Car-Mart sales soften, not as much as broader market

by Jeff Della Rosa ([email protected]) 379 views 

Sales have fallen for America’s Car-Mart amid the COVID-19 (coronavirus) pandemic, but they’re not as weak as the broader market in which sales have declined more than 50%, analysts said.

Meanwhile, a recent survey conducted before the health crisis shows the top fear about buying used cars is the risk of future repairs.

In a recent report on the Bentonville-based buy here, pay here used car dealer, equity analysts Kyle Joseph and John Hecht and equity associates Ryan Carr and Lance Jessurun, all of Jefferies, highlighted a conference call hosted with Car-Mart management regarding the disruption of COVID-19 and the company’s response. The analysts noted lower volumes, more stress on the consumer and lower used car prices while recognizing Car-Mart’s “robust performance in the last downturn.” Car-Mart management also provided insight on how the existing macro environment may impact volumes, credit and competition.

The report shows Car-Mart is in a good position and reminded investors of how the company performed in the Great Recession. This is offset by declining used car prices that are impacting recoveries but supporting margins and allowing the company to provide customers with a higher quality vehicle at an affordable price.

“[Car-Mart] is working with customers individually to help them through this challenging time,” the analysts said. “The company has seen customers in financial duress noting that it has seen some offsets with stimulus checks and federal unemployment benefits hitting its consumers.”

The company expects pressure on used car prices and the benefit should be reflected in margins as Car-Mart can find higher-quality vehicles for lower prices. Car-Mart has started to see some anecdotal evidence of tightening credit, and this benefited the company in the Great Recession. The results were increased revenue and improved credit performance. With regard to competitors, Car-Mart expects difficulties for those with higher levels of leverage.

The report also included what the analysts have learned from consumer finance companies that have already reported first-quarter earnings. Credit was stable in these companies while sales declined nearly 50%. Another company that operates in the non-prime market reported declines in loan demand offset by “robust retail activity in its stores through April,” the analysts said, adding that the results show customers “have had an influx of cash from stimulus, tax refunds, lower gas prices…”

Car-Mart sales are expected to slow, loss rates look to rise, and margins should become stable as it benefits from lower used car prices. Also, expect reductions in expenses in the company’s 2021 fiscal year, which starts May 1. Earnings per share estimates were reduced to $7.20 for fiscal 2020 and $5.63 for fiscal 2021 and set the estimate for 2022 at $7.42, according to the analysts. They set a 12-month target price at $64.

In mid-March, the company announced it had drawn an incremental $30 million on its revolver, which the company amended in September. As of Jan. 31, the company had drawn $184 million on the revolver, and the company has drawn about $214 million on its $241 million in total permitted borrowings, according to Joseph, Hecht, Carr and Jessurun. The company has low leverage with a debt to receivables balance of about 30%, they noted.

In the past recession, Car-Mart outperformed its peers both fundamentally and in stock performance, the analysts said. Its net charge offs declined in the previous recession, and the lowest level of net charge offs were in fiscal year 2010, which ended in April 2010. As traditional auto lenders tightened credit, Car-Mart “became a go-to lender for non-prime borrowers needing to purchase a car,” the analysts said. As a result, revenue rose 9% in fiscal years 2009 and 2010.

Since mid-March, sales have decreased for Car-Mart, but they are not down as much as the broader market, the report shows. Competitors in the buy here, pay here industry are seeing a declining supply of credit in the auto finance market, and those with higher levels of leverage and less scale might not survive through this economic disruption. Car-Mart recently made a small acquisition in Illinois, and the downturn might lead to other consolidation opportunities.

Some of Car-Mart’s customers are struggling financially amid the health crisis, and the company plans to work with borrowers as the company has experience working with its borrowers facing financial hardships and has various initiatives to help, such as deferrals and extensions. The impact on Car-Mart’s credit performance depends on the length of the crisis and the impact of the federal relief aid and unemployment programs. The company has slowed its repossession activity.

Through the first half of April, used vehicle values have declined nearly 12% while physical auctions have stopped, leading to increased supply and the expectation that it will continue to rise as rental car companies reduce their fleets more than usual as a result of lower demand. The lower values might impact Car-Mart’s credit metrics but could benefit margins because of the ability to find better vehicles at the same price, which should help customers.

Shares of Car-Mart (NASDAQ: CRMT) closed Tuesday at $62.68, up 79 cents, or 1.28%. In the past 52 weeks, the stock has ranged between $129.70 and $35.18.

CAR BUYING FEARS
A recent survey by JW Surety Bonds shows that the top fear of buying a used vehicle is the risk of future repairs.

More than two-thirds of respondents believe buying a used car is worth the risk, but 27% fear the risk of future vehicle repairs, the survey shows. Also, 19% of respondents were afraid the seller didn’t disclose the car’s true history, and 12% were concerned about overpaying.

NEW VEHICLES RECOVER
Retail sales of new vehicles have started to recover, according to J.D. Power Valuation Services. The company recently released a report on vehicle markets as of April 19.

It was the third consecutive week in which new market conditions have improved, but some markets remain down, including wholesale auction activity. However, the activity is improving.

Wholesale sales improved for the second consecutive week along with the rate of decline in auction prices, according to J.D. Power. Used wholesale prices are expected to fall 8% to 11% through June before they start to recover.

Before the health crisis, new vehicle retail sales were projected to fall 1.1% to 1.09 million in April, from the same month in 2019. The updated outlook shows the sales are expected to be between 500,000 and 613,000 vehicles, down between 43-54% from previous projections. Total retail sales are projected to be between 11.3 million and 12.5 million in 2020, compared to the pre-virus projection of 13.4 million.

Wholesale auction sales rose 19% to 28,000 units for the week ending April 19, from the previous week. In the first three weeks of April, volume fell 80% from the same month in 2019. Since mid-March, action volumes have been 160,000 vehicles, and compared to pre-virus projections, down 70%.

Used retail sales were less than 400,000 in the four-weeks ending April 19, while wholesale auction sales were 93,000 vehicles. Franchise dealers are selling vehicles but are reluctant to purchase replacement vehicles, the report shows.

Used retail sales fell 44% for the week ending April 19, from the same week in 2019. Sales declined 57% in the previous week, compared to the same week in 2019. So far in April, used retail sales have fallen 54%, compared to the same period in 2019. Sales in March declined 38%, from the same month in 2019.

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