AMERICAS CARMART INC annual report, FY2016

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Business Context and Reporting Period

America’s Car-Mart, Inc. filed this Form 10-K for the fiscal year ended April 30, 2016. It operates 143 used-car dealerships, primarily in smaller South-Central U.S. communities, and finances substantially all vehicle sales to customers with limited or impaired credit histories. The filing also reports fiscal fourth-quarter results; this is not a calendar-year 2015 report.

Financial Performance and Condition

  • Revenue: $567.9 million, up 7.1% from $530.3 million. Vehicle sales rose 7.2% and interest and other income rose 6.3%.
  • Profit: Net income was $11.6 million versus $29.5 million; diluted EPS was $1.33 versus $3.25. Pretax income fell 60.7% to $18.5 million.
  • Margins and costs: Gross profit was $201.6 million, a 39.8% margin on vehicle sales, down from approximately 42.3% in 2015. Cost of sales rose to 60.2% of sales from 57.7%; SG&A rose to 18.2% from 17.7%.
  • Credit performance: Provision for credit losses was $144.4 million, up 20.0%; it equaled 28.5% of sales versus 25.5%. Management reported 27.6% excluding a second-quarter allowance increase. Net charge-offs were 31.3% of average finance receivables versus 27.8%.
  • Cash flow: Operating cash flow was $14.3 million, compared with $12.4 million. Investing used $4.5 million and financing used $10.0 million; cash declined $0.2 million to $0.6 million.
  • Debt and liquidity: Total debt was $107.9 million, against total equity of $228.8 million. Revolver borrowings were $107.4 million, with approximately $61 million available under facilities totaling $172.5 million. The company reported covenant compliance. Revolving facilities mature in October 2017.
  • Receivables and reserve: Net finance receivables were $334.8 million. The $102.5 million allowance was 25.0% of principal, net of specified deferred revenues. Receivables 30 or more days past due were 3.0%, down from 5.8%.

Material Changes Versus Prior Year

  • Revenue grew more slowly than in fiscal 2015 (7.1% versus 8.4%), while retail units sold edged down 0.6%. Average retail selling price increased 7.0% to $10,361, and same-store revenue growth was 2.7% versus 2.9%.
  • Profitability weakened sharply as higher vehicle purchase and repair costs, increased repossessions and wholesale sales, and higher credit-loss expense compressed margins.
  • Finance receivables grew 4.5%, below revenue growth of 7.1%; management attributed this mainly to higher charge-offs and wholesale sales. Average portfolio contract term increased to 31.6 months from 30.2 months.
  • The company ended the year with two more dealerships than a year earlier: 143 versus 141. It opened six and closed four during fiscal 2016.
  • Stock repurchases totaled $14.2 million, down from $20.0 million in fiscal 2015.

Outlook, Risks, and Unusual Items

  • No formal quantified earnings or revenue guidance is provided. Management expects credit losses to remain above historical ranges in the near term and gross margin percentages to remain under pressure.
  • Management deferred further dealership expansion to focus on improving existing operations, with future expansion dependent on operating performance. It expected approximately $2.2 million in property and equipment purchases over the next 12 months, subject to results.
  • After year-end, in May 2016, the company raised its retail contract rate from 15.0% to 16.5% in response to continued high credit losses.
  • Key risks include subprime borrower defaults, allowance estimation, competition and pressure on contract terms, used-vehicle supply and purchase costs, regulatory compliance, economic conditions in concentrated markets, and access to credit facilities. Arkansas accounted for approximately 31% of revenue.
  • The allowance for credit losses included a $4.8 million second-quarter provision increase. Management states that a 1 percentage-point change in the allowance as a share of finance receivables would change pretax results by approximately $4.1 million.
  • The company disclosed ordinary-course litigation not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. It also identified tax-treatment risk related to intercompany receivables sales; an adverse tax interpretation could increase taxes and accelerate tax payments.
  • Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.

Investor Verification Priorities

  1. Track subsequent charge-offs, collections, repossessions, and whether the $102.5 million credit-loss allowance proves adequate.
  2. Assess whether the May 2016 rate increase, underwriting changes, and collection initiatives improve credit performance without further weakening sales.
  3. Verify continued access to the revolver, covenant headroom, refinancing plans ahead of the October 2017 maturity, and the quality of borrowing-base availability.
  4. Monitor vehicle acquisition costs, wholesale recovery values, repair expenses, and gross-margin trends.
  5. Review the tax position for intercompany receivables sales, lease commitments, and geographic concentration, particularly the Arkansas revenue exposure.