America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2015; fiscal year ends April 30. Amounts are in U.S. dollars unless stated otherwise. The company sells used vehicles and finances substantially all customers through 138 dealerships, primarily in the South-Central United States.
Financial performance and position
| Metric | Three months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2015 |
|---|---|---|
| Total revenue | $131.5 million, up 7.3% | $392.7 million, up 7.1% |
| Net income | $7.5 million, versus $1.5 million | $22.2 million, versus $14.8 million |
| Diluted EPS | $0.82, versus $0.16 | $2.45, versus $1.56 |
| Credit-loss provision | $30.2 million; 25.9% of sales | $89.5 million; 25.6% of sales |
- For the nine months, vehicle sales were $349.3 million and interest and other income was $43.4 million. Retail units sold rose 9.6%; average retail selling price fell 2.0% to $9,571.
- Gross margin was 42.7% for the first nine months, versus 42.4% a year earlier. SG&A was 17.9% of sales, versus 18.2%. Pretax income was $35.4 million, versus $23.6 million.
- At January 31, net finance receivables were $329.8 million, inventory $38.2 million, and total assets $409.7 million. The finance-receivable principal balance was $425.1 million; the allowance for credit losses was $95.3 million, or 23.8% of principal after the stated deferred-revenue adjustments.
- More than 30-day delinquencies were 5.2% of receivables, compared with 5.8% at January 31, 2014. Net charge-offs were 19.9% of average receivables for the nine-month period, slightly above 19.8% a year earlier.
- Cash was $1.6 million. Operating cash flow was negative $0.8 million and investing cash flow negative $2.8 million for the nine months; financing provided $4.8 million. Ending cash increased by $1.3 million.
- Revolving debt was $112.6 million, up from $97.0 million at April 30, 2014. The $145 million facilities mature October 2017; reported additional availability was $33.2 million. The company reported compliance with covenants.
Changes versus comparable periods
- Third-quarter revenue increased 7.3%, while net income rose to $7.5 million from $1.5 million. The prior-year quarter included a $7.7 million increase in the credit-loss allowance; excluding that increase, the prior-year provision was 26.8% of sales versus 25.9% in the current quarter.
- Nine-month revenue rose 7.1% and net income rose about 50%. Growth reflected new dealerships and higher sales at stores operating in both periods. The company sold 35,061 retail units versus 31,986.
- The nine-month credit-loss provision declined 2.3% in dollars and fell to 25.6% of sales from 28.2%; the prior-year ratio was 25.8% excluding the allowance increase. Net charge-offs remained elevated and increased slightly as a percentage of average receivables.
- Finance receivables net grew $36.5 million from April 30, 2014; inventory increased $8.1 million, partly in preparation for fourth-quarter tax-refund-season sales. Debt increased $15.5 million net during the nine months.
Outlook, risks and notable items
- Management expects gross margins to remain generally in the 42% range near term and anticipates finance-receivable growth may exceed revenue growth as contract terms lengthen. No specific full-year earnings or revenue guidance is provided.
- Management expects near-term credit losses to remain above historical ranges, citing customer economic pressures and increased competition. It identifies collections execution as a key determinant and cites credit reporting, GPS installation, training and oversight initiatives.
- Management expects vehicle supply and purchase-cost pressures to continue, though rising new-car sales may provide some relief. Lower gasoline prices provided some customer relief in the second and third quarters.
- The company says it expects adequate liquidity for the foreseeable future. It plans to use cash for receivables growth, approximately $4.5 million of property and equipment purchases over the next 12 months, possible share repurchases and debt reduction when excess cash is available. Repurchases and distributions are subject to lender restrictions.
- Key risks include credit underwriting, collections and collateral recovery; used-vehicle availability and pricing; competition; economic pressure on customers; variable-rate debt; and consumer-finance regulation. A proposed CFPB rule could subject Colonial to examination and supervision; the potential business impact was uncertain.
- The company disclosed a $600,000 standby letter of credit and routine legal proceedings for which it did not expect a material adverse outcome. It also described tax uncertainty concerning intercompany receivable sales; an adverse tax determination could increase its effective tax rate and alter tax-payment timing.
- Operations are seasonal. Management notes that sales and collections can shift between quarters with the timing of customer tax refunds. The allowance for credit losses is a significant estimate; a 1% change in the allowance rate would change pretax results by approximately $4.0 million.
Important facts for investors to verify
- Whether collections, delinquencies and net charge-offs improve or deteriorate, and whether the $95.3 million credit-loss allowance remains adequate as the portfolio grows and contract terms lengthen.
- Whether reported earnings translate into cash generation, given negative operating cash flow and continued funding needs for receivables and inventory.
- Available borrowing capacity, covenant headroom and refinancing plans for the revolving facilities, particularly if receivables growth or credit losses weaken.
- Whether gross margins hold near management’s stated 42% range amid vehicle-cost pressures, and whether new-store growth translates into sustainable same-store performance.
- The eventual CFPB rule and any tax-authority challenge to the intercompany receivable-sale treatment; the filing does not quantify the potential financial impact of either matter.