Car-Mart reports dip in quarterly income on higher revenue

America’s Car-Mart management says its work to stem the onslaught on competition is paying off as the buy here, pay here used car company posted quarterly revenue of $127.376 million, up 3.94% from the same period last year.

Car-Mart’s fiscal 2015 first quarter net profits totaled $7.25 million, down slightly from the $7.51 million earned a year earlier. On a per-share basis earnings totaled 79 cents, even with a year ago, and 19 cents better than Wall Street’s consensus estimate of 60 cents.

Same-store sales, a key metric for the Bentonville-based company, fell 1.5% in the quarter, but overall unit sales rose to 11,482 automobiles, up 7.9% from the prior-year period.

"We are pleased with our results for the quarter, especially the sequential improvement in per store productivity,” said CEO Hank Henderson.

The company reported 28.4 sales per lot per month, flat with the year-ago results. Car-Mart had 136 stores at the end of the quarter which was 10 more than a year ago.

“We continue to get better with our lot level execution on the sales side and will push hard with our 33-plus year effort to attract good, hard-working customers looking for quality vehicles, affordable payment terms and excellent service,” Henderson said.

"As we have mentioned previously, we are proud of the fact that our average retail sales price has decreased making our offering more affordable for our customers. While other finance companies are seeing significant increases in average contract balances and term lengths, we continue to swim upstream by taking the longer term view from our customers' perspective,” he added.

The average retail price in the quarter was $9,464, down 3.8% from a year ago. At the same time the average down payment rose to 6.9% of the sales price, up from 6.6% a year ago. Henderson said the company’s average contract balance and average new term are down from this time last year. 

Part of the Car-Mart’s recent lackluster earnings have stemmed from higher charge-offs from heightened competition in the subprime auto lending market.

"While the operating environment remains very challenging, we are happy to see the leveling off of our net charge-offs, the improvement in collections and the reduction in our accounts over 30 days past due,” said Jeff Williams, chief financial officer.

The company has finance receivables of $396.32 million, up 4.3% from a year ago. Net charge-offs in the recent quarter were 6.3% of receivables. A year earlier receivables totaled $379.92 million, with charge-offs at 6.2% of that amount. The 30-day past due accounts declined to 4.7% from 5.4% a year ago.

A report released this week by Experian noted that subprime auto loans surged in the second quarter accounting for 19.6% of all auto loans. Also rising in the period were auto repo rates among subprime lenders as well as higher 30-to-60-day delinquencies reported. The average repo charge-off among subprime lenders in the quarter was $8,149, according to the Experian report.

Phil LeBlanc, transportation analyst with CNBC, said while subprime lending levels at 19.6% look high, it has not yet reached the 2009 recession levels of 23.9%.

“This report shows that more Americans are beginning to struggle with their auto loans,” LeBlanc said.

Williams said Car-Mart faces more competitors and macro-economic factors that may negatively impact Car-Mart’s customer base.

“With each passing month we are gaining more clarity on how the business model performs in a perfect storm stress test. We are encouraged,” Williams said. "While charge-offs remain above historical levels, we feel confident we can effectively manage our losses and produce very attractive cash-on-cash returns on the capital we employ in growing the business.”

He notes that the downward pressure on average retail prices are a double-edged sword in that they help with customer success, but they also put short-term pressure on operating margins.

“We would love to see a better operating environment as that would translate into higher customer success rates, but we will remain focused on the things we can control. … The lower average sales price, which results from a lower purchase cost, helps keep the cash cost of running the business down allowing us to continue to expand without incurring significant additional debt. We do expect some operating leverage in the future as we grow the top line but the exact timing is hard to pinpoint," Williams said.

The company reported strong cash flows with a $17 million increase in finance receivables, $1 million in net capital expenditures and the $2.8 million in common stock repurchases (74,683 shares) with a $2.8 million decrease in total debt.

Car-Mart said it remains committed to growth and plans to open eight new dealerships for this fiscal year and then return to a more historical store opening rate for 2016 and beyond.

The company’s earnings release came after the market closed Wednesday (Aug. 20). Shares of America’s Car-Mart closed at $37.19, down 28 cents on Wednesday. Last month shares hit $40 before losing steam. Car-Mart shares are down 10% since the beginning of 2014, but have rebounded 5% in the last six months.