Business context and reporting period
America’s Car-Mart, Inc. filed this Form 10-K for the fiscal year ended April 30, 2013. The company sells older-model used vehicles and finances substantially all customer purchases, primarily serving borrowers with limited or impaired credit histories. It operated 124 dealerships at year-end, up from 114 a year earlier. The filing reports annual results; fourth-quarter figures are noted separately below.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $464.7 million | $430.2 million |
| Sales revenue | $415.7 million | $386.9 million |
| Net income | $32.2 million | $33.0 million |
| Net income attributable to common stockholders | $32.1 million | $32.9 million |
| Diluted EPS | $3.36 | $3.24 |
| Income before taxes | $50.7 million | $52.8 million |
| Gross profit on vehicle sales | $176.6 million; 42.5% of sales | $163.5 million; 42.3% of sales |
| Net cash from operating activities | $(1.3) million | $11.7 million |
| Capital expenditures, net | $5.5 million | $4.4 million |
| Revolving debt | $99.6 million | $77.9 million |
Revenue rose 8.0%, while net income declined 2.5%. The provision for credit losses increased to $96.0 million, or 23.1% of sales, from $81.6 million, or 21.1%. SG&A was $73.1 million, or 17.6% of sales, compared with $67.7 million, or 17.5%. Interest expense was $2.9 million, up from $2.3 million.
At April 30, 2013, total assets were $358.3 million, including net finance receivables of $288.0 million and inventory of $32.8 million. The credit-loss allowance was $75.3 million, equal to 21.5% of principal receivables less unearned payment-protection-plan revenue. Cash was $0.3 million. Total equity was $202.3 million; management reported revolving debt to equity of 0.49 to 1.0.
Receivables grew 14.5%, faster than revenue growth of 8.0%. Principal collections were 60.6% of average finance receivables, down from 65.6%. Receivables 30 or more days past due rose to 5.1% of the portfolio from 4.1%; net charge-offs were 25.2% of average receivables, versus 24.8%.
Operating cash flow was negative despite net income, reflecting the cash demands of finance-receivable growth and lower collections relative to receivables. The company increased debt by $21.7 million during the year and spent $17.3 million on share repurchases. It had approximately $40 million of additional revolver availability at year-end under its $145 million facilities, which mature in March 2015; the company was in covenant compliance.
Material changes and fourth-quarter results
- Annual revenue growth slowed to 8.0% from 13.4% in FY 2012. Retail units sold increased 8.0%, while average retail selling price rose 0.5%; interest and other income increased 13.0%.
- Same-store revenue growth slowed to 3.3% from 7.5%. Ten dealerships opened in FY 2013, compared with eight in FY 2012.
- Credit-loss expense increased faster than revenue, reflecting lower principal collections, higher delinquencies, longer contract terms, lower down payments and competitive and macroeconomic pressures.
- Fourth-quarter revenue was $125.5 million, compared with $113.5 million a year earlier. Fourth-quarter net income was $8.8 million, down from $9.6 million; diluted EPS was $0.92 versus $0.97.
Outlook, commentary, risks and contingencies
- Management plans to continue organic growth, targeting roughly one new dealership for every ten existing locations, subject to operating performance and available trained personnel. It anticipated approximately $6 million of property and equipment purchases over the next 12 months.
- Management expected gross margin to remain around 42% in the near term and anticipated credit losses to be somewhat higher than historical ranges. It also said vehicle supply and purchase-cost pressures could persist and contract terms could lengthen further amid competition.
- Management stated that it expected adequate liquidity for the foreseeable future and anticipated renewing or refinancing the credit facilities by their March 2015 maturity. This outlook depends on continued operating cash generation and access to borrowing capacity.
- Key risks include subprime borrower defaults and repossessions, the judgment-sensitive credit-loss allowance, vehicle availability and cost, competition, economic pressures on customers, financing access and covenant compliance, seasonal sales patterns, and consumer-finance regulation, including potential CFPB oversight. Approximately 39% of revenue came from Arkansas, creating geographic concentration.
- The company disclosed ordinary-course legal proceedings and did not expect them to have a material adverse effect, while noting outcomes cannot be predicted with certainty. An IRS settlement concerning FY 2008–2009 tax timing resulted in an additional tax payment and immaterial interest; the IRS was auditing FY 2010–2011 returns. The company also described tax treatment of intercompany receivable sales as dependent on facts and circumstances.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor verification points
- Track delinquency, collections, net charge-offs and the adequacy of the $75.3 million credit-loss allowance as receivables and contract terms grow.
- Assess whether operating cash flow can support receivable growth, dealership expansion, capital spending and repurchases without materially higher borrowing.
- Review revolver availability, borrowing-base eligibility, covenant headroom and refinancing plans ahead of the March 2015 maturity.
- Monitor vehicle sourcing costs, gross margins, down payments and contract terms as competition for subprime customers and inventory changes.
- Follow regulatory developments and the IRS examination and related-party tax position, including potential effects on cash taxes and effective tax rates.