America’s Car-Mart - Earnings Call - Q2 2020

Transcript

Speaker 0

Good morning, everyone. Thank you for holding, and welcome to America's Car Mart Second Quarter Fiscal twenty twenty Conference Call. The topic of this call will be the earning and operating results for the company's second quarter for fiscal twenty twenty. 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 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. The results were expected and provide further validation that the hard work of our associates focusing on the basics and taking care of customers gives our business model real sustainable power. The market we serve is large and fragmented and consumer demand for great service and peace of mind for local transportation needs is very high and we have an obligation to grow our customer count at a rate that's in line with our ability to serve at the highest operational levels.

The customer experience starts and ends with a vehicle and we pledge to do everything we can to keep our customers on the road with quality vehicles and great customer service after the sale. We will continue to educate consumers about the financial benefits of our offering in the market with our lower interest rates, shorter terms and our focus on putting valued customers in an equity position along with the peace of mind and knowing that we have a real sense of urgency from top to bottom to keep customers on the road. Our customers' overall quality of life is better when they're part of the Car Mart family. I'll now turn it over to Vicki to go over some numbers. Vicki?

Speaker 2

Good morning. As Jeff mentioned, we had a solid quarter with record revenues of $190,000,000 This resulted from a 14.6% increase in sales and an 8.7% increase in interest income. Same store revenues were up 12.2%. We had a great selection of quality vehicles and our associates did a great job of helping customers get into a vehicle to fit their needs. The investment that we've made in inventory an additional $8,800,000 since last October is contributing to higher sales volumes by attracting more potential customers including our repeat customers.

We saw solid increases across all ages of dealerships. Revenues from stores in the over 10 years of age category was up 13%, stores in the five to ten year category was 12% and revenues for stores in the less than five years of age category was about 43% to $21,000,000 Retail units sold increased by 8.7% and the average retail sales price increased by 5.1% to $11,589 compared to $11,030 last year. At quarter end, 20% or 14% of our dealerships were from zero to five years old, 39 or 27% were from five to 10 years old and the remaining 86 dealerships were ten years old or older. Our overall productivity was 31.6 units per lot per month, up 6.4% from 29.7. Our ten year plus lots produced 34.2 units sold per month per lot for the quarter compared to 31.9 for the prior year quarter.

Lots in the five ten year category produced 29.4 compared to 27.7 for the prior year. And the lots less than five years of age had productivity of 25.2 compared to 25.1 for the second quarter of last year. Our down payment percentage was up slightly to 6% compared to 5.8% for the prior year quarter. Collections as a percentage of average finance receivables was up 30 basis points to 13.3%. We did see some slight increases in term, primarily due to the increasing average selling price.

The average originating contract term was thirty point four months compared to twenty nine point two for the prior year quarter and up from twenty nine point nine months sequentially. But again, the average selling price was up $559 with a one point two month increase in term. Our weighted average contract term for the entire portfolio including modifications was thirty two point three months compared to thirty two point one for the prior year October. The weighted average age of the portfolio was basically flat at approximately nine months. Interest income increased 1,800,000 or 8.7% compared to the prior year quarter, primarily due to the $44,200,000 increase in average finance receivables and 8.3% increase.

The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4%, flat from the prior year quarter. The gross profit percentage for the second quarter was 40.5% compared to 41.7% for the prior year quarter, but basically flat compared to the prior two sequential quarters. This is primarily a result of the higher average selling price as our gross margin percentages are lower at a higher selling price. While we did sell a few more SUVs compared to the prior year, most of the increase relates to selling an overall higher cost vehicle as a result of our on quality inventory and the overall strength of the used car values in our market. Our gross profit margin dollars per unit sold increased by $116 or 2.4% to $4,935 compared to $4,819 per unit in the prior year.

SG and A for the quarter was up $2,100,000 or 16.9% of sales compared to 17.9% for the prior year quarter and at 57.4% of total revenues less cost of sales and the provision for credit losses compared to 60.5% for the prior year quarter. This three ten basis point improvement is important as a large part of our efforts have been focused on keeping good customers and driving down credit losses. So this measurement is important for our integrated sales and finance business. We believe the investments that we are making in our associates, systems and infrastructure are essential to continuing operational improvements. The increased SG and A spend was mostly related to salaries and benefits including stock based compensation as we are making long term investments focused on recruiting and developing great associates and an infrastructure to support a growing customer base.

We added over 4,500 customers since this time last year and 1,700 this quarter. We continue to stay focused on efficiencies and cost control, while continuing to invest for the long term. For the current quarter, our net charge offs as a percentage of average finance receivables was 6.1%, down from 6.6% in the prior year second quarter. We continued to see both improvement in both the frequency and severity of losses compared to the prior year as a result of the higher quality vehicle, improved deal structures and the consistent focus on our operational non negotiables related to collections practices. We will stay focused on these while ensuring that we provide great customer service after the sale to keep customers in their car and on the road.

The improved collections of 30 basis points better contributed to the decreased severity of the losses. Recovery rates for the quarter were slightly lower than the 2020, but approximately flat compared to the same quarter last year. The effective income tax rate was 22.7% for the second quarter compared to 20.1% for the prior year second quarter. Income tax expense does include an income tax benefit of 140,000 and $543,000 related to share based compensation for the current quarter and the prior year quarter respectively. It's about a $06 per share change.

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 approximately $177,000,000 We had over $63,000,000 in additional availability under our credit facilities. Our current debt to equity ratio is 63.6% and our debt to finance receivables is 30.1. We did repurchase 112,091 shares during the quarter for approximately $10,000,000 at an average cost of $89 per share. Since 2010, we've repurchased approximately 54% of our company for $239,000,000 at an average price of approximately $38 per share.

We continue to have strong cash flows. For the six months, we have added $43,800,000 in finance receivables, repurchased $14,700,000 of common stock, funded $1,700,000 in CapEx and increased inventory by $10,600,000 This is a total of $70,800,000 with only a $24,100,000 increase in debt. Thank you and I'll turn it back to Jeff.

Speaker 1

Okay. Well, you, Vicki. Our hard work and attention to detail is allowing us to grow in a healthy manner. We've opened two locations this year and we have new dealerships in process in Chattanooga, Tennessee and in Cabot, Arkansas. Additionally, as mentioned in the press release, we've begun work on our new dealership in Edmond, Oklahoma.

We have high expectations for new openings and we will continue to open new stores as we move forward. As we've said many times, we have significant market share opportunities from existing dealerships and we will continue to leverage these locations, our cost structure and the management talents that we already have in place. Most of our existing general managers have the potential to serve 1,000 customers or more from their current dealerships over time. It's a great time to be at America's Car Mart. We have such a great team and our associates are dedicated to helping customers succeed.

Thanks to our customers for coming to us for their transportation needs and for our and to our associates for the hard work and dedication of this effort. There is real purpose in our work and we're pushing hard to get better every day. 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 the participants' prepared remarks and to anything that may came up during the Q and A. Our first question is from John Murphy from Bank of America. Your line is now open.

Speaker 3

Good morning, guys. This is Yarden Amsalem on for John. First question on the cost side. SG and A to gross has been getting incrementally better in recent quarters and it was very strong in 2Q as well. Can you maybe talk a little more about the specific actions you're taking there?

And where do you see that number going to over time? Do you think about the mid to high 50s is kind of the limit? Or can it get even potentially better over time?

Speaker 1

Well, we certainly feel like the top line can continue to grow at a healthy rate. So that's going to help with that ratio. And then in addition to that, we do expect to continue to see some improvements on the credit loss line. We're working hard. We're running the play at a higher level.

And our operations team focused on collection is doing good work. So we would expect to continue to see some good improvements in that ratio.

Speaker 3

Thank you for that. And can you just remind us what percentage of your SG and A is fixed versus variable?

Speaker 1

Yes. Most all of our SG and A is going to be fixed. I think a large majority of our costs are salaries and benefit related, but almost all of our costs are fixed in nature. So incremental volumes are extremely important to us.

Speaker 3

Okay. Got it. Thank you. And then can you maybe give us some details on the sales cadence through the quarter? Was it kind of an even growth throughout?

Or were there any particular month that was stronger or weaker than other?

Speaker 1

No. It was a pretty solid quarter, pretty consistent between months.

Speaker 3

Okay. Thank you. That's all from my end.

Speaker 1

Thank you.

Speaker 0

Thank you. Our next question is from Hugh Miller from Buckingham. Your line is now open.

Speaker 4

Hi. Thanks for taking my questions. And just on the sales side following up on the prior question. As we think about kind of the change in unit volume growth over the past couple of quarters versus seeing a nice improvement or rebound this quarter, can you just give us a little bit more as to kind of what the bigger drivers of that are? Are you seeing benefits from the online credit app or the digital inventory?

I think you referenced kind of the quality of inventory and any success you're having just consumers on the total cost of ownership? If you could just provide a little bit more color on maybe are you seeing any of those being more drivers than others and your thoughts there?

Speaker 1

Yes. It's a combination of all the things you mentioned. It does start with inventory And we've made a good push to improve the quality of inventory and also increase the volumes of cars we have at our dealerships. So we're working hard to get titled on display units out front and that's attracting more traffic to our dealerships. We're also functioning at a higher level just from the field sales efforts that we have in place.

So and then the online effort is certainly adding some benefit too with our inventory online and online credit apps. All that's fairly new to us within the last six months, but we're seeing some nice improvements in those areas. And then just generally better customer service at the lot level. All that's adding up to more market share for us. We think we've got room to grow.

These communities really need what we do. And so we feel like everything we have in place and all the hard work we've done will allow us to continue to pick up some market share in our existing locations.

Speaker 4

Okay. That's helpful. And then maybe you've talked a bit about the procurement process and maybe working a bit more with some of your larger wholesalers to source higher quality inventory maybe kind of reduce some inventory costs and so on. If you could give us an update on where things stand with that and the potential to see an improvement in the coming quarters?

Speaker 1

Yes. We've made some good progress with procurement efforts. We are looking at leveraging our size more than we have in the past, sourcing from maybe a few less sources, but holding those sources more accountable, creating partnerships through the chain. And so we've got a lot of good things going on with the procurement side of the business. And it's relatively a new effort for us, but we're catching up in a hurry there and feel like we're going to have some good answers on the procurement side in terms of getting really good cars for good prices at the right times in the right places by partnering with our better wholesalers.

Speaker 4

Okay. That's helpful. And then one more for me. When we think about kind of the repossession process with a car consumer defaults, can you give us a sense how much are you typically going to an auction in order to kind of liquidate the asset versus maybe scrapping the car and going through that channel or something else?

Speaker 1

Well, almost all of our repos are going to be run through the auction. We don't do anything straight to salvage. Most of our repos are processed and sold at auction.

Speaker 4

Okay. Thank you.

Speaker 0

Thank you. Our next question is from John Rowan from Janney. Your line is now open.

Speaker 5

Good morning, guys.

Speaker 2

Good morning.

Speaker 1

Good morning.

Speaker 5

Just to follow-up on the last question. Most cars get repossessed and then sold at auction, but there's got to be a percent. I mean, always remember you talking about a good percent hitting or going for scrap value. Is there a rate of cars that don't hit minimums in the auction lane, so there's no bid that then wind up in a salvage situation?

Speaker 1

Yeah. That's going to be fairly minor. I think our average sales price with wholesales at this point is around $2,000 So there are a few in that average that are at the 200 or $300 $400 range, but I don't think that's a big piece of our puzzle.

Speaker 5

Okay. Well, because you've always talked about reduction in used car values as being a positive, right? You can put a better car on a lot get consumers in something that's probably more mechanically sound, which obviously is really the number one reason why people would you have to repossess a car if it stops running. So what we've seen obviously in the fall, a lot of the index are showing reduction in used car values. Can you just talk us through kind of how that impacts your recovery on the deals you have out now versus how that impacts the forward look on credit if you can give people a better car?

Speaker 1

Yes. I think the positives far outweigh the negatives. As you say, when prices are going down, it gives us a chance to put our customers in a better car for the same money. So it's a very good thing for our business. There is a you might say there might be a slight negative as far as short term recovery rates.

But even that we're selling a ten year old car with 100,000 plus miles on it. So the depreciation we get is not as significant as folks that operate at levels above us. So we consider deflation on used car prices to be a very good thing for our business.

Speaker 5

But that I think goes back to the scrap value, right? If there's an asymmetrical impact to your recovery because you're scrapping a certain number of cars, but you get because that goes for the price of the metal not necessarily the retail price of the car and you're getting a benefit your consumers are getting a benefit from having a better car that's more mechanically sound running better. That's where to me it seems like there would be an asymmetrical benefit to Car Mart having a weaker wholesale market. Does that sound about right?

Speaker 1

Yes. Yes. We hit the floor. We do hit that floor pretty quick.

Speaker 5

Okay. And then just to clarify the duration numbers that you gave Vicki, I think it was thirty two point three months total weighted portfolio term versus 32.1 last year. Is that correct?

Speaker 2

Yes, 32.3 this year, 32.1 last year.

Speaker 5

Okay. And then any comments on CECL, whether or not you're going to implement it, what you see happening to the allowance under a CECL scenario? And that's it for me. Thanks.

Speaker 2

Sure. The CECL scenario should not result in any significant change to our financials. We already provisioned for our entire portfolio through the term, especially with our term being a little shorter. So we're not expecting a financial impact. There will be some additional disclosures once we do adapt it.

Speaker 5

Okay. Thank you. Thank

Speaker 1

you.

Speaker 0

Thank you. Our next question is from Kyle Joseph from Jefferies. Your line is now open.

Speaker 6

Hey, good morning. Congratulations on a good quarter. Thanks for taking my questions. Most of them have been answered, but just a few follow ups. In terms of the same store sales acceleration in the quarter, I know you touched on an increase in inventory as well as some of the sales initiatives you were talking about.

But I think it'd be helpful if you could comment on the overall competitive environment as well.

Speaker 1

Yes. We the competitive environment has been pretty stable for quite a while now. We're not seeing any positives or negatives to speak of on the competitive front. And the improvements we're seeing internally is really efforts that we put in place within the company to carry more product with title, better product and improve our blocking and tackling with the sales efforts. So but the competitive environment is still there's still plenty of money out there chasing these consumers, but we feel like we're stepping up our game in a big way.

Speaker 6

Got it. And then one last one for me. Just in terms of credit, obviously, sounds like you guys are putting a better car out there. And just weighing macro factors the health of your underlying consumer as well as your accelerating growth and the fact that you've had improving credit for numerous quarters. Just can you give us an outlook from where we are and your thoughts on credit going forward?

Speaker 2

Well, I think that we've got a couple of factors here. One, the increasing selling price that we've been dealing with. So we may have to at some point make some term adjustments. But I think overall with the quality of the car we're putting out there and the service that we're talking about for this customer after we sell the vehicle and our collections practices that we've got in place, we certainly hope to keep those stable, if not still improving to some extent.

Speaker 1

Yes. And to add on to that, are really focused on keeping customers in the Car Mart family much longer than we have historically. And that would be a customer that we know very well. We know their payment history and we want to keep them in the family. And in the past, they maybe have graduated on to the used car division of a new car dealership and we're asking why.

So we may see some term increases for the right reasons as we go forward and try to keep more of these customers in the family for life by offering them a little higher quality, higher cost car that they've proven their credit worthiness over the years. So this is exactly what we need to be doing as a company to pick up market share.

Speaker 6

That's great color. Thanks very much for answering my questions.

Speaker 2

Thank you. Thank you.

Speaker 0

Thank you. Our next question is from Hugh Miller from Buckingham. Your line is now open. Pardon me, Hugh Miller. Your line is now open.

Sorry

Speaker 4

about that. Thank you. Yes. So just you mentioned the improved quality of inventory aiding traffic as well as sales for the company. How do you feel about the inventory mix heading into this quarter versus where things stood heading into the last quarter?

I know the overall level of inventory is higher quarter over quarter, but how would you say that your view in terms of the mix of vehicles and also the quality of the vehicles that you have right now on the lot?

Speaker 1

We feel like the mix and the quality is improving quickly. And we feel like it's in better shape today than it was a year ago and will continue to get better as we move forward.

Speaker 4

Okay. And then in the press release, you also mentioned the dealership in Chattanooga Cabot as well as one coming on at some point in Edmond. Can you give us a sense as to the time horizon we should be thinking about those coming on and opening up?

Speaker 1

Yes. We're looking at the fourth quarter for Chattanooga and Cabot. And we're still a little new with the Edmond lease to have a time specified yet. But all three of those dealerships are going to be very good for us and we're trying to get those open just as quickly as we can.

Speaker 4

And then obviously you've talked about how the bench of managers will play an impact in terms of the longer term outlook for dealership openings. How do we think about maybe calendar twenty twenty one? And where you think the bench is now and the ability to kind of open dealerships beyond the ones that you've talked about now?

Speaker 1

Yeah. Our bench is getting stronger. Our training efforts are very good and getting better. And so we feel like we're on a good track to have a bench of qualified folks to run dealerships and we're getting closer in that area. We do plan to open a few dealerships a year.

But when we open a dealership, it's going to be a dealership with very high expectations like Edmond. But nothing specific as far as 2021 at this point, but it's safe to say that we will open some new locations in 2021 in some good spots.

Speaker 4

Okay. And then last for me. Obviously, as we think about the rise in the average selling price, should we think that that's predominantly driven by the increase in repeat customers and kind of going up the credit spectrum a little bit for the right customer? How much is that really playing a factor? I know it's an initiative that you've had, but are you should we think that you're gaining significant traction in that?

Or how is that progressing?

Speaker 1

Well, our repeat business is increasing. And we know that what we offer consumers is a better financial deal than they might get down the street with a longer term and a higher interest rate. So we're really trying to educate our markets about the financial benefits of a Car Mart transaction and it is making a difference with repeat customers and it is bringing in folks that might choose another option. And so it's up to us if we're going to benefit communities is to make sure we're educating those communities on the total cost of ownership. And we think we've got a very good answer for consumers from a total cost standpoint.

Speaker 4

Thank you for taking my questions.

Speaker 5

Thank you.

Speaker 0

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Jeff Williams for closing remarks.

Speaker 1

Okay. Well, once again, for listening to our call this morning. As always, just like to thank all of our associates for their dedication and commitment to this effort. We've got a great team out there and we're going to keep pushing on. So thanks and have a great day.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.