America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2020, the first quarter of fiscal 2021. Comparisons are generally with the three months ended July 31, 2019; balance-sheet comparisons are with April 30, 2020. Amounts below are in U.S. dollars.
Business context and results
The company operates an integrated used-car sales and financing business, primarily serving customers with limited or impaired credit histories. It had 150 dealerships, mainly in the South-Central United States, at quarter-end.
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $187.9 million | $171.9 million | +9.3% |
| Vehicle and other sales | $162.8 million | $150.1 million | +8.5% |
| Interest and other income | $25.1 million | $21.8 million | +15.2% |
| Income before taxes | $25.5 million | $19.8 million | +28.7% |
| Net income | $19.6 million | $15.5 million | +26.1% |
| Diluted EPS | $2.83 | $2.21 | +28.1% |
Financial position, cash flow and credit
- Margins and costs: Gross margin was 41.7% of sales, versus 40.8%. SG&A was 17.7% of sales, versus 19.1%. Credit-loss provision was $36.1 million, or 22.2% of sales, compared with $31.5 million, or 21.0%.
- Cash flow: Operating activities used $7.4 million, versus $2.1 million used a year earlier. Investing activities used $2.9 million, mainly for property and equipment. Financing activities provided $1.3 million. Cash declined $8.9 million to $50.6 million from April 30, 2020.
- Receivables and allowance: Net finance receivables were $482.5 million at July 31, up from $466.1 million at April 30. The $160.8 million allowance equaled 26.5% of the stated principal balance, after being increased from 24.5% at fiscal year-end due to COVID-19 uncertainty. Net charge-offs were 4.8% of average receivables, down from 5.4%; balances more than 30 days past due were 2.6%, versus 3.8% at July 31, 2019.
- Debt and liquidity: Debt facilities totaled $214.3 million, including $214.6 million drawn on revolving lines before debt issuance costs and other items. Cash was $50.6 million, and additional revolving-facility availability was approximately $26 million. The facilities have $241 million of permitted borrowings, mature in September 2022, and the company reported covenant compliance at quarter-end.
- Other balance-sheet items: Inventory was $56.2 million, up from $36.4 million at April 30, as the company replenished stocks after holding back purchases during the prior quarter. Total assets were $699.0 million and total equity was $325.8 million.
Changes, outlook and risks
- Revenue growth reflected higher interest income and average selling prices, as well as contributions from newer dealerships. Retail units sold fell 2.8% to 12,176; average retail price rose 12.2% to $12,800. Same-store revenue increased 5.5%.
- Management attributed stronger gross margin to improved wholesale margins and lower payment-protection-plan expenses. Vehicle supply constraints and strong demand kept acquisition costs elevated; management expected tight supply and further modest purchase-cost increases in the near term.
- COVID-19 had reduced customer traffic and vehicle availability and had previously disrupted collections, including a temporary suspension of some collection and repossession activity. Collection procedures returned to normal in Q1. Management said enhanced CARES Act unemployment benefits contributed to improved delinquencies, but the continuing economic and employment effects remained uncertain.
- Management warned that longer contract terms, elevated vehicle costs, unemployment and economic pressure on customers could weigh on collections, liquidity and future credit losses. The portfolio serves higher-risk borrowers; the allowance is a significant estimate, and a one-percentage-point change in the allowance as a share of receivables would change pretax results by approximately $6.1 million.
- The company reported no specific earnings or revenue guidance. It expected approximately $6.5 million of property-and-equipment purchases over the next 12 months for dealership refurbishments and openings, and said it believed liquidity would be adequate for foreseeable needs. It made no share repurchases in the quarter, citing pandemic uncertainty. Credit agreements restrict shareholder distributions.
- Variable-rate debt creates interest-rate exposure: a 1% rate increase on revolving borrowings outstanding at quarter-end would add approximately $2.1 million in annual interest expense. The filing also identifies tax uncertainty relating to intercompany receivables sales; an adverse interpretation could increase the effective tax rate and alter the timing of tax payments.
- The filing reports ordinary-course legal proceedings but says their outcomes are not expected to have a material adverse effect. It discloses a $250,000 standby letter of credit and no other material off-balance-sheet arrangements apart from operating leases and that letter of credit.
Important facts for investors to verify
- Whether improved delinquency and charge-off measures persist as CARES Act benefits and pandemic-related conditions change, and whether the 26.5% credit-loss allowance remains adequate.
- Whether vehicle supply, purchase prices and average contract terms affect affordability, gross margins, customer collections and credit losses.
- Current borrowing-base availability, covenant headroom and the company’s ability to refinance or renew facilities before their September 2022 maturity.
- Whether operating cash generation can fund receivables growth, inventory needs and planned capital expenditures without increasing reliance on debt.
- Any developments in the tax treatment of intercompany receivables sales and related potential tax costs.