America’s Car-Mart, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended October 31, 2020, America’s Car-Mart’s fiscal 2021 second quarter. The company operates 150 dealerships, primarily in the South-Central United States, selling used vehicles and financing substantially all customers, many of whom have limited or impaired credit histories. Dollar amounts below are in millions unless noted.
Key financial metrics
| Metric | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2020 |
|---|---|---|
| Total revenue | $223.4; up 17.4% year over year | $411.3; up 13.6% |
| Net income | $21.2, versus $13.9 | $40.8, versus $29.4 |
| Diluted EPS | $3.05, versus $2.00 | $5.88, versus $4.21 |
| Gross margin on sales | 40.7%, versus 40.5% | 41.1%, versus 40.6% |
| Provision for credit losses | $43.9, or 22.3% of sales | $79.9, or 22.2% of sales |
For the six-month period, interest and other income was $51.8 million, including interest income growth of 16.7% as average finance receivables increased. SG&A was $61.3 million, or 17.1% of sales, compared with 17.9% a year earlier. Interest expense declined to $3.4 million from $4.1 million, primarily due to lower rates.
Operating cash flow was negative $29.7 million, compared with negative $8.4 million in the prior-year period, reflecting greater finance-receivable originations and inventory purchases, among other factors. Investing cash flow was negative $4.4 million. Cash declined $40.0 million from April 30 to $19.5 million. Finance receivables, net, were $519.8 million; inventory was $67.4 million.
Debt facilities totaled $213.5 million at October 31, compared with $215.6 million at April 30. The company reported approximately $27 million of additional borrowing availability under its $241 million revolving facilities and said it was compliant with covenants. Total equity was $343.6 million. The allowance for credit losses was $173.0 million, or 26.5% of the specified receivables base.
Material changes versus the prior comparable period
- Second-quarter revenue rose 17.4%; retail units sold increased 1.9%, while average retail selling price rose 15.3% to $13,365. Six-month retail units sold were down 0.3%, while average selling price increased 13.9% to $13,102.
- Six-month net charge-offs as a percentage of average finance receivables declined to 9.6% from 11.5%; accounts more than 30 days past due were 2.5%, down from 3.5% a year earlier. Management attributed improvement to collections and operating practices and noted that enhanced CARES Act unemployment benefits also contributed.
- Finance receivables, net, increased $53.7 million from April 30. Inventory increased $31.0 million as the company rebuilt stocks after conserving cash during the early pandemic period.
- Cash fell from $59.6 million to $19.5 million, while net cash used in operations increased. The company repurchased $6.1 million of stock in the first six months.
Outlook, commentary, risks and unusual items
- Management expects adequate liquidity for the foreseeable future and anticipates about $6.5 million of property and equipment purchases over the next 12 months for dealership refurbishments and openings. It also expects to use cash and borrowing capacity to grow receivables, repurchase shares when conditions are favorable, and reduce debt if excess cash is available.
- Management expects vehicle supply to remain tight in the near term, with further modest increases in purchase costs. Higher vehicle costs and selling prices could pressure gross-margin percentages and affordability; longer contract terms could also weaken collections and increase credit risk.
- COVID-19’s effects on customers, employment, collections, repossessions, vehicle supply and the broader economy remain uncertain. Management warned that economic deterioration and extended contract terms could increase credit losses. A one-percentage-point change in the allowance rate would produce an estimated $6.5 million pretax adjustment.
- The revolving facilities mature in September 2022 and bear variable rates. A one-percentage-point increase in rates on the reported revolving debt would increase annual interest expense by approximately $2.1 million. The facilities restrict dividends and impose conditions on share repurchases.
- The company identified a tax-position contingency involving intercompany receivables sales between subsidiaries. It believes its treatment is supportable; failure to meet applicable tax requirements could increase its effective tax rate and affect tax-payment timing. Ordinary-course legal proceedings were not expected to have a material adverse effect. A $250,000 standby letter of credit supports an insurance policy.
- No specific revenue or earnings forecast was provided. The company noted seasonality: its third fiscal quarter has historically been the slowest for vehicle sales. It also identified risks involving competition, staffing, vehicle availability, regulation, technology and cybersecurity.
Important facts for investors to verify
- Whether improved delinquency and charge-off trends persist, and whether the 26.5% credit-loss allowance adequately reflects COVID-19 and future portfolio risk.
- How tight vehicle supply and rising purchase costs affect inventory availability, customer affordability, gross margins and contract terms.
- Cash consumption, receivables growth, borrowing-base availability and covenant headroom under the revolving facilities.
- The potential impact of the intercompany receivables tax treatment and any developments in tax or legal matters.
- Whether management’s liquidity assessment and planned capital spending remain supportable as pandemic conditions and collections evolve.