America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2023. The company sells used vehicles and finances substantially all customer purchases, primarily serving customers with limited or impaired credit histories. It operated 157 dealerships at period-end. Financial figures below are in U.S. dollars; “$ millions” denotes amounts converted from thousands.
Financial performance and position
| Metric | Three months ended Jan. 31, 2023 | Prior-year quarter | Nine months ended Jan. 31, 2023 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $326.5 million | $287.3 million | $1,017.2 million | $849.3 million |
| Net income | $1.5 million | $19.1 million | $18.3 million | $68.6 million |
| Diluted EPS | $0.23 | $2.82 | $2.79 | $9.97 |
| Provision for credit losses | $85.7 million | $61.6 million | $250.7 million | $168.0 million |
| Interest expense | $9.8 million | $2.9 million | $25.5 million | $7.4 million |
- Quarterly revenue rose 13.7%; nine-month revenue increased 19.8%. Nine-month sales were up 18.1% and interest and other income up 31.1%.
- Revenue growth reflected higher average retail prices and more retail units sold. For the nine months, average retail price increased 13.3% to $18,059 and retail units sold rose 4.0% to 45,929.
- Profitability weakened sharply as credit-loss provisions, vehicle costs and interest expense increased. Pretax income fell to $1.8 million for the quarter from $25.3 million, and to $23.5 million for nine months from $88.7 million.
- Gross margin on sales declined to 33.6% from 36.7% for the quarter and to 33.3% from 36.8% for nine months. The company cited higher vehicle procurement and reconditioning costs, wholesale losses and other inflationary expenses. Nine-month gross profit per retail unit nevertheless rose to $6,341 from $6,171.
- SG&A was $44.7 million for the quarter and $130.9 million for nine months. As a percentage of sales, it was 16.2% for the quarter and 15.0% for nine months.
- Net charge-offs were 16.9% of average finance receivables for nine months, versus 13.3% a year earlier; quarterly net charge-offs were 5.9% versus 5.1%. The allowance for credit losses was $282.8 million, or 23.65% of principal finance receivables. Receivables 30 or more days past due were 3.7% at January 31, 2023, versus 4.0% at January 31, 2022.
- Operating cash flow was negative $123.3 million for nine months, compared with negative $102.7 million. Investing cash use was $25.0 million; financing provided $171.3 million. Cash, cash equivalents and restricted cash totaled $65.5 million, including $61.1 million of restricted cash held for securitization-related purposes and not generally available to the company.
- Total debt was $616.1 million at January 31, 2023, versus $440.7 million at April 30, 2022: $588.3 million of net non-recourse notes and $27.8 million of net revolving borrowings. The revolver rate was 7.5%, up from 2.85% at April 30, 2022. Additional revolver availability was approximately $148 million; the company reported covenant compliance at period-end.
- Finance receivables, net, were $1,023.2 million, up from $863.7 million at April 30, 2022; inventory was $131.6 million, compared with $115.3 million. Total assets were $1,384.7 million and equity was $495.2 million.
Material changes, outlook and risks
- Funding: On January 31, 2023, the company issued $400.2 million of non-recourse asset-backed notes at a weighted-average fixed coupon of 8.68%. Proceeds were used principally to repay revolving borrowings and fund collection and reserve accounts. The April 2022 securitization had a 5.14% weighted-average coupon.
- Credit and customer trends: Management attributed worsening credit-loss results in part to normalization after unusually favorable prior-year periods supported by stimulus payments. Longer contract terms, lower principal collections as a share of average receivables, inflation and customer affordability pressures remain relevant risks.
- Vehicle market and margins: Management said vehicle supply remained tight and elevated purchase costs continued to pressure margins, although used-vehicle values began to decline slightly late in the second quarter and during the third quarter. It expects supply effects and margin pressure to persist in the near term.
- Liquidity and spending: Management expects to fund receivables growth and operations through operating cash, revolving credit and further securitizations, and stated it believes liquidity is adequate for the foreseeable future. It expects approximately $20 million of fixed-asset purchases over the next 12 months, subject to strong operating results. The revolver matures in September 2024. Share repurchases are subject to credit-facility limits; no shares were repurchased in the quarter.
- Credit-facility waiver: A February 22, 2023 amendment expanded borrowing-base eligibility to certain contracts with terms over 60 and up to 72 months. It also included a limited waiver after borrowing availability had been below 10% of aggregate revolver commitments from November 30, 2022 through January 31, 2023. The filing says the related account-funding requirement did not increase or accelerate obligations.
- Controls and corrections: Management reported a material weakness in internal control over financial reporting concerning the precision of review controls over the CECL allowance analysis, with staffing and technical-accounting expertise contributing. Disclosure controls were deemed ineffective as of January 31, 2023. Management described remediation efforts, including hiring a finance and reporting leader, engaging CECL advisers and evaluating software, but said effectiveness testing remains ongoing. Prior-period figures were revised for immaterial errors relating to ancillary-product revenue at charge-off and the credit-loss allowance.
- Other exposures: The business is exposed to subprime borrower defaults, interest-rate changes, used-car supply and pricing, competition, staffing and regulatory risks. A tax-position contingency could increase the effective tax rate and change payment timing if the company’s interpretation of rules governing intercompany receivables sales is not sustained. The filing reports ordinary-course legal proceedings not expected to have a material adverse effect and $2.85 million in standby letters of credit.
- No specific earnings or revenue guidance was provided. The filing notes the third fiscal quarter is historically the slowest sales period, with the first and fourth quarters generally busier.
Most important facts for investors to verify
- Whether credit-loss provisions, charge-offs and delinquency trends stabilize, and whether the $282.8 million allowance remains appropriate as the portfolio seasons.
- Whether vehicle procurement costs and wholesale performance improve enough to arrest gross-margin compression while keeping vehicles affordable.
- How higher funding costs affect net interest income, earnings and future securitization economics; also monitor revolver availability and the implications of the disclosed borrowing-availability trigger and waiver.
- Whether operating cash flow and liquidity can support receivables growth, planned capital spending and debt obligations, given the substantial restricted-cash balance.
- Whether management remediates and tests the CECL-related material weakness and whether future allowance estimates or financial reporting require further correction.
- Whether the tax treatment of intercompany receivables sales is sustained and whether the company can renew or refinance its revolving facilities before September 2024.