Higher than expected loan losses and fewer overall unit sales drove America’s Car-Mart profits downhill in the third quarter ending Jan. 31.
The Bentonville-based buy here, pay here car dealer posted net income of $4.092 million, or 47 cents a share, which was reported Thursday (Feb. 18) after the market closed. Net income fell short of Wall Street’s expectation of 50 cents per share and well below the$7.451 million reported in the same period last year.
Total revenue – unit sales as well as interest income – rose 4.5% to $137.48 million in the quarter over the $131.5 million reported in the year-ago period. Revenue also outpaced the $132.35 million consensus estimate by Wall Street analysts.
It’s been a tough year for the used car dealer as its fiscal nine-month results weren’t much better. For the first three quarters of fiscal 2016 Car-Mart returned net income of $8.203 million or 93 cents per share compared to $22.2 million or $2.45 per share in the same nine-month period last year. Fiscal year earnings include a $1.28 charge related to a special $3 million contribution to the company’s provisions against credit losses that took place in the second quarter.
Revenues for the nine-month period rose to $413 million from the $393 million reported a year ago. Same store revenue rose 1.3% in the nine-month period, but so did the company’s net charge-offs.
Company executives said the competitive climate and a particularly tough January has forced some management restructuring.
“With our growth and the changes we have seen in the industry, it is time to make a few management structure changes that we believe will allow us to continue our success out into the future,” said William “Hank” Henderson, CEO of America’s Car-Mart Inc. “We have promoted Leon Walthall to the newly created position of Field Operations Officer where he will be leading our Regional Vice Presidents of Operations. Leon has been with the Company for over 27 years and has had tremendous success both as a General Manager and for the last six years as a Regional Vice President.”
Jeff Williams, the chief financial officer for the previous 10 years, will also take on the role of president.
“I am confident that expanding their scope of influence will be very beneficial and a move in the right direction to realizing the true potential of our company,” Henderson said.
He explained why profits faltered in the quarter. Lots on average sold 25 cars per month, which was down from 28 in the prior year period. The average sales price was up by $835 to $10,599 in the quarter. Overall gross margins fell to 40.3% in the quarter because of higher wholesale volumes and losses, slightly higher repair costs, and the effect of a higher average selling price.
“We feel good about the quality of the vehicles we are selling and the credit profiles of our customers. However, we continue to struggle with our sales volumes as we haven’t yet seen relief from the operating environment,” Henderson said.
He described competition as “still very intense.” The company has also taken a more conservative underwriting approach after recording too many defaults. Net charge-offs as a percent of average finance receivables rose to 6.6%, up from 6.5% in the prior year quarter. The accounts over 30 days past due stood at 5% at the end of the quarter (Jan. 31), down slightly from 5.2% a year ago. Higher charge-offs also pushed up the company’s provision for credit losses to 26.9% in the quarter, versus 25.9% a year ago.
Williams said one of the company’s biggest concerns is finding its footing on the sales side of the business and also making sure its infrastructure costs are in aligned.
“Our cash on cash returns for the deals we are writing are solid, but we are struggling with attracting enough good, solid deals in this environment. While we still believe we will grow into our cost structure, which was created with the view of supporting much higher volumes, that was certainly not the case this quarter and we are making adjustments, including pushing for higher volumes,” Williams said. “The market has been difficult to read.”
The executives said they plan to work on reducing expenses and improving productivity and strike the right balance between risk and volume. The company continues to generate solid levels of free cash which it is using to repurchase shares. In the recent quarter the company bought back 252,513 shares for $6.5 million. Since February 2010, the company has repurchased 4 million shares or 34% of the its outstanding stock.
Shares of America’s Car-Mart (NASDAQ: CRMT) closed Thursday (Feb. 18) at $25.52, up 26 cents on the day. The stock has been on an upward run over the past week gaining 14.85% over the past 30 day period. That said, shares are still well off of their 52-week high of $57 reached in June of last year. During the past 52-weeks the shares have ranged in price from $20.67 to $57.77.