AMERICAS CARMART INC quarterly report, Q1 FY2019

America’s Car-Mart, Inc. — Form 10-Q Summary

Reporting period: First quarter of fiscal 2019, the three months ended July 31, 2018; comparisons are with the three months ended July 31, 2017 unless noted. The company operates 140 used-car dealerships, primarily in the South-Central U.S., and finances substantially all customer purchases.

Financial performance and position

Metric	Q1 FY2019	Q1 FY2018	Change
Total revenue	$164.0 million	$146.4 million	+12.0%
Income before taxes	$13.1 million	$10.9 million	+20.6%
Net income	$10.9 million	$7.0 million	+55.7%
Diluted EPS	$1.53	$0.90	+70.0%
Operating cash flow	$0.4 million	$2.8 million	Down $2.4 million

Sales were $144.1 million, up 12.3%; interest and other income was $19.9 million, up 9.8%. Retail units sold increased 5.9% to 12,533, and average retail selling price rose 6.1% to $11,015. Same-store revenue increased 12.1%.
Gross margin on sales improved to 41.6% from 41.4%. SG&A was 18.3% of sales versus 18.6%; credit-loss provision was 26.1% versus 26.6%.
The effective tax rate was 17.1%, compared with 35.8%. The lower rate included a $943,000 discrete tax benefit from excess tax benefits on share-based compensation. Net income growth therefore reflects both stronger pretax earnings and lower tax expense.
At July 31, total assets were $472.5 million, including net finance receivables of $398.4 million and inventory of $37.5 million. Debt facilities totaled $155.1 million, up from $152.4 million at April 30. Cash was $841,000.
Revolving credit borrowings were $154.2 million; the company reported approximately $44 million of additional borrowing availability and compliance with credit covenants. The facilities mature in December 2019, and the stated current rate was 4.43%.
Net finance receivables grew 3.8% from April 30. The $122.4 million credit-loss allowance equaled 25% of principal receivables after the specified unearned revenues. Net charge-offs were 6.4% of average finance receivables, unchanged year over year.

Material changes and cash flows

Revenue growth reflected higher interest income, more retail units sold, and same-store growth. The company attributed the increase in interest income to a larger average receivables portfolio and the previously increased contract rate.
Operating cash flow declined to $414,000, principally in the context of higher finance-receivable originations. Originations were $134.3 million and collections were $66.7 million. Capital expenditures were $685,000.
Financing activities were nearly flat at $90,000 provided. The company repurchased 115,999 shares for $7.4 million and debt increased by approximately $2.8 million. The quarter ended with cash down $181,000 from April 30.
Delinquencies over 30 days improved to 3.5% of receivables from 4.6% a year earlier. Collections as a percentage of average receivables rose to 13.1% from 12.4%; the 3–29-day past-due category was higher at quarter end, which management partly attributed to the weekday on which the period ended.

Outlook, risks and unusual items

No specific earnings or revenue guidance was provided. Management expects gross margin to remain within its historical range in the near term, expects modest further vehicle purchase-cost increases amid tight supply, and believes liquidity will be adequate for foreseeable needs.
Management anticipates credit losses will remain elevated near term compared with historical ranges, citing extended contract terms, lower recovery rates, competition, and pressures affecting customers. It continues to emphasize underwriting, collections, and dealership-level execution.
Planned uses of cash and borrowing include receivables growth, share repurchases when conditions are favorable, and approximately $3.2 million of property and equipment purchases over the next 12 months for dealership refurbishment and expansion. Repurchases and distributions are constrained by credit-facility terms.
Key risks include subprime customer defaults, vehicle availability and purchase costs, competition for consumer financing, variable borrowing rates, economic pressures such as inflation and unemployment, and dependence on qualified employees. A 1% interest-rate increase on reported revolver debt would raise annual interest expense by approximately $1.5 million.
The allowance for credit losses is a significant management estimate; a 1% change in the allowance as a percentage of finance receivables would imply an approximately $4.9 million pretax adjustment. Management cautions actual losses may differ materially from estimates.
The company disclosed ordinary-course legal proceedings but does not expect them, individually or together, to have a material adverse effect. A $1 million standby letter of credit supports an insurance policy. It also identified uncertainty around tax treatment of intercompany receivable sales; an unfavorable outcome could increase taxes and alter payment timing.
Seasonality is material: the first and fourth fiscal quarters are generally stronger, while November through January is historically the slowest sales period. Revenue recognition, cash-flow classification, and income-tax standards adopted in fiscal 2019 did not materially affect reported results; the company was evaluating future lease accounting requirements.

Important facts for investors to verify

Whether improved delinquencies and collections persist and support the adequacy of the $122.4 million credit-loss allowance as the portfolio grows.
Whether elevated near-term credit losses, vehicle costs, and competition pressure margins, customer affordability, and cash generation.
Available borrowing capacity and covenant headroom as receivables growth, debt costs, and share repurchases continue; the revolving facilities mature in December 2019.
How much of the sharp year-over-year net income and EPS increase is sustained by operating performance versus the lower effective tax rate and share-based compensation tax benefit.
Execution of planned capital spending and the effect of repurchases, seasonality, and low quarter-end cash on liquidity.