wholesale values on repossessions. It expects receivables growth to exceed revenue growth as terms lengthen, partly offset by underwriting and collection improvements.
- Management described liquidity as adequate for foreseeable needs and expected about $1 million of capital spending over the next three months for dealership additions and refurbishments. It also anticipated moderately higher selling prices as vehicle quality improves.
- Collections and credit quality are central risks. Thirty-day-plus delinquencies were 5.0%, compared with 5.2% a year earlier, while nine-month collections as a percentage of average receivables declined to 40.6% from 41.9%. The portfolio’s weighted-average term increased to 30.9 months from 29.7 months.
- Other key exposures include subprime customer credit risk, vehicle acquisition costs and supply, competitive financing terms, variable interest rates, and seasonality. A 1% increase in rates on January 31 debt would add approximately $1.2 million of annual interest expense.
- The company had a $1 million standby letter of credit and ordinary-course legal proceedings; management did not expect the proceedings to have a material adverse effect. A tax treatment involving intercompany receivables sales could increase taxes and alter payment timing if the company’s interpretation of tax regulations is not sustained.
- Stock repurchases totaled $10.5 million in the first nine months. Credit-facility terms restrict repurchases and other distributions. The company reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the 25% credit-loss allowance adequately reflects rising net charge-offs, per-vehicle losses and future repossession recoveries.
- Whether collections, delinquencies and contract-term trends improve, particularly after the timing shift in tax refunds.
- Available borrowing capacity and covenant headroom after the February 2016 facility increase, and the company’s ability to refinance before October 2017.
- Whether margin pressure, vehicle costs and higher operating expenses persist, and whether newer dealerships contribute profitable growth.
- The continued permissibility and financial impact of the intercompany receivables-sale tax treatment, as well as compliance with repurchase restrictions.