America’s Car-Mart, Inc. — Form 10-Q
Reporting period: Three months ended July 31, 2011 (first quarter of fiscal 2012). Unless noted, financial amounts below are in millions of dollars. Comparisons are with the three months ended July 31, 2010; balance-sheet comparisons are with April 30, 2011.
Business context
The company sells older-model used vehicles and finances substantially all customer purchases, serving primarily customers with limited or impaired credit histories. It operated 107 dealerships at quarter-end, primarily in the South-Central United States. Arkansas accounted for approximately 44% of revenue.
Financial and operating performance
| Metric | Q1 FY2012 | Prior-year period / change |
|---|---|---|
| Total revenue | $100.5 | $91.5; up 9.9% |
| Sales | $90.3 | $82.6; up 9.3% |
| Interest income | $10.2 | $8.9; up 15.2% |
| Income before taxes | $13.3 | $12.7; up 4.5% |
| Net income | $8.3 | $8.0 |
| Diluted EPS | $0.78 | $0.70 |
| Operating cash flow | $1.2 | $3.0 |
- Cost of sales was 57.1% of sales, versus 56.2%; management cited higher wholesale sales, vehicle purchase costs and service-contract expenditures. Gross margin was approximately 42.9%, consistent with management’s near-term expectation of about 43%.
- Provision for credit losses rose 14.8% to $18.5 million and increased to 20.5% of sales from 19.5%. Net charge-offs were $16.0 million versus $13.7 million; net charge-offs as a percentage of average finance receivables rose to 5.6% from 5.1%.
- Finance receivables, net, increased to $231.7 million from $222.3 million. The allowance for credit losses was $62.7 million. Receivables at least 30 days past due were 4.0% of the portfolio, versus 3.6% at July 31, 2010; the current portion fell to 83.32% from 84.99%.
- Cash was $0.2 million. Revolving debt and notes payable were $57.5 million, up from $47.5 million at April 30; the $90 million credit facility had $33 million of additional availability. The company reported compliance with facility covenants.
- Operating cash flow was $1.2 million; capital expenditures were $0.7 million. The company repurchased 388,520 shares for $11.1 million. Net borrowings under revolving facilities were $9.9 million, and ending cash was $0.2 million.
- Inventory increased to $26.6 million from $23.6 million. Total assets were $288.0 million and total liabilities $102.7 million at July 31.
Material changes and management commentary
- Revenue growth reflected 6.7% more retail units sold, a 2.2% increase in average retail selling price, higher interest income and increased wholesale sales. Newer dealerships contributed materially; same-store revenue growth was 3.6%, down from 6.4%.
- Retail units sold increased to 9,049 from 8,481, while average units sold per store per month declined to 28.2 from 28.8. The average retail selling price was $9,441, compared with $9,242.
- Net income increased modestly despite faster expense growth. Pretax income as a percentage of sales declined to 14.7% from 15.3%. Lower interest expense ($0.4 million versus $1.0 million) partly reflected lower variable rates; average borrowings were higher.
- Management said credit losses were at the low end of its acceptable range, but acknowledged pressure from the economy and weaker collection measures. Collections as a percentage of average receivables declined to 15.9% from 16.3%.
Outlook, risks and contingencies
- Management expected annual credit losses to be 20%–22% of sales, subject to potentially adverse macroeconomic conditions. It expected gross margin to remain around 43% in the near term, while noting pressure from rising vehicle acquisition costs.
- The company planned approximately $4 million of property and equipment spending over the next 12 months for dealership additions, refurbishments and expansions. It expected to use operating income and revolving borrowings to fund receivables growth, capital spending and possible share repurchases, and stated it believed liquidity would be adequate for the foreseeable future.
- The $90 million revolving facilities mature in November 2013. Borrowings carry variable rates; a 1 percentage-point rate increase on the $57.5 million outstanding would increase annual interest expense by approximately $575,000 before tax.
- Key risks include subprime customer delinquencies and losses, collection execution, inflation in fuel and staple prices, unemployment, constrained vehicle supply and higher purchase costs, competition, personnel retention, regulatory changes and access to credit.
- The IRS disputed the timing treatment of certain payment-protection-plan revenue and related deductions for fiscal 2008 and 2009. The company was contesting the proposed adjustment through the IRS Appeals process; the filing describes the issue as affecting tax-payment timing, not the overall tax provision. No related accrued interest or penalties were reported at July 31, 2011.
- Approximately 75% of dealership and office properties were leased. The filing reported no material off-balance-sheet arrangements other than operating leases. The company also disclosed that a 1% change in the credit-loss allowance as a percentage of receivables would change pretax expense by approximately $2.9 million.
Important facts for investors to verify
- Whether delinquencies and charge-offs continue to rise, and whether the $62.7 million allowance adequately reflects expected losses.
- Whether same-store sales and per-store unit productivity recover, particularly at older locations and in Texas.
- Whether vehicle acquisition costs and wholesale volumes pressure margins beyond management’s approximately 43% expectation.
- Available borrowing capacity, covenant compliance and refinancing plans ahead of the November 2013 facility maturity.
- The resolution and potential cash-tax timing effects of the IRS dispute, and the ongoing impact of share repurchases on liquidity.