America’s Car-Mart fiscal first quarter income falls 36.4%, revenue up 12%

While calendar 2015 has yet to round out its third quarter, the fiscal 2016 year for America’s Car-Mart is off to slow start. First fiscal quarter net profits were $4.606 million, tumbling 36.4% from $7.25 million earned in the same period last year.

The first quarter results were reported after the market closed on Thursday (Aug. 20). The 52-cents earnings per share were way off the mark from the 86-cent consensus estimate by equity analysts.

Account charge-offs from a rise in delinquent car loans was the main culprit of the underperforming profits.

While profits were lighter, the Bentonville-based used car dealer’s overall sales revenue rose to 12% to $142.69 million, which was on par with what analysts expected. Another solid metric in the earnings were same-store sales which increased 8.9% from a year ago.

"While we are pleased with our top line improvement and the increased sales volume productivity, we were very disappointed with our net charge-offs for the quarter. We certainly anticipated some elevated loss levels as we started the quarter with a high 5.8% of our finance receivables being 30-plus days past due,” CEO Hank Henderson noted in the release.

Last quarter Car-Mart execs noted disappointment in the company’s collections efforts and Henderson said they fully expected a challenging start to fiscal 2016 in that regard. He also cited operational inconsistencies among dealerships, with respect to collection practices, properly utilizing the GPS technology recently put into the cars financed by the company, as well as other distractions related to a new software adoption. 

Henderson said last quarter that lot managers have a great deal of autonomy in the loans made and 100% of the payment collection responsibility. The company will continue to train and monitor improvements in collections and loan quality going forward. He also said the competitive landscape is still a hinderance to sales, but took full responsibility for the recent earnings miss which he said is “more attributable to our own lack of consistent blocking and tackling."

“We have certainly not been reaching our own internal best practices standards and are committed to getting this fixed,” Henderson added.

The bears dominated the day as America’s Car-Mart shares (NASDAQ: CRMT) closed down 4.14% on Thursday (Aug. 20) before the earnings miss was made public. Shares closed at $41.68, down $1.80, with slightly higher than normal average volume. For the past 52-weeks the share price has ranged from a $57.55 high to a $38.53 low. 

Analysts with Stephens Inc. remain neutral in the company because Car-Mart has missed earnings expectations in the past two quarters. J.R. Bizzell, analyst with Stephens, noted May 26 that the company has likely been a little too aggressive in its underwriting to secure new loans in the face of heightened competition, and in the process the credit quality of its loan portfolio has deteriorated a bit.

“While we continue to be impressed with Car-Mart’s organic earnings growth and we like the business model long term we believe that new investors should await a better point of entry due to the current valuation premium versus peers. As such, we maintain our equal weight rating with a $55 price target,” Bizzell said. (Stephens Inc. conducts investment banking service with America’s Car-Mart and is compensated accordingly.)

SOLID PRODUCTIVITY
From a sales perspective, Car-Mart over-delivered expectations with the average retail cars sold per store increasing to 28.9, or 1.8% a year ago. The average retail sales price was $9,965, up 5.3% from the prior year quarter.

“We now have 143 dealerships in ten states and eight new location projects in process including one in Iowa, which will be our eleventh state. At this time, we believe that we can continue to add dealerships and address our collections challenges at the same time," Henderson said. "For us to achieve our mission of earning repeat business, we must consistently demonstrate excellence in our collections practices at all dealerships all of the time."

As of July 31, the end of the first quarter 2016, the company had 65,600 active accounts on its books. The company’s finance receivables grew 8% year-over-year to $427.881 million. 

HIGHER CHARGE-OFFS, LOW DEBT

America’s Car-Mart reported net charge-offs of 7.8% of its finance receivables in the quarter. These losses increased from 6.3% of receivables in the same period last year. Accounts over 30 days past due started the quarter at 5.8% of the loans but declined to 3.8% by the end of the period, resulting in a decrease of $7.7 million in those loans past due.

As of July 31, Car-Mart reports that 81% of its customer accounts were current, which was on par with the current accounts reported a year ago. Henderson said it’s a positive start, but just a small step in the right direction, with more work needed. The company’s provision made for its credit losses was 27.7% of sales, well above the 24.6% of sales for prior-year period.

As more loans default, the company must continue to add to its credit loss provisions, which is money that is directly diverted from the bottom line profits.

“While we are disappointed with the current quarter's results, we are always looking long-term and do expect that we will see benefit from several investments in the future," said Jeff Williams, chief financial officer.

He said for several years the company has invested in its own infrastructure to support a larger customer base. Investing in information technology, compliance, lot support and training, GPS technology, centralization of non-core lot level administrative functions, customer payment technology, and credit reporting. Williams said the investments were made to provide better service to customers and field associates and to allow for productivity improvements in all its lots.

"The competitive landscape remains challenging, but as Hank mentioned, we know that we can do so much better at helping our customers succeed. Our bottom line results are always dependent on our customers succeeding on their individual contracts with us," Williams said.


While earnings were light, the company continues to have a low debt level and is committed to buying back its own stock with its free cash flow. Car-Mart  re-purchased 46,000 shares of common stock during the quarter for $2.3 million at an average cost of $50.24. Since Feb. 1, 2010 the company has re-purchased 3.7 million shares, or 32% of the outstanding shares for $123 million at an average cost of $33.18, Williams said. 

"We believe in the long-term opportunity before us to create value for our company, and we are fully aware of the fact that we will not create sufficient value unless our collections practices are excellent, our deal structures are strong, and as a result more customers succeed,” Williams said.