America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2017 (the company’s first quarter of fiscal 2018; not calendar 2017 Q1). Comparatives are for the three months ended July 31, 2016 unless stated otherwise. The company operates 140 used-car dealerships, primarily in the South-Central U.S., and finances substantially all customer purchases.
Financial performance
| Metric | Quarter ended July 31, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $146.4 million | $145.8 million | +0.4% |
| Sales | $128.3 million | $129.7 million | -1.1% |
| Interest and other income | $18.1 million | $16.2 million | +12.3% |
| Income before taxes | $10.9 million | $11.3 million | -4.0% |
| Net income | $7.0 million | $7.1 million | -1.6% |
| Diluted EPS | $0.90 | $0.87 | +3.4% |
Gross margin was 41.4% of sales, down from 41.8%, mainly due to higher payment protection plan claims. SG&A was $23.9 million, or 18.6% of sales, versus 17.9%. Credit-loss provision rose to $34.2 million, or 26.6% of sales, from $33.4 million, or 25.7%. Lower net income alongside higher diluted EPS reflects a lower weighted-average diluted share count.
Cash flow, balance sheet and funding
- Operating cash flow was $2.8 million, compared with cash used of $4.3 million in the prior-year quarter. Capital expenditures were $0.6 million; cash increased $0.1 million to $0.5 million.
- Net finance receivables were $370.0 million at July 31, up from $357.2 million at April 30. The $483.7 million principal portfolio carried a $113.7 million allowance, approximately 25% of principal less specified deferred revenues.
- 30-days-or-more delinquency was 4.6%, versus 4.4% a year earlier. Net charge-offs were 6.4% of average receivables, versus 6.2%. Collections as a percentage of average receivables fell to 12.4% from 13.0%.
- Debt and notes payable totaled $117.6 million, slightly below $117.9 million at April 30. The $200 million revolving facilities mature in December 2019; approximately $79 million was available to draw. The company reported covenant compliance.
- Total assets were $437.8 million and total liabilities were $199.9 million. Cash was limited at $0.5 million; liquidity depends principally on operating cash flow and access to revolving credit.
Changes, outlook and risks
- Revenue growth was supported by higher interest income, including a larger average receivables balance and the increase in contract rates from 15.0% to 16.5% in May 2016. Retail units sold declined 1.0%; same-store revenue increased 2.1%. Store count fell to 140 from 143 a year earlier, partly reflecting closures.
- Management attributed higher credit losses primarily to greater loss severity, longer terms, lower collections and competitive pressure. Portfolio weighted-average contract term, including modifications, increased to 32.6 months from 31.7; management said terms may continue to rise to keep payments affordable and remain competitive.
- Management expects near-term credit losses to remain above historical ranges and gross margin to stay under pressure. It expects tight vehicle supply and modest further increases in purchase costs. The filing provides no specific earnings or revenue guidance.
- Planned uses of liquidity include receivables growth, share repurchases and approximately $3.2 million of property and equipment purchases over the next 12 months. Credit-facility covenants restrict distributions and repurchases. The company repurchased 102,843 shares for $3.7 million during the quarter.
- Key risks include subprime customer credit quality, collections and repossession outcomes, used-vehicle availability and cost, competition, economic pressures on customers, variable borrowing rates, and regulatory or tax changes. A 1% increase in rates on quarter-end debt would add approximately $1.2 million in annual interest expense. Management says a 1 percentage-point change in the allowance rate would change pre-tax results by about $4.5 million.
- The company disclosed ordinary-course legal proceedings and a $1 million standby letter of credit; it does not expect the legal matters to have a material adverse effect. A tax treatment involving intercompany receivables sales could be challenged, potentially increasing the effective tax rate and changing tax-payment timing.
Important facts for investors to verify
- Whether delinquency, charge-off severity and collections trends improve, and whether the $113.7 million credit-loss allowance remains adequate.
- Whether longer contract terms and competitive pressure continue to affect collections, portfolio risk and liquidity.
- Whether vehicle acquisition costs and payment protection plan claims further pressure gross margin.
- Current borrowing availability, covenant headroom, interest-rate exposure and capacity for planned repurchases and investment.
- Developments in the intercompany receivables tax position and the potential financial impact of its challenge.