Car-Mart shares tumble on sluggish earnings (Updated)

Investors found it easy to drive away from America's Car-Mart following a lackluster earnings report released late Monday, (Nov. 19).

Shares of America's Car-Mart tumbled nearly 11% in near-record volume trading at $37.34, down $4.57 in the morning session Tuesday, (Nov. 20)

America’s Car-Mart embraced an aggressive growth strategy that has driven big returns this year. But the company downshifted to a caution lap in the recent quarter as net income stalled at $7.3 million, or 76 cents per diluted share, slightly below the year-ago period.

The buy here, pay here auto dealer, missed Wall Street’s 86-cent per share estimate on revenue of $121.16 million, citing stiffer competition as more subprime funding sources have become available in Car-Mart’s larger, more mature, markets.

In the quarter ending Oct. 31, Car-Mart experienced a 4.8% same-store sales decrease with the year-ago period. This meant total revenues – $110 million – were $1 million less than the prior year.

“While we are facing some near-term revenue challenges, we are convinced that the direction we are going will provide significant profitable long-term opportunities for America's Car-Mart,” said William “Hank” Henderson, CEO and president of the Bentonville-based used-car business that now includes 117 dealerships across the Southeast.

Henderson said the company is making adjustments to help retain the firm’s better repeat customers, who now may have more options than they have had in the recent past for vehicle financing.

“We believe that Car-Mart's local presence and face to face relationships give us the ability to work with customers far more effectively than subprime finance companies,” he said. "While August and October sales were solid, potential customers pulled back in the month of September. Our mature stores sold fewer of the high-dollar cars than historically. We think these potential repeat customers had more options with new car dealers and subprime financing arms."

The high-dollar car at Car-Mart would be in the range of $11,000 to $12,500, Henderson said in the Tuesday's earnings call. He said the company will be more flexible with this class of customers going forward,  perhaps offering a slightly longer term than the average 27 months in addition to some repurchase assistance.

Henderson said the company will continue adding new locations in an effort to expand its customer base which now includes more than 55,000 active accounts. Six new stores are on tap in the next few months expanding into Georgia – a new market — as well as Alabama and Tennessee.

Roughly 25% of Car-Mart's stores are under 5 years old, and Henderson these new stores are doing quite well, outperforming expectations in terms of sales and credit quality.

In the recent quarter Car-Mart sold 9,814 vehicles, 1.1% less than in year ago period despite having seven additional dealerships.

Meanwhile, new car sales across the United States continue to improve, rising 7% in October, 13% in September and 20% in August, concurrent with Car-Mart’s recent quarterly results, according to Edmunds.com.

Car-Mart’s average retail price also slid less than 1% to $9,516 in the quarter, a function of slightly lower used car and truck prices than in recent years.

“Lower unit sales combined with the fact that we have seen three consecutive sequential quarter decreases in our average retail sales price has had somewhat of a negative short-term effect on gross margin dollars, selling, general and administrative expense leveraging and overall credit losses as a percentage of sales. However, we believe that over the long-term, lower selling prices increase affordability and resulting customer success," said Jeff Williams, chief financial officer of America's Car-Mart.

He said the ongoing macroeconomic environment continues to be challenging but the company remains committed to creating value over the long-term. Williams said bright spots in the quarter include the firm’s aggressive stock repurchase efforts – buying back $5.25 million worth or 1.3% of the firm’s outstanding shares.

“We now have less than 9.1 million shares outstanding, higher interest income on our portfolio and an overall higher gross profit percentage as we continue to work hard on managing expenses,” Williams said.

He said the company will continue to repurchase its shares, but in the immediate future efforts were focused on bringing recovering revenues and growing earnings.

Car-Mart shares have plunged nearly 24% since attaining a high $47.20 per share high two months ago. The company's aggressive repurchase plan and growth projections help to hoist the share price higher ahead of the recent broad market sell-off and this last earnings report.

Because Car-Mart provides financing for its customers the company also earns net interest income on it loan portfolio. At the end of the quarter the company’s finance receivables totaled $339.25 million, up 9.6% from the year-ago period. The average interest rate charged was in excess of 14%.

Williams said roughly 50% of its customer base will make additional payments with their tax refunds, which should help make up some ground for the additional payment modifications and slightly higher delinquencies seen in the past quarter. But he also warned the company could see slightly higher credit losses for the fiscal year.