America’s Car-Mart, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2023, the three months ended July 31, 2022, with comparisons to the three months ended July 31, 2021. America’s Car-Mart operates an integrated used-car sales and consumer-finance business, primarily serving customers with limited or impaired credit histories. It had 154 dealerships at quarter-end, primarily in the South-Central United States.
Financial and operating performance
- Revenue: Total revenue was $344.9 million, up 23.0%. Vehicle and related sales were $300.5 million, up 21.8%; interest and other income was $44.3 million, up 32.0%.
- Profit: Net income was $13.2 million, down 47.0% from $25.0 million. Diluted EPS was $2.00 versus $3.57; pretax income was $17.1 million versus $31.8 million.
- Margins and costs: Gross margin declined to 35.7% of sales from 38.1%. Gross profit per retail unit increased 12.0% to $6,915. SG&A was $43.2 million, or 14.4% of sales, compared with $38.8 million, or 15.7%. Provision for credit losses rose 53.2% to $82.9 million, equal to 27.6% of sales versus 21.9%.
- Credit portfolio: Net charge-offs were 5.6% of average finance receivables versus 4.3%. Receivables 30 or more days past due were 3.6% at July 31, compared with 3.3% a year earlier and 3.0% at April 30, 2022. The allowance for credit losses was $265.8 million, or 24.5% of the stated adjusted principal balance. Average originating contract term increased to 42.8 months from 38.8 months.
- Cash flow: Operating cash flow was negative $59.1 million, compared with negative $31.4 million. Investing cash outflow was $8.2 million, mainly property and equipment purchases. Financing provided $66.6 million. Cash, cash equivalents and restricted cash decreased $0.7 million to $41.9 million; unrestricted cash was $4.4 million.
- Debt and liquidity: Total debt was $512.0 million, comprising $323.1 million of net non-recourse notes and $188.9 million drawn on the revolving facility. Revolver availability was approximately $125 million. The revolver rate was 5.5% at quarter-end, up from 2.85% at April 30, 2022. The company reported compliance with its debt covenants.
- Balance sheet and activity: Net finance receivables were $919.5 million, inventory $145.2 million, and total assets $1.248 billion. Retail units sold increased 2.1% to 15,536; average retail selling price rose 19.8% to $18,455. Same-store revenue growth was 21.5%.
Material changes versus the prior-year quarter
- Revenue growth reflected higher interest income, a higher average vehicle selling price, and modestly higher retail unit sales. Average finance receivables increased by $295.1 million, supporting higher interest income.
- Profitability fell despite revenue growth: credit-loss provision increased, gross margin percentage contracted, and interest expense rose by $5.4 million to $7.3 million. The company attributed higher interest expense to rising rates and average borrowings approximately $241.6 million higher.
- Management cited higher vehicle purchase costs and inflation in repair parts, transport and fuel as pressures on gross margin. Gross profit dollars per retail unit increased, but percentage margins declined.
- Finance receivables grew, while principal collections as a percentage of average receivables fell to 9.1% from 11.5%. Management attributed the decline partly to longer contract terms, two fewer collection days, and the prior-year quarter’s stimulus-related benefit.
- Debt increased from $440.7 million at April 30, 2022; revolving borrowings rose while non-recourse notes declined following note payments. The company repurchased $5.2 million of common stock during the quarter.
Outlook, commentary and risks
- Management expects tight used-vehicle supply and elevated purchase costs to persist in the near term, continuing pressure on gross-margin percentages. It intends to focus on gross-profit dollars per retail unit.
- The company expects to spend approximately $25 million on fixed assets over the next 12 months, subject to strong operating results, for technology, dealership refurbishment and new locations. It expects to fund growth and capital needs with operating cash flow and borrowing and states it believes liquidity is adequate for the foreseeable future.
- The company expects its revolving facilities, which mature in September 2024, to be renewed or refinanced by maturity. It also expects to continue accessing the securitization market after its April 2022 issuance of $400 million in non-recourse asset-backed notes.
- Key risks include inflation in customers’ essential expenses, unemployment and other economic conditions affecting collections; normalization or further deterioration in credit losses; vehicle supply constraints and high acquisition costs; higher variable-rate borrowing costs; competition for subprime credit and qualified employees; and pandemic, supply-chain, regulatory, technology and cybersecurity risks. A 1 percentage-point rise in rates on the quarter-end revolver balance would add approximately $1.9 million of annual interest expense.
- Seasonality is significant: the first and fourth fiscal quarters are typically busier, while the third is historically slowest. Management cautions that disruption in busy quarters could disproportionately affect annual results.
- The filing reports ordinary-course legal proceedings but does not expect a material adverse effect. It identifies a tax contingency involving intercompany receivable transfers: an adverse tax interpretation could increase the effective tax rate and accelerate tax payments. Two insurance-related standby letters of credit totaled $750,000.
Important facts for investors to verify
- Whether rising delinquencies and charge-offs, longer loan terms and larger average vehicle amounts financed require further credit-loss provisions.
- Whether management’s allowance assumptions and collection performance remain adequate as inflation and the end of pandemic-related benefits affect customers.
- Whether vehicle supply costs, cost of sales and financing costs continue to pressure gross margin and earnings.
- Available revolver capacity, covenant headroom, refinancing plans and the effect of variable interest rates on liquidity.
- Progress and returns from planned capital spending, dealership growth and technology investments, alongside continued share repurchases.
- The potential tax and cash-payment consequences if the company’s intercompany receivable-sale tax treatment is challenged.