Car-Mart Shifts Gears

At America’s Car-Mart, experienced salesmen need not apply.

That’s because the company’s primary focus is financing.

“We typically don’t hire people who have been in the car business,” said Hank Henderson, president of Bentonville-based Car-Mart. “We don’t want them to think it’s all about sales.”

With 62 used car lots and $118.6 million in annual revenue, Car-Mart has a niche customer base. The company sells cars to people who probably couldn’t get a bank loan to pay for a vehicle.

“That’s the biggest part of what we do — the financing,” Henderson said. “That’s our product. We market convenience for our customers. We’re strictly a buy-here/pay-here business. We finance what we sell. We provide credit. We’re also financing cars that the bank’s not going to finance.”

Whether it’s a automobile dealer or a finance company, Car-Mart has been doing something right. The company’s sales jumped by 19.2 percent in fiscal 2002, which ended April 30. Car-Mart sold 18,658 vehicles that year.

Stephens Inc. of Little Rock predicts that Car-Mart’s revenue will increase by 15.4 percent during the current fiscal year and another 16.2 percent in fiscal 2004 to $171.5 million.

For the six months ended Oct. 31, Car-Mart’s revenue increased by 19 percent to $74.4 million, and income jumped 55 percent to $6.5 million.

Car-Mart opened seven new lots so far this fiscal year and plans to open two more before the end of April. Car-Mart currently has about 500 employees. The 21-year-old company has been profitable every year of its existence.

And this is a company that once traded for a dead four-legged chicken.

Jewel of Crown

In 1981, Bill Fleeman, a homebuilder, founded Car-Mart Inc. in Rogers. Initially, he had about 20 vehicles on the lot. In 1986, with about 100 cars in stock, Fleeman moved the Rogers Car-Mart lot across Walnut Street from its original location, and the corporate office was located in the upstairs part of a new building there.

Fleeman, who was terminally ill with cancer, sold Car-Mart to Crown Group Inc. of Irving, Texas, in 1999 for $41 million. He died later that year. Llama Co. of Fayetteville, Alice Walton’s investment company, represented Car-Mart in the sale to Crown.

Crown Group, a holding company, sold its other businesses and in January 2002 changed its name to America’s Car-Mart Inc.

Founded in 1983 as a cable television business, Crown also developed a casino in Lake Charles, La., before selling it and becoming a buyout firm.

At the end of fiscal 2002, Crown Group owned 95 percent of Car-Mart; 70 percent of Smart Choice Automotive Group; 50 percent of Precision IBC Inc., a firm specializing in the sale and rental of intermediate bulk containers; 80 percent of Concorde Acceptance Corp., a prime and sub-prime mortgage lender; and a minority interest in some Internet and technology companies.

Car-Mart accounted for 31 percent of Crown’s revenue in fiscal 2002.

“We were the jewel of Crown,” Henderson said of Car-Mart.

With the name change, America’s Car-Mart became a public company, trading on the Nasdaq stock exchange under the symbol “CRMT.”

There were also some personnel changes. Edward R. McMurphy, president and CEO of Crown, was replaced by T.J. “Skip” Falgout as CEO and Henderson as president. Nan Smith became chairman of America’s Car-Mart in September.

Falgout and Mark Slusser, chief financial officer, continue to work in the Car-Mart office in Irving, Texas. They were both Crown employees before that company purchased Car-Mart.

Earlier this year, Car-Mart officially moved its corporate headquarters to Rogers, but the announcement was largely symbolic. The company still maintains offices in Irving, Texas, and Benton County, as it did before. Then in June, the local office was moved from Rogers to 1501 S.E. Walton Blvd. in Bentonville.

“The operational management has always been here,” Henderson said of the Benton County office, whether it was in Rogers or Bentonville.

Henderson, Smith and Chief Operating Officer Eddie Hight work in the Bentonville office. All three are long-term veterans of Car-Mart.

Car-Mart has dealerships in seven states: Arkansas, Texas, Oklahoma, Missouri, Kansas, Kentucky and Indiana. Henderson said the company likes to open new lots near existing Car-Mart dealerships. Wal-Mart Stores Inc. followed a similar strategy during its early growth spurt. Most of the new lots that Car-Mart opened this year were in Oklahoma and north Texas.

Ugly Duckling

Dennis Telzrow of Stephens Inc.’s Dallas office, the only analyst who follows Car-Mart, initiated coverage of the company in August with an “overweight” rating and 12-month target stock price of $19.

In mid-December, the stock was trading at about $15 per share. The past 52-week range was $5 to $17 per share.

Overweight means Telzrow thinks Car-Mart will outperform the industry sector.

Telzrow said the sector, which includes 30,688 car lots, is led by Ugly Duckling Corp., a private company based in Phoenix that operates 72 lots in metropolitan areas. (Formerly public, Ugly Duckling traded under the stock symbol UGLY.O on Nasdaq.)

Ugly Duckling isn’t a direct competitor to Car-Mart because Car-Mart operates primarily in cities with fewer than 50,000 people, Telzrow said. Also, the average Ugly Duckling car sells for more than $11,000. Telzrow said Car-Mart’s average vehicle sold for $6,100 last year with prices ranging from $2,500 to $8,500 including a service contract.

Ugly Duckling sold 47,000 vehicles in 2001, 152 percent more than Car-Mart sold last year.

Business Model

In his initial report, Telzrow praised Car-Mart’s track record of growth, proven business model, self-financing, market potential and sustainable high margins.

“The company’s operating margin is 15 percent, and the return on equity is 17 percent,” he wrote. “Return on capital is 11.2 percent. Earnings growth is forecasted at 17 percent.”

Telzrow said the buy-here/pay-here used car market varies from 2 million to 3.6 million cars annually. For the sector, same-store sales in the past three years have been in the range of 12 percent to 15 percent.

Telzrow said Car-Mart has a “very high” percentage of repeat customers, estimated at about 40 percent for “mature” lots and 10 percent at new lots. The company honors these customers by putting their names on plaques at the dealerships. Silver plaques are used for customers who have bought five cars from Car-Mart. The gold plaque signifies 10 cars, and platinum is used for 15.

It costs about $250,000 to open a new Car-Mart lot, Telzrow wrote, and new lots have only two employees initially.

Car-Mart vehicles are sold “as is,” although a four-month, 4,000-mile service contract is available. About 90 percent of the cars are sold with a service contract, Telzrow wrote.

The lots vary in size from 15 cars to about 100. The company’s largest lots are in Rogers, Fayetteville, Conway and Russellville. Henderson said the lots usually turn over an entire inventory once a month. Telzrow estimates the average Car-Mart lot brings in $2.2 million in revenue per year.

The average car loan note has a life of 22 months, and Car-Mart has a maximum loan of 24 months. About 40 percent of Car-Mart’s customers make payments weekly, and 45 percent make payments every other week.

“The company will cash payroll checks to facilitate the car payments,” Telzrow wrote. “At the time of sale, customers are shown a video, which goes over the transaction and their financial duties.”

The interest rate on accounts receivable averaged 9 percent. The rate is 19 percent for most lots, Henderson said. But with Arkansas’ low usury rate (5 percent above the federal discount rate), the 31 Car-Mart lots in this state are currently charging only 5.75 percent. Henderson said that doesn’t affect the price customers pay for the vehicles, though.

“That’s great for our Arkansas customers,” he said.

Customer Base

In his report, Telzrow said the average household income of Car-Mart’s customer is $20,000 to $25,000 per year. About 29 percent of U.S. households have incomes of less than $25,000 per year, he said.

“The customer base that they serve is really so credit impaired that [the customer] just wants to be financed. He just wants transportation,” Telzrow told the Business Journal.

As a result, Car-Mart doesn’t sell luxury cars, sports cars or sports utility vehicles.

“Operating in small communities allows for a more stable customer who is easier to locate and has established roots,” Telzrow wrote.

That means it’s easier to repossess a car if necessary, and Henderson said that is part of the business.

“We work really hard not to [repossess cars],” Henderson said. “It is continually a focus of ours to improve that part of our business. When it does occur, we think we’ve done something wrong.”

“Two regional account directors track delinquency rates daily,” Telzrow wrote in his report. “On average, the goal is to keep the delinquency level under 20 percent, and generally delinquencies are about 15 percent. A delinquency is measured from the date the payment is due.”

Comparison of charge-offs to origination of loans has ranged from 16.2 percent to 21.5 percent for Car-Mart, Telzrow said. The average was 18.8 percent.

Pythons and chickens

Henderson said most car salespeople view the sale as the end of the transaction. At Car-Mart, that’s just the beginning.

“We’re going to continue to see that customer face to face,” Henderson said.

It’s all about establishing a relationship with the customer.

Henderson said he wants Car-Mart’s customers to think of the company as “honest and straight up.”

“We will work through any problems our customers have,” he said.

“It’s been very dependable,” Tracy Hundley of Lowell said of the 1995 Oldsmobile Cutlass she bought from Car-Mart in 2001. “They’ve worked with me on my payments.”

Bill Miles of Farmington is so happy with the 1993 Ford F150 pickup truck he bought from Car-Mart in 2001 that he plans to buy another vehicle from the company as soon as he gets it paid off.

“One window don’t want to go back up,” he said. “That’s the only problem I’ve had. I can get it back up with my hand. … I pay every week. Payments are $70 per week.”

Part of that customer relationship begins with fun promotions. In April, Car-Mart plans to resume its “crazy trade-in days,” a contest where the company will “trade for anything of value.”

In the past, that has included cows, horses, ostriches, pigs, bird dogs, a llama and a python. The salesman and the customer who come up with the most unusual trade each win a trip to someplace like Branson, Hot Springs or Dallas. A few years ago, a man from Batesville won when he traded in a four-legged chicken. It was frozen, but that still counted. Car-Mart normally gives $100 for the quirky items the company can’t resell (like the chicken).

Usually, Car-Mart trades for items that can be sold to bring in a little extra money, like washers, dryers, television sets, furniture and computers.

The traded-in goods are often put in the lobby of the company’s dealerships and are usually purchased by customers who come in to make payments.

“Several hundred people come through the lobby weekly,” Henderson said.

When asked if there was a reason Car-Mart’s logo is similar to that of Wal-Mart, Henderson quipped, “No, unless they copied it off of us.”

Bentonville-based Wal-Mart, the world’s largest company in terms of revenue, was founded in 1962, 19 years before Car-Mart.

But Car-Mart doesn’t seem to be intimidated by the cross-town retailer.