America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2022. The filing is unaudited. The company operates 153 dealerships, selling used vehicles and financing substantially all customer purchases, primarily for customers with limited or impaired credit histories. Financial amounts below are in U.S. dollars; dollar figures are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Jan. 31, 2022 | Change vs. prior year | Nine months ended Jan. 31, 2022 | Change vs. prior year |
|---|---|---|---|---|
| Total revenue | $291.9 | +27.9% | $860.5 | +34.6% |
| Net income | $18.8 | −5.6% | $66.6 | +9.9% |
| Diluted EPS | $2.77 | Down from $2.85 | $9.68 | Up from $8.73 |
| Gross margin on sales | 37.8% | Down from 40.6% | 37.8% | Down from 40.9% |
| Credit-loss provision as % of sales | 26.4% | Up from 23.8% | 24.2% | Up from 22.8% |
Quarterly sales were $252.9 million, up 26.5%, and interest and other income was $39.0 million, up 37.7%. Quarterly pretax income declined to $24.8 million from $25.7 million as costs and expenses grew faster than revenue. For the nine months, sales were $750.9 million and interest and other income was $109.6 million. Nine-month pretax income was $86.1 million, up 8.9%.
Quarterly retail units sold increased 0.5% to 14,126, while average retail selling price rose 24.8% to $17,076. For the nine months, retail units increased 9.7% to 44,169 and average selling price rose 21.7% to $16,199. Gross profit per retail unit increased to $6,773 for the quarter and $6,424 for the nine-month period.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities used $102.7 million in the first nine months, compared with $39.5 million used in the prior-year period. The filing attributes the outflow principally to growth in finance receivable originations. Investing activities used $15.2 million, including $13.9 million for property and equipment. Financing activities provided $117.6 million, primarily reflecting net revolving-credit borrowings.
- Cash and debt: Cash was $2.6 million at January 31, 2022. Revolving credit borrowings were $375.1 million gross, or $373.2 million net of debt issuance costs, versus $226.6 million gross at April 30, 2021. Additional borrowing availability was approximately $84.4 million. The facilities mature in September 2024; the company reported compliance with covenants.
- Receivables and credit: Net finance receivables were $797.2 million, up 27.5% from April 30, 2021. The allowance for credit losses was $232.0 million, approximately 24.5% of the specified adjusted receivables base. Receivables 30 or more days past due were 4.0%, versus 2.6% at April 30, 2021; balances more than 90 days past due were $5.2 million, compared with $2.4 million a year earlier.
- Other balance-sheet movements: Inventory increased to $119.6 million from $82.3 million at April 30, 2021. Total assets were $1.045 billion, total liabilities $593.7 million, and total equity $450.5 million at quarter-end.
- Capital allocation: The company repurchased $26.5 million of stock during the nine months and paid $30,000 in preferred-stock dividends. Credit-facility terms restrict dividends and stock repurchases, subject to stated conditions.
Material changes, outlook and risks
- Management linked revenue growth to higher vehicle prices, increased retail volume over the nine-month period, and a larger finance receivables portfolio. Used-vehicle supply remained tight amid strong demand, contributing to higher acquisition costs and pressure on gross-margin percentage. Management expected tight supply and elevated purchase costs to persist in the near term.
- Quarterly unit sales were affected by severe weather and the Omicron variant, which reduced staffing and dealership customer traffic in January. Management also said Omicron contributed to customer work-hour and wage losses and higher delinquencies.
- Credit-loss expense increased with receivables growth. Management reported nine-month net charge-offs at 14.5% of average finance receivables, flat with the prior-year period, while delinquencies had increased. It highlighted collection execution, underwriting, customer affordability, inflation, employment and pandemic-related disruption as relevant risks.
- Longer contract terms and higher selling prices support affordability but may affect collections and liquidity. The portfolio’s weighted-average contract term was 41.2 months, compared with 35.7 months a year earlier; management said terms could increase further if vehicle prices continue rising.
- The company expected to spend approximately $25 million on property and equipment over the next 12 months, mainly refurbishing existing dealerships and adding new ones. It stated that it expected adequate liquidity for foreseeable capital needs. No specific numerical revenue or earnings guidance was provided.
- Other risks include variable-rate debt: a 1 percentage-point rate increase on January 31 borrowings would raise annual interest expense by approximately $3.8 million. A tax position involving intercompany receivables sales could result in higher taxes or a change in payment timing if the company’s interpretation of tax rules were not sustained. Ordinary-course legal proceedings were not expected to have a material adverse effect; two insurance-related standby letters of credit totaled $750,000.
Investor verification points
- Track delinquency trends, charge-offs, recoveries and whether the 24.5% credit-loss allowance remains adequate as the portfolio grows.
- Assess whether vehicle supply, acquisition costs and customer affordability continue to pressure gross margins and contract terms.
- Reconcile operating cash use and receivables growth with borrowing levels, covenant headroom and the $84.4 million of reported facility availability.
- Monitor the effects of variable interest rates, the September 2024 facility maturity and the company’s planned capital spending and repurchases.
- Review the tax treatment of intercompany receivables sales and any subsequent developments in the company’s disclosed legal or other contingencies.