America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 31, 2021. The filing compares the quarter and nine-month period with the corresponding periods ended January 31, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
America’s Car-Mart operates an integrated used-car sales and financing business, serving primarily customers with limited or impaired credit histories. It operated 151 dealerships, principally in the South-Central United States, at period-end. The company finances substantially all vehicle sales and therefore bears material consumer-credit and collection risk.
Financial performance and liquidity
| Metric | Three months ended Jan. 31 | Nine months ended Jan. 31 |
|---|---|---|
| Total revenue | $228.3 million, up 22.2% | $639.5 million, up 16.5% |
| Net income | $19.9 million, versus $12.7 million | $60.6 million, versus $42.1 million |
| Diluted EPS | $2.85, versus $1.83 | $8.73, versus $6.03 |
| Gross margin on sales | 40.6%, versus 40.3% | 40.9%, versus 40.5% |
| Provision for credit losses / sales | 23.8%, versus 24.6% | 22.8%, versus 23.5% |
Quarterly sales increased 22.5%; interest and other income increased 20.5%. For the nine months, sales rose 16.3% and interest and other income rose 18.0%. Nine-month pretax income was $79.0 million, versus $53.5 million. The filing attributes growth to higher average retail prices, modestly higher unit sales, additional dealerships, and growth in average finance receivables.
Operating cash flow was negative $39.5 million for the nine months, compared with negative $13.4 million a year earlier, primarily reflecting increased finance-receivable originations. Investing cash flow was negative $6.4 million. Financing cash flow was negative $9.5 million. Cash fell from $59.6 million at April 30, 2020 to $4.2 million at January 31, 2021.
Debt facilities were $210.5 million at January 31, 2021, including $211.2 million drawn on revolving lines before debt issuance costs and other adjustments. The revolving facility’s total permitted borrowings had been increased to $326 million; additional availability was approximately $115 million. The facilities mature in September 2022, and the company reported compliance with covenants. Its variable-rate borrowing cost was generally LIBOR plus 2.35% (2.85% at January 31, 2021). A 1 percentage-point rate increase on outstanding revolver debt would add approximately $2.1 million in annual interest expense.
Net finance receivables were $558.9 million, up from $466.1 million at April 30, 2020; inventory was $68.6 million, up from $36.4 million. The credit-loss allowance was $185.6 million, or 26.5% of the specified receivables base. Total assets were $741.9 million and total equity was $363.3 million. Operating lease liabilities were $63.6 million.
Material changes and management commentary
- Retail units sold rose 5.6% in the quarter and 1.6% for the nine months. Average retail sales prices increased 16.5% and 14.8%, respectively; management attributed this largely to higher vehicle acquisition costs, tight supply, and a shift toward higher-quality vehicles.
- Management reported that sales and customer traffic recovered from weakness early in the fiscal year and improved toward the end of the quarter. Vehicle availability and prices remained affected by COVID-19, auction disruptions, low repossession volumes, and strong demand.
- Credit indicators improved year over year: receivables at least 30 days past due were 2.8%, versus 3.6%; nine-month net charge-offs were 14.5% of average receivables, versus 17.5%. Management said CARES Act stimulus and enhanced unemployment benefits contributed to improved delinquencies.
- The allowance ratio had been raised from 24.5% to 26.5% at April 30, 2020 amid pandemic-related uncertainty and remained at 26.5%. Management cautioned that future unemployment, collections, and economic conditions could increase losses; a 1 percentage-point change in the allowance ratio would affect pretax results by approximately $7.0 million.
- Gross margin improved modestly, aided by wholesale margins and lower repair expenses. Management warned that elevated vehicle costs and efforts to keep vehicles affordable could pressure gross-margin percentage. Longer contract terms are also a potential consequence of higher vehicle prices.
- The company increased revolving-facility capacity and expanded borrowing-base eligibility for qualifying longer-term receivables. A February 10, 2021 amendment raised the permitted annual capital-expenditure amount from $10 million to $25 million. Management expected approximately $12 million of property and equipment purchases over the next 12 months and said it believed liquidity was adequate for the foreseeable future.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue forecast. Management expects vehicle supply to remain tight in the near term, with further modest increases in purchase costs, and anticipates ongoing uncertainty regarding COVID-19’s effects on customers, collections, credit availability, and demand. It expects to use operating cash and borrowings to grow receivables, fund capital expenditures, repurchase shares when conditions permit, and reduce debt when excess cash is available. Third-quarter seasonality is typically weaker for sales than the first and fourth fiscal quarters.
Key risks include subprime borrower defaults and repossessions, pandemic-related economic disruption, vehicle supply and affordability, interest-rate exposure, competition, consumer-finance regulation, technology and cybersecurity, and attracting and retaining qualified managers. The company also disclosed a tax-position contingency: if its intercompany receivables-sale structure is not sustained by tax authorities, deductions and the timing of tax payments could be affected and its effective state tax rate could rise. Ordinary-course legal proceedings were not expected to have a material adverse effect. A $250,000 standby letter of credit was outstanding.
Share repurchases totaled $9.8 million for the nine months. The credit facilities restrict dividends and repurchases, subject to specified availability and other conditions; management said it did not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether improved delinquency and charge-off trends persist as pandemic-related assistance and economic conditions change, and whether the 26.5% allowance remains adequate.
- Whether tighter used-vehicle supply and higher acquisition costs continue to raise selling prices, extend contract terms, or pressure affordability and gross margins.
- How receivables growth, originations, collections, and credit losses affect operating cash flow and the company’s reliance on revolving borrowings.
- Available borrowing-base capacity, covenant headroom, and refinancing or renewal plans ahead of the September 2022 facility maturity.
- The outcome of tax-authority scrutiny of the intercompany receivables-sale treatment, and any changes to the disclosed tax exposure.