America’s Car-Mart saw third-quarter earnings fall 30% as a result of the delay in income tax refunds, market softness related to years of excess lending and a customer base that has been “stuffed with offerings.”
The Bentonville-based used-car dealer is closing three dealerships and expects more closings are on the way.
Reporting late Monday (Feb. 20), Car-Mart earned $2.82 million, or 35 cents per share, for the quarter ending Jan. 31, down from $4.09 million, or 47 cents per share, in the same period the previous year.
Stock markets were closed for Presidents Day. Car-Mart missed analysts’ earnings estimate of 64 cents per share. The company also missed the revenue estimate of $140.43 million.
Revenue, from both sales and interest income, rose 1% to $138.78 million, from $137.46 million. Same-store revenue increased 1.1%. But even with the same-store sales increase, “we were a little disappointed with our top line for the quarter,” William “Hank” Henderson, CEO of America’s Car-Mart, said in a news release.
“Some of the shortfall was most likely related to delays with income tax refunds this year.”
He also spoke about market softness related to “so many years of excess lending with significantly extended contract terms” as well as the company’s customer base being “stuffed with offerings” over the past several years.
In this quarter, the company began the process to close three dealerships, “and we anticipate a few more closings as we rationalize our individual locations,” Henderson said. As of Jan. 31, the company had 143 dealerships, down from 147 dealerships in the same quarter the previous year. “We continue to believe that we can add new dealerships again at some point in the future when we begin to see the anticipated improvements within our current dealership base.”
Car-Mart is addressing its “revenue challenges head-on” and added “lot-level productivity tools to assist our managers with efforts to attract quality customers and improve our closure rates,” he said. The company recently started a general manager recruitment and advancement team. It is also in the “middle of a top to bottom review” of its sales and marketing, and a third-party company is helping on this.
In the quarter, the buy here, pay here dealer, which offers in-house financing on each car it sells, had 67,300 accounts and net finance receivables of $363.53 million. The company sold 10,866 vehicles in the quarter, down 1.3% from the same quarter in the previous year. Accounts more than 30 days past due fell to 4.7%, from 5%. Net charge-offs rose to 7.8%, from 6.6%. After the company repossesses a vehicle, it is sold on the wholesale market, and the difference between the loan amount and the wholesale price represents the net charge-off.
Credit losses increased “broadly across the company,” Henderson said. Car-Mart is working to improve its collection efforts, “particularly with our ground level face-to-face interaction with our customers.” It recently added a “key position, with support staff,” to work to improve credit results.
“The team has been instrumental in developing tools to give management better visibility toward efficiencies and the effectiveness of our account representatives as they work to improve customer success rates. We expect these efforts to result in improvements to our credit losses as we move forward,” he said.
REVENUE GAIN, DEBT REDUCTION
Jeffrey Williams, president and chief financial officer, said inventory management improvements have allowed the company “to see solid gross margin percentages with increased turns.” Gross profit margin rose to 40.8%, from 40.3% in the same quarter the previous year. The company also continues to drive down its selling, general and administrative costs, which fell 3.9% in the quarter.
“In the last 12 months, we have added $32 million in receivables, re-purchased almost $12 million of our common stock and funded $1.7 million in net capital expenditures, all while paying down $3.7 million in debt,” Williams said. “Our debt to finance receivables ratio is 25% compared to 27.6% at this time last year.”
Over the past three quarters of fiscal 2017, revenue has risen 5.2% to $434.83 million. Net income has risen 81% to $14.96 million, from $8.23 million. Same-store sales have increased to 4.2%, from 1.3%. Vehicles sold has increased 2.5% to 34,990, from 34,138. Net-charge offs have fallen to 21.8%, from 22.2%.
On Dec. 12, the company signed off on an amended lending agreement, extending its revolving credit until 2019 and increasing its total permitted borrowings by more than 15% to $200 million.
Shares of Car-Mart (Nasdaq: CRMT) closed on Friday (Feb. 17) at $38.85, down $1.15 or 2.88%. In the past 52 weeks, the stock has traded between $47.75 and $19.49.
Wholesale used vehicle prices fell slightly in January, according to the most recent Manheim Used Vehicle Value Index. The index fell 0.3% to 124.8 in January, compared to the same month in 2016.
“The theme that played throughout 2016 continued into the start of 2017 as wholesale pricing remained stable despite sharply rising supplies,” according to Manheim. “Give credit to a retail used vehicle market that enabled dealers to quickly and profitably sell their auction purchases.”
In January, the price of pickups rose 5.2% while the price of compact cars declined 3.9%. Also, midsize car prices fell 2.6%.
“A cursory look at wholesale pricing by price tier and market segment suggest only a modest impact from the delayed flow of tax refunds this year,” according to Manheim. “That stands in contrast to the many electronic and furniture retailers who reported that late January sales were negatively affected by the reduced monies.”
Analysts had expected new car sales to slow more significantly in January, but incentives prevented the larger-than-expected declines. U.S. sales of new pickups and cars fell 1.8% to 1.14 million in January, from 1.16 million in the same month the previous year, according to Autodata. Sales of pickups rose 5.7% to 715,953, from 677,137, while car sales fell 12.2% to 427,596, from 487,235.
“The coming impact of new vehicle inventory overhang is also less than clear,” according to Manheim. “The topline days’ supply numbers were scary, but less so after accounting for seasonal issues, model shifts, temporary factors and reduced fleet volumes. Still production cuts seem warranted.”