America’s Car-Mart is beginning to reap the rewards of its disciplined business model. The company posted net profits of $7.519 million in its second quarter of fiscal 2015. Net income rose 29.5% from the same period last year. On a per-share basis earnings were 83 cents, blowing past the 66 cents forecast by analysts and the 61 cents profited a year ago.
Top line revenue for the quarter ended Oct. 31 was $133.83 million, a gain of 10.2% over the $121.42 million in sales recorded a year ago. Analysts expected revenue of $120 million, a decline of 0.7%.
For the first half of fiscal 2015 Car-Mart had earnings of $14.75 million, versus $13.32 million last year. Revenue totaled $261.21 million, up 7% from the $243.97 million recorded in the same period last year.
"We are pleased with the results for the quarter especially the improvements with our sales productivity. By focusing on affordability and offering a good mix of vehicles at all price points, we were able to increase the average retail units sold per store per month to 29.6 from 27.6 for the prior year quarter,” CEO Hank Henderson said in the earnings report released Wednesday (Nov. 19) after the markets closed. “Offering a solid assortment including lower priced vehicles allows our transactions to be more affordable for our customers, which we hope will increase success rates into the future. Our general managers continue to raise the bar in the field and their efforts are to be commended.”
Henderson said the competitive landscape continues to be challenging. Car-Mart finished the quarter with 136 dealerships, an increase of 7 from this time last year.
“We have opened two new dealerships so far in fiscal 2015, and we continue to expect to open a total of 8 for the current fiscal year and then return back to a more historical store opening rate for 2016 and beyond,” Henderson said.
The company reported top line growth of 13.9% in unit sales with 12,084 vehicles sold in the quarter. The average sales price declined 3% from a year ago to $9,477, but the number of sales per lot improved overall for the first time in three quarters.
”We remain convinced that we are moving the company in the right direction, and we are excited about our future,” Henderson noted in the release.
J.R. Bizzell, an analyst with Stephens Inc., underestimated Car-Mart’s fiscal second quarter earnings, but said there is solid store growth coming in the back half of 2015 and in fiscal 2015. Bizzell cited competitive pressures in the subprime auto finance market for his tempered expectations in the recent quarter. Bizzell has the stock rated equal-weight, or a hold position with a target price of $45.50. (Stephens Inc. has received compensation for products or services other than investment banking services from America's Car-Mart, Inc. in the past 12 months.)
“Although we wait for further confirmation before becoming more constructive on the stock, we will continue to monitor shifts in the competitive landscape, as we believe Car-mart’s business model has the company well positioned to take advantage of favorable market dynamics,” Bizzell noted to investors.
C.L. King, an analyst with Bill Armstrong, also underestimated Car-Mart’s earnings potential in the recent quarter. But unlike Bizzell, he recently reiterated a “buy” position on the stock.
“We think credit availability for subprime auto buyers may begin tightening up in the months ahead as industry-wide loss rates continue to increase. At the same time, Car-Mart appears to be more effectively adapting to the still-difficult competitive environment, as evidenced by its improved recent performance,” Armstrong said. “To the extent that overall credit availability for subprime auto buyers does in fact begin tightening, it would be a clear positive for the company as it would represent a reduction in competitive pressure and would drive more traffic to its stores. Car-Mart holds its own paper and does not rely on securitizations. We remind investors that during the credit crisis Car-Mart experienced very strong sales and earnings increases.”
He has a target price of $47.99 on the stock.
Charge-offs are another metric that can weigh on Car-Mart profits. Despite the higher profits in the quarter, Car-Mart’s charge-offs rose to 7% of receivables in the quarter, up from 6.9% a year ago.
“We have been working hard to ensure we focus on balancing the benefits of volume increases with credit quality risks, and we are generally pleased with deal structures for the quarter. Charge-offs continue to be higher than we would like, which is an indication of a continuing tough operating environment, although we feel like we are getting better with our blocking and tackling in the key areas of the business," said Jeff Williams, chief financial officer of America's Car-Mart.
Analysts commend Car-Mart for its strong balance sheet. Bizzell said Car-Mart’s strong cash flow generation has allowed for the company to fund its growth without the need to add on excessive debt.
"Our balance sheet remains very conservative with a debt to equity ratio was 48.4% and a debt to finance receivables ratio of 25.9% at the end of the quarter. We believe in the long-term value of the company,” William added.
He said the company’s first priority for capital allocation will be to support the healthy growth of the business.
"We are dedicated to adhering to the thirty-three year Car-Mart tradition of ‘watching every dime’ and being the lowest cost provider on both the financing side of the business and the dealership side," Williams said.
Shares of Bentonville-based America’s Car-Mart (NASDAQ: CRMT) closed Wednesday at $44, down 50 cents. For the past 52-weeks the share price has ranged from $34.56 to a recent high of $48.93.