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CRMT > SEC Filings for CRMT > Form 10-Q on 4-Dec-2013All Recent SEC Filings

Show all filings for AMERICAS CARMART INC

Form 10-Q for AMERICAS CARMART INC


4-Dec-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company's future objectives, plans and goals, as well as the Company's intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as "may", "will", "should", "could", "believe", "expect", "anticipate", "intend", "plan", "foresee", and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited to:

new dealership openings;

performance of new dealerships;

same store revenue growth;

future revenue growth;

future credit losses;

the Company's collection results, including but not limited to collections during income tax refund periods;

investment in development of workforce;

gross margin percentages;

financing the majority of growth from profits;

seasonality;

having adequate liquidity to satisfy its capital needs;

compliance with tax regulations; and

the Company's business and growth strategies.

These forward-looking statements are based on the Company's current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors that may cause actual results to differ materially from the Company's projections include, but are not limited to:

the availability of credit facilities to support the Company's business;

the Company's ability to underwrite and collect its contracts effectively;

competition;

dependence on existing management;

availability of quality vehicles at prices that will be affordable to customers;

changes in consumer finance laws or regulations, including but not limited to rules and regulations that could be enacted by federal and state governments;

the outcome of pending tax audits; and

general economic conditions in the markets in which the Company operates, including but not limited to fluctuations in gas prices, grocery prices and employment levels.

The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

Overview

America's Car-Mart, Inc., a Texas corporation (the "Company"), is one of the largest publicly held automotive retailers in the United States focused exclusively on the "Integrated Auto Sales and Finance" segment of the used car market. References to the Company typically include the Company's consolidated subsidiaries. The Company's operations are principally conducted through its two operating subsidiaries, America's Car Mart, Inc., an Arkansas corporation ("Car-Mart of Arkansas"), and Colonial Auto Finance, Inc., an Arkansas corporation ("Colonial"). Collectively, Car-Mart of Arkansas and Colonial are referred to herein as "Car-Mart". The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company's customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems. As of October 31, 2013, the Company operated 129 dealerships located primarily in small cities throughout the South-Central United States.


Car-Mart has been operating since 1981. Car-Mart has grown its revenues between 3% and 16% per year over the last ten fiscal years (average 12%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 10.8% for the first six months of fiscal 2014 compared to the same period of fiscal 2013 due primarily to an 8.6% increase in retail units sold and a 14.0% increase in interest income. The average retail sales price also increased 2.3% to $9,773 for the first six months of fiscal 2014 from $9,549 for the first six months of fiscal 2013.

The Company's primary focus is on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. During the last five fiscal years, the Company's credit losses as a percentage of sales have ranged between approximately 20.2% in fiscal 2010 and 23.1% in fiscal 2013 (average of 21.3%). In fiscal 2009, the Company saw the benefit of operational improvements despite negative macro-economic factors and experienced credit losses of 21.5% of sales. Improvements in credit losses continued into fiscal 2010 as the provision for credit losses was 20.2% of sales for the year ended April 30, 2010. The Company experienced credit losses of 20.8% of sales for fiscal 2011 and 21.1% of sales for fiscal 2012. In fiscal 2011 the higher credit losses primarily related to credit losses during the second fiscal quarter as the Company experienced some modest operational difficulties. In fiscal 2012 the Company experienced slightly higher credit losses; however, the losses were within the range of credit losses that the Company targets annually. Credit losses as a percentage of sales in fiscal 2013 increased to 23.1% primarily due to increased contract term lengths and lower down payments resulting from increased competitive pressures as well as higher charge-offs which resulted, to an extent, from negative macro-economic factors affecting the Company's customer base. These macro-economic and competitive pressures have continued to negatively impact the Company's credit losses in fiscal 2014. Credit losses as a percentage of sales for the first six months of fiscal 2014 were 25.3% compared to 23.1% of sales for the prior year period, resulting from lower finance receivable collections and higher charge-offs along with the effect of lower wholesale sales.

Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is the case because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Normally the older, more mature dealerships have more repeat customers and on average, repeat customers are a better credit risk than non-repeat customers. Negative macro-economic issues do not always lead to higher credit loss results for the Company because the Company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers. However, the Company does believe that general inflation, particularly within staple items such as groceries and gasoline, as well as overall unemployment levels and potentially lower personal income levels affecting customers can have, and have had in recent quarters, a negative impact on collections. Additionally, increased competition for used vehicle financing can have, and management believes it is currently having, a negative effect on collections and charge-offs.

The Company continues to make improvements to its business practices, including better underwriting and better collection procedures. The Company has installed a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company has implemented credit reporting and has begun installing global positioning system units on vehicles. Additionally, the Company has placed significant focus on the collection area as the Company's training department continues to spend significant time and effort on collections improvements. The Vice President of Support Operations oversees the collections department and provides timely oversight and additional accountability on a consistent basis. In addition, the Company now has several Collection Specialists who assist with monitoring and training efforts. Also, turnover at the dealership level for collections positions is down compared to historical levels, which management believes has a positive effect on collection results. The Company believes that the proper execution of its business practices is the single most important determinant of credit loss experience.

The Company's gross margins as a percentage of sales have been fairly consistent from year to year. Over the last five fiscal years, the Company's gross margins as a percentage of sales have ranged between approximately 42% and 44%. Gross margin as a percentage of sales for fiscal 2013 was 42.5%. The Company's gross margins are based upon the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages. Gross margins in recent years have been negatively affected by the increase in the average retail sales price (a function of a higher purchase price) and higher operating costs, mostly related to increased vehicle repair costs and higher fuel costs. Additionally, the percentage of wholesale sales to retail sales, which relate for the most part to repossessed vehicles sold at or near cost, can have a significant effect on overall gross margins. Annual gross margin percentages over the five-year period peaked in fiscal 2010 partially as a result of higher retail sales levels and a strong wholesale market for repossessed vehicles due to overall used vehicle supply shortages. The gross margin percentage in fiscal 2011 and fiscal 2012 was negatively affected by higher wholesale sales, increased average retail selling price, higher inventory repair costs and lower margins on the payment protection plan and service contract products. Gross margin improved slightly in fiscal 2013 due to improved wholesale results partially offset by higher losses under the payment protection plan. For the first six months of fiscal 2014, the gross margin as a percentage of sales was 42.2% down slightly from 42.8% for the first six months of fiscal 2013. The Company expects that its gross margin percentage will not change significantly in the near term from the current level (42% range).


Hiring, training and retaining qualified associates are critical to the Company's success. The rate at which the Company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company's ability to add new dealerships and to meet operational initiatives. The Company has added resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce.

                            Consolidated Operations
                   (Operating Statement Dollars in Thousands)

                                                                                   % Change            As a % of Sales
                                                       Three Months Ended            2013            Three Months Ended
                                                           October 31,               vs.                 October 31,
                                                       2013          2012            2012             2013          2012

Revenues:
 Sales                                               $ 107,765     $  98,194             9.7 %          100.0 %      100.0 %
 Interest income                                        13,666        12,025            13.6             12.7         12.2
   Total                                               121,431       110,219            10.2            112.7        112.2

Costs and expenses:
 Cost of sales, excluding depreciation shown below      62,823        56,204            11.8             58.3         57.2
 Selling, general and administrative                    19,581        17,351            12.9             18.2         17.7
 Provision for credit losses                            28,296        23,647            19.7             26.3         24.1
 Interest expense                                          722           708             2.0              0.7          0.7
 Depreciation and amortization                             795           696            14.2              0.7          0.7
 Gain on Disposal of Property and Equipment                 (2 )           -               -                -            -
   Total                                               112,215        98,606            13.8            104.1        100.4

   Pretax income                                     $   9,216     $  11,613           (20.6 ) %          8.6 %       11.8 %

Operating Data:
 Retail units sold                                      10,608         9,814
 Average stores in operation                               128           116
 Average units sold per store per month                   27.6          28.2
 Average retail sales price                          $   9,710     $   9,515
 Same store revenue change                                 3.8 %        (4.8 )%

Period End Data:
 Stores open                                               129           117
 Accounts over 30 days past due                            4.7 %         4.3 %

Three Months Ended October 31, 2013 vs. Three Months Ended October 31, 2012

Revenues increased by $11.2 million, or 10.2%, for the three months ended October 31, 2013 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) a revenue increase from dealerships that operated a full three months in both periods ($4.2 million, or 3.8%), (ii) revenue growth from dealerships opened during the three months ended October 31, 2012 ($800,000), and (iii) revenue from dealerships opened after October 31, 2012 ($6.2 million).


Cost of sales as a percentage of sales increased 1.1% to 58.3% for the three months ended October 31, 2013 from 57.2% in the same period of the prior fiscal year. The increase from the prior year period relates primarily to higher inventory repair costs and higher claims under the payment protection plan. The average retail sales price for the second quarter of fiscal 2014 increased $195 from the second quarter of fiscal 2013. The Company will continue to focus efforts on minimizing the average retail sales price in order to help keep the contract terms shorter, which helps customers to maintain appropriate equity in their vehicles. The consumer demand for vehicles the Company purchases for resale remains high. This high demand has been exacerbated by the recent increases in funding to the used vehicle financing market and by the overall decrease in new car sales during the recession when compared to pre-recession levels. Both the supply of vehicles as well as the availability of funding to the used vehicle finance market can result in higher purchase costs for the Company. Recent increases in new car sales have had a positive effect on purchase costs. Average selling prices and top line sales levels in relation to wholesale volumes, resulting from credit loss experience, can have a significant effect on gross margin percentages.

Selling, general and administrative expenses as a percentage of sales were 18.2% for the three months ended October 31, 2013, an increase of 0.5% from the same period of the prior fiscal year. In dollar terms, overall selling, general and administrative expenses increased $2.2 million in the second quarter of fiscal 2014 compared to the same period of the prior fiscal year, consisting primarily of increased payroll costs, incremental costs at new dealerships as well as higher marketing and advertising costs.

Provision for credit losses as a percentage of sales increased to 26.3% for the three months ended October 31, 2013 compared to 24.1% for the three months ended October 31, 2012. The increase as a percentage of sales was partially the result of the lower collections as a percentage of average finance receivables, as well as higher charge-offs and lower wholesale sales levels. Net charge-offs as a percentage of average finance receivables was 6.9% for the three months ended October 31, 2013 compared to 6.5% for the prior year quarter. The increase primarily resulted from the frequency of losses; however the severity of net charge-offs as a percentage of average principal outstanding decreased slightly from the prior year period. The Company has implemented several operational initiatives (including credit reporting and installing global positioning system units on vehicles) for the collections area and continues to push for improvements and better execution of its collection practices. However, the extended negative macro-economic and competitive pressures are expected to continue to put pressure on our customers and the resulting collections of our finance receivables. The Company believes that the proper execution of its business practices is the single most important determinant of credit loss experience.

Interest expense for the three months ended October 31, 2013 as a percentage of sales remained constant at 0.7% compared to the three months ended October 31, 2012. The overall dollar increase in interest expense resulted from higher average borrowings during the three months ended October 31, 2013 ($101.6 million compared to $90.4 million in the prior year), which were partially offset by lower interest rates on the Company's variable rate debt.


                            Consolidated Operations
                   (Operating Statement Dollars in Thousands)

                                                                                  % Change           As a % of Sales
                                                        Six Months Ended            2013            Six Months Ended
                                                           October 31,              vs.                October 31,
                                                       2013          2012           2012            2013         2012

Revenues:
 Sales                                               $ 216,914     $ 196,491           10.4 %         100.0 %     100.0 %
 Interest income                                        27,061        23,728           14.0            12.5        12.1
   Total                                               243,975       220,219           10.8           112.5       112.1

Costs and expenses:
 Cost of sales, excluding depreciation shown below     125,445       112,389           11.6            57.8        57.2
 Selling, general and administrative                    39,395        35,207           11.9            18.2        17.9
 Provision for credit losses                            54,826        45,310           21.0            25.3        23.1
 Interest expense                                        1,512         1,361           11.1             0.7         0.7
 Depreciation and amortization                           1,572         1,358           15.8             0.7         0.7
 Loss on Disposal of Property and Equipment                 39             -              -               -           -
   Total                                               222,789       195,625           13.9           102.7        99.6

   Pretax income                                     $  21,186     $  24,594          (13.9 ) %         9.8 %      12.5 %

Operating Data:
 Retail units sold                                      21,251        19,567
 Average stores in operation                               126           115
 Average units sold per store per month                   28.1          28.4
 Average retail sales price                          $   9,773     $   9,549
 Same store revenue change                                 4.6 %         0.1 %

Period End Data:
 Stores open                                               129           117
 Accounts over 30 days past due                            4.7 %         4.3 %

Six Months Ended October 31, 2013 vs. Six Months Ended October 31, 2012

Revenues increased by $23.8 million, or 10.8%, for the six months ended October 31, 2013 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) revenue growth from stores that operated a full six months in both periods ($10.1 million or 4.6%), (ii) revenue growth from stores opened during the six months ended October 31, 2012 ($3.2 million), and (iii) revenue from stores opened after October 31, 2012 ($10.5 million).

Cost of sales as a percentage of sales increased 0.6% to 57.8% for the six months ended October 31, 2013 from 57.2% in the same period of the prior fiscal year. The increase from the prior year period relates primarily to higher inventory repair costs resulting from continued efforts to help our customers succeed and to meet competitive pressures and higher claims under the payment protection plan. The average retail sales price increased 2.3% to $9,773 for the six months ended October 31, 2013 compared to $9,549 for the six months ended October 31, 2012. The Company will continue to focus efforts on holding down purchase costs (and the related selling price) and expects to see gross margin percentages generally in the 42% range over the near term. Average selling prices and top line sales levels in relation to wholesale volumes, resulting from credit loss experience, can have a significant effect on gross margin percentages. Wholesale sales decreased during the six months ended October 31, 2013 compared to the prior year period due to a lower average wholesale price combined with fewer repossessed units being sold at wholesale in the current year.

Selling, general and administrative expense as a percentage of sales was 18.2% for the six months ended October 31, 2013, an increase of 0.3% from the same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more fixed in nature. The overall dollar increase of $4.2 million related primarily to higher payroll costs and to incremental costs related to new locations opened after October 31, 2012.


Provision for credit losses as a percentage of sales increased 2.2% to 25.3% for the six months ended October 31, 2013 from 23.1% in the same period of the prior fiscal year. The increase as a percentage of sales was partially the result of lower collections as a percentage of average finance receivables as well as higher charge-offs and lower wholesale sales levels. Net charge-offs as a percentage of average finance receivables was 13.1% for the six months ended October 31, 2013 compared to 12.4% for the prior year quarter. Continuing negative macro-economic and competitive conditions continue to put pressure on our customers and the resulting collections of our finance receivables. The Company has implemented several operational initiatives (including credit reporting and installing global positioning system units on vehicles) for the collections area and continually pushes for improvements and better execution of its collection practices. The Company believes that the proper execution of its business practices is the single most important determinate of credit loss experience and that the negative impact on credit losses in both the current and prior year periods resulting from negative macro-economic and competitive pressures has been somewhat mitigated by the improvements in oversight and accountability provided by the Company's investments in our corporate infrastructure within the collection area.

Interest expense as a percentage of sales remained constant at 0.7% for the six months ended October 31, 2013 compared to the same period of the prior fiscal year. The overall dollar increase in interest expense was attributable to higher average borrowings during the six months ended October 31, 2013 as compared to the same period in the prior fiscal year ($100.9 million compared to $86.2 million) partially offset by lower interest rates on the Company's variable rate debt.

Financial Condition

The following table sets forth the major balance sheet accounts of the Company
as of the dates specified (in thousands):

                                             October 31, 2013       April 30, 2013
Assets:
  Finance receivables, net                   $         308,100     $        288,049
  Inventory                                             30,217               32,827
  Income taxes receivable, net                             216                2,390
  Property and equipment, net                           32,547               30,181

Liabilities:
  Accounts payable and accrued liabilities              26,100               24,957
  Deferred payment protection plan revenue              13,454               12,910
  Deferred tax liabilities, net                         18,710               18,167
  Debt facilities                                      101,650               99,563

Historically, finance receivables tended to grow slightly faster than revenue growth. This has been historically due, to a large extent, to an increasing weighted average term necessitated by increases in the average retail sales price over recent years. The weighted average term for installment sales contracts at October 31, 2013 increased as compared to October 31, 2012 (29.5 months vs. 28.3 months). Benefits related to software and operational changes made in an effort to shorten relative terms by maximizing up-front equity and scheduling payments to coincide with anticipated income tax refunds have helped maintain the overall term length in the face of the increasing average retail sales prices. However, in response to current competitive and economic conditions, the Company has made and is continuing to make some structural changes to its customer contracts which include increases to the overall length of contract terms. Revenue growth results from same store revenue growth and the addition of new dealerships. The Company currently anticipates going forward that the growth in finance receivables will be higher than overall revenue growth on an annual basis due to the overall term length increases partially offset by improvements in underwriting and collection procedures.

During the first six months of fiscal 2014, inventory decreased 8.0% ($2.6 million) as compared to inventory at April 30, 2013 due to seasonal inventory increases surrounding fourth quarter which includes tax time. The Company strives to offer a broad mix and sufficient quantities of vehicles to adequately serve its expanding customer base. The Company will continue to manage inventory levels in the future to ensure adequate supply, in volume and mix, and to meet anticipated sales demand.

Income taxes receivable, net, decreased $2.2 million at October 31, 2013 as compared to April 30, 2013 primarily due to the timing of quarterly tax payments and the use of the majority of the receivable existing at April 30, 2013.

Property and equipment, net, increased $2.4 million during the six months ended October 31, 2013 as compared to property and equipment, net, at April 30, 2013 as the Company incurred expenditures related to new dealerships as well as to . . .

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