America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2021 (the first quarter of fiscal 2022). Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
The company operates an integrated used-auto sales and financing business, primarily serving customers with limited credit histories or financial resources. It financed substantially all vehicle sales and operated 151 dealerships, principally in the South-Central United States.
Financial performance and position
| Metric | Quarter ended July 31, 2021 | Prior-year quarter |
|---|---|---|
| Total revenue | $280.3 million | $187.9 million |
| Sales | $246.7 million | $162.8 million |
| Interest and other income | $33.6 million | $25.1 million |
| Income before taxes | $31.8 million | $25.5 million |
| Net income | $25.0 million | $19.6 million |
| Diluted earnings per share | $3.57 | $2.83 |
| Net cash used in operating activities | $31.4 million | $7.4 million |
- Revenue rose 49.2% year over year; sales increased 51.6% and interest income increased 33.7%. Retail units sold rose 25.0%, while average retail selling price increased 20.4% to $15,405.
- Gross margin as a percentage of sales fell to 38.1% from 41.7%, primarily reflecting higher vehicle purchase costs and selling prices. SG&A was 15.7% of sales versus 17.7%; provision for credit losses was 21.9% versus 22.2%.
- Net income increased 27.6% year over year. The effective tax rate was 21.4%, versus 23.4%.
- Net finance receivables were $688.6 million at July 31, up from $625.1 million at April 30. The allowance for credit losses was $201.9 million, equal to 24.5% of principal receivables net of deferred product revenue.
- Cash was $2.7 million. Debt facilities were $271.8 million carrying value ($272.4 million before debt issuance costs), up from $225.9 million at April 30. The company reported $53.4 million of additional borrowing availability and compliance with its debt covenants.
- Operating cash use increased as finance receivable originations grew to $234.9 million, substantially exceeding collections of $97.3 million. Investing cash use was $1.7 million and financing provided $32.9 million; cash declined $0.2 million during the quarter.
Material changes and management commentary
- Management attributed strong growth partly to the prior-year quarter’s pandemic-related sales disruption. Used-vehicle supply remained tight amid strong demand, contributing to higher vehicle costs and pressure on gross margin percentage.
- Average originating contract term increased to 38.8 months from 32.4 months; portfolio weighted-average term increased to 38.7 months from 33.9 months. Management said it may extend terms further if vehicle prices continue rising to keep customer payments manageable.
- Accounts more than 30 days past due increased to 3.3% of receivables from 2.6% a year earlier. Net charge-offs as a percentage of average finance receivables improved to 4.3% from 4.8%. Collections as a percentage of average receivables declined to 11.5% from 13.0%; management attributed the comparison partly to pandemic stimulus payments in the prior-year quarter and longer terms.
- The company repurchased 81,742 shares for $11.6 million. Credit-facility terms restrict dividends and limit stock repurchases; the company said it does not expect to pay dividends in the foreseeable future.
Outlook, risks and contingencies
- Management expects vehicle supply to remain tight in the near term, with further modest increases in purchase costs and continued pressure on gross margin percentage. It expects to spend approximately $25 million on property and equipment over the next 12 months, including dealership refurbishments and additions.
- Management stated it believes liquidity will be adequate for foreseeable needs. The revolving credit facilities mature in September 2022; the company expects renewal or refinancing by maturity. The facilities bear variable rates, generally LIBOR plus 2.35%; a 1 percentage-point rate increase would add approximately $2.7 million in annual interest expense at the period-end debt level.
- Key risks include credit losses and collections, inflation and unemployment affecting customers, used-vehicle availability and affordability, competition for vehicles and financing, COVID-19 and Delta-variant disruption, and recruiting and retaining dealership managers. The allowance for credit losses is a significant estimate; a 1 percentage-point change in the allowance as a share of receivables would change pretax results by approximately $8.2 million.
- The company disclosed a tax-related contingency involving sales of receivables between subsidiaries. If its tax treatment were challenged, tax deductions could be lost and the effective tax rate and timing of tax payments could increase. Ordinary-course legal proceedings were not expected to have a material adverse effect. Two insurance-related standby letters of credit totaled $0.75 million.
- Vehicle sales are seasonal; the first and fourth fiscal quarters have historically been busier. Management cautioned that disruption in those periods could have a disproportionate effect on annual results.
Important facts for investors to verify
- Whether rising vehicle costs and longer contract terms continue to pressure gross margins, affordability and portfolio risk.
- Whether past-due balances, collections and charge-offs remain consistent with the assumptions underlying the 24.5% credit-loss allowance.
- Available borrowing capacity, covenant compliance and renewal or refinancing of facilities maturing in September 2022.
- Developments in the intercompany receivables tax treatment and any resulting change in taxes or cash payments.