Car-Mart earnings, revenue to fall in first quarter of fiscal 2021, analysts say

Rogers-based America’s Car-Mart is expected to report a decline in earnings per share and revenue in the first quarter of fiscal 2021, which ended July 31.

The buy here, pay here used car dealer will report earnings after the markets close Monday (Aug. 17).

Earnings are expected to fall 34.4% to $1.45 per share, from $2.21 per share in the same period in 2019, based on a consensus of four analysts. Revenue is projected to decrease by 2.4% to $167.67 million, from $171.88 million.

In an auto lending report, equity analysts John Hecht and Kyle Joseph and equity associates Ryan Carr and Lance Jessurun, all of Jefferies, attributed the earnings decline to “a higher provision expense.”

Gross adjusted margin on auto sales is expected to rise 18 basis points to 41%, from the same period in 2019, according to the analysts’ report. Provision as a percentage of sales is expected to increase 557 basis points to 26.6%. Vehicles sales are expected to fall 5% to about 11,900 vehicles, and average retail sales price is expected to increase by about 5% to $11,981.

Car-Mart’s results are expected to rise quickly as the economy returns to normal and receive a boost in states that reopened faster, the analysts said. They noted the company’s “relatively defensive business model” and that it had the highest losses in 2007 and the lowest losses from 2009 to 2011 as a result of competitive trends that were in the company’s favor.

“Management’s strategy of ‘blocking and tackling’ by investing in long-term employees, building community-based stores and selling reliable vehicles that will be less likely to charge off has paid off as the company has consistently delivered strong top-line results,” the Jefferies analysts said.

Shares of Car-Mart (NASDAQ: CRMT) closed Monday (Aug. 10) at $96.30, up $1.17, or 1.23%. In the past 52 weeks, the stock has ranged between $129.70 and $35.18.

OPERATING CONDITIONS IMPROVE
Operating conditions for U.S. auto lenders are better than analysts would have projected several weeks or months ago, according to the Jefferies report. Credit metrics look to have benefited from the stimulus, deferrals and good household finances. Also, loan demand and used car values have recovered from several weeks ago.

Throughout the second quarter of 2020, loan volumes recovered and have exceeded levels from the same period in 2019 in some areas and categories. Loans volumes fell between 25% and 50% early in the second quarter, but were between 10% and 20% higher by the end of the period. Also, vehicle values had been down nearly 10% at the first part of the period but have since recovered.

In July, the Manheim Used Vehicle Value Index rose to a second consecutive record high, up 12.5% from the same month in 2019. Wholesale used vehicle prices on a mix-, mileage-, and seasonally adjusted basis increased 5.8% in July, from June.

Total used vehicle sales volume declined 4% in July, from the same month in 2019, according to Cox Automotive. The seasonally adjusted annual rate of sales declined to 38 million in July, from 39.7 million in the same month in 2019, but was up from 36 million in June.

Used vehicle prices have recovered as the supply of the vehicles has decreased, according to Manheim. Supply reached a peak of 115 days on April 8. Normal used retail supply is about 44 days. At the end of July, the supply was 34 days. Wholesale vehicle supply reached a peak of 149 days on April 9. Normal supply is 23 days. By the end of the month, it was down to 23 days.

New vehicle sales declined 12% in July, from the same month in 2019, according to Manheim. The seasonally adjusted annual rate of sales was 14.5 million, down from 17 million in the same month in 2019, but up from 13.1 million in June.

Consumer confidence fell 5.8% in July, and confidence is down 32% from the same month in 2019. The number of those who plan to purchase a vehicle in the next six months fell in July and is down from the same month in 2019. The number of people who plan to purchase a home has increased. Consumer sentiment fell to 72.5 in the final reading for July, from the preliminary estimate of 73.2 at mid-month, according to the University of Michigan. Sentiment fell after rising in June.

An increased number of COVID-19 cases along with rising unemployment could stall the economic recovery, while the supply of new and used vehicles affects the auto market recovery, according to Manheim.

TIGHTENING CREDIT CONDITIONS
Since 2016, banks have been tightening lending standards, and amid the COVID-19 pandemic, they have tightened them even more, the Jefferies analysts said. More tightening is expected but at the same level as in the past few years. Borrower credit scores also have risen. And loan terms continue to be extended for most new car and some used car loans.

The increasing term lengths for subprime loans continue to be a risk for the industry, the analysts said. But the risk has moderated slightly. The average term length for deep subprime loans increased 0.6 months in the first quarter, from the same period in 2019.

For Car-Mart, the average contract term was 33.3 months as of April 30, up from 32.1 months at the same time in 2019, according to a recent filing with the U.S. Securities and Exchange Commission. The company expects growth in financial receivables to be higher than revenue because of the rising term lengths and partially offset by improvements in underwriting and collection procedures to reduce credit losses.

In fiscal 2020, which ended April 30, revenue increased 11.3% to $744.61 million, from $669.12 million in the previous year. Net finance receivables rose 12.2% to $466.14 million, from $415.48 million.

Average interest rates fell for more new and used car loans, according to the Jefferies analysts. However, they were flat for subprime and deep subprime loans. Car-Mart loans comprise subprime loans and have an interest rate of 15% or 16.5%, except for in Illinois, where it ranges from 19.5% to 21.5%, according to the federal filing.

Across the auto lending sector, delinquencies and net-charge offs have fallen recently, according to the Jefferies report. S&P and Experian reported in May that net-charge offs fell the lowest rate in 10 years.

For Car-Mart, net-charge offs as a percentage of average finance receivables were 23.1% for fiscal 2020, down from 25.7% in fiscal 2019. The decline can be attributed to a lower frequency of losses combined with a lower severity of losses as a result of improvements in collections and higher recovery rates on repossessions. However, Car-Mart temporarily suspended repossessions in the fourth quarter amid the pandemic, and this contributed to a decrease in the percentage of net-charge offs, the filing shows.