America’s Car-Mart - Earnings Call - Q2 2019
November 16, 2018
Transcript
Speaker 0
Good morning, everyone. Thank you for holding, and welcome to the America's Car Mart Second Quarter twenty nineteen Conference Call. The topic of this call will be the earnings and operating results for the company's second quarter for fiscal twenty nineteen. Before we begin, I would like to remind everyone that this call is being recorded and 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 3038, 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
Thank you for joining us and thank you for your interest in America's Car Mart. We are pleased with our results for the quarter. We believe that our solid numbers are the direct result of our increased efforts to recruit, train and retain quality associates, especially at the general manager position and to our commitment to operational non negotiables for the key areas of our business. We believe that the competitive environment may be a little friendlier, but our focus on the basic blocking and tackling at the dealership level is the main reason for the results. We continue to make improvements with our presentation in terms of our facilities and our associates, as well as our inventory management processes, which has led to increased traffic levels and resulting sales volume increases.
This business starts and ends with putting our customers in a good car for a good price. We believe that service levels after the sale, which includes solid consistent collection efforts are improving and resulting in better credit results. And as always, we are a company focused on expense management, being frugal and thoughtful with our resources, while at the same time investing in our people. We must spend our money wisely as we grow. I'll now turn it over to Vicki to go over some numbers.
Vicki?
Speaker 2
Good morning. For the quarter, overall revenues were $167,000,000 with same store revenues up 11%. This resulted from a 12.3% increase in sales and an 11.1% increase in interest income. Revenues from stores in the 10 years of age category was up 10%, stores in the five to ten year category was up almost 13% to $39,000,000 and revenues for stores in the less than five years of age category was up 36% to about $22,000,000 We believe our focus on having quality inventory displayed well at our dealerships, along with increasing our digital initiatives is helping increase traffic at our dealerships. Our average selling price increased to $11,030 a 5.9% increase or $612 compared to the prior year quarter.
There's also an increase of $15 sequentially. This increase results primarily from the increase in overall vehicle purchase costs because of the high demand for the vehicles in the used car market and this in turn results in higher selling prices. Our goal is to keep the transaction affordable for our customer and to put our customers in the best vehicle for the money. At quarter end, 24 or 17% of our dealerships were from zero to five years old, 36 or 25% were from five to ten years old and the remaining 83 were 10 years old or older. Our overall productivity increased to 29.7 from 28.4 compared to the prior year second quarter or a 4.6% increase.
Our ten year plus lots produced 31.9 units sold per month per lot for the quarter compared to 30.4 for the prior year quarter. Our lots in the five to ten year category produced 28% compared to 26.2%, and the lots less than five years of age had productivity of 25.9% compared to 21.9% for the second quarter of last year. Our down payment percentage was basically flat compared to the prior year. However, collections as a percentage of average finance receivables was 13% compared to 12.2% last year. We continue to be pleased with the decrease in our average originating contract term, especially considering the six twelve dollars increase in the average sales price.
It was twenty nine point two months compared to twenty nine point four months for the prior year quarter and down from twenty nine point seven months for the 2019. Our weighted average contract term for the entire portfolio, including modifications, was thirty two point one months for the second quarter compared to thirty two point five for the prior year second quarter. The weighted average age of the portfolio was basically flat at nine months. Interest income was up $2,100,000 compared to the prior year quarter due to the $41,100,000 increase in average finance receivables that accounted for almost 80% of the increase and also due to our increase in the interest rate on our contracts to 16.5% from 15%, which began in May 2016. The weighted average interest rate for all finance receivables at the end of the quarter was 16.4%, up from 16.1% in October.
For the second quarter, our gross profit margin was 41.7% of sales, down from 42% for the prior year and up from 41.6% sequentially. The reduction in gross margin is a result of the higher average selling price as gross margin percentages are lower at a higher selling price. This was partially offset by lower payment protection plan claims and lower repair costs as we manage inventory better and improve the quality of the vehicle we purchased. For the quarter, SG and A as a percentage of sales was 17.9% compared to 18.2% for the prior year quarter. Overall SG and A dollars was up $2,500,000 from the prior year quarter.
We have added over 4,500 customers since this time last year and we're serving more customers per full time associate as we work to stay efficient with our operations. We will continue to invest in our people and infrastructure to provide the best possible customer service. For the quarter, net charge offs as a percentage of average finance receivables was 6.6%, down from 7.5% in the prior year second quarter. Both the frequency and the severity of losses were improved compared to the prior year quarter. Improved collections, which were up to 13% versus 12.2% for the prior year and higher recovery rates contributed to the decreased severity of losses.
Recovery rates for the quarter were approximately 25% to 26% compared to 24% last quarter and 22% in the prior year quarter. The effective income tax rate was 20% versus 30% in the prior year. This decrease is a result of tax reform, a reduction in our base effective rate from 37% to 24% and an excess income tax benefit from stock option exercises, dollars 543,000 in the current quarter versus $612,000 in the prior year quarter. We 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 $165,000,000 and we had over $35,000,000 in additional availability under our revolving credit facility.
Our current debt to equity ratio is 67.5% and our debt to finance receivables ratio is 30.8%. Our interest expense increased $657,000 this quarter compared to last year's quarter due to the increase in debt, which was about 60% of the increase and also due to the increased interest rate. During the quarter, we repurchased over 89,000 shares, 1.3% of our company, for $6,500,000 at an average of $72.44 per share. Since 2010, we have repurchased over 51% of our company for $212,000,000 at an average price of approximately $35 We continue to have strong cash flows. In the last twelve months, we've added $43,300,000 in receivables, repurchased $36,100,000 of common stock, funded $2,800,000 in net capital expenditures and increased inventory by $7,900,000 a total of $90,100,000 with only $6,800,000 increase in debt.
We're in a very good place to be able to continue to invest in our associates, grow the business and take advantage of market opportunities while continuing to purchase shares opportunistically. Jeff, I'll turn it back to you now.
Speaker 1
Okay. Thank you, Vicki. We opened three new dealerships during the quarter and we have three more in process. All of these dealerships will be managed by experienced proven general managers and we're excited about the potential. We currently have over 74,000 customers from 143 dealerships.
We know that when Car Mart opens a dealership in a new community, that community is better because we're there. We contribute by helping hardworking customers with their local transportation needs by providing quality vehicles and excellent service. We care. Our plans are to expand and positively contribute to communities by bringing more customers into the Car Mart family. Our limiting factor is finding enough qualified general managers because of our decentralized structure.
Our bench is getting better and we will continue to invest in our people and we plan to grow at a rate that matches our ability to support our customers at a very high level. As always and especially this time of year, I'd like to say thank you to our associates for their hard work and dedication to this effort. And thank you again for your interest in Car Mart. Now we'll open it up for questions. Operator?
Speaker 0
Thank you. 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 to both participants' prepared remarks and to anything that may come up during the Q and A. Our first and question comes from John Murphy with Bank of America. Your line is now open.
Speaker 3
Hey guys, good morning. This is Yarden Amsellem here on for John. So my first question is on the cost side. I mean, SG and A to gross was very strong this quarter. And is this purely a function of you getting better leverage on the acceleration in sales?
Or are there any specific actions that you've taken at the store level to improve performance there?
Speaker 2
Well, majority of it was the increase in sales. So there was just a little more leveraging there. We obviously are working very hard every day at being more efficient with what we're using the resources that we have as well. But the biggest part of it this quarter was the increase in revenues.
Speaker 3
So how should we think about SG and A to growth going forward? I mean, do you think this level is sustainable? Or could there be even more room for improvement there?
Speaker 2
I think it will be small. We always strive to leverage that SG and A, but we've built an infrastructure for more revenues and increased volumes. So that's really where we're going to get the biggest bang for our buck is to continue to increase those volumes.
Speaker 1
We do expect investments we're making today. We do expect those investments to be leveraged It's a little hard to know quarter by quarter, but over time, investments are expected to be leveraged through that SG and A line through higher volumes as we move forward.
Speaker 3
Okay, very helpful. Thank you. And then another question on your recent investments in the recruiting of and training of general managers. Could you maybe elaborate on these efforts and the results that you're seeing to Spire?
Speaker 1
Yes, we've really gone back and really revamped and established some really solid training plans for folks that come into our company into the future manager program. And then after that program they go into an assistant manager position. And then we continue some pretty intensive training and follow-up both on the job and in the classroom. And we feel like our future managers are going to come from that assistant manager position and we're combining a lot of good solid training for those assistant managers to try to build up that bench in that assistant manager position for those folks to eventually get the keys to their own dealership. So we've really formalized a lot of training.
We're investing a lot of resources into those areas and feel like over time we're going to have a good solid bench of folks that are going to run dealerships someday.
Speaker 3
Great. Thank you very much. I have one last question. Could you maybe share with us what you're seeing in terms of credit availability in the subprime space as well as some of the competitive environment there?
Speaker 1
Yes. I mean, we read the same headlines that everyone else does as far as a little less credit out there for the deep subprime consumer. But really in markets that we operate in, there's still plenty of competition on the lending side. We've not seen huge benefits from the credit side. We do feel like most of our improved results relate to us just doing a better job on the blocking and tackling, but I think that there probably has been some positive effect from the competitive environment.
It's just a little bit hard to quantify that.
Speaker 3
Okay. Thank you very much. That's it and congratulations on the quarter.
Speaker 4
Thank you.
Speaker 0
Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is now open.
Speaker 5
Hey, thanks. Good morning, guys. And yes, excellent quarter. Wanted to talk about a couple of points on the third quarter. So you had really good metrics across the board.
I'm kind of wondering where you think these metrics can go. So for example, the productivity units sold per store, what does an experienced store sell? And is that the sort of level we can we think you can get to? And then when we think about the net losses, your net losses continues to improve and has improved for several quarters now. Is there a certain level of losses that you're targeting where we think we should get to over the next couple of quarters?
Speaker 1
I'd say on productivity side, we're still under 30 sales per dealership per month. And if you go way back in history that number was you know in the mid-30s. And I would say that when you look at our dealerships that we have currently, our expectations would be that we have an opportunity to keep pushing those numbers up over time. So, we think we've got quite a bit of headroom to get more productive and to get better with the sales volumes and the customer counts in our existing dealership base. So, we're pretty optimistic over time that we can continue to show some productivity improvements.
As far as net charge offs, we have seen some good trends as of late. We're working hard to knock that down as far as we can. The environments a little different today than it was say in 2010. The terms are much longer, recovery rates are lower, interest rates are higher. So just mechanically, we're not sure if we can get back to 2010, 2011 type charge off numbers, but that would certainly be our goal and we're pushing hard to get there.
We may just be a little limited because of the business and the industry has changed quite a bit since those days.
Speaker 5
Okay, got it. That makes sense. Then also on the third
Speaker 2
Yep. I was just going to add on really on both of these, several of our general managers are still young. They're still inexperienced general managers. And as they gain experience, I think that helps both the productivity as well as the losses as they gain experience in setting up the deals at the front end and working with our customers. So I think, again, back to that training and the experience in those GMs will help both of those as well.
Speaker 5
Okay, very helpful. And then another one on the fiscal second quarter. Were there any hurricane or other weather related impacts this quarter that would affect the results? And then when we think about the year over year comparisons, were there any impacts last year's quarter or weather related issues?
Speaker 1
We had a few dealerships that were affected for a few days, but it wasn't anything that made a difference in either period.
Speaker 5
Okay, very helpful. And then the last one for me, you mentioned digital initiatives. Was wondering if you can expand on that and describe what are those initiatives? Thank you.
Speaker 2
We've just taken some of our advertising dollars and are looking more on the digital side, both with some of our website updates, looking more at increasing our Google reviews and putting customer testimonials and such on all of the social media channels. We're also working on an online credit application that will help the customers get started online and spend some time there before they come into the dealership. So those are some of the big items that we've worked on.
Speaker 1
Yes. And being part of these communities from a digital standpoint is very important. Our advertising is shifting more to testimonials. We've been in business thirty seven years and we do a lot of things to help these folks be successful. We really go above and beyond and we're going to do a better job going forward of really highlighting real customer testimonials for the benefit we add to these communities.
Speaker 5
Okay, great. Thanks very
Speaker 1
much. Thank
Speaker 2
you.
Speaker 0
Our next question comes from Kyle Joseph with Jefferies. Your line is now open.
Speaker 4
Good morning, guys. Thanks for taking my questions and congratulations on a great quarter. Just wanted to talk about your underlying consumer. Obviously, we've had tax changes, gas price fluctuations, we're seeing signs of wage growth. Just talk about the health of your underlying consumer as it relates to demand and credit performance.
Speaker 1
Yes. I think our consumer has certainly benefited from the lower tax rates and the pretty dynamic economy we're seeing right now. There's more jobs and higher wages and more hours worked and all that. So our consumer might finally be getting a little bit of a raise after ten years of not much increases there. So that's good to see that.
We feel like our consumer from a cash flow standpoint is in a better position today than they've been in a while and that's certainly affecting our demand too. And we're doing a better job with inventory and getting good cars out front ready to sell. So when you combine the consumer being a little stronger and our offering being a little better, then we expect both sales and credit results to look good going forward.
Speaker 4
Got it. And then on credit specifically, it's been great and way ahead of my expectations. Is that the combination of competition and the health of the consumer and a little bit the rise in used car prices or any of those being sort of disproportionately impactful?
Speaker 1
I would say the recovery rates on the repossessions that's clicked up a little bit, which certainly helps us. But more than anything, I think we're just doing a better job internally with that good blocking and tackling, just putting our boots on every day, punching the clock and running the business, running the play right from a credit and collection standpoint out in the dealerships.
Speaker 2
Some of it, Kyle, too on the frequency side would be just the better quality of the vehicle that we're putting our customers in. That makes a big difference in the credit loss rate as well.
Speaker 4
Got it. That makes sense. And then just on used car prices, obviously, we track the Manheim and J. D. Power and whatnot.
Are you guys seeing similar trends there? And you've been doing what appears to be a great job whereas used car prices appear to be helping your credit while you've been able to sort of sustain margins. But can you give us your outlook for used car prices given you're really more in the market than we are?
Speaker 1
Yes, I'd say, you know, we're looking for a nine to eleven year old car and it was nine to eleven years ago when the SAR went from 17 to 10 for a few years. So there's a lot of folks chasing a lower quantity of inventory out there, but that will eventually end. So we might see some pricing pressure. We may have to pay a little more than we'd like to pay for a while, but we do see some light at the end of the tunnel. But we're not having trouble finding good solid mechanically sound cars.
We are having to pay a little more than we'd like to pay, but we do see that leveling off a little bit. But going forward maybe sales price levels go up, maybe more in line with inflation like we've historically seen.
Speaker 4
Got it. Thanks very much for answering my questions.
Speaker 2
Thank you. Thank you.
Speaker 0
You. 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 closing remarks.
Speaker 1
Okay. Again, you for joining us this morning. Thanks for your interest in Car Mart and thanks to all of our associates out there that are working hard to make this company better. So thanks. Have a good day.
Speaker 0
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 great day.