America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2015, corresponding to fiscal 2016 Q2 and first half. Amounts are in millions of dollars unless otherwise noted. The company operates 145 used-car dealerships and finances substantially all customer purchases, primarily serving customers with limited or impaired credit histories.
Financial performance
| Metric | Quarter ended Oct. 31, 2015 | Six months ended Oct. 31, 2015 |
|---|---|---|
| Total revenue | $133.0; down 0.6% year over year | $275.7; up 5.5% |
| Net income (loss) | $(0.5), versus $7.5 profit | $4.1, versus $14.8 profit |
| Diluted EPS | $(0.06), versus $0.83 | $0.46, versus $1.62 |
| Provision for credit losses | $38.1; 32.4% of sales | $73.4; 29.9% of sales |
| Operating cash flow | Not separately reported for the quarter | $5.6, versus $0.6 |
- First-half sales were $245.3 million, up 5.3%; interest and other income was $30.4 million, up 7.5%. Retail units sold fell 1.9% to 23,125, while average selling price rose 6.6% to $10,098.
- First-half cost of sales was 59.8% of sales, implying a 40.2% gross margin, down from 42.6%. Management attributed pressure to vehicle purchase and repair costs, higher repossession and wholesale volumes, and lower wholesale values. For Q2, cost of sales was 60.8% of sales.
- First-half SG&A rose 9.4% to $45.4 million and was 18.5% of sales. The increase reflected payroll, new locations, marketing, infrastructure and GPS implementation costs.
- Net charge-offs were 15.6% of average finance receivables for the first half, versus 13.4% a year earlier. The allowance for credit losses was $100.4 million, or 25.0% of the relevant receivable balance, increased from 23.8% during Q2.
Financial position, liquidity and cash flow
- At October 31, 2015, cash was $1.4 million; net finance receivables were $327.2 million; total assets were $403.7 million; and equity was $230.7 million.
- Revolving debt was $104.4 million under a $145 million facility bearing LIBOR plus 2.375% (2.57% at period-end), maturing October 2017. The company reported covenant compliance and approximately $38.1 million of additional borrowing availability.
- First-half cash flow from operations was $5.6 million; investing cash outflow was $2.9 million, mainly capital expenditures; and financing cash outflow was $2.1 million. Cash increased by $0.6 million. Operating cash flow benefited from the non-cash credit-loss provision and higher collections; finance receivable originations were $223.3 million and collections were $117.6 million.
- First-half share repurchases totaled $4.0 million. Management expected approximately $2.5 million of capital expenditures in the following six months. Credit facilities restrict distributions and repurchases subject to specified conditions.
Changes, outlook and risks
- Despite first-half revenue growth, profitability declined sharply as credit-loss provisions increased 24.0% and total costs and expenses rose 13.3%. Q2 revenue declined, and the company recorded a quarterly net loss.
- Management cited continued competitive pressure and internal collection challenges, alongside increased loss frequency and severity. Lower wholesale values contributed to more severe losses. Thirty-day delinquencies improved to 3.5% from 4.4% a year earlier, but management cautioned that credit losses were expected to remain above historical ranges in the near term.
- Management expected gross margins to remain under pressure near term, with possible improvement from the most recent quarter. It anticipated finance receivables growth could exceed revenue growth as contract terms lengthen. The portfolio’s weighted-average term, including modifications, was 30.6 months versus 29.6 months a year earlier.
- Management said it believed liquidity would be adequate for the foreseeable future and expected to renew or refinance the revolving facilities by their October 2017 maturity. Vehicle supply and acquisition costs, competition for subprime financing, customer economic pressures, collections execution, and staffing are key risks. Results are seasonal; management identified the third fiscal quarter as historically slower, with tax-refund-related sales potentially affecting timing.
- The filing identifies a $1 million standby letter of credit, ordinary-course legal proceedings not expected to have a material adverse effect, and a tax-related uncertainty involving intercompany receivable sales. The company said failure to meet applicable tax requirements could increase its effective tax rate and affect tax-payment timing. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether elevated credit-loss provisions and the 25.0% reserve adequately reflect future charge-offs; management noted a 1 percentage-point reserve change would alter pretax results by approximately $4.0 million.
- Whether collections, loss severity, wholesale recovery values and delinquency trends improve, and whether GPS, credit reporting and collection initiatives deliver results.
- Whether gross margins stabilize despite vehicle acquisition, repair and repossession costs, and whether longer contract terms affect receivable growth and liquidity.
- Actual borrowing availability and covenant headroom, the renewal or refinancing of facilities by October 2017, and compliance with repurchase restrictions.
- The outcome of the intercompany tax treatment and any changes in litigation or other contingencies; the filing does not quantify a potential tax exposure.