America’s Car-Mart, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended April 30, 2017. The filing also reports fourth-quarter results for the three months ended April 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
America’s Car-Mart sells older-model used vehicles and finances substantially all customer purchases, primarily for customers with limited or impaired credit histories. At year-end it operated 140 dealerships in the South-Central U.S., down from 143 a year earlier; no new dealerships opened and three closed. Its results depend heavily on underwriting and collections, receivables growth, vehicle purchase costs, and competition in subprime auto financing.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $587.8 million | $567.9 million |
| Vehicle sales | $520.1 million | $506.5 million |
| Net income | $20.2 million | $11.6 million |
| Net income attributable to common stockholders | $20.2 million | $11.6 million |
| Diluted EPS | $2.49 | $1.33 |
| Gross profit / gross margin on vehicle sales | $215.2 million / 41.4% | $201.6 million / 39.8% |
| Operating cash flow | $7.3 million | $14.3 million |
| Debt at year-end | $117.9 million | $107.9 million |
- Revenue increased 3.5%; sales rose 2.7% and interest and other income increased 10.1%. Retail units sold rose 1.4% to 47,116, while average retail price increased 1.7% to $10,540.
- Net income improved from the prior year, which included challenging credit-loss and margin conditions. FY2017 income before tax was $32.2 million, versus $18.5 million; the filing attributes the improvement in gross margin chiefly to lower repair costs and lower wholesale losses.
- Credit-loss provision was $149.1 million, or 28.7% of sales, compared with $144.4 million, or 28.5%, in FY2016. Net charge-offs were 30.5% of average finance receivables, down from 31.3%; 30-days-past-due receivables increased to 3.6% from 3.0%.
- Net finance receivables were $357.2 million, up from $334.8 million; receivables growth of 7.0% exceeded revenue growth. The allowance for credit losses was $109.7 million, 25% of the relevant receivables balance.
- Cash and cash equivalents were $0.4 million. The company reported approximately $79 million of additional availability under its revolving facilities. Total equity was $233.0 million; debt-to-equity was reported as 0.51 to 1.0.
Fourth-quarter results and comparison
FY2017 fourth-quarter revenue was $152.9 million, gross profit $56.5 million, net income $5.2 million, and diluted EPS $0.66. In FY2016’s fourth quarter, revenue was $154.7 million, gross profit $54.0 million, net income $3.4 million, and diluted EPS $0.40. Thus, fourth-quarter revenue was lower year over year while profit and EPS were higher. The filing notes that the fourth quarter is typically one of the company’s busiest periods.
Management outlook, risks, and notable items
- Management expects gross margin percentages to remain under pressure in the near term and anticipates credit losses to remain above historical ranges, citing competition, contract terms, macroeconomic pressures on customers, and collection performance.
- The company plans to prioritize improving existing dealerships and collections before resuming selective expansion. It anticipates approximately $4.2 million of property and equipment purchases over the next 12 months, subject to operating results, and says it expects adequate liquidity for the foreseeable future.
- Management cites increased competitive pressure and tighter supply/high costs for suitable vehicles as constraints on affordability, margins, and credit quality. The company raised originating contract interest rates from 15% to 16.5% in May 2016; average down payment was 6.0% and portfolio weighted-average term was 32.5 months, up from 31.6 months.
- Revolving credit facilities total $200 million, mature December 12, 2019, and bore interest at LIBOR plus 2.375% at year-end (3.37%). The company reported compliance with covenants. A 1% rate increase on year-end revolving debt would increase annual interest expense by approximately $1.2 million.
- FY2017 included $20.5 million of common-stock repurchases. Repurchases and distributions are subject to lender restrictions. The company pays no regular cash dividend and intends to retain earnings.
- Risks include credit losses and allowance-estimation uncertainty, competitive financing and vehicle sourcing, economic weakness in concentrated markets (about 30% of revenue came from Arkansas), CFPB and other regulatory oversight, cybersecurity, key-personnel needs, and seasonal sales concentration. Ordinary-course litigation was not expected by management to have a material adverse effect, though outcomes are uncertain.
- The auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether delinquency, collections, charge-offs, and the 25% loss allowance remain adequate as receivables and contract terms grow.
- Whether the improvement in gross margin and earnings is sustainable amid vehicle-cost pressure, and whether credit losses improve or remain elevated.
- How finance-receivables growth is funded, including actual borrowing-base availability, covenant headroom, and refinancing plans before the December 2019 facility maturity.
- Whether management’s planned dealership investment and potential return to expansion depend on measurable improvement in existing-lot performance.
- The tax consequences if the intercompany receivable-sale tax treatment is challenged, and any significant developments in litigation or regulatory matters.