America’s Car-Mart struggles to turn business around, share price down 60% in last year

The buy here, pay here car dealership model used by America’s Car-Mart for the past 35 years is struggling to meet expectations thanks to higher credit losses, sluggish growth and shrinking gross margins over the past year.

Bentonville-based America’s Car-Mart reported dismal fiscal year and fourth quarter earnings Monday (May 23) after the market close. While overall revenue increased 7.1% to $568 million in fiscal 2016, the number of cars sold was down fractionally 0.6% from the prior year. CEO Hank Henderson told analysts during the company’s earnings call on Tuesday (May 24) that it has put stricter underwriting guidelines in place during the recent fourth quarter which should result in more sustainable growth.

The company halted its aggressive expansion plans, and closed four smaller dealerships in the recent quarter. Henderson said there are a few other dealerships on a watch list for closure but all the dealerships have improvement plans in place to hopefully avoid that outcome. Car-Mart now has 143 dealerships with 65,000 automobile loans on its books with finance receivables of $334.793 million, up 3.28% from a year ago.

Wall Street was not happy with the Car-Mart performance and outlook as shares tumbled at the market opening Tuesday. Car-Mart shares (NASDAQ: CRMT) sunk to a new 52-week low of $19.49 at the opening. But by the early afternoon session shares had rebounded to $21.26, down 8.26% from the prior-day. Over the past 52 weeks shares have lost 60% of their value.

While company executives seem upbeat about some modest improvements in loan delinquencies in the recent quarter there is still ongoing concern about the competitive finance pressures in the marketplace.

One of the biggest issues facing the company is the shrinking gross margin which historically has been above 43%. In the last year the gross profit margin dipped to 38.7%, according to Car-Mart President Jeff Williams. He said getting gross margins back above 40% is a priority. He said expense control will be part of the solution as will the higher interest rate of 16.5% the company will implement effective May 31.

Over the past year the company’s average interest rate on its finance receivables was 14.9%. Williams said the company has been studying the rate increase as credit losses ticked up over the past few quarters. Williams said the company was hopeful the credit losses would come down, but given that they remain elevated the company decided to raise the interest rate to better support the overall business.

When asked by analysts if customers would balk at the higher rate, Williams said the increase amounts to roughly $10 per month on the average payments. He said lot managers did not believe it would be a concern by customers.

Car-Mart, unlike most car dealers, carries the financing for every car it sells and that brings an added level of compliance given that the company is on the hook if the buyer should default. The company saw its net charge-offs increase to 31.3% of sales over last year. That was up from 27.8% in the prior year. Net charge-offs relate the losses from repossessions.

Once Car-Mart has to repossess a car, it is sold in the wholesale market, which is also depressed. Any difference between the loan amount and the wholesale proceeds are a net charge-off.

Henderson said more new car dealers now offering special financing on later car models has shrunk the buyer pool and demand for the older, lower quality wholesale market. He said the competition Car-Mart is feeling from special financing arrangements at new car dealers is having a major impact on profits. For instance, Henderson said some of Car-Mart’s better customers have been lured away with special financing for new cars, trucks and SUVs with longer terms out to 60 months, which he says is not sustainable long term, as the car will likely need major repairs before it is paid off.

To make matters worse, Henderson said some of the lot managers at Car-Mart received loan payoffs from special finance lenders who were rolling the residual owed to Car-Mart into the new loan they were making to the former Car-Mart customer.

“That is something we do not do. It is not good for the customer,” he said during the call.

Williams said the average term on a Car-Mart loan is 29.7 months, up from 24 months the company tried to stick with in prior years. He said the higher price of cars, trucks and SUVs have caused the term to be extended to keep the payment affordable. He said more trucks and SUVs are being sold given the lower gasoline prices and they are typically more expensive than cars.

Henderson admitted on the call that perhaps the executives were a little too optimistic in past quarters that the competitive environment would subside. Analysts asked if there was a plan should that not be the case.

“If this is the new normal, we wouldn’t be satisfied with anything less than a 10% return on equity. We don’t expect credit losses to get back to 20%, but we are pushing hard to get there,” Williams said.

Henderson said other investments made by the company in recent months regarding changes at regional vice president level, improvements in repair expenses which has been trending higher, as well as integrating the GPS locating data into its own database should provide for a leaner operation.