America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended October 31, 2023, compared with the corresponding 2022 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company operates 153 used-vehicle dealerships and finances substantially all customer purchases.
Financial performance and position
| Metric | Quarter ended Oct. 31, 2023 | Quarter ended Oct. 31, 2022 | Six months ended Oct. 31, 2023 | Six months ended Oct. 31, 2022 |
|---|---|---|---|---|
| Total revenue | $361.6 | $351.8 | $729.6 | $690.7 |
| Net income (loss) | $(27.5) | $3.1 | $(23.3) | $16.8 |
| Basic EPS | $(4.30) | $0.49 | $(3.65) | $2.64 |
| Provision for credit losses | $135.4 | $88.8 | $231.7 | $165.1 |
| Interest expense | $16.6 | $8.4 | $30.9 | $15.7 |
- Revenue and margins: Quarterly revenue increased 2.8%, while sales declined 0.4% and interest and other income rose 23.0%. Six-month revenue grew 5.6%, mainly from a 25.1% increase in interest income; retail units sold fell 1.1%. Gross margin on sales improved to 34.3% for the quarter from 32.1%, and to 34.4% for six months from 33.2%.
- Credit performance: The provision for credit losses was 44.8% of sales for the quarter and 37.8% for six months, versus 29.3% and 27.6%, respectively. Net charge-offs as a percentage of average receivables were 7.2% for the quarter and 11.0% for six months. The allowance for credit losses was $344.3 million at October 31, or 26.04% of the relevant receivables measure, compared with 23.91% at April 30. Receivables 30 or more days past due were 3.6%; balances more than 90 days past due were $7.4 million, versus $3.5 million a year earlier.
- Cash flow: Six-month cash used in operating activities was $76.1 million, compared with $95.1 million used in 2022. Investing activities used $1.6 million; financing activities provided $104.2 million. Cash, cash equivalents and restricted cash totaled $94.5 million at period-end, including $90.2 million of restricted cash. Unrestricted cash was $4.3 million.
- Debt and liquidity: Total debt was $744.5 million, up from $638.6 million at April 30, 2023: $579.0 million of non-recourse notes and $165.5 million drawn on the revolving facility. The company reported $86.3 million of additional revolver availability and compliance with facility covenants. Its $600 million revolving facilities mature in September 2024.
- Balance sheet: Net finance receivables were $1.105 billion, inventory $113.8 million, total assets $1.487 billion, and total equity $476.6 million at October 31, 2023.
Material changes and management commentary
- During the quarter, the company implemented third-party software and changed its allowance estimate methodology. It recorded a $28.0 million increase in credit-loss provision, reducing net income by $21.8 million, or $3.40 per basic share. The filing says this change in estimate affected the current quarter and did not affect prior periods.
- Management attributed elevated credit losses to increased loss frequency and severity, including lower vehicle recovery values, longer contract terms, lower average down payments, inflationary pressure on customers and portfolio changes. Average originating contract term rose to 44.1 months for the six-month period from 42.7 months; portfolio weighted-average term was 47.3 months, with 36.5 months remaining.
- Higher interest rates and average borrowings drove interest expense up 96.6% for the quarter and 96.6% for six months. Management said approximately 60% of the six-month increase related to higher rates.
- Management cited procurement, reconditioning and remarketing improvements for higher gross margins. Average retail selling price increased 4.8% for six months, while retail units sold declined 1.1% and average monthly sales per store edged down to 33.4 from 34.0.
Outlook, risks and notable items
- No specific earnings or revenue guidance is provided. Management expects to invest approximately $12 million in fixed assets over the next 12 months and says it expects adequate liquidity for foreseeable needs. It expects to renew or refinance the revolver by its September 2024 maturity and anticipates continued access to securitization funding.
- Management expects used-vehicle supply constraints and elevated purchase and selling prices to persist in the short term, and gross margin percentages to remain under pressure. It expects affordability may improve gradually with wage growth. The filing notes fiscal Q3 (November–January) is historically the slowest sales period.
- Key risks include customer affordability and credit losses, used-vehicle availability and pricing, interest rates and access to financing, collections and underwriting execution, competition, staffing, regulatory changes, cybersecurity and acquisition integration.
- On July 6, 2023, the company issued $360.3 million of non-recourse asset-backed notes at a weighted-average fixed coupon of 8.8%; net proceeds were approximately $356.4 million. After quarter-end, on December 1, 2023, it agreed to acquire the dealership assets of Central Auto Sales in Hot Springs, Arkansas; financial terms are not stated in the provided filing text.
- The company disclosed ordinary-course legal proceedings and does not expect them to have a material adverse effect. It also described tax treatment of intercompany receivable sales that management believes is permissible; an adverse tax interpretation could increase its effective tax rate and change tax-payment timing. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the $28 million quarterly credit-provision increase reflects the methodology change versus underlying portfolio deterioration, and how future allowance estimates may change.
- Trends in delinquencies, charge-offs, recovery values, collections and the allowance as a percentage of receivables, especially for newer loan vintages.
- Ability to refinance or renew the revolver before September 2024, maintain covenant compliance and access securitization markets at acceptable costs.
- Whether higher interest income and improved vehicle gross margins can offset rising funding costs, credit losses and operating expenses.
- Cash availability: most reported cash and cash equivalents plus restricted cash is restricted for securitization obligations; unrestricted cash was $4.3 million.
- Terms and expected financial contribution of the Central Auto Sales acquisition, and any developments in the disclosed tax-treatment contingency.