America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2018 (fiscal 2019 second quarter and first half). The company sells used vehicles and finances substantially all customer purchases; it operated 143 dealerships, primarily in the South-Central United States.
Financial performance
- Quarter: Revenue was $167.2 million, up 12.1% year over year; net income was $11.3 million versus $6.0 million; diluted EPS was $1.58 versus $0.79. Sales rose 12.3%, and interest and other income rose 11.1%.
- Six months: Revenue was $331.2 million, up 12.1%; net income was $22.2 million versus $13.0 million; diluted EPS was $3.11 versus $1.69.
- Margins and costs: Gross margin was 41.7% for the quarter versus 42.0% and 41.6% for the six months versus 41.7%. Credit-loss provision was 26.3% of sales for the quarter and 26.2% for the first half, improving from 29.7% and 28.2%, respectively. First-half SG&A was 18.1% of sales versus 18.4%.
- Cash flow: First-half operating cash flow was negative $2.5 million; investing cash flow was negative $1.5 million and financing cash flow was positive $3.7 million. Cash declined $343,000 to $679,000.
- Balance sheet and liquidity: At October 31, finance receivables, net, were $409.7 million; inventory was $39.3 million; total assets were $487.4 million. Debt facilities were $164.8 million, up from $152.4 million at April 30. The company reported approximately $35 million of additional revolver availability and compliance with covenants. Revolving facilities mature in December 2019.
- Credit portfolio: The allowance for credit losses was $126.1 million, or 25% of the stated adjusted principal balance. First-half net charge-offs were 13.0% of average finance receivables versus 13.8%. Receivables over 30 days past due were 3.4% versus 4.1% a year earlier; the 3–29-day-past-due share was 16.9%, up from 11.9% at April 30.
Changes versus prior comparable periods
- Revenue growth reflected higher same-store sales, more retail units sold, additional dealerships, and higher interest income from a larger receivables portfolio and the 16.5% contract rate. First-half retail units sold increased 6.0%; average selling price rose 6.0% to $11,022.
- Profit increased faster than revenue, supported by lower credit-loss provision as a share of sales and a lower effective tax rate. The six-month effective tax rate was 18.7%, versus 33.3%; the 2018 period included an approximately $1.5 million discrete tax benefit from excess share-based-compensation tax benefits.
- Interest expense increased 51.6% for the first half, reflecting higher average borrowings and interest rates. The applicable revolver rate was 4.65% at October 31, versus 4.25% at April 30.
- First-half share repurchases totaled $13.9 million, compared with $20.1 million a year earlier.
Outlook, commentary and risks
- Management gave no specific earnings or revenue guidance. It expects gross margin to remain within its historical range in the near term and believes liquidity will be adequate for foreseeable needs.
- Management expects used-vehicle supply to remain tight, with modest further increases in vehicle purchase costs. It expects credit losses to remain elevated near term relative to historical ranges, despite recent improvement in collections and delinquency measures.
- The company plans approximately $3.4 million of property and equipment purchases over the next 12 months for dealership refurbishments and additions. It expects to fund growth primarily through operating income and revolving facilities.
- Key risks include subprime customer credit and collection performance, vehicle purchase costs and availability, competition for consumer financing, variable-rate debt, economic pressures on customers, and the ability to recruit and retain dealership managers. Management noted that seasonal vehicle sales are generally weakest in the November–January quarter.
- Credit-loss estimates are a significant judgment; management states that a 1-percentage-point change in the allowance as a percentage of finance receivables would change pretax results by approximately $4.1 million. The company also disclosed a $1 million standby letter of credit and ordinary-course legal proceedings not expected to have a material adverse effect.
Important facts for investors to verify
- Whether improving charge-off and delinquency trends continue, particularly given the increase in 3–29-day delinquencies since April and management’s expectation of elevated credit losses.
- Whether the $126.1 million allowance adequately reflects expected losses and how the estimate responds to portfolio seasoning and economic conditions.
- Revolver availability, covenant headroom and refinancing plans ahead of the December 2019 facility maturity, alongside rising debt and interest costs.
- Whether higher vehicle costs pressure gross margins, affordability, contract terms and future collections.
- The sustainability of earnings growth after considering the discrete tax benefit, share repurchases and noncash credit-loss provision.