CRMT

Business Context and Reporting Period

Company: America's Car-Mart, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009
Business Overview: The Company is the largest publicly held automotive retailer in the U.S. focused exclusively on the "Buy Here/Pay Here" segment of the used car market. As of July 31, 2009, it operated 95 stores primarily in the South-Central United States, selling older model used vehicles and providing financing for customers with limited credit histories.

Key Financial Metrics

Key Ratios:
- Gross Margin: 44.1% of sales (up from 43.6% implied by prior year cost/sales ratio).
- Provision for Credit Losses: 19.5% of sales (down from 20.9% in prior year).
- Delinquency Rate (30+ days): 3.5% (down from 3.6%).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10.7% to $83.8 million, driven by an 11.3% increase in retail units sold and a 1.0% increase in average retail sales price. This was partially offset by a 10.6% decrease in wholesale sales.
• Profitability: Net income increased 32.9% to $7.0 million. Pretax income rose 32.9% to $11.1 million.
• Expense Management: The provision for credit losses decreased as a percentage of sales to 19.5%, attributed to improved underwriting, collection procedures, and lower gasoline prices benefiting customers. Selling, general, and administrative expenses increased 8.7% in dollars but decreased as a percentage of sales to 18.1%.
• Interest Expense: Interest expense decreased 64.4% to $247,000, primarily due to lower average borrowings ($30.0 million vs. $43.4 million) and a net gain of $319,000 from an interest rate swap agreement.
• Cash Flow: Operating cash flow turned positive ($835,000) compared to a negative $929,000 in the prior year, driven by higher sales volumes, improved gross margins, and lower credit losses.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margins to remain in the 43% range. Credit losses are anticipated to be in the range of 21-23% of sales on a going-forward basis, though macro-economic factors could cause deviations.
• Liquidity: The Company believes it has adequate liquidity. It holds $238,000 in cash and has $29.6 million of availability under its revolving credit facilities. The facilities mature in April 2010, and the Company expects to renew or refinance them.
• Capital Needs: The Company plans to spend approximately $3 million on property and equipment in the next 12 months for store refurbishment and expansion.
• Risks and Contingencies:
  • Tax Audit: The IRS is currently auditing the 2008 income tax return for Car-Mart of Arkansas. A related finance company contingency involves the sale of receivables between subsidiaries, which reduces the effective state tax rate; failure to satisfy regulations could increase tax liabilities.
  • Interest Rate Risk: The Company uses an interest rate swap to manage exposure on variable rate debt. A 100 basis point decrease in rates would increase expense by approximately $625,000 due to fair value changes.
  • Arkansas Interest Rate Cap: Federal legislation currently allows charging up to 17% on Arkansas loans until December 31, 2010. If a state constitutional amendment is not approved in November 2010, rates may revert to lower limits, potentially impacting profitability.

Investor Verification Checklist

• Verify the sustainability of the 19.5% credit loss provision ratio against historical averages (21-23%) given the economic environment.
• Confirm the renewal status of the $51.5 million revolving credit facility maturing in April 2010.
• Monitor the outcome of the IRS audit regarding the 2008 tax return and the intercompany receivable sales structure.
• Assess the impact of the expiration of the federal Supplemental Appropriations Act (Dec 31, 2010) on interest income from Arkansas loans.
• Review the $29.6 million unused credit line availability to ensure it covers projected capital expenditures and receivable growth.