America’s Car-Mart, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended January 31, 2020 (fiscal 2020 third quarter; unaudited). The request metadata labels this “2019 Q3,” but the filing period is January 31, 2020. Unless stated otherwise, amounts below are in millions of dollars.
Business context
The company operates 145 dealerships, primarily in the South-Central U.S., selling used vehicles and financing substantially all customers. Its customer base often has limited credit histories or financial resources, making credit performance and collections central to results.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2020 |
|---|---|---|
| Total revenue | $186.7 (+15.9% year over year) | $548.9 (+11.5%) |
| Net income | $12.7 (+16.4%) | $42.1 (+27.3%) |
| Diluted EPS | $1.83 (vs. $1.55) | $6.03 (vs. $4.66) |
| Gross margin on sales | 40.3% (vs. 41.5%) | 40.5% (vs. 41.6%) |
| Credit-loss provision / sales | 24.6% (vs. 25.4%) | 23.5% (vs. 25.9%) |
- For the nine months, sales were $481.1 million and interest and other income was $67.9 million. Retail units sold increased 6.6%; average retail selling price rose 4.7% to $11,587.
- SG&A was $87.3 million for the nine months, up 10.4%; it declined slightly as a share of sales to 18.1%. Interest expense was $6.1 million, up 3.6%.
- Net cash used in operating activities was $13.4 million, versus $4.8 million provided a year earlier. Receivable originations and inventory growth were substantial cash uses. Investing cash use was $3.2 million; financing provided $17.0 million.
- At January 31, cash was $2.1 million, net finance receivables $467.3 million, inventory $54.0 million, and debt facilities $184.3 million. Total debt facilities increased $31.4 million from April 30, 2019. The company reported approximately $56 million of additional revolver availability and covenant compliance.
- Finance receivable principal was $607.5 million; the allowance for credit losses was $140.3 million, or 24.5% of the stated adjusted principal base. Receivables 30 or more days past due were 3.6%, compared with 3.2% a year earlier.
Material changes and management commentary
- Revenue growth reflected same-store expansion, additional dealerships, higher average selling prices, and increased retail unit sales. Same-store revenue grew 9.8% for the nine-month period.
- Gross margin declined as a percentage of sales, which management attributed mainly to higher vehicle purchase costs and a deliberate shift toward higher-quality vehicles. Management expects gross margin percentage to remain within its historical range in the near term.
- Credit-loss performance improved year over year: net charge-offs were 17.5% of average receivables for nine months, versus 19.2%. Management cited collections execution, improved deal structures, and vehicle quality. A first-quarter reduction in the allowance rate from 25% to 24.5% produced a $2.6 million provision credit and a $2.0 million after-tax earnings benefit.
- The company adopted lease accounting in fiscal 2020, adding $34.5 million to assets and liabilities at adoption; management said income statement and cash flow effects were not material. January 31 reported right-of-use assets of $37.2 million and lease liabilities of $39.2 million.
- A revised credit agreement extended revolving facilities to September 2022 and raised total commitments from $215 million to $241 million. Approximately $6.5 million of capital expenditures were expected over the next 12 months for dealership refurbishments and openings.
Outlook, risks, and contingencies
- No specific earnings or revenue forecast is provided. Management stated it expects adequate liquidity for the foreseeable future and anticipates modest further increases in vehicle costs amid tight supply and strong demand.
- Management identified competitive subprime auto financing, vehicle affordability and purchase costs, customer inflation and employment conditions, collections execution, and availability of quality vehicles as risks. The filing specifically noted uncertainty related to the developing coronavirus situation and its possible effects on demand and costs.
- Credit losses are a significant estimate: management said a 1 percentage-point change in the allowance rate would change pretax results by approximately $5.7 million. Actual losses may differ from estimates.
- Variable-rate borrowing exposes the company to interest-rate changes; a 1% increase on reported revolver debt would increase annual interest expense by approximately $1.8 million. Repurchases and distributions are subject to lender restrictions.
- The company disclosed ordinary-course legal proceedings, which it did not expect to have a material adverse effect, and a $250,000 standby letter of credit. It also described uncertainty around tax treatment of intercompany receivable sales; an adverse tax conclusion could raise its effective tax rate and accelerate tax payments.
Important facts for investors to verify
- Whether improved collections and lower net charge-offs persist, particularly as delinquencies and balances over 90 days past due increased year over year.
- The adequacy of the $140.3 million credit-loss allowance, including the effect of the $2.6 million first-quarter allowance reduction.
- Whether vehicle acquisition costs, higher selling prices, and longer contract terms pressure margins, affordability, or future credit performance.
- Cash generation and funding needs as receivables and inventory grow; confirm available borrowing capacity and compliance with credit-facility covenants.
- The eventual operating and financial effects of coronavirus-related disruption and the tax contingency involving receivable transfers.