Business Context and Reporting Period
Company: America's Car-Mart, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2010
Business Model: 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. It sells older model used vehicles and provides financing for substantially all customers, many of whom have limited credit histories. As of January 31, 2010, the Company operated 95 stores primarily in the South-Central United States.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Jan 31, 2010 | Nine Months Ended Jan 31, 2010 | Nine Months Ended Jan 31, 2009 |
|---|---|---|---|
| Total Revenues | $83,805 | $250,121 | $221,096 |
| Net Income | $6,279 | $19,619 | $12,818 |
| Diluted EPS | $0.53 | $1.65 | $1.08 |
| Cash and Equivalents | $341 (Balance Sheet) | Net increase of $173 (9 months) | |
| Finance Receivables, Net | $205,809 (Balance Sheet) | Increased $23.8M from prior year-end | |
| Total Debt | $35,123 (Balance Sheet) | Revolving credit facilities and notes payable | |
| Provision for Credit Losses | $16,460 | $46,664 | $43,878 |
Margins: Gross margin as a percentage of sales was 43.9% for the nine months ended January 31, 2010, compared to 43.0% in the prior fiscal year. The provision for credit losses decreased to 20.5% of sales for the nine-month period, down from 21.8% in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.1% for the quarter and 13.1% for the nine-month period compared to the prior year. This was driven by a 12.5% increase in retail units sold, a 1.1% increase in average retail sales price, and a 13.2% increase in interest income.
- Profitability: Net income attributable to common stockholders increased 72.4% for the quarter and 53.2% for the nine-month period. Pretax income rose 72.1% for the quarter and 52.5% for the nine-month period.
- Expense Management: Interest expense decreased significantly (62.3% for the quarter, 52.4% for nine months) due to lower average borrowings. Selling, general, and administrative (SG&A) expenses as a percentage of sales decreased slightly to 18.3% for the nine-month period.
- Credit Quality: Accounts over 30 days past due decreased to 4.2% from 4.5% in the prior year. The provision for credit losses as a percentage of sales improved to 20.5% from 21.8%.
Guidance, Outlook, and Risks
Management Commentary: Management attributes improved results to better underwriting, enhanced collection procedures, and operational improvements. The Company expects gross margins to remain in the 43%-44% range. Credit losses are anticipated to remain in the 21-23% of sales range, though macro-economic factors could cause deviations.
Liquidity and Capital Resources: The Company had $341,000 in cash and $23.5 million in availability under its revolving credit facilities as of January 31, 2010. The Company expects to fund growth through income from operations and borrowings. Revolving credit facilities mature in April 2011 and are expected to be renewed or refinanced.
Risks and Contingencies:
- Interest Rate Risk: The Company has variable rate debt but utilizes an interest rate swap agreement ($20 million notional) to manage exposure. A 100 basis point decrease in rates would increase expense by approximately $550,000 due to the swap's fair value change.
- Regulatory/Tax Risk: The IRS is currently auditing the 2008 and 2009 income tax returns for Car-Mart of Arkansas. Additionally, federal legislation allowing higher interest rates in Arkansas expires December 31, 2010, pending a state constitutional amendment vote.
- Concentration Risk: Approximately 48% of revenues come from customers residing in Arkansas.
Key Facts for Investor Verification
- Credit Loss Allowance: Verify the adequacy of the $55.8 million allowance for credit losses (22% of principal balance) given the sub-prime nature of the customer base and potential macro-economic shifts.
- Arkansas Interest Rate Cap: Monitor the outcome of the November 2010 Arkansas constitutional amendment vote, which determines if the Company can continue charging up to 17% interest on loans in that state after December 31, 2010.
- Debt Maturity: Confirm the renewal or refinancing of the $51.5 million revolving credit facility maturing in April 2011.
- Inventory Levels: Inventory increased 25.9% year-over-year to $19.5 million; verify that this aligns with sales velocity and does not indicate obsolescence risk.
- Tax Audit Status: Track the resolution of the ongoing IRS audit for Car-Mart of Arkansas regarding the sale of finance receivables to Colonial Auto Finance.