America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2014 (fiscal 2014). Dollar figures are in millions unless stated otherwise. The company sells used vehicles and finances substantially all customer purchases; it operated 130 dealerships, primarily in the South-Central United States.
Financial performance
| Metric | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2014 |
|---|---|---|
| Total revenue | $122.6; up 3.1% year over year | $366.6; up 8.1% |
| Net income | $1.5, versus $8.0 | $14.8, versus $23.4 |
| Diluted EPS | $0.16, versus $0.84 | $1.56, versus $2.43 |
| Income before taxes | $2.4, versus $12.5 | $23.6, versus $37.1 |
| Provision for credit losses | $36.8, versus $25.2 | $91.6, versus $70.5 |
- Nine-month sales were $325.3 million, up 7.5%; interest income was $41.2 million, up 13.2%. Retail units sold increased 6.7% and the average retail selling price rose 1.3% to $9,762.
- Nine-month gross margin was 42.4%, compared with 42.7%. Cost of sales was 57.6% of sales versus 57.3%. SG&A was 18.2% of sales versus 17.8%.
- Credit-loss provision was 28.2% of sales for nine months, or 25.8% excluding the allowance increase, versus 23.3% a year earlier. Net charge-offs were 19.8% of average finance receivables versus 18.1%.
- At January 31, net finance receivables were $309.7 million, up from $288.0 million at April 30, 2013. The allowance was $90.9 million, or 23.5% of the relevant receivable balance, versus 21.5% previously. Receivables over 30 days past due were 5.8%, compared with 6.0% at January 31, 2013.
- Cash from operations was negative $1.6 million for nine months, improved from negative $14.2 million. Investing cash outflow was $5.5 million; financing provided $7.1 million. Cash at period end was $0.3 million.
- Revolving debt was $114.3 million, up from $99.6 million at April 30, 2013; the company reported approximately $29 million of additional borrowing availability. The $145 million facility bore LIBOR plus 2.25% (2.41% stated at January 31) and matured in June 2016. Total assets were $382.8 million and total liabilities $172.0 million.
Material changes and management commentary
- Profit fell sharply despite revenue growth. Management attributed the deterioration principally to higher credit losses, including a $7.7 million pre-tax ($4.9 million after-tax) charge to raise the allowance from 21.5% to 23.5%. Management expects elevated losses to persist in the near to medium term, citing competition, lower collections and economic pressure on customers.
- Collections as a percentage of average finance receivables declined to 40.5% from 42.8%. Management cited longer terms, more contract modifications and more delinquent accounts. The portfolio’s weighted average term, including modifications, was 29.5 months versus 28.7 months a year earlier.
- Same-store revenue declined 2.8% in the quarter but increased 1.8% over nine months. Growth in newer dealerships offset weaker quarterly performance at established stores. The company reported that competitive pressure was affecting sales volumes, particularly at older dealerships.
- Management expects near-term gross margin to remain around 42%. It expects finance receivables to grow faster than revenue as contract terms lengthen, while continuing collection, underwriting, credit-reporting and GPS initiatives.
- The company expects about $6 million of property and equipment purchases over the next 12 months for dealership refurbishment and expansion. It believes liquidity will be adequate for foreseeable needs; no specific earnings or revenue guidance was provided.
- After quarter-end, a February 13, 2014 credit-facility amendment changed when fixed-charge coverage testing applies, raised the annual capital-expenditure limit to $10 million and permitted certain contract sales. The company said it was in covenant compliance at January 31.
- The company repurchased 200,000 shares in a December block transaction from an affiliate at an average $41.04 per share. Nine-month repurchases totaled $8.7 million.
Risks, contingencies and other items
- Key risks include subprime borrower credit and collections, increased competition for customers and funding, vehicle availability and acquisition costs, economic pressures such as unemployment and fuel or grocery prices, and dependence on continued access to revolving credit.
- Management’s allowance estimate is a significant accounting judgment; a one-percentage-point change in the allowance rate would change pre-tax results by approximately $3.9 million.
- The IRS was auditing federal tax returns for fiscal 2010 and 2011. The filing describes a separate tax-structure contingency relating to intercompany receivable sales and the possibility of higher tax rates or altered payment timing if the company’s tax position is not sustained.
- Approximately 80% of dealership and office properties were leased. The filing reported no material changes in contractual payment obligations outside the ordinary course and no material off-balance-sheet arrangements other than operating leases.
- Quarterly results are seasonal; the company noted that the timing of customer tax refunds can shift sales and collections between quarters.
Important facts for investors to verify
- Whether credit losses, charge-offs and collections stabilize, and whether the 23.5% allowance remains adequate.
- Whether longer customer contract terms and competitive pressures continue to increase receivables growth and funding needs.
- Actual borrowing availability, covenant headroom and refinancing plans before the June 2016 facility maturity.
- Results of the IRS audits and any developments affecting the intercompany receivable-sale tax treatment.
- Whether new dealership growth and collection initiatives can offset declining same-store performance without further margin or credit-quality deterioration.