America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended July 31, 2013; comparisons are with the three months ended July 31, 2012 unless stated otherwise. Dollar amounts are in U.S. dollars.
Business context
America’s Car-Mart sells older-model used vehicles and finances substantially all customer purchases, serving primarily customers with limited or impaired credit histories. It operated 126 dealerships at quarter-end, chiefly in the South-Central United States, and reported one operating segment.
Financial performance and position
| Metric | Quarter ended July 31, 2013 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $122.5 million | $110.0 million; up 11.4% |
| Sales | $109.1 million | $98.3 million; up 11.0% |
| Interest and other income | $13.4 million | $11.7 million; up 14.5% |
| Income before taxes | $12.0 million | $13.0 million; down 7.8% |
| Net income | $7.5 million | $8.1 million |
| Diluted EPS | $0.79 | $0.83 |
| Provision for credit losses | $26.5 million; 24.3% of sales | $21.7 million; 22.0% of sales |
| Gross margin on sales | 42.5% | 42.8% |
| Cash from operating activities | $1.2 million | $1.2 million |
| Capital expenditures | $1.8 million | $0.9 million |
Retail units sold increased 9.1% to 10,643. Average retail selling price rose 2.6% to $9,836, while same-store revenue grew 5.6%. Total costs and expenses increased 14.0%, faster than revenue, largely reflecting the higher credit-loss provision. Pretax income was 9.8% of total revenue, compared with 11.8% in the prior-year quarter.
At July 31, 2013, total assets were $368.9 million, including net finance receivables of $301.1 million. The receivables portfolio’s principal balance was $379.9 million and its allowance for credit losses was $78.8 million. Cash was $0.3 million. Revolving debt was $99.5 million, against a $145 million facility; the company reported $42 million of additional availability and compliance with covenants. The facility matures in June 2016. No conventional current ratio is presented in the filing.
Operating cash flow was modest relative to earnings, in part because receivable originations of $102.8 million exceeded collections of $51.1 million. Cash increased by $16,000 during the quarter. Finance receivables, net, increased $13.1 million from April 30, 2013.
Material changes and credit trends
- Revenue growth reflected 5.6% same-store growth, contributions from recently opened dealerships, and higher interest income. The company had 10 more stores open at quarter-end than a year earlier.
- Credit quality weakened on several measures: accounts more than 30 days past due rose to 5.4% from 4.0%; collections as a percentage of average receivables declined to 13.8% from 14.9%; and net charge-offs as a percentage of average receivables increased to 6.2% from 5.9%.
- Average originating contract term increased to 27.7 months from 26.7 months; the portfolio’s weighted average term, including modifications, increased to 29.5 months from 28.1 months. Average down payment declined to 6.6% from 7.2%.
- Management attributed higher credit losses to increased loss severity, lower wholesale prices, longer terms, lower down payments, weaker collections, and competitive and economic pressures. The allowance estimate is a significant judgment; management stated that a one-percentage-point change in the allowance as a percentage of finance receivables would change pretax results by approximately $3.7 million.
- Net income and EPS declined despite revenue growth, principally as credit-loss expense rose. The company repurchased 9,020 shares for $384,000, compared with 215,846 shares for $9.4 million in the prior-year quarter.
Outlook, risks, and contingencies
Management expected near-term gross margins to remain around 42% and credit losses to be somewhat higher than historical ranges. It anticipated continued increases in contract terms under competitive and economic conditions, partly mitigated by underwriting and collection improvements. The company planned approximately $6 million of property and equipment purchases over the next 12 months for dealership refurbishments and openings, and stated that it expected to have adequate liquidity for the foreseeable future. These are expectations, not formal earnings guidance.
Key risks include customers’ ability to pay, higher delinquencies and charge-offs, vehicle purchase costs and wholesale values, competition for customers and financing, macroeconomic pressures, and the company’s access to credit facilities. A 1% increase in rates on the $99.5 million of outstanding variable-rate debt would increase annual interest expense by approximately $1.0 million. The company also identified seasonality in vehicle sales and collections.
The IRS was auditing federal income tax returns for fiscal 2010 and 2011. A negotiated settlement of earlier fiscal 2008 and 2009 examinations was approved in January 2013; the filing describes the resulting payment as immaterial in interest and says the timing issue was expected to produce a later tax deduction and refund. The company also disclosed a tax-related contingency concerning intercompany receivables sales and stated that an adverse interpretation could increase its effective state tax rate and alter payment timing. No material change in contractual payment obligations was reported.
Most important facts for investors to verify
- Whether worsening delinquency, collections, charge-off severity, and longer contract terms continue to pressure credit-loss expense and the $78.8 million allowance.
- Whether the reported $42 million of revolver availability and covenant compliance remain adequate as receivables grow; also monitor the June 2016 facility maturity.
- Whether management’s expectations for roughly 42% gross margins, higher near-term credit losses, and approximately $6 million of planned capital spending are borne out.
- The outcome of the IRS audits and the tax contingency related to finance-receivable sales between subsidiaries.
- The cover page reports 9,015,929 common shares outstanding at August 28, 2013, while the balance sheet reports 9,017,929 outstanding at July 31, 2013; verify share-count changes and timing.