Business context and reporting period
America’s Car-Mart, Inc. operates 145 dealerships focused on used-vehicle sales and in-house financing, primarily for customers with limited or impaired credit histories. This unaudited Form 10-Q covers the fiscal second quarter and six months ended October 31, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Three months ended October 31, 2019 | Six months ended October 31, 2019 |
|---|---|---|
| Total revenue | $190.3 million, up 13.8% | $362.2 million, up 9.4% |
| Net income | $13.9 million, up from $11.3 million | $29.4 million, up from $22.2 million |
| Diluted EPS | $2.00, versus $1.58 | $4.21, versus $3.11 |
| Gross margin on sales | 40.5%, versus 41.7% | 40.6%, versus 41.6% |
| Credit-loss provision as a percentage of sales | 24.5%, versus 26.3% | 22.9%, versus 26.2% |
- Quarterly sales were $167.7 million, up 14.6%; interest and other income was $22.6 million, up 8.7%. Six-month sales increased 9.4% and interest and other income increased 9.1%.
- Six-month SG&A was $57.0 million, up 8.3%, but declined to 17.9% of sales from 18.1%. Interest expense was $4.1 million, up 7.9%; it remained 1.3% of sales.
- Operating cash flow was negative $8.4 million for the six months, compared with negative $2.5 million a year earlier. Investing cash outflow was $1.7 million; financing cash inflow was $10.8 million. Cash at period-end was $2.5 million, up from $1.8 million at April 30, 2019.
- Net finance receivables were $451.6 million, up 8.7% from April 30; inventory was $48.1 million, up $10.6 million. The credit-loss allowance was $135.5 million, or 24.5% of the specified adjusted principal balance. Receivables 30 or more days past due were 3.5%, versus 3.4% a year earlier; balances over 90 days past due rose to $2.2 million from $1.5 million.
- Debt facilities totaled $177.0 million net of issuance costs, compared with $152.9 million at April 30. The company reported approximately $63 million of additional revolver availability and compliance with covenants. The revolving facilities mature September 30, 2022; the current stated rate was generally LIBOR plus 2.35% (4.14% at October 31).
- Total assets were $575.4 million and total liabilities were $296.6 million. Adoption of the lease accounting standard added $34.5 million to assets and liabilities at adoption; the October 31 balance sheet included a $35.5 million right-of-use asset and $37.7 million lease liability.
Material changes versus the prior comparable period
- Quarterly retail units sold increased to 13,763 from 12,667; the average retail selling price rose to $11,589 from $11,030. Six-month units sold rose to 26,286 from 25,200, while average price increased to $11,504 from $11,022.
- Management attributed revenue growth to same-store growth, additional dealerships, higher average selling prices and more retail units. Six-month same-store revenue growth was 7.6%, below 11.6% in the prior-year period.
- Gross margin declined as higher-quality vehicles and stronger used-car values raised vehicle costs. Management said gross profit per retail unit nevertheless increased to $4,912 for the six months from $4,801.
- Net charge-offs as a percentage of average finance receivables improved to 11.5% for the six months from 13.0%; management cited improved collections, deal structures and vehicle quality. The allowance rate was reduced from 25% to 24.5% in the first quarter, producing a $2.6 million credit to provision and a reported $2.0 million after-tax income benefit ($0.29 per diluted share).
- On September 30, 2019, the company refinanced and amended its credit agreement: total permitted borrowings increased from $215 million to $241 million, the accordion feature increased from $50 million to $100 million, and maturity was extended to September 2022.
- Six-month share repurchases were $14.7 million. The company repurchased 112,091 shares in the reported quarter at an average $89.05 per share.
Outlook, commentary, and risks
- Management expects gross margin percentage to remain within its historical range in the near term. It expects vehicle supply to remain tight and purchase costs to increase modestly, while recent strong new-car sales may help mitigate pressure. Planned property and equipment purchases are approximately $6.5 million over the next 12 months, for dealership refurbishment and new locations.
- Management expects subprime auto-credit availability and vehicle demand to remain elevated. It cautions that competition can encourage lower down payments and longer loan terms, potentially weakening collections and increasing credit losses. Inflation in essentials, unemployment, fuel prices and customer income conditions are additional risks.
- The company says it expects adequate liquidity for foreseeable needs, using operating cash and revolver borrowings to fund receivables growth, capital expenditures and repurchases, and to reduce debt if excess cash is available. Share repurchases and distributions are subject to lender restrictions.
- Seasonality is significant: the November–January fiscal third quarter is historically the slowest sales period, while the first and fourth quarters are generally busier. Tax-refund-related sales and collections have principally occurred in the fourth quarter in recent years.
- Credit-loss estimates are a critical judgment. Management states that a 1 percentage-point change in the allowance rate relative to finance receivables would imply an approximately $5.5 million pretax adjustment. Actual losses could differ materially from the estimate.
- The company disclosed a tax-related contingency concerning receivable sales between subsidiaries and the related tax deduction. If the tax treatment is not sustained, the company could face higher effective taxes and altered payment timing. It also reported ordinary-course legal proceedings but did not expect them to have a material adverse effect. Two insurance-related standby letters of credit totaled $0.5 million.
- Variable-rate debt creates interest-rate exposure: management estimated that a 1 percentage-point rate increase on outstanding revolving debt would raise annual interest expense by approximately $1.8 million before tax. The company reported no material change in risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether collection trends and credit quality remain strong, particularly given the increase in receivables over 90 days past due and the reduced allowance rate.
- How much of earnings growth reflects recurring operations versus the $2.6 million first-quarter allowance reduction credit.
- Whether higher vehicle acquisition costs continue to pressure gross margins, affordability, contract terms and future credit losses.
- Revolver availability, borrowing-base capacity, covenant headroom and compliance with stock-repurchase limits; cash was only $2.5 million at period-end.
- The eventual tax-authority treatment of the intercompany receivable-sale deductions and the potential effects on taxes and cash payments.
- How operating cash flow and debt evolve as the company funds receivables and inventory growth, planned capital spending and share repurchases.