Car-Mart shares hit 52-week low on interest rate competition concerns

Higher-than-expected loan losses prompted America’s Car-Mart to amend its credit agreement with lenders. The 2% adjustment to credit losses cut third quarter earnings by $4.9 million, or 68-cents a share, and sent Car-Mart stock to a 52-week low on Wednesday (Feb. 19).

“We still have $220 million in equity, after the $4.9 million aftertax charge off. We looked at our $400 million in loans owned by our 62,000 customers and estimated that if we didn’t sell another car, we could likely collect 23.5% of the money owed to us. The last time we did this calculation it was 21.5%,” Jeff Williams, chief operating officer for the Car-Mart said in a phone interview Wednesday.

He said the credit loss adjustment is a cautious play made by the company based on the competitive climate they are facing in the deep subprime auto lending market.

Car-Mart execs said some of its mature dealerships are experiencing customers defaulting on their loan, parking the car on the Car-Mart lot after they have purchased another car from a competitor offering a lower monthly payment. 

Williams warns that the lower payment is accomplished by a longer term, out to 60 months or so, which is not in the consumer’s best interest at the high interest rates and higher mileage cars. He said Car-Mart does not play that game but instead works to ensure their customers can own the car outright within two and a half years.

The experts agree that large bank lenders are fronting cash to the subprime auto finance market with the belief they have the technology to collect. Car-Mart executives said technology may be giving these bankers the boldness to lend, but it is not a viable substitute for good collections. 

“Even our best customers will need two or three payment modifications when they may have a repair issue or some other personal finance concern. They may need some local help working through this issues. That’s hard to do unless you have brick and mortar stores and local customer service relationships,” Williams said.

Other costs Car-Mart absorbed in the quarter were $300,000 toward GPS systems in the cars sold. This effort is costly on the front-end and average about $3 to $4 per car per month. Williams said it’s part of the company’s investment in infrastructure costs that will pay off over time.

Williams said the company is experiencing more late payments because of higher utility costs. There were more defaults and repossessions among the company’s mature lots as they are being hit hardest by competitive lenders wooing away some of the best customers.

“The hyper-low interest rate environment is attracting more dollars with the subprime auto lending. We thought the competition might have subsided by now, but it has not. And it looks like it may be with us for some time longer,” Williams said.

For the full nine months of this fiscal year the provision for credit losses increased to $91.6 million, up from $65.83 million. These are reserves set aside for losses should they occur. 

CEO Hank Henderson said the company did not get to where it is today by focusing on one or two quarters, but instead, investing for where the company wants to be five years down the road.

“In the past five years we have grown our finance receivables by nearly $200 million, added 20,000 new customers and are selling about 1,000 more cars each month. I would say that’s pretty impressive. While it’s true we are facing some competitive pressures, that’s always been the case in one fashion or another,” Henderson said in the earnings call on Wednesday. 

Car-Mart continues to repurchase its stock. Since February 2010 Car-Mart has repurchased 3.1 million shares or 27% of the company. 

“We will continue to stay focused on cash returns and aggressive expense management. We believe in the long-term value of our company and will continue to invest in the repurchase program when we believe favorable conditions exist. Our first priority for capital allocation will continue to be to support the healthy growth of the business,” Williams said.

Shares of Car-Mart fell 4.87% to close Wednesday at $35.72. During trading on Wednesday the stock set a new 52-week low of $35.50.