America’s Car-Mart, Inc. (NASDAQ:CRMT) Q1 2024 Earnings Call Transcript

America’s Car-Mart, Inc. (NASDAQ:CRMT) Q1 2024 Earnings Call Transcript September 5, 2023

America’s Car-Mart, Inc. misses on earnings expectations. Reported EPS is $0.63 EPS, expectations were $0.98.

Operator: Good morning, everyone. Thank you for holding, and welcome to America’s Car-Mart’s First Quarter Fiscal 2024 Conference Call. Before we begin today’s call is being recorded and will be available for replay for the next 12 months. During today’s call, management may make certain statements that are considered forward-looking, which inherently involve risks and uncertainties that could cause actual results to differ materially from management’s present view. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements.

Photo by Jan Kopřiva on Unsplash

For more information regarding forward-looking information, please see Part 1 of the company’s annual report on Form 10-K for the fiscal year ended April 30, 2023, and its current and currently — quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. Please see the company’s website for the earnings release for the first quarter of fiscal 2024, along with the second news release about a leadership transition. Participating on the call this morning are Jeff Williams, CEO; Doug Campbell, President; and Vickie Judy, CFO. I will now turn the call over to Jeff Williams, CEO. You may begin.

Jeff Williams: Okay. Well, thank you for joining us on the call this morning, and thank you for your interest in America’s Car-Mart. I’m pleased to report that we delivered strong revenue growth for the quarter. We had solid improvements in many areas of our business. Near-term credit results are a challenge, and we’ll discuss that in more detail in just a few minutes. Before we get into the details, I’m excited to cover our other news today that President, Doug Campbell, will succeed me as CEO effective October 1. Over the last year in his role as President, Doug has more than demonstrated his readiness for the new role. In my role as CEO and a board member, there are many responsibilities, but succession planning has been at the very top of the list for me, identifying a candidate with a strong cultural fit, the skill set to capitalize on opportunities and navigate the challenges ahead is why we first engaged with Doug almost two years ago now.

Doug’s appreciation of the company’s culture, strong industry knowledge and being a change agent is why he’s the perfect fit to lead us to the next level. Our transition plan will allow for a smooth handoff and I’ll be here to fully support Doug as we move forward. So congratulations, and thank you, Doug. I’ll now turn it over to Vickie and Doug to review the quarter results, update you on the status of initiatives and provide an outlook on our business. Doug?

Doug Campbell: Thanks, Jeff. I want to thank Jeff for all that he’s done for the company over his 18 years of service and in particular, the last 6 years as CEO. We have continued to source inventory and grow our business despite the industry being very constrained and volatile over the last couple of years. While competitors are exiting the business unable to manage capital constraints, we have been investing in our business. It’s in stark contrast with how others are managing through the environment and a testament to Jeff’s both leadership and vision for the company in what has been one of the most challenging environments in the history of our industry. I owe Jeff a debt of gratitude for the time he has spent with me over the last year, and during that time, we’ve cultivated a fantastic working relationship that will serve us in facilitating the transition ahead.

I’m equally appreciative to our Chair and our Board members who have been investing in my development and their feedback and guidance has been valuable. On a personal note, I’m deeply humbled and thankful for the opportunity. As I look forward, I’m more enthusiastic about our future here at America’s Car-Mart than it was a year ago. We’re focused on the long-term health and success of our business and are demonstrating our ability to operate in any environment. Before we transition over to the quarterly results, I’d like to thank our associates who worked tirelessly to deliver improvements in sales volume, gross margin, procurement efforts, wholesale performance and reductions in repair spend. Their relentless pursuit to both put and keep our customers on the road continues to be a winning combination.

Let’s start with sales performance. Our sales performance was strong, generating 15,912 units sold, which was up 2.4% over the prior year’s quarter. Same-store sales base is up 8.2%. That had a nice impact on inventory turns as those moved up from 5.9 to 7.2 turns. Growth in online credit applications was up 19% for the quarter, which was mentioned in the press release. That accounts for about 70% of all of our applications. Overall, application volume was up 8.1% when including the contract that we see in our dealerships. This is especially impressive when you consider that we’ve now begun to augment our advertising spend because of the power of LOS and its ability to drive online traffic. The LOS continues to be the primary driver for our sales growth despite what is a down cycle for many with the remainder of the industry down in sales year-over-year during the same period.

Credit availability continues to be an issue for the industry and is tighter than previous year when looking at COX Automotive dealer track credit availability index. It has shown some mild improvement in the last month or two, but it’s still worse when comparing it to pre-pandemic periods. This is a benefit for us as consumers now look to us for access to credit. When I think about average selling prices during the quarter, they were up by 4.1% year-over-year. About half of that was related to the price of the vehicle. The other half was related to the ancillary products that we sell. On the last call, I discussed that the cars we were purchasing during the spring market were up about 3%, so there should be no surprise here. However, we also mentioned that the cars that we are buying are newer and have lower mileage.

This ultimately makes it eligible for longer warranties, which generates more revenue in the selling prices. As a reminder, this is now even more pronounced when you consider the price increase that we made to our service contracts in December of last year. The industry saw wholesale pricing decline sharply in May and June, while prices in July decreased at a more normalized rate. During the first quarter, our procurement teams lowered purchase prices sequentially throughout the quarter, contributing to a 3% reduction in prices from where we started. August wholesale pricing is showing price increases, which is at normal this time of year. It could be related to the sales strength we’re seeing in the overall marketplace in August or low inventory days supply on the ground.

And I think some speculation of what will happen between negotiations with the UA team and the Big 3 in Detroit. We’re keeping a close eye on that and what’s transpiring and working to mitigate any effects and some of its effects there. Gross margin came in at 34.6%, which was up 20 basis points compared to last year and up 120 basis points when I look at it sequentially versus the fourth quarter. We went into a fair bit of detail in the press release regarding gross margin and articulated what our plan was on the last call. So I don’t want to be too redundant. But to put it simply, we’re executing at an elevated level on the plan that we had laid out. We are now — we are buying newer and lower mileage assets and those are trickling through our ecosystem.

We’re improving the performance of our operations teams as it relates to vehicle repairs and we continue to scale our reconditioning initiative, which has a target savings of $300 to $500 per unit. We’re seeing progress in all three areas, which isn’t surprising, but I guess I’m really encouraged at the rate at which we’re seeing in some of this benefit. We had estimated that we could recover 260 basis points of gross margin to achieve a 36% target that we alluded to on the last call. However, there are other opportunities that we’re now exploring. I’ll give you an example. Transportation would be one of these. Last year, we changed the technology stack that we use to move vehicles throughout our ecosystem by optimizing loads and routes. We began to roll this out in the fourth quarter, but Q1 is the first full quarter we’re seeing the benefit.

It represented an improvement of 20 basis points in gross margin when compared to the first quarter of last year. And ultimately, we’re now saving about 15% on the way we move our vehicles. There are other opportunities with ancillary products, wholesale and repairs that we’re looking at to drive even further improvements beyond what was initially indicated. Some of these opportunities can be realized during this fiscal year. Others will be more long term in nature. I’ll now turn it over to Vickie, who will cover our financial results.

Vickie Judy: Good morning, and thank you, Doug. For the current quarter, our net charge-offs as a percentage of average finance receivables were 5.8%. That’s compared to 5.1% for the first quarter of ’23 and 6.3% sequentially. It is above our five-year average of 5% and our 10-year average of 5.6% for first quarters. Both of these include the low credit loss pandemic period. For some comparisons to pandemic, our first quarter losses for fiscal year ’18 and ’19 were 6.1%. A little over half of the increase in losses contributed compared to the first quarter of fiscal ’23 was due to the higher severity of losses and the remainder being an increased frequency in the losses. Our recovery values were down from historically high levels in the prior year quarter of 32% and held flat sequentially at approximately 27%.

As of July 31, the allowance for loan losses was 23.91% of finance receivables, net of deferred revenue. And as discussed in the press release, our provision exceeded actual charge-offs by $14.8 million. We have over $125 million of deferred revenue on the balance sheet. And in addition, we also collected an additional $12 million in interest income, an increase of 27.3% when compared to Q1 of fiscal ’23. We also mentioned in the press release the benefit of the LOS and attracting additional customers. It’s also going to be instrumental in helping us improve deal structures and ultimately, the success rate of our customers once it is fully implemented across all lots. Our customer scores during the quarter remained consistent with the prior year.

On the delinquency side, our accounts plus past due was at 4.4% compared to 3.6% in the prior year quarter. The month ending on a Monday versus a Sunday in the prior year contributed to part of this as well as the continuing negative impact of the inflationary environment on our customers. Total collections were up 12% to $166 million and total collections per active customer per month were $535 compared to $516 in the prior year quarter. We continue to work with our customers on payment options and modifications in an effort to keep them in the vehicle and successful on their contract. The average originating contract term for the quarter was 44.7 months compared to 42.8 for the prior year quarter and up slightly from 43.5 months sequentially.

We added 1.9 months to the originating contract term compared to the prior year first quarter to assist our customers with an affordable payment. Our weighted average contract term for the entire portfolio, including modifications, was 46.9 months compared to 44 for the prior year quarter. The weighted average age of the portfolio increased to approximately 10.4 months. The percentage of the portfolio held by the highest credit quality customers continues to improve compared to the prior year. On the SG&A side, we’ve been focused on identifying efficiencies in the business across the board. And as mentioned in the release, we had a savings with our SG&A spend of over $600,000 from the fourth quarter, excluding the stock-based compensation. A large percentage of the savings was in advertising.

We continue to shift more of our advertising dollars to digital spend, which is more efficient and also help supplement our LOS efforts. Our customer count increased by 8.1% over the prior year to almost 105,000 customers. Our SG&A spend per average customer improved over the prior year first quarter and over the sequential quarter. Our investments are being made to better serve this growing base while improving the efficiencies as we move forward. And although we continually evaluate our return on investment and allocation of capital, it becomes even more important in this environment of increasing funding costs. With that in mind, we did close two underperformed dealerships during the quarter to better allocate our available capital. We’ll continue to review and monitor capital invested in each dealership and other investments to maximize returns.

At quarter end, we had $6.3 million in unrestricted cash and approximately $159 million in additional availability under our revolving credit facilities based on our current borrowing base of receivables and inventory. Our total securitized non-recourse notes payable was $711.8 million, with $86 million in restricted cash related to those notes. We closed on our third securitization in early July with net proceeds of $356 million and a coupon of 8.8%. And this paid off our revolving line of credit. Our total debt, net of cash to finance receivables ratio is at 42.9% and up from 41.5% at April 30. Interest expense increased $6.9 million with approximately 60% of that related to the increased rates over the prior year and the remainder a result of the increased borrowings.

I’ll now let Jeff to close this out.

Jeff Williams: Okay. Well, thank you, Vickie. The demand for our offering will continue to increase. Our model is the very best way to serve our high-touch customer base and the unique challenges that require a balance between face-to-face decentralized decisioning and leveraging scale where it makes sense. We’re striking just the right balance, and that’s more apparent as we continue to pick up market share. Current demand exceeds what we can supply. We believe that affordability will improve over time as basic transportation must be available for average consumers. Currently, many customers are sitting out and will flow back into the market over time. In many respects, our customers are always in recession, which makes the current environment ideal as we focus on affordability and delivering outstanding service to keep our customers on the road.

Foundational investments are nearing completion and will be leveraged, allowing us to become a more efficient data-driven company. We’ve not yet seen the benefit that will come. We’re on track to sell between 40 and 50 retail units per dealership per month in the next few years and eventually serve 1,000 customers per dealership. We believe credit results will improve, especially as we look at the opportunities with the LOS, increasing car quality and execution levels. We believe gross profit percentages will improve and will leverage SG&A as we move forward. And as discussed in the press release, we’re in a unique period in the industry, and we have significant opportunities in the acquisitions areas. And we’re talking to several strong operators with highly accretive opportunities, very excited about that.

We have great days ahead and Doug is ready to lead our team forward. Thank you to all of our passionate associates who have signed on to our vision to be the best and dreams big about what we could be while taking care of our customers one at a time. Thank you, and we’ll now open it up for questions. Operator?

See also Wall Street Analysts See Upside Potential for 10 Stocks with Rising Price Targets and 10 Countries That Produce the Best Quality Leather in the World.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from John Murphy from Bank of America. Your line is now open.

John Murphy : Good morning, everybody. Congrats to Jeff and Doug on the next legs of your careers here. I guess just a first question. When you think about the extension in contract terms to help with the monthly affordability equation, I’m just curious if you think that ever reverses? Or is this something that is now structurally in place and that we’ll continue to see lengthening? Or has there been a period of time Car-Mart’s history or over time where contract terms have actually shortened once they’ve been entered over time?

Jeff Williams : Yeah. We do see an opportunity in the future to reel back in and decrease terms as we go forward. Our customers’ wages continue to go up. And I think the last few months, few quarters, we’ve seen real wage increases for our consumers. So we do feel like eventually, we can move that term in the other direction. But that’s going to be based to a large extent on what happens with car prices and wages as we go forward and other inflationary pressures. But we would certainly like to really in term, and we do think there’s a very realistic and real possibility of us moving that direction, especially as we look at the LOS and all the different features and functions and benefits we’re going to get when that tool gets fully rolled in.

John Murphy : That’s helpful. And then just a follow-up on some of the comments that were made in the press release about the changes in purchase and disposition of vehicles. And I’m just wondering if you could sort of expand on what changes have actually occurred? And is it something where we’re just looking at slightly newer vehicles that are being put into inventory that have lower recon costs, and that’s the efficiencies that are gained and just what’s actually changing there that’s making that more efficient over time? Because I thought you’ve been pretty good at that historically, but it sounds like you see room for improvement.

Doug Campbell : Yeah. Thanks for the question. I would say historically, we have been very good at that. It was, I think, my very first call on — that I spoke about how we had used that as a lever to mitigate some of the costs. And we went to a little bit older car with a little bit higher mileage. And while it had its benefits upfront, there’s a repair cost associated with that downstream, which has been somewhat problematic. And so what we’re trying to do is get back to our historical norms. But beyond that, we’ve seen efficiency gains what I would call that are more closer to pre-pandemic levels. And so the car we used to sell might have been nine or 10 years old, we’re able to shave a year off that and improve the overall mileage by 10,000 to 12,000 miles, what I would call versus pre-pandemic.

So the car inherently is a lower mileage car, which should generate less in repairs and ultimately, I think it gives us a second chance at retailing the unit, should we have to go down the repossession route. It creates a second chance to — for the inventory to have another purpose in our business.

Jeff Williams : John, I would add in the last two or three years with the pandemic and the chip shortage and the used car issues and all the supply chain issues we had that there was some real disruption in our historical performance on product and procurement and is kind of working itself out at the same time that we’re making some good improvements internally.

John Murphy : All right. Thank you very much, guys. I’ll get back in the queue. That’s very interesting. Thank you.

Jeff Williams: Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from Kyle Joseph from Jefferies. Your line is now open.

Kyle Joseph : Hey, good morning, guys. Congrats Jeff. Let me know if you or everyone go play golf. Anyway, so kind of piggybacking on that last question in terms of gross profit margin. Obviously, used car prices have been elevated. It seemed like they may be coming back to earth for a while. But longer term, do you think the gross profit margin has changed systemically? Or do you think gradually over time and get back to where it was?

Doug Campbell : Yeah. Thanks, Kyle, for the question. I think there’s an opportunity to sort of have a middle ground there. But as we sort of called out earlier, maybe we set our expectations a little too low on that 36%, and we’re realizing in real time. There’s benefits beyond what we initially anticipated, especially when you consider items like transportation that maybe wasn’t sort of initially on the table, but we’re looking at any and all things in the business to sort of drive improvements there. One thing that I didn’t mention in the last answer was what we own those cars relative to the book value. And if I just go back, if I used, I call it, this time last year to the current time. So over the last 12 or 13 months, how we own those cars relative to the book has improved 8% or 9%.

So it’s a combination of an improvement of how these cars are starting life in our portfolio. There’s the improvement in a younger car with lower miles which all should have benefits downstream in terms of credit loss and fair market value retention, right? It sort of takes some of that risk and exposure off the table.

Kyle Joseph : Got it. Very helpful. And then, yeah, my follow-up would be the health of the underlying consumer. I know you mentioned the quarter ended on a different day and — but at the end of the day, the low-end consumer still employed inflation pressures are easing a bit? How would you gauge the health of your underlying consumer?

Vickie Judy : Yeah. I don’t think we’re seeing any large changes yet. Again, to your point, unemployment still very low. They’re working, wages are still good, hours worked are still good. But there are still a lot of inflationary pressures and just the adjustment to those inflationary pressures and the lack of stimulus that was there for a point in time. So credit, the use of credit has gone back up for our consumers. We’re seeing that kind of across the board. But again, our consumers are almost typically always in a recession, living paycheck to paycheck. So it’s really just an adjustment and getting them back used to the higher car payments and keeping them in their car.

Jeff Williams : But overall, the health of our consumer is increasing quarter-over-quarter. As we move forward, we believe that’s going to be a better situation for us as we go forward and as Vickie mentioned, unemployment rates are historically low and real wages are gaining some steam in the areas we serve and the customers we serve.

Vickie Judy : And I think a piece of that is, as Doug mentioned, the tightening in the lending environment, we are seeing a different cohort of consumers come down into our market. We continue to see that.

Kyle Joseph : Got it. Thanks Vickie, thanks, Doug, thanks Jeff.

Jeff Williams : Thanks, Kyle.

Operator: And thank you. [Operator Instructions]And our next question comes from John Rowan from Janney Montgomery Scott. Your line is now open.

John Rowan : Good morning. Congrats Jeff and Doug. I guess some other larger lenders have postulated that with the potential for our strike, and you guys mentioned this in your prepared remarks a little bit, that there would be an increase in dealer inventory, guys would take up floor plan loans. Obviously, fiscal 2023 midyear, you were very heavy in inventory. Are you planning on raising inventory levels at all if this strike looks like it’s going in one direction? And I’m not sure really — obviously, everything flows downstream. I don’t necessarily think there’s necessarily an immediate shortage in used cars, but just curious if you think there’ll be a ripple effect that could cause you to raise inventory levels?