Car-Mart’s 2Q revenue rises 12.9%, beats analysts’ expectations

America’s Car-Mart Inc. saw second-quarter revenue soar as car sales increased and expenses were slashed.

The Bentonville-based used-car dealer, reporting late Thursday (Nov. 17), earned $5.01 million, or 62 cents per share, for the quarter ending Oct. 31, compared to net loss of $485,000, or a 6 cents per share loss, a year earlier.

The company beat the average earnings estimate of 50 cents per share from five analysts surveyed by Thomson Reuters. It also beat the average revenue estimate of $134.72 million.

Revenue, from both sales and interest income, rose 12.9% to $150.21 million.

CEO William H. “Hank” Henderson said in a news release “we are pleased with our top-line growth and our sales volume productivity improvement. There is a significant demand for what we provide our markets, and we are excited that we have expanded our customer base by 2,600 since the beginning of our fiscal year.”

Serving nearly 67,600 customers, the company focuses on the “buy here, pay here” segment of the used-car market, providing financing for most of its customers. Car-Mart operates 143 car dealerships in 11 states in the South and Midwest.

Productivity at dealerships increased as they sold more than 28 vehicles monthly, up from about 25 vehicles a month last year. Same store revenue growth jumped 11.6%.

Cars sales grew 11.8% in the quarter to 12,167, from 10,881 a year earlier. Average retail sales price rose 2.4% to $10,491, from $10,247. Net charge-offs fell to 7.7%, from 7.8%, and accounts over 30 days past due increased to 4.8%, from 3.5%.

“We believe that we have significant opportunities for improvements within our existing network, especially as related to customer success rates, and we remain committed to prioritizing efforts to improve results at all of our individual dealerships,” Henderson said. The company, which had 144 dealerships in the same quarter a year ago, plans to start opening new dealerships in the future “as we see improvements in results from our efforts.”

Jeff Williams, president and chief financial officer, said in the release the increase in top-line revenue was “driven by a 12.3% improvement in sales volume productivity for the quarter.”

As car sales rose, it “resulted in leveraging our cost structure,” driving down selling, general and administrative expenses to 17%, from 18.9% a year ago, Williams said.

“Improvements with inventory management resulted in a 220 basis point improvement in our gross profit percentage,” Williams added. “Net charge-offs, while slightly down for the quarter, were higher than we would like to see, and we attribute some portion of our credit results to the continuing tough operating environment.”

In the past six months, net income has jumped 193% to $12.12 million, from $4.13 million in the same period last year. Revenue has risen 7.4% to $296.05 million, from $275.69 million. Car sales have increased 4.3% to 24,124, from 23,125, and same store revenue growth has jumped to 5.8%, from 2.4%. Net charge-offs have fallen to 14%, from 15.6%, while accounts over 30 days past due have increased to 4.8%, from 3.5%.

Car-Mart (NASDAQ: CRMT) shares closed at $41.05, down 50 cents or 1.2 percent on Thursday (Nov. 17). In the past 52 weeks, shares have traded between $19.49 and $43.06.

ANALYST ACTION, TRENDS
On Oct. 19, shares soared after Bank of America Merrill Lynch upgraded the stock to buy, from underperform.

Bank of America Merrill Lynch adjusted its rating after Car-Mart’s shares have experienced steady gains over the previous four months.

In October, Manheim, which measures used vehicle prices, reported prices fell narrowly, leading its Used Vehicle Value Index to a slight decline from the previous month. However, the index is slightly up to 126, from a year ago. The index value was 100 in 1995.

“The continued strength in wholesale pricing is largely explained by current and past increases in new vehicle transaction prices, even after adjusted for mix shifts,” Tom Webb, chief economist for Cox Automotive, said in a news release. “This in mind, wholesale used vehicle prices relative to those of new vehicles are not misaligned with historic norms.”

As a positive sign in long-term stability of the market, sales rose 4.7% from a year ago for the first eight months of 2016.

“Heading into the remainder of the year, the seasonal headwind to wholesale pricing has always been strongest during the Labor Day through Thanksgiving period,” Webb said. “Statistics show that seasonal pressure on wholesale pricing in October has not diminished over the past 20 years despite new model introductions that are increasingly scattered throughout the calendar year.”

One area to look out for is the increased use of down payment deferral programs “to get a jump-start on the tax selling season; but the actual flow of refunds is still important,” according to Manheim. “In 2017, the PATH Act requires that IRS hold tax refunds claiming the Earned Income Tax Credit (EITC) until Feb. 15.”

Data shows more than $100 billion in tax refunds had already been handed out by mid-February. A lot of that money was EITC funds, “which have the highest correlation with lower-end retail used vehicle sales,” according to Manheim.