America’s Car-Mart - Earnings Call - Q1 2020
August 16, 2019
Transcript
Speaker 0
Good morning, everyone. Thank you for holding, and welcome to America's Car Mart's First Quarter Fiscal twenty twenty Conference Call. The topic of this call will be the earnings and operating results for the company's first quarter for fiscal twenty twenty. Before we begin, I would like to remind everyone that this call is being recorded and it will be available for replay for the next thirty days. The dial in number and access information are included in last night's press release, which can be found on America's Car Mart's website at www.carmart.com.
As you all know, some of management's comments today may include forward looking statements, 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. For more information regarding forward looking information, please see Part one of the company's annual report on Form 10 ks for the fiscal year ended April 3039, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms eight ks and 10 Q. Participating on the call this morning are Jeff Williams, the company's President and Chief Executive Officer and Vicki Judy, Chief Financial Officer.
And now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.
Speaker 1
Okay. Well, thank you for joining us and thank you for your interest in America's Car Mart. We are pleased to report another good solid quarter and we're off to a great start for the fiscal year. Our top line was up almost 5% and we added 1,600 customers for the quarter. We are happy with the significant improvement in our credit results and what that says about our product and service and the value that we're adding to the lives of our customers.
We believe that taking care of people will drive operational success and long term value creation. We will continue to invest in training and development of our associates and at the same time educate consumers on the savings we provide in terms of the total cost of ownership with the goal to keep customers for life and move up market as their credit profiles improve over time. We will leverage the infrastructure we built and grow our top line and customer count. As we have said, even though we're 30 eight years old and have a great history, in many ways we're a startup company. Many important initiatives are just getting off the ground and we're excited about our place in the world.
Our team is putting everything we have into giving our customers a great experience and supporting our associates as they build their careers. As we've said, our model represents the best way to serve this high touch market and we aim to be the best company in the world at providing transportation solutions to credit challenged customers. I will now turn it over to Vicki to go over some numbers. Vicki?
Speaker 2
Good morning. For the quarter, overall revenues were $172,000,000 with same store revenues up 3.3%. This resulted from a 4.1% increase in sales and a 9.5% increase in interest income. Revenues from the dealerships in the over 10 years of age category was up 2%, stores in the five to ten year category was up 4%, and revenues for stores in the less than five years of age category was up about 34% to about $16,000,000 Most of the sales increase was a result of the increased selling price as sales volumes were basically flat. Our average selling price increased to $11,410 a 3.6% increase or $395 compared to the prior year quarter.
It was also an increase of $105 sequentially. This resulted from the continued high demand for vehicles in the used car market and our effort to provide a high quality vehicle for our customers. At quarter end, 20 or 14% of our dealerships were from zero to five years old, 40 or 28% were from five to 10 years old, with the remaining 85 being 10 years old or older. Our overall productivity was 29 units per lot per month, down from 29.8 compared to the prior year quarter. Our ten year plus lots produced 31.8 units sold per month per lot for the quarter compared to 32.8 for the prior year quarter.
Lots in the five to ten year category produced 26.6 compared to 26.8 for the prior year quarter. Lots less than five years of age had productivity of 21.7 compared to 22.1 for the first quarter of last year. We continue to believe we have potential to increase sales volumes and improve productivity with the ongoing investments being made in our inventory, our field sales efforts and the digital area. Our down payment percentage was up slightly to 6.5% compared to 6.1% for the prior year quarter. Collections as a percent of average finance receivables was up 40 basis points to 13.5% compared to 13.1% last year.
The average originating contract term was twenty nine point nine months compared to twenty nine point seven for the prior year quarter and up slightly from twenty nine point eight sequentially. Our weighted average contract term for the entire portfolio, including modifications, was thirty two point one months compared to thirty two point four for the prior July. The weighted average age of the portfolio was basically flat at approximately nine months. Interest income increased 9.5% to $1,900,000 compared to the prior year quarter, primarily due to the $41,500,000 increase in average finance receivables at an 8.1% increase. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4%, up from 16.3%.
Our gross profit margin dollars per retail unit sold increased by $104 2.2% to $4,886 compared to $4,782 in the prior year quarter. Our mix of retail units sold was consistent with the prior year. SG and A for the quarter was up $2,300,000 19.1% of sales compared to 18,300,000.0 for the prior year quarter. This increase was almost entirely related to salaries and benefits, including stock based compensation as we're making long term investments focused on recruiting and developing great associates and an infrastructure to support a growing customer base. We've added over 4,300 customers since this time last year, 1,600 since fiscal year end and our efficiency improved again this quarter based on the number of customers served per associate.
We're focused on efficiencies and cost control while continuing to invest for the long term to be able to grow and be prepared to capitalize on market opportunities. As an integrated sales and finance company, we would not have seen the improvements in our credit losses and net income without these investments. For the current quarter, net charge offs as a percentage of average finance receivables was 5.4%, down from 6.4% in the prior year first quarter. Both the frequency and severity of losses have improved compared to the prior year as a result of a higher quality vehicle, improved deal structures and improved collections practices. Our focus on customer experience and ensuring customer concerns are addressed and resolved in a timely manner have contributed to the reduced frequency of losses.
Improved collections 40 basis points better and higher recovery rates contributed to the decreased severity of losses. Recovery rates for the quarter were approximately 27% compared to 28% last quarter and 25% in the prior year quarter. We're very pleased with this continued improvement in credit results and the fact that we have more customers being successful and staying in their vehicles. As a result of these continued improvements in our net charge offs and the quality of our portfolio, we reduced the allowance for credit losses from 25% to 24.5%, resulting in a $2,600,000 decrease in the allowance for credit losses as of July 31. This was a $2,000,000 after tax benefit in net income or $0.29 per diluted share.
Excluding this adjustment, the provision for credit losses on the income statement would have been 22.7% of sales for the current quarter compared to 26.1% for the prior year quarter. The effective income tax rate was 21.8% for the 2020 compared to 17.1% for the prior year quarter. Income tax expense did include an additional income tax benefit of $276,000 and $943,000 related to share based compensation for the current quarter and the prior year quarter respectively. We continue to expect our base effective tax rate to be approximately 24 going forward prior to any excess tax benefits from stock option exercises. At quarter end, our total debt was approximately $159,000,000 We had over $56,000,000 in additional availability under our credit facilities and our current debt to equity is 58.1% and our debt to finance receivables ratio is 28.3%.
During the quarter, we repurchased 55,507 shares of our company for $4,700,000 at an average of $84.94 per share. Since 2010, we've repurchased approximately 53% of the company for $229,000,000 at an average price of approximately $37 per share. We continue to have strong cash flows. For the quarter, we added $17,800,000 in finance receivables, repurchased $4,700,000 of our common stock, funded $1,000,000 in net CapEx and increased inventory by $7,200,000 a total of $30,700,000 with only $5,800,000 increase in debt. Thank you.
And now I'll turn it back to Jeff.
Speaker 1
Okay. Well, thank you, Vicki. As mentioned in the press release, we did open two new dealerships during the quarter, one in Bryant, Arkansas and one in Conway, Arkansas. These dealerships have gotten off to a good start and we expect great things from these locations as well as the other new lots opened in the last year. We will add additional locations in the future at a rate that matches our ability to support customers and associates at the highest levels.
Our focus over the near term will continue to be to leverage our top performing general managers as we have a large number that can serve 1,000 customers or more in their existing markets. These proven leaders are executing at very high levels and they deserve our full support and attention as they pick up market share and help us build our future leaders. As a company with great customer experience as our guide, we are transitioning into being more aggressive in keeping customers for life and making the necessary investments with inventory, facilities and associates to make that happen. Once again, we built an infrastructure that can support a significantly higher number of customers and we believe we have an obligation to grow as communities are better when Car Mart is there. We will now open it up for questions.
Operator?
Speaker 0
At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward looking statements apply both to participants' prepared remarks and to anything that may come up during the Q and A. You. Our first question comes from John Murphy with Bank of America. You may proceed with your question.
Speaker 3
Good morning, guys. This is Yarden Amsellem on for John. Could you share with us what you're seeing in terms of credit availability in the subprime space as well as the competitive environment there? And I guess relatedly, how will lower interest rate impact this dynamic?
Speaker 1
Well, we can continue to see healthy competition out there. There's still a lot of money available for subprime and deep subprime. So, is competitive. We do believe that our offering and the pricing of our offering is very attractive to consumers when you look at the total cost of ownership. And our job is to educate those consumers on the value that we have on our offering compared to others.
But it is competitive. The market certainly is flushed with cash and we're trying to make our offering better, that customer experience better, and to educate those consumers about the benefit and the cost savings of dealing with the Car Mart. And we do have a lot of room we believe to be more aggressive with our repeat customers and the customers we know and keeping those customers in the family. But the competitive market is it's pretty intense.
Speaker 3
Okay. Thank you. And I guess relatedly, are you seeing any change in the credit health of your consumer? Obviously, your credit metrics improved materially in recent quarters, but accounts over a thirty day past due ticked up a little bit. What do you think was driving that?
Speaker 1
Well, was such a slight we don't look at that a big deal, a slight increase in 30 plus. I'd say overall the health of our customers is pretty strong. The wages are up, the hours worked are up. We're attracting more repeat customers with the offering and we believe the overall portfolio is healthier today than it was a year ago.
Speaker 3
Okay, thank you.
Speaker 2
I'll just add to that 30 plus and some of those they're pretty sensitive to the day of the month or the day of the week that the month closes on. So, you know, unless we're seeing something out of the ordinary, we're not too concerned about where that's at right now.
Speaker 3
Thank you. Thank you for the color. I guess my last question, can you maybe talk more broadly on your capital allocation strategy, how you're prioritizing share buybacks versus investment in managers, store openings, paying down debt and so on?
Speaker 2
Well, our first order of business is to always make investments for the business first prior to buybacks. And then when we have excess cash, then we invest in those buybacks opportunistically. But certainly, our first order of business is to take care of our associates so that they can provide that service that we're looking for, for our customers. And that's where our first priority is going to be.
Speaker 1
And we have a number of, as mentioned, a number of general managers that are very talented and running good businesses. And so capital allocations to those folks is a top priority for us as we try to build market share and improve and increase our already impressive repeat business percentages.
Speaker 3
Okay. Thank you. Thank you very much. That's it from my end.
Speaker 1
Thank you.
Speaker 0
Thank you. And our next question comes from Hugh Miller with Buckingham. You may proceed with your question.
Speaker 4
Hi, thanks for taking my questions. I guess one of which as we think about the improvement in collections that you guys have enjoyed, how much would you say is kind of driven by internal efficiency enhancements that you've been able to deliver versus kind of just benefits from a higher quality car?
Speaker 1
We do believe that most of the improvements we're seeing is from internal improvements. We have much better visibility on delinquent accounts. We are getting resolution with delinquent accounts much quicker than we were before. We're seeing productivity at the field level that we didn't have. Visibility is better.
And we have a great team in place corporately to assist the field with collections efforts and training and hiring and personnel matters involved with those account reps in the field. So, we think the primary reason for lower credit losses is the basic improvements with blocking and tackling and running the play in the field. But certainly, we do also believe we're putting a better car out there, more mechanically sound car, customer expectations are higher, especially as you try to attract a more creditworthy customer, you've got to put a good product out there. So that certainly is a piece of the equation too.
Speaker 4
That's helpful. Thank you. And then I guess, as you mentioned the initiative to kind of maintain the customer base, create customers for life, move up the credit spectrum with them. How should we think about that and the influence over time on kind of the gross margin and also the other income revenue line item, as you kind of progress with that customer base?
Speaker 1
Well, that's a good question. Over time, over the years, customers good customers sometimes have graduated beyond Car Mart and moved on to a special finance, maybe at new car dealerships or independent dealers. And we believe that when we look at pricing above us and what a customer is paying above us, that there's quite a bit of room for us to move up with the quality of car, the age and mileage of the car and keep some of those customers that we know and have known and are good credit risks by offering a better product, maybe a little longer term with a lower payment. The car quality would certainly support that. So we're looking at being more aggressive with inventory and with underwriting and marketing to customers we already know as we see what's going on above us.
We think we've got some competitive advantages for markets above us a little bit, would mean more inventory, carrying more inventory, the mix and quality of inventory being a little higher and certainly the sales prices over time maybe continuing to drift up, which is a good thing.
Speaker 4
Got it. That's helpful color there. And then just as we think about the unit volumes and kind of some of the headwinds that we've seen more recently there, can you just talk to us a little bit about kind of what's driving that? I know in the past, you've mentioned kind of inventory mix and having the right mix to sell is important. But are you seeing any intensification of competition?
Or has there been any benefit that you've noticed to this point about some of the website enhancements you've made? Just some more color on that and how we should think about kind of unit volumes on a go forward basis would be great.
Speaker 1
Well, are again, it's a little bit of a transition. Are certainly improving the quality of our inventory, quantity and the quality to be more competitive. Really focusing in on repeat customers and customers we already know and it is competitive. There's a lot of money and we've got to educate our consumers about the quality of our car, the value of the service. So we're in a little bit of a transition period with inventory educating the consumers.
The digital side is really is very new to us. The online credit application, the pictures of inventory online, the online marketing efforts, we're new in that side of things within the last quarter or two. And we're very optimistic that we're going to see some nice movements in all those areas in the right direction with increased volumes and we feel like the market is there for us. The value proposition we bring is fantastic And but we're in a little bit of a transition period. But in the meantime, still selling plenty of cars and credit losses are fantastic.
So it's really in a pretty good spot.
Speaker 4
Great color there. I appreciate that. And then last for me, the tax rate came in a little lower than what we're looking for. Any guidance you could provide about how we should think about the tax rate on a go forward basis would be great. Thank you.
Speaker 2
Sure. So the only difference really is the discrete item of the stock based compensation. And when exercises are done, we always get a good benefit from those. We do still continue to have some options that will be expiring over the next few quarters, but we don't know exactly when those get exercised. Otherwise, we should be pretty close or just under that 24% tax rate excluding those discrete items.
Speaker 4
Got it. Thank you very much. Thank you.
Speaker 0
Thank you. Our next question comes from Kyle Joseph with Jefferies. You may proceed with your question.
Speaker 5
Hey, good morning guys. Congratulations on another good quarter and thanks for taking my questions. First, sorry, one more on credit, if you don't mind, talked about better vehicles and better collections. Anything on the underwriting front or any changes in terms of approval rates there?
Speaker 1
No. Traffic has been up based on the improvements with inventory and the efforts to improve our field sales efforts in the field. So traffic is actually up. The online efforts have improved online traffic obviously. And so we're seeing more customers at the dealerships and online and we're being a little more selective.
And that's a good thing for a finance company. We're trying to find always trying to find that right balance and make sure that we're cherry picking and getting the very best credit risks. And but the traffic has been solid both online and at the dealerships. And we are being a little more selective on the underwriting and we have some room to loosen up there, but we have room to really go after and be more aggressive with those higher rated customers.
Speaker 5
Got it. And then one follow-up for me, just given the week we've had. Can you just remind us how your business performs in economic cycles?
Speaker 1
Well, know only recent example is not that recent anymore is the great recession and the company's credit results were actually at all time lows at the tail end of the last recession. So by putting a good product out there for a fair price and supporting these customers, If credit was to constrict in the market significantly that would certainly be a positive for us. And as somebody that's providing good basic affordable transportation with the service to support these customers and things that happen in their lives. The last recession was actually very good for Car Mart.
Speaker 5
Got it. Thanks very much for answering my questions.
Speaker 1
Okay. Thank you.
Speaker 0
Thank you. Our next question comes from John Rowan with Janney. You may proceed with your question.
Speaker 6
Good morning.
Speaker 2
Good morning.
Speaker 6
I just want to drill down into severity and well, frequency and severity a little bit more. Obviously, you talked a lot about improving the car that you're providing to the consumer. How much of that decrease in loss frequency is a function of a better mechanical soundness of the cars as opposed to a change in underwriting?
Speaker 2
The majority of it is related to the cars. I mean, we continue to tweak our underwriting and obviously see our down payments and our upfront equity and a lot of that stuff is improving. But I would say the majority of it is related to the car and just to us getting in front of the customer a little sooner and making sure we're resolving any issues on a timely basis. You know, if you let these guys go too far, then they can't get back out of it and they can't catch up. So, think a lot of it is the car and again our internal processes.
Speaker 1
Yeah, but if you had to kind of break it out, we feel like the biggest factor in frequency is the good work our folks are doing in the field, the visibility we have on collections efforts, and the quality of the car fits in there too. But it's a combination of things.
Speaker 6
Okay, and then as far as severity goes, I don't know if you gave out the information on duration, but we've obviously seen over the past year or so, we've seen duration come down, we've seen down payment go up and the cash conversion cycle improve, which should theoretically, even frequency situation reduce severity. Is that can
Speaker 5
you
Speaker 6
give the duration figure and just speak to how much of that is driving the reduction in severity?
Speaker 2
Yes. So it's not huge. Our overall portfolio is at thirty two months. You know, it's 0.3 compared to last year, so not a big reduction in the term. We are keeping customers in their cars a little over a month longer, so that contributes to some reduced severity there.
Speaker 1
And the car is better.
Speaker 2
And the car is better. When we, you know, if we do have to repo it and wholesale it, we are getting more on our, for market values there as well.
Speaker 6
So has there been a big change in the number of cars that you're repo ing and scrapping as opposed to repo ing and taking back to auction?
Speaker 2
No. It's been really pretty consistent.
Speaker 6
Okay. All right. Thank you very much.
Speaker 1
Thank you.
Speaker 0
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Jeff Williams for any further remarks.
Speaker 1
Okay. Well, you again for listening to our call and your interest in America's Car Mart. As always, we'd like to thank our associates for all the great work going on out there to take care of our customers. We feel like we're in a great spot as a company. Very excited about our future.
We're all on the same page and pulling the same direction. I think we have an obligation to grow and serve more customers over time and that's where we're going. You guys have a great day. Thank you.
Speaker 3
Thank you.
Speaker 0
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.