Car-Mart doesn’t expect negative impact from new car dealer’s move to expand used car sales

New car dealers are looking to sell more used cars, but automobile dealers like America’s Car-Mart don’t expect it will impact their business, as its customers would likely not have the credit the new car dealerships would require.

Mike Jackson, chairman and CEO of AutoNation, recently said the new car dealer would look to expand its used car sales after clearing out its overhang in pre-owned inventory.

“We’re very optimistic about pre-owned long term,” Jackson told CNBC.

Car-Mart President Jeff Williams said the Bentonville-based buy here, pay here dealership doesn’t really compete directly with the large car dealerships. Where it might compete, however, is when it comes to financing. But credit on subprime lending has been tightening.

“I don’t think it will have much of a negative effect,” Williams said. Also, Car-Mart and AutoNation don’t have much of an overlap in business, as it’s mostly in larger, urban areas.

Nearly all of Car-Mart’s customers are in the deep subprime credit range, and Williams expects, with the tightening credit for that credit level, the customers won’t have the credit to purchase a vehicle from the new car dealerships.

“The pullback is coming for the deep subprime rate,” he said.

In the conference call on fourth-quarter earnings this week, Williams said the company was excited about decreased car prices, allowing it to pass on the savings to the customer. Car-Mart bases its selling price on the company’s purchase price, he said. As long as the selling price doesn’t change, he doesn’t expect profit margins to be impacted. Also, the company’s risk of deflation is low because it turns over its inventory between nine and 10 times per year.

Lower vehicle prices have also allowed Car-Mart to pass up on a car that might need more work and has led to reduced maintenance costs.

“The customer’s going to have a better car,” Williams said.

The price of used vehicles is expected to continue to decline as leased vehicles come off lease in 2017 and 2018, said Mervin Jebaraj, interim director for the Center for Business and Economic Research at the University of Arkansas. Jebaraj said if Car-Mart is passing on lower prices to the customer, it might see a rise in sales volume.

USED VEHICLE PRICING
Equity analysts with Jefferies expect used vehicle prices to decline in the “mid-single-digit range” as the 8.5 million vehicles leased in 2015 and 2016 enter the used vehicle market.

Seasonally adjusted used vehicle prices fell 7.1% in April, from the same month in 2016, according to the J.D. Power Valuation Services. In May, wholesale vehicle prices are expected to decline 1%, and in June, 2%. For the year, prices should fall about 6%, according to J.D. Power Used Car and Light Truck Guidelines, formerly NADA Used Car Guide.

Wholesale used vehicle prices rose 1.6% in April, according to the Manheim Used Vehicle Value Index.

Analysts with Jefferies noted the NADA values might be more accurate because Manheim doesn’t adjust for improvements in vehicle quality.

“We expect the Manheim index will have an upward bias as it is impacted by higher value vehicles due to increased technology penetration and other vehicle quality improvements entering the mix. The NADA index adjusts for vehicle quality and essentially measure the price of a fixed portfolio of vehicles over times, proving a more ‘apples-to-apples’ comparison.”

Pricing headwinds related to new vehicle incentives might decline, “as we expect incentives have reached ‘peak’ levels.” Also, the number of leased cars is expected to moderate, “as we believe lease penetration has reach peak levels near 30%, while increased losses associated with optimistic residual assumptions and declining used vehicle values will drive captive finance arms to take a more conservative approach to estimating future residual values, leading to higher monthly lease payments and thus decreasing relative affordability compared to financing new vehicle purchases.”

Payments also will rise as interest rates increase.

CREDIT SQUEEZE
In the fourth quarter of 2016, lenders started tightening standards as serious delinquencies rose. Nationwide, auto debt rose 5.1% in the quarter, from the same period in 2015, according to the Federal Reserve Bank of St. Louis. Serious delinquencies, or debt more than 90 days past due, rose 0.4%.

In the Car-Mart earnings call, CEO William “Hank” Henderson said some dealers have been cut off from lenders, and the feedback he’s hearing is competition was tightening. Dealership general managers are starting to see customers returning.

As of April 30, the end of the 2017 fiscal year, Car-Mart’s accounts over 30 days past due rose to 3.6%, up from 3% at the same time in the previous fiscal year. However, over the same period, net charge-offs, which relates to the losses from repossessions, declined to 30.5%, from 31.3%. When a vehicle is repossessed, it’s sold in the wholesale market, and any difference between the loan amount and the wholesale proceeds are the net charge-offs.

Williams said in the call the company is starting the new fiscal year with “a little higher delinquency level,” but the company’s “internal metrics are showing we are selling to a better customer.”

For the fiscal year, Car-Mart’s earnings rose 74% to $20.16 million, or $2.49 per share, up from $11.55 million, or $1.33 per share. Revenue rose 3% to $587.75 million, from $567.90 million. For the fourth-quarter, which ended April 30, net income rose 56% to $5.23 million, or 66 cents per share, from $3.35 million, or 40 cents per share. Revenue declined 1% to $152.91 million.

Car-Mart (NASDAQ: CRMT) reported earnings after the markets closed on Monday (May 22), when the share price was $35.20. The stock closed Friday (May 26) at $37.15, and was trading early afternoon Tuesday at $37.03. In the past 52 weeks, the stock has traded between $47.75 and $23.22 per share.