America’s Car-Mart posts thinner profits (updated)

America’s Car-Mart Inc. said higher than expected credit losses curbed its earnings in the company’s fiscal first quarter ending July 31. But the Bentonville-based firm still managed to deliver healthy top line results.


The buy here, pay here dealer posted net income of $7.541 million, 7% less than $8.118 million earned in the year-ago period. Car-Mart’s net profits equaled 79 cents per share, missing Wall Street expectations by 9 cents and 4 cents less than a year ago. The earnings report was released after the market closed on Monday (Aug. 19).

Top line revenue in the quarter totaled $122.5 million, up nearly 11% from a year ago. That revenue included sales and interest income, which is generated from its in-house finance operations.

Investors sold off shares early Tuesday (Aug.20) given the headwinds Car-Mart is facing with increased competition. Shares were trading at $41.62, down 3.44% following the company's call with analysts. Over the past 52 weeks Car-Mart shares have traded between $35.89 and $50.59.

On a bright note, same-store sales, a key metric in retail performance, were up a healthy 5.6% from a year ago.

"We are very pleased with our top line growth for the quarter. Our general managers continue to work hard at helping our customers succeed and are meeting the challenges of the current competitive environment head–on,” said CEO Hank Henderson.

"Even though our revenues were up, we feel like we could have done even better as we believe that increased funding to the sub-prime auto industry continues to have a negative effect on our business especially on the provision for credit losses line,” he added.

The company has said over the past few quarters that it continues to see more competition for its better customers, which prompted it to slightly extend loan terms and have to ante up more money to loan loss provisions. Loan loss provisions are the cushion the company has against defaulting loans as it finances each auto that it sells in-house. Car-Mart has some 59,000 active accounts with a finance balance sheet totaling $379.92 million, up 15% from a year ago.

The company’s loan loss provision was $26.53 million in the recent quarter, up 22% from a year ago. The accounts over 30 days past due rose to 5.4% in the quarter, up from 4% a year ago, amid a somewhat sluggish macroeconomic climate, according to Jeff Williams, chief financial officer for Car-Mart.

Operating expenses also rose 10% in the quarter from a year ago as there were 10 more dealerships in operation in the recent quarter compared the year-ago period. The company continues to expand its footprint at a robust clip of 10 to 12 new dealerships per year.

The company also recently began equipping the cars it sells with GPS tracking devices. This practice is widely used among subprime auto finance dealers as it helps them keep tabs on a vehicle.

Williams said the cost is about $4 per vehicle per month, and though Car-Mart doesn't actually lose that many vehicles, it will help the company stay in close contact with the customers should they fall behind of their payments. Once the loan is repaid, the device is removed.

Car-Mart also said it was taking advantage of lower used cars prices and purchasing some newer cars with less mileage for its lots. This took the firm's average retail sales price up 2.6% in the recent quarter, from a year ago.

Car-Mart customers paid an average $9,836 for vehicle purchases in the quarter. This compared to $9,584 a year ago.

Williams said while the cost is a little higher, they still believe putting their customers into better vehicles is the best for the long term. Instead of passing along lower prices to their customers, Car-Mart is working to keep prices near level and buying cars with less mileage.

“We remain convinced that the business model will continue to support significant unit volume expansion. We are excited about our future and we will continue to fight to retain our better customers," Henderson said.

FINANCIALS (quarter ending July 31)
Gross Revenue
2013: $122.54 million
2012: $110 million

Net Income
2013: $7.531 million
2012: $8.108 million

Earnings Per Share
2013: 79 cents
2012: 83 cents