Car-Mart’s Q1 financial results to be mixed, analysts say

Rogers-based America’s Car-Mart Inc. is expected to post a decline in earnings but an increase in revenue in the first quarter of fiscal 2024 as used vehicle price increases moderate, and credit tightens.

The buy here, pay here used vehicle dealer will report first-quarter earnings before the markets open Tuesday (Sept. 5). Earnings are projected to fall to 91 cents per share in the quarter ending July 31 from $2 per share in the same period last year, based on a consensus of four analysts. Revenue is expected to rise by 2.1% to $352.12 million from $344.88 million.

According to Car-Mart, the company changed its first-quarter earnings release date “to accommodate a change in the earnings release cadence to better align with other market participants. The change in the earnings release date is not related to any financial reporting delays, and the company expects the earnings for the first quarter of fiscal 2024 to be in line with internal expectations.” In 2022, the company reported first-quarter fiscal 2023 earnings on Aug. 17.

In an earnings preview, equity analysts John Hecht and Kyle Joseph and equity associates Matthew Hurwit, Sagiv Hartmayer, Alexander Villalobos and Ibrahim Kargbo, all of Jefferies, expect Car-Mart’s gross profit margin to fall by 1.93 percentage points to 33.8% in the first quarter from the same period last year. The first-quarter margin narrowly improved from the fourth quarter. On credit, loss rates are expected to rise by 3.3 percentage points in the first quarter from the same period last year. The higher loss rates can be attributed to higher frequency and severity, resulting in a provision expense of $87 million, up 5% from last year. Total expenses are projected to be $352 million, up 7% from last year.

According to the analysts, Car-Mart sold 15,900 vehicles in the quarter, up 2.5% from last year. The average retail sales price is expected to be flat at about $18,500. Year-over-year price increases reached a peak in the third quarter of fiscal 2022 at a rate of 25% and have slowed since then. The year-over-year price change was 1.5% in the fourth quarter of fiscal 2023. Prices have continued to show signs of stability, rising narrowly from the fourth quarter.

“Moving forward, we anticipate price increases to flatten in our outer-year projection periods as (Car-Mart’s) core customer battles persistent inflation and higher interest burden,” the analysts said. “Despite a challenging autos market, we believe (Car-Mart) remains well positioned competitively as credit tightening benefits (Car-Mart’s) customer funnel and the company’s geographic exposure to smaller population centers insulates it from industry competition.

“Credit trends have remained relatively stable despite broader normalization in non-prime and lower used car prices, and (delinquencies) have remained fairly stable,” they added. “We believe the current state of autos market underscores (Car-Mart’s) value proposition as an affordable used car dealer.”

According to the analysts, credit availability for auto finance recently fell to a two-year low. While traditional providers of credit tighten underwriting, Car-Mart is expected to see market share gains “as customers from above the company’s typical credit box flow to the company’s lots. At the same time, we get the sense the low-end consumer has adapted toward higher inflation and remains employed. The broader credit environment continues to tighten, which should support sales.”

The analysts added that the top-line comparisons to the first quarter of fiscal 2023 “remain tough as we lap (the first half of 2023) performance, which had still shown strong pricing and unit growth trends. However, growing top-of-funnel customer reach and potential for gross margin recovery may provide some offset.”

The analysts noted that Car-Mart’s larger portfolio balance should help revenues, while portfolio growth results in a higher provision.

Jefferies maintained its hold rating on Car-Mart shares but increased its 12-month target to $95.

According to Seeking Alpha, Little Rock-based Stephens Inc. recently changed its rating of Car-Mart shares from equal-weight (hold) to overweight (buy) and raised the target price to $135 from $70.

“With the market still concerned about the implications of lower used car prices, we pick (Car-Mart) as a winner whether industry turmoil continues or begins to recover,” the research report shows.

Car-Mart is expected to benefit because of the recent exit of several auto lenders from the industry, according to the report. The benefits will be organic, with less competition, and in terms of acquisitions.

Shares of Car-Mart (NASDAQ: CRMT) closed Tuesday (Aug. 29) at $110.58, up $4.29 or 4.04%. In the past 52 weeks, the stock has ranged between $52.24 and $127.96. The stock hit the 52-week high on July 18, the day after Stephens changed its rating on Car-Mart shares.

BROADER TRENDS
As of mid-August, wholesale used vehicle prices in the United States fell by 7.8% from August 2022, according to the Manheim Used Vehicle Value Index. However, prices increased by 0.1% in the first 15 days of August from July.

“This is the first time since March that we are seeing an uptick in the index,” said Jeremy Robb, senior director of economic and industry insights at Cox Automotive.

Retail used vehicle inventory is down eight days from last year, according to vAuto data. The inventory is down three days from July. Wholesale vehicle supply is down four days from last year and two days from July.

According to Manheim, wholesale supply decreased amid stronger wholesale sales in early August and is tighter than normal for this time of year. Used retail sales are at their highest levels of 2023, which is unusual for this time of year.

Meanwhile, new vehicle sales in the United States are expected to rise in August, with inventory levels at a two-year high. The pace of sales is projected to moderate from July. New retail sales have increased for four consecutive weeks.

According to Jefferies, the average new vehicle loan rose by 3.1% to $40,851 from last year, while the average used vehicle loan fell by 5.7% to $26,420. The average monthly payment for new vehicles increased to $725 in the first quarter from $650 in the same period last year. Over the same period, the average monthly payment for used vehicles rose to $516 from $505. The increase was attributed to rising interest rates.