Car-Mart Q2 revenue, earnings to rise, analysts say

Rogers-based America’s Car-Mart Inc. is expected to post increases in earnings and revenue in the second quarter of fiscal 2024 as sales volumes rise and price growth flattens.

Before the markets open Tuesday (Dec. 5), Car-Mart is expected to report second-quarter earnings of 78 cents per share for the period ending Oct. 31, up from 48 cents per share in the same period last year, based on a consensus of four analysts. Revenue is projected to rise by 3.4% to $363.76 million from $351.84 million.

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, attributed the revenue increase to vehicle volume growth and a higher receivables balance. They expect sales to rise by 2.5% to about 16,300 vehicles in the second quarter from the same period last year. The average sales price is expected to be flat at about $18,000.

The analysts noted year-over-year price increases for Car-Mart reached a peak of 25% in the third quarter of fiscal 2022. The price increases have become more stable, at about 2% in recent quarters.

“We anticipate price increases to flatten as (Car-Mart’s) core customer battles persistent inflation/higher interest burden in addition to pricing weakness seen in the JD Power/Manheim indices,” the analysts said. “However, we believe (Car-Mart’s) positioning at the bottom of the consumer credit spectrum may provide some pricing power support. Credit tightening benefits (Car-Mart’s) customer funnel through a trade-down effect, and the company’s geographic exposure to smaller population centers insulates it from industry competition.”

Regarding credit, loss rates are expected to rise to 40% of net finance receivables, compared to 33.4% in the first quarter. The analysts attributed this to “higher frequency and severity. As a result, our provision expense estimate of $100 million is up 20% (year-over-year). Taken together, this results in total expenses of $360 million, up 4% (year-over-year).”

Gross profit margin is expected to be 35.7% in the second quarter of fiscal 2024, up 3.62 percentage points from the same period last year and up 1.15 percentage points from the first quarter of fiscal 2024.

“Top-line comps remain tough as near-term growth is expected to be primarily driven by unit volume growth with less of a tailwind from (average selling price) increases than occurred in (fiscal year 2023),” the analysts said. “(Car-Mart’s) receivables portfolio continues to grow which bolsters interest income but is counteracted by a higher provision.”

Jefferies maintained a hold rating on Car-Mart shares and a 12-month target price of $95.

Shares of Car-Mart (NASDAQ: CRMT) closed Tuesday (Nov. 28) at $77.31, up 53 cents or 0.69%. In the past 52 weeks, the stock has ranged between $62.05 and $127.96.

U.S. MARKET TRENDS
The average new vehicle loan was flat at about $40,657 in the second quarter from the same period last year. Over the same period, the average used vehicle loan fell by 6.1% to about $26,863. The average monthly payment for new vehicle loans rose from $672 to $729. The average monthly payment for used vehicle loans increased from $519 to $528. The increase was attributed to rising interest rates.

“This upward pressure comes with two factors worth monitoring: lower unit volumes tied to unaffordability and the impact on credit risk over the longer term from higher monthly debt servicing,” the analysts said. “Inflation and tightening credit conditions will exacerbate this risk as higher non-discretionary costs crowd out some borrowers’ ability to service debt while lower access to capital impacts liquidity overall.”

In the second quarter, used cars comprised 59.3% of financed vehicles, down from 63% in the same period last year. Meanwhile, leases rose to 21.3% of new financing from 19.9%.

Term lengths for used vehicle loans declined across most credit segments, except for deep subprime. Car-Mart customers largely comprise this credit segment. The term lengths rose in the segment to offset higher rates, the analysts said.

The average loan rate for new vehicles rose by 2.03 percentage points to 6.63%. The average loan rate for used vehicles increased by 2.54 percentage points to 11.38%.

“These increases are solely reflective of the overall interest rate environment, and we anticipate a leveling off of rates in the near term,” the analysts said. “We highlight potential affordability concerns within subprime and deep subprime segments, which have been resilient to rate increases until recently.”

The Manheim Used Vehicle Value Index declined by 5.3% in the first half of November from the same month in 2022. The index, which tracks used vehicle wholesale prices, fell by 1.6% from October.

According to Manheim, wholesale vehicle supply was 27 days as of Nov. 15. It’s down one day from last year and flat from the end of October. Wholesale supply is normally not as tight this time of year.