Car-Mart stock rises more than 10% after earnings report; manager recruitment progress noted in call

by Jeff Della Rosa (JDellaRosa@nwabj.com) 128 views 

For the second consecutive quarter in fiscal 2019, America’s Car-Mart stock price jumped more than 10% the day after its earnings report, and as of midday Friday (Nov. 16), shares of Car-Mart (NASDAQ: CRMT) were trading at $84.50, up $12.50, or 17.4%. Also Friday, executives of the Bentonville-based buy here, pay here used car dealer also provided updates to its management recruitment and training program, advertising spending and buyers in an earnings call.

After the markets closed Nov. 15, the company reported earnings rose 89% to $11.281 million, or $1.58 per share, in the quarter that ended Oct. 31. Revenue increased 12.1% to $167.171 million. Earnings beat estimates by 42 cents, and revenue beat estimates by $5.731 million.

On Aug. 17, the day after the company reported earnings rose 55.7% to $10.874 million, or $1.53 per share, in the first quarter of fiscal 2019 that ended July 31, the stock hit a 52-week high of $81.85. Revenue rose 12% to $164.015 million. First-quarter earnings beat estimates by 38 cents, and revenue beat estimates by $11.585 million. The stock closed Sept. 6 at $84.85 and has yet to close higher since then. It closed Nov. 15 at $72 per share.

In an earnings report, equity analysts Kyle Joseph and John Hecht and equity associate Michael Del Grosso, all of Jefferies, said the company beat analyst expectations as a result of the strength in credit performance and profit margins. Net charge-offs and 30-day delinquencies declined 90 basis points and 70 basis points, respectively, in the quarter, from the same period in 2017. They attributed the strength in credit as a sign of easing competition.

Joseph, Hecht and Del Grosso saw the margin stability as a positive, especially in light of the rise in used car prices, but the 30 basis point decline in margins to 41.7% was likely a result of the strength in used car prices. However, the rising prices don’t look to be impacting sales, which rose 6% to 12,667 vehicles. They gave Car-Mart stock a hold rating and a 12-month target price of $82.

FORMAL TRAINING PROCESS
In Car-Mart’s second-quarter earnings call, President and CEO Jeff Williams explained the company continues to invest in its manager training and recruiting program after noting that the addition of more dealerships is limited by the company’s ability to find qualified general managers. The company has opened several dealerships, but they are being managed by top-performing general managers.

New employees who are hired into the company’s management training program go into an assistant manager position after completing the program. Williams said the company’s future general managers are expected to come from the pool of assistant managers.

“We’ve really formalized a lot of training,” he said. “We’re investing a lot of resources into those areas and feel like over time we’re going to have a good, solid bench of folks that are going to run dealerships someday.”

When asked about sales productivity, Williams explained that in the past dealership sales volume per month was in the mid-30s, and he believes there’s an opportunity to continue to improve the volume. The company also strives to continue to reduce its net charge-offs, but reaching 2010 levels will be a challenge as the market has changed, with higher interest rates, longer contract terms and lower recovery rates.

“On both of these, several of our general managers are still young. They’re still inexperienced general managers,” Chief Financial Officer Vickie Judy said. “And as they gain experience, I think that helps both the productivity as well as the losses as they gain experience in setting up the deals in the front end and working with our customers. Again, back to that training and the experience in those GMs will help both of those as well.”

CUSTOMER TESTIMONIALS
When asked about the company’s digital initiatives, Judy explained the company has invested advertising money into website updates, Google reviews and customer testimonials, placing them on social media sites. The company also is working on an online credit application, allowing customers to start online before having to come into the dealership.

“Being a part of these communities from a digital standpoint is very important,” Williams said. “Our advertising is shifting more to testimonials. We’ve been in business 37 years, and we do a lot of things to help these folks be successful. We really go above and beyond, and we’re going to do a better job going forward of really highlighting real customer testimonials for the benefit we add to these communities.”

Customers have benefited from the recent tax reform, leading to job growth, higher wages and more hours worked, said Williams, adding that “our consumer might finally be getting a little bit of a raise after 10 years of not much increases there.” The company also has been able to offer a better quality vehicle,and combining that with the increased amount of cash the consumer has, credit results and sales are expected to improve.

The company is purchasing a nine- to 11-year-old vehicle on average, and the supply is more limited given that over that period fewer new vehicles were sold, compared to previous years. Williams expects that the company will pay more for vehicles for a while, but that’s starting to level off some. Sales prices might rise more along with inflation, as the company has seen historically.

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