America’s Car-Mart underperforms expectations, annual profits fall 60%

The unfolding story at Bentonville-based America’s Car-Mart during the past year has been one of misses. The buy-here pay here used car dealer did it again Monday, (May 23) reporting fiscal year net income of $11.596 million, falling 60% from the $29.45 million reported a year ago.

Revenue on the other hand rose to $567.906 million, up 7.1% from the $530.321 million reported a full year earlier. The company underperformed Wall Street expectations missing on revenue and earnings.

Analysts expected America’s Car-Mart to earn $1.86 per share for the full year, and the actual earnings per share were $1.33 as reported by the company. While the full-year report was disappointing, company executives insist progress is being made in business operations.

“While the operating environment continues to be challenging, we are doing a lot of things right and we are excited about the direction we are headed with the business. Specifically, we saw improvement with our sales volume productivity during the recent quarter driven by solid results for our older dealerships,” said Hank Henderson, CEO of America’s Car-Mart.

For the fourth quarter, the company reported 40 cents per share, or net income of $3.363 million, down 53% from $7.250 million, or 81 cents earned a year ago. The company also badly missed Wall Street’s quarterly consensus earnings estimates of 58 cents. Also during the fourth quarter, Car-Mart closed four dealerships: Tyler, Texas; Atlanta, Texas; Cushing, Okla.; and Trumann, Ark. The company also raised its finance rate to 16.5% from 15% previously.

Henderson said during the year the company made “significant improvements with underwriting and collections as evidenced by our 30-day plus delinquencies finishing at the lowest point in five years.”

“We believe that the competitive environment on the lending side during the fourth quarter was particularly intense this year during income tax refund season as competitors even more aggressively targeted our customers to maintain their volumes in an increasingly difficult environment,” Henderson said.

The company is committed to its model and says that many of the competitive offerings in the marketplace will not be sustainable over the long-term.

“We are left with doing our best to help customers succeed while competitors are pushing hard and in many cases enticing some of our good customers to default with us,” Henderson said. “Obviously, due to the shortfall in operating results caused by the tough environment, we have had to slow down our new store opening plans. We are working hard to make improvements and to get all existing dealerships performing at a high level. We do continue to expect to return to a more historical rate for new dealership openings at some point in the future.”

The full-year results include a $3 million after-tax charge resulting from an increase to the company’s loan loss reserves on its finance portfolio. Same-store sales increased 2.7% for the full year, while overall vehicle unit sales were down fractionally to 46,483 units. The per-store monthly volume of units sold decreased to 26.7 vehicles, compared to 28.4 vehicles a year ago.

Net charge-offs increased to 31.3% for the full year, compared to 27.8% last year. The higher rate of charge-offs and loan defaults resulted in a higher provision for loan losses which rose to 28.5% of sales, compared to 25.5% for the year-ago period.

Despite the earnings hiccups, the company continues to generate strong cash flows with finance receivables increasing by $19.9 million from the prior year. Interest income on the increased finance receivables rose 4.8% year-over-year. The company also spent $4.5 million in capital expenditures with eight new stores openings during the fiscal year and the closure of four others. The average retail sales price also increased to $10,361, up from $9,680 a year ago.

The company repurchased $14.2 million of its own stock during the fiscal year, while also increasing its debt totals by $4.7 million.

FOURTH QUARTER WRAP

• Net earnings of $3.4 million or 40 cents per diluted share vs. 81 cents per diluted share for prior year quarter.

• Revenues of $155 million increased 12.5% compared to $138 million for the prior year quarter.

• Retail unit sales increase of 5.5% to 12,345 from 11,699 for the prior-year quarter.

• Average retail sales price increased $634 to $10,641 or 6.3% from the prior-year quarter .

• Net Charge-offs as a percent of average finance receivables of 9.0%, up from 7.8% for prior year quarter.

• Accounts over 30 days past due decreased to 3.0% from 5.8% at April 30, 2015 (a decrease of approximately $11 million).

• Provision for credit losses of 27.4% of sales vs. 25.0% for prior year quarter.

The company also reported that the gross profit margin slipped in the fourth quarter down to 38.7% from a previous level of 41.5%. The reasons cited for the lower profit margin was a higher number of wholesale volumes, which relate to cars being repossessed, slightly higher repair costs and a slightly higher average selling price as the company continues to improve the quality of its inventory.

“It was nice to see productivity improve during the quarter, which led to solid operating expense leveraging. We believe that we have a very lean but effective structure in place that can support the business as we continue to grow,” said Jeff Williams, president of America’s Car-Mart. “We can and will get better along the way but, realistically, as long as competitors are offering what we consider to be unsustainable deal structures, we will continue to face headwinds related to credit losses,” Williams warned.

Williams added that the company is entering fiscal year 2017 at very low delinquency levels with inventory levels in great shape.

“We are laser-focused on good, solid blocking and tackling, and we are optimistic that we can perform well even if market conditions do not improve. We do, however, believe conditions will improve but we are not waiting around for that to happen,” he said.

Shares of America’s Car-Mart (NASDAQ: CRMT) closed Monday at $23.25, down 7 cents. For the past 52 weeks, the share price has ranged from a low of $20.67 to a high of $56.59. The average one-year target price given by analysts for the stock is $28. Executives of America’s Car-Mart will hold an earnings call with analysts on Tuesday (March 24) at 10 a.m. Central Time.