America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2012 (fiscal 2013 second quarter), compared with the same periods in 2011. The company sells used vehicles and finances substantially all customer purchases; it operated 117 dealerships at quarter-end.
Financial performance
| Metric | Three months ended Oct. 31, 2012 | Six months ended Oct. 31, 2012 | Comparable 2011 period |
|---|---|---|---|
| Total revenue | $110.2 million, down 0.5% | $220.2 million, up 4.2% | $110.8 million quarter; $211.3 million six months |
| Net income | $7.3 million, down 6.2% | $15.4 million, down 4.0% | $7.8 million quarter; $16.0 million six months |
| Diluted EPS | $0.76, versus $0.77 | $1.59, versus $1.55 | Prior-period amounts shown in parentheses |
| Provision for credit losses | $23.6 million; 24.1% of sales | $45.3 million; 23.1% of sales | 22.6% quarter; 21.6% six months |
| Gross margin on sales | Approximately 42.8% | 42.8%, versus 42.6% | Prior-period six-month margin |
| Operating cash flow | Not separately stated | $0.4 million provided | $1.1 million used in prior-year six months |
Quarterly sales were $98.2 million, down 1.9%; interest income rose 12.6% to $12.0 million. For the six-month period, sales increased 3.2% to $196.5 million and interest income increased 13.6% to $23.7 million. Six-month pretax income declined 4.5% to $24.6 million as expenses, especially credit-loss provision and SG&A, increased faster than revenue.
Balance sheet, debt and liquidity
- At October 31, 2012, finance receivables, net, were $268.8 million, up from $251.1 million at April 30; gross principal was $339.2 million and the credit-loss allowance was $70.4 million, or 21.5% of principal less unearned payment-protection revenue.
- Revolving debt was $91.3 million, up from $77.9 million at April 30. The $145 million facilities mature in March 2015, carry a generally applicable rate of LIBOR plus 2.5%, and had $53.7 million of additional availability. The company reported compliance with covenants.
- Cash was $0.4 million. Total assets were $329.9 million; total liabilities were $142.3 million. The filing identifies operating income and revolving-facility borrowings as principal liquidity sources.
- Six-month capital expenditures were $2.0 million. Management expected approximately $4 million of property and equipment purchases over the next 12 months for dealership additions, refurbishments and expansion.
Changes, outlook and risks
- Six-month retail units sold increased 3.2%, while same-store revenue was nearly flat (+0.1%); new and recently opened locations contributed substantially to overall growth. In the second quarter, same-store revenue fell 4.8%, retail units declined, and the average selling price was $9,515 versus $9,557.
- Credit performance weakened: net charge-offs as a percentage of average receivables increased to 12.4% from 12.0%; receivables 30 or more days past due rose to 4.3% from 3.9%. Collections as a percentage of average receivables fell to 29.4% from 31.6%. Management attributed pressure to economic conditions, longer terms, and newer dealerships, while emphasizing collection execution.
- Management expected near-term gross margins of 42%–43% and said fiscal 2013 credit losses could be slightly higher, depending in part on collections during tax-refund season. It anticipated finance-receivable growth somewhat above revenue growth as contract terms increase. These are expectations, not guarantees.
- The company repurchased $14.7 million of stock during the six months. Credit agreements restrict repurchases and distributions and require minimum availability; future contract-structure changes could reduce repurchases.
- Material risks include subprime customer defaults and collateral losses, economic pressures on customers, vehicle supply and purchase costs, competition and consumer-credit availability, dependence on trained dealership managers, variable-rate debt, and tax uncertainty. A 1% increase in rates on period-end debt would add about $0.9 million to annual interest expense.
- The IRS proposed a negotiated settlement concerning fiscal 2008–2009 tax examinations; it remained subject to final approval. The issue was described as timing-related, with an immaterial interest payment expected. IRS audits of fiscal 2010 and 2011 returns were ongoing. The company also disclosed uncertainty regarding tax treatment of intercompany receivable sales.
- About 79% of dealership and office properties were leased. The company reported no material change in contractual obligations outside the ordinary course and no other material off-balance-sheet arrangements beyond operating leases.
Important facts for investors to verify
- Whether rising delinquencies, charge-offs and the allowance adequately reflect future losses, and whether tax-refund-season collections meet expectations.
- How much growth and profitability depend on newer stores versus established-store performance, particularly after the quarterly same-store revenue decline.
- Revolver borrowing-base availability, covenant headroom, debt refinancing plans before March 2015, and sensitivity to interest-rate changes.
- Final IRS settlement terms and the outcome of the fiscal 2010–2011 audits and the intercompany-receivable tax position.
- Whether planned vehicle sourcing, contract-term changes and dealership investment sustain margins and liquidity without worsening credit quality.