High vehicle prices pressuring margins

Rogers-based America’s Car-Mart is facing margin pressures as a result of high used car prices, but they are expected to support credit performance, analysts said.

In recent research on Car-Mart’s quarterly earnings report, equity analysts Kyle Joseph, John Hecht and Ryan Carr, and equity associate Hogan Yang, all of Jefferies, noted the buy here, pay here used car dealer’s gross margin declined by 3 percentage points to 37.5% in the second quarter of fiscal 2022, from the same period last year. Meanwhile, the company’s gross margin on a dollar basis increased.

“This is the second consecutive quarter where we have seen used car prices weigh on [Car-Mart’s] margin as the company balances term/margins,” the analysts said.

On Nov. 17, Car-Mart reported earnings for the period ending Oct. 31 increased by 8% to $22.88 million, or $3.33 per share, from $21.18 million, or $3.05 per share, in the same period last year. Revenue rose by 29.1% to $288.3 million, from $223.36 million. The company beat earnings and revenue expectations for the period.

“We consider the top-line trends favorably, and given used car prices we are not surprised by the margin compression and expect strong used car prices to insulate [Car-Mart] from credit normalization,” according to the analysts.

The analysts explained that elevated used car prices contributed to the 29% increase in revenue and offset margin compression and higher provision for credit losses.

“We are seeing signs of credit normalization as the losses [and delinquencies] ticked up [quarter-over-quarter] but remain consistent [year-over-year] and below pre-COVID levels,” the analysts added. “The contractual term continues to increase in cadence with used car prices.”

The average term has risen to 40 months, from 35 months in the same period last year.

The analysts maintained their hold rating on Car-Mart shares and reduced their 12-month price target by $5 to $130.