America’s Car-Mart, Inc. — Q2 FY2015 Form 10-Q
Business context and reporting period. The quarter and six-month period ended October 31, 2014. The company sells used vehicles and finances substantially all customers, many of whom have limited or impaired credit histories. It operated 136 dealerships, primarily in the South-Central United States.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars. Quarterly comparisons are to the three months ended October 31, 2013; year-to-date comparisons are to the six months ended October 31, 2013.
| Metric | Q2 FY2015 | Six months FY2015 |
|---|---|---|
| Total revenue | $133.8 (+10.2%) | $261.2 (+7.1%) |
| Net income | $7.5, versus $5.8 | $14.8, versus $13.3 |
| Diluted EPS | $0.83, versus $0.61 | $1.62, versus $1.40 |
| Provision for credit losses | $31.4; 26.3% of sales | $59.2; 25.4% of sales |
| Operating cash flow | Not separately presented | $0.6, versus $1.2 |
- Sales and operating trends: Six-month sales were $232.9 million, up 7.4%; interest and other income was $28.3 million, up 4.6%. Retail units sold increased 10.9% to 23,566, while average retail selling price declined 3.0% to $9,477. Same-store revenue grew 1.7% for the six months and 5.4% in Q2.
- Margins and expenses: Gross margin was 42.6% of sales for the six months, compared with 42.2%. Cost of sales declined to 57.4% of sales from 57.8%. SG&A was 17.8% of sales, down from 18.2%. Credit-loss provision remained a substantial cost at 25.4% of sales year to date.
- Credit portfolio: Net finance receivables were $319.0 million at October 31, versus $293.3 million at April 30. Principal outstanding was $411.5 million and the allowance for credit losses was $92.5 million, or 23.8% of principal after specified deferred revenues. Net charge-offs were 13.4% of average receivables, versus 13.1%. Receivables at least 30 days past due were 4.4%, compared with 4.7% a year earlier; over-90-day balances were $2.0 million.
- Cash flow and capital spending: Six-month operating cash flow was $0.6 million; investing cash use was $1.8 million, including $1.9 million of property and equipment purchases. Finance receivable originations of $222.0 million substantially exceeded collections of $111.0 million. Cash ended at $0.3 million.
- Debt and liquidity: Revolver borrowings were $106.5 million, up from $97.0 million at April 30; additional borrowing availability was approximately $36.1 million. The $145 million facilities bear a generally applicable rate of LIBOR plus 2.375%, mature October 2017, and were in covenant compliance. A 1% increase in rates on outstanding debt would increase annual interest expense by approximately $1.1 million.
- Balance sheet and repurchases: Total assets were $391.6 million and total equity was $220.1 million. The company repurchased 255,208 shares for $10.3 million during the six months. On November 19, 2014, the board again authorized repurchases of up to one million shares.
Material changes and management commentary
- Revenue growth reflected higher unit sales, new dealerships and growth at existing stores. The company had 136 stores at period end, compared with 129 a year earlier.
- Management attributed higher credit-loss severity mainly to lower wholesale values on repossessed vehicles. Collections improved to 28.2% of average receivables from 27.3%, and delinquency measures improved year over year, although net charge-offs increased.
- The October 2014 credit-facility amendment extended maturity to October 2017 and increased existing pricing tiers by 0.125 percentage points, while adding a new pricing tier.
- The company changed the presentation of its allowance ratio to deduct both deferred payment protection plan and service contract revenue. It stated that the change had no material effect on net income or EPS.
Outlook, risks and contingencies
- Management expects near-term gross margins to remain around 42% and anticipates credit losses to remain higher than historical ranges, citing customer economic pressures and competition for subprime auto financing. It expects finance receivables to grow faster than revenue in the future, partly because of longer contract terms.
- The company expects approximately $4.5 million of property and equipment spending over the next 12 months for dealership refurbishments and openings. It believes available liquidity is adequate for the foreseeable future; no specific revenue or earnings guidance is provided.
- Management identified used-vehicle supply and purchase costs, underwriting and collections execution, customer affordability, competition, economic conditions, and consumer-finance regulation as significant risks. Lower gasoline prices provided some customer relief during Q2, but management expects difficult conditions to persist near to mid-term.
- A proposed CFPB rule could subject finance subsidiary Colonial to examination and supervision as a larger participant in auto financing; the effect remained uncertain. The company also disclosed tax uncertainty around intercompany receivable sales, which it believes comply with applicable rules.
- Operating leases cover approximately 87% of dealership properties. The company also had a $0.6 million standby letter of credit. Management did not expect ordinary-course legal proceedings, individually or collectively, to have a material adverse effect.
- Results are seasonal, and the filing cautions that timing of tax refunds can shift sales and collections between quarters. The company is evaluating the future revenue-recognition standard ASU 2014-09.
Key facts for investors to verify
- Whether rising credit-loss severity and the 23.8% allowance remain adequate as the finance receivables portfolio grows and contract terms lengthen.
- Whether collections, delinquencies and repossession recovery values sustain recent trends, including the effect of wholesale vehicle prices.
- Whether operating cash generation and the $36.1 million of revolver availability are sufficient to fund receivable growth, capital spending and repurchases.
- How the CFPB’s proposed rule and other consumer-finance requirements affect Colonial’s supervision, compliance costs and business practices.
- Whether the company’s intercompany receivable-sale tax treatment remains accepted by tax authorities, and whether repurchases remain within lender restrictions.