A recovering economy, more lenders in the subprime auto space and higher charge-offs have thrown a monkey wrench into the operations of America’s Car-Mart, a large buy here, pay here auto dealer.
While the Bentonville-based company is poised for topline growth, the bottomline profits were a big miss in the recent quarter. Late Tuesday (Feb. 18) Car-Mart reported net income of $1.5 million for the third quarter ending Jan. 31. A charge of $4.9 million after tax related to higher than expected charge-offs weighed heavy on net income returns. Profits equated to 16 cents per share, down after the charge, plummeting 80% from the same period last year.
A consensus of five analysts who follow the company predicted Car-Mart would deliver 70 cents a share in net income profits in the quarter, which the auto dealer/finance company failed to do even before the taking extra 52-cent charge.
Revenue grew 3.3% to $122.58 million in the quarter, missing Wall Street’s estimate of $126.7 million.
“Despite the pressure we are feeling in the current competitive environment, we are continuing to see some good growth. We remain committed to growing our business the right way with the realization that so long as the competition does not share our same focus on customer success, our results could continue to be affected somewhat,” CEO Hank Henderson noted in the release.
He said the company is seeing some of its best customers lured away with deals that Car-Mart believes involve impractical terms.
“We will continue to do our very best to set our customers up to succeed so that we will be in a position to earn their repeat business in the future. Anything short of our customers successfully completing the terms of their individual contracts is not acceptable to us and not in line with how we believe this business should operate. Unfortunately, the current environment is contributing to higher levels of charge-offs and we will continue to work hard to reverse these trends," Henderson said.
Analysts recently polled by The City Wire noted that the heightened competition Car-Mart faces with each sale is not likely to soon subside as more subprime lenders continue to make credit available at perhaps lower interest rates than the 15% Car-Mart charges.
“Private equity firms and other initial public offering activity with companies like Springleaf Leasing are creating a lot of liquidity in the subprime auto and consumer credit space,” said Martin Kemnec, analyst with Jeffries, who rates America’s Car-Mart as a “hold” with a one-year target price of $38.
“While we believe in the strength of Car-Mart’s management team, they have some delicate balancing to do fending off the competition, growing sales and not incurring more risks in the process,” he said during a recent phone interview.
Jeff Williams, chief financial officer at Car-Mart, recently told The City Wire that the company believes the 15% interest rate charged to all of its customers is fair.
“We try to set everyone up to succeed and feel like the 15% is a good rate even for our very best customers,” Williams said.
That said, the company knows it stands to lose some of its better customers to other dealers willing to offer new cars at similar or even lower interest rates. More independent lenders are making new auto loans to credit challenged borrowers and then packaging the credit pools into portfolios and selling that debt instrument on Wall Street to investors seeking higher yields.
COMPANY EXPANSION CONTINUES
The company opened seven new dealerships in the past nine months with four more on tap before the company’s fiscal year end on April 30.
“Our new dealerships are performing well and we are excited to be adding great new towns to our footprint. We have added almost 4,400 active accounts and are working hard to make these new customers, and our existing customers, fans for life of America's Car-Mart," Henderson said.
WIlliams said because of the stubbornly high net charge-off levels, and the company’s expectation that tough conditions will continue at least over the short-term to mid-term, it was necessary for to increase the allowance for credit losses to 23.5% from 21.5%.
This action is responsible for the $4.9 million ding to the company’s bottomline profits in the quarter. The last time Car-Mart adjusted its allowance was in April 2012 when it reduced the percentage to 21.5% from 22.0%.
“This non-cash charge will not in any way affect our efforts to help our customers succeed, and our cash on cash returns continue to be very attractive even with higher charge-off levels. We are focused on maximizing efficiencies on the operating expense side of the business and are committed to always being the lowest cost operator," Williams said. “We know we can do better, but the business model is certainly being stress tested by forces outside of our control. We are working hard to continue to grow in a healthy manner so that we are in a good position if conditions change in our favor.”
Shares of America’s Car-Mart (NASDAQ: CRMT) closed Tuesday at $37.55, up 32 cents. The earnings were released several hours after the close of trading. For the past 52 weeks, shares of Car-Mart have ranged from a low $36.22 to a high $50.59.
Car-Mart management will hold a call with investors and analysts on Wednesday morning (Feb. 19).
FAST FACTS (year-over-year)
Automobiles sold: 10,735, up 3.2%
Number of dealerships: 129, up 9.3%
Average sales price: $9,739, down 0.6%
Same-store sales: down 2.8% year-over-year
Accounts over 30 days past due: 5.8%, down from 6%
Finance receivables: $400.651 million, up 10.1%