Q1 2025 Earnings Summary
- Strong online demand indicated by over 25% year-over-year increase in website traffic for 5-6 consecutive months, suggesting a robust pipeline for future sales.
- Initiatives to improve vehicle affordability by reducing procurement costs by $500 to $800 per vehicle are expected to expand the addressable market and boost sales volume.
- Implementation of the Loan Origination System (LOS) now accounts for 40% of the portfolio, leading to better credit performance and higher cash-on-cash returns projected at 72.4% for fiscal 2025 originations.
- Increased SG&A expenses without immediate revenue due to recent acquisitions, leading to higher costs. The company acknowledged that when they acquire dealerships, they assume the SG&A expenses immediately but do not acquire the existing customer portfolios, starting with costs but no revenue. This was particularly impactful with the acquisition of Texas Auto Center (TAC) due to its size.
- Ongoing impact of underperforming loans from fiscal years 2021-2023, contributing to higher net charge-offs. The "back book" of originations from fiscal years '21 through '23 still accounts for approximately 33% of the portfolio, and these loans have higher defaults and losses. Although their impact is decreasing, they continue to affect net charge-offs.
- Decreased sales volumes due to performance management of underperforming locations and affordability issues, potentially limiting growth. The company has been restricting capital to underperforming stores, resulting in a reduction of approximately 2,000 units in sales. They've also closed three locations in the past year and may need to close more, indicating operational challenges. Affordability issues require lowering vehicle procurement costs by $500 to $800 to increase the addressable market.
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Affordability Thresholds and Sales Growth
Q: How much must used car prices drop to boost demand?
A: CEO Douglas Campbell explained that if they could reduce procurement costs by $500 to $800 per vehicle, it would significantly increase their addressable market and boost demand. They've observed that website traffic has grown over 25% year-over-year for five to six consecutive months, indicating strong interest, but current vehicle prices may not match customer needs. They are focused on achieving these cost reductions within the calendar year to stimulate sales growth. -
Affordability Initiatives and Used Car Prices
Q: How will your actions and used car prices impact affordability?
A: The company has implemented strategies like partnering with Cox to refurbish and resell vehicles, aiming to lower average prices. They are targeting applicants facing income softness by adjusting loan origination systems and payment-to-income thresholds to match affordable vehicles. CEO Douglas Campbell expects used car prices to continue falling at a normalized rate for the remainder of the year, improving affordability. -
Performance Managing Underperforming Locations
Q: What are you doing to improve underperforming stores?
A: The company restricts inventory and tightens underwriting at stores with unacceptable default rates. They analyze whether issues are due to environmental factors or operational execution. If stores improve, they ease restrictions; if not, they may close locations. Over the past year, they've closed three locations and plan to be more proactive in managing underperforming stores. -
Credit Improvement via LOS System
Q: How much of the portfolio benefits from the 30bps LOS improvement?
A: CFO Vickie Judy stated that 40% of the portfolio has been originated on the new Loan Origination System (LOS) as of July. All dealerships, except for nine recent acquisitions, are using the new system, and its positive impact will continue to grow each month. The 30 basis point benefit is a net effect from qualitative and quantitative factors in their CECL analysis, with LOS contributing more positively. -
Loss Expectations and SG&A Expenses
Q: Can you bifurcate loss expectations and explain SG&A normalization?
A: For the "back book" loans from fiscal 2023, projected cash-on-cash returns improve from 49% in FY23 to 64% in FY24 and 72% in FY25 as these loans age and become a smaller portion of the portfolio. About 33% of the portfolio relates to this back book, now 22 months aged. Regarding SG&A, expenses were relatively flat quarter-over-quarter, a win compared to historical increases of over 10%. Cost-cutting actions are yielding $4 million to $5 million in annualized benefits, with payroll costs down over $2 million in the quarter. Technology investments add about $1 million quarterly but are offset by these savings. -
Competitive Environment and Acquisition Opportunities
Q: Is market stress creating competitive or acquisition opportunities?
A: Smaller competitors are struggling to access credit, leading them to hold less inventory or finance fewer vehicles, affecting the competitive landscape. The company sees several acquisition opportunities and is analyzing them carefully to ensure cultural fit, integration capability, and accretion from day one. They focus on opportunities within their footprint to ensure proper servicing and care.