America's Car-Mart, Inc.
Q3 2019 Earnings Call Transcript

Published: 20 Feb 2019

[Operator:]

Good morning, everyone. Thank you for holding, and welcome to the America's Car-Mart Third Quarter 2019 Conference Call. The topic of this call will be the earnings and operating results for the Company's third quarter for fiscal 2019. Before we begin, I would like to remind everyone that this call is being recorded, and will be available for replay for the next 30 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 Web site at www.car-mart.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 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2018, and its current and quarterly reports furnished to, or filed with, the Securities and Exchange Commission on Forms 8-K and 10-Q. Participating on the call this morning are Jeff Williams, the Company's President and Chief Executive Officer; and Vickie Judy, Chief Financial Officer. And now, I'd like to turn the call over to the Company's Chief Executive Officer, Jeff Williams.

[Jeff Williams:]

Okay. Thank you for joining us and thank you for your interest in America's Car-Mart. We had a good quarter with solid improvement in the key areas of our business. We're happy to see our hard work and our focus on operational non-negotiables translate into solid bottom line results. Sales volume productivity was up, net charge-offs was down, and collections improved, and we finished the quarter with a much lower 30-plus pass-through percentage. Even though the results are good, we know that we have a lot of room to continue to improve, and we're working hard to get better and serve our customers through our associates at the very highest levels. We are restless about continuous improvement. We believe we have an obligation to push for healthy growth as we believe communities are better when Car-Mart is there. I'm going to go ahead and turn it over to Vickie to go over some numbers. Vicki?

[Vickie Judy:]

Good morning. For the quarter, overall revenues were $161 million, with same-store revenues up 8.5%. This resulted from a 9% increase in sales and an 11.6% increase in interest income. Revenues from stores in the over 10 years of age category was up 8%. Stores in the five to 10-year category was up 8%, to about $36 million. Revenues for stores in the less than five years of age category was up about 30% to about $20 million. We've continued to see increased traffic at our dealership, and we believe our focus on quality inventory has helped drive this. Our average selling price increased to $11,146, a 4.5% increase or $484 compared to the prior year quarter. We also saw an increase of $116 sequentially. This increase results primarily from the increase in overall vehicle purchase costs because of the high demand for vehicles in the used car market, which in turn results in higher selling prices. We do expect purchase cost to continue to remain elevated through tax time and off-work quarter. However, we will continue to stay focused on keeping the transaction affordable for our customer, and to provide the best vehicle for the money. At quarter-end 23, or 16%, of our dealerships were from zero to five years old, 36 or 25% were from five to 10 years old, and the remaining 84 were 10 years old or older. Our overall productivity increased to 27.9 units per lot, from 27.2 compared to the prior year third quarter, a 2.6% increase. Our 10-year lots -- 10-year-plus lots produced 30.3 units sold per month per lot, compared to 29.1 for the prior year quarter. Our lots in the five to 10-year category produced 25.6 compared to 24.7 for the prior year quarter, and the lots less than five years of age had productivity of 22.7 compared to 21.6 for the third quarter of last year. Our down payment percentage was flat compared to the prior year quarter, however collections as a percentage of average finance receivables was up 70 basis points to 13.2%, compared to 12.5% last year. The average originating contract term was 29.4 months, compared to 29.5 for the prior year quarter, and up from 29.2 months sequentially. Our weighted average contract term for the entire portfolio, including modification, was 32 months for the third quarter, compared to 32.4 for the prior year quarter. The weighted average age of the portfolio was basically flat at approximately nine months. We believe our investments in collections staffing, better visibility, and consistency in our collections efforts have contributed to these improvements. Interest income was up $2.2 million compared to the prior year quarter due to the $45.5 million increase average finance receivables, almost 90% of the increase, and also due to our increase in the interest rage on our contracts to 16.5% from 15%, which began in May of '16. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4%, up from 16.2% at January of '18. Our gross profit margin remained flat, at 41.5% of sales for the third quarter, and down from 41.7% sequentially. We continue to stay focused on managing inventory and repair costs while battling the gross margin pressure as a result of the higher average selling price as our gross margin percentages are lower at a higher selling price. We are pleased to see the productivity improvements from some of our investments that we made with some leveraging of the SG&A. SG&A dollars were up $1.6 million at 18.9% as a percentage of sales, compared to 19.4% for the prior year quarter. We have added over 4,800 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 associates and our infrastructure to improve the customer experience. One of our ongoing initiatives is to improve our Web site and our overall online customer experience. For the current quarter, net charge-offs as a percentage of average finance receivables was 6.2%, down from 7.4% in the prior year third quarter. We've continued to improve both the frequency and severity of losses compared to the prior year as we work to improve our deal structures and drive customer success. Improved collections were 70 basis points better, and higher recovery rates contributed to the decreased severity of losses. Recovery rates for the quarter were approximately 27%, compared to 25% to 26% last quarter, and 22% in the prior year quarter. Our effective income tax rate was 23.7% for the third quarter of fiscal year '19. And the prior year tax benefit resulted from a $9.7 million adjustment recorded primarily due to the enactment of the Tax Cuts and Jobs Act, in December of '17. 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 $171 million, and we had over $44 million in additional availability under our revolving credit facility. We did amend our revolving credit facility in December of '18 to extend the term to December of '21. We increased the total committed borrowings from $200 million to $215 million, and reduced the current applicable interest rate by 10 basis points until May of '19. Our current debt-to-equity ratio is 69.5%, and our debt-to-finance-receivables ratio is 31.4%. Our interest expense increased $628,000 this quarter compared to last year's quarter due to the increase in debt, about 60% of the increase, and also due to the increased interest rate. During the quarter, we repurchased 141,500 shares, or 2.1% of our company, for $10.2 million at an average cost of $72.20 per share. Since 2010, we have repurchased approximately 53% of the company for $222 million at an average price of $36 per share. We continue to have strong cash flows. For the nine months, we've added $41.5 million in receivables, repurchased $24.1 million of common stock, funded $3 million in capital expenditures, and increased inventory by $5.2 million, a total of $73.8 million with only $18.4 million increase in debt. Our focus will be to continue to invest in our associates, grow the business, and take advantage of market opportunities while continuing to purchase shares opportunistically. I'll turn it back to you now, Jeff.

[Jeff Williams:]

Okay, thank you, Vickie. Our non-negotiables relate to, number one, facilities and associates. Number two, inventory, number three, collections practices, and number four, expense management. With our fifth non-negotiable, customer relations and customer experience being a part of but separate from the other four. Our improved financial performance to this point has been mostly the result of our disciplined focus on lot-level blocking and tackling the non-negotiables one through four, where we still have a lot of work to do but are making solid progress. We understand that to be a great company our purpose has to be clear. And in this high-touch business the customer experience through our associates must be great always. The service we provide is so very important to the good hardworking customers we serve, and we can have such an effect on the quality of their lives, we have a duty to be over-the-top good with all customer interactions. Again, we believe we have room to improve on the first four non-negotiables. However, customer experience is emerging as our top priority as we strive to be a great company. As mentioned in the press release, we have four new dealership openings in process, and we're excited to get started in these communities. Our plan is to grow at a healthy rate, in line with our ability to support our associates and customers at the very highest levels. We will continue to invest in our people, especially our general managers, and we're pleased to see our investments being leveraged so quickly. The market we serve is large, and we have a great opportunity to serve more communities in the future. As always, we would like to thank our associates for their hard work and dedication to this effort, and thank you again for your interest in Car-Mart. We will now open it up for some questions. Operator?

[Operator:]

At this time, the participants will now answer questions from the callers. I would like to reiterate that my regular comments regarding forward-looking statements apply both to the participants' prepared remarks and to anything that may come up during Q&A. [Operator Instructions] And our first question comes from John Murphy with Bank of America Merrill Lynch. Your line is open. Aileen Smith Good morning. This is Aileen Smith on for John. First question around provision for credit losses in what were, at least relative to our estimates, significantly lower than expected, and even down year-over-year. How do we marry some of that performance with your other data points that we're seeing around delinquencies potentially picking up in the subprime lending space? Is this something where you guys have already provisioned for and feel appropriately situated or is it just the credit quality of the consumers coming through your dealerships is a little bit better than you would have otherwise envisioned? Jeff Williams I would say that it always starts with a better car. So I think the improvements we've made in the acquisition of good product is the starting point for better credit results. And then on top of that, we efforts we've made with collection practices and getting resolution with pass-through accounts much quicker has also contributed. It's basically we're doing a better job blocking and tackling internally with a better car and a slightly better customer. So, we attribute our better results to our work. Our work product is better than it has been. The product we're putting out is better. We're seeing a lot of success with our collection's practices and our provisioning has remained relatively flat. We provisioned to a point where we keep our reserve at 25% receivables, and we feel like the quality of our portfolio is certainly improving. We're going to leave that provisioning at a level that keeps us at 25% of receivables reserved. We feel pretty good about the portfolio, the delinquencies, losses in the future. We just think that most of these improvements are the result of a better car and us doing better work after the sale on the collection side. Vickie Judy I'm going to also add to that, Aileen, I think our deal structure, I mean that's part of our collection practices and that I think whole deal structure and the way we're modifying the accounts we'll continue to work on that area as well. And I think that's helping in this. Aileen Smith Okay, great, that's very helpful. Second question, there's been reports probably over the past two, three weeks and even ourselves, we've looked into it around the impact of tax refunds this year and what could be lower tax refunds for consumer is potentially for not withholding correctly in terms of their paychecks, have you guys in the past -- two, three weeks around tax season and refund filing seen any differences in the consumers coming and sort of appetite for buying used vehicles particularly if we think about tax refunds representing oftentimes a good chunk of a down payment for consumers? Is there really any evidence to support that at least from what you guys see yet? Jeff Williams Well, our context indicate that for our customer, specific to our market refunds are expected to be up some this year. These refundable credits are going to more than offset some withholding issues that consumers above ours might have. So we expect as we look through the entire tax season that our customers are going to be getting a net increase in tax refunds. The timing has been a little funny with the refund anticipation loan starting in early January. It looks like consumers are taking those loans at a pretty good clear, but they're taking smaller amounts than maybe was expected. So we haven't really seen a bump yet from tax refunds and we do expect that to come and maybe be here at the last part of February and onto a good portion of March. So the government shutdown and all the noise out there has may be put a slight damper on sales demand, and the money is not out there yet, but we feel pretty confident that it's coming. Our inventory is in good shape, our folks are ready to move some cars in this fourth quarter and we feel pretty good about things. Aileen Smith Great. That color is really helpful. And then last question following up on some of the prepared remarks you made around investing in a better Web site. I realize it might be early days, but do you have any sort of assessment of a payback period or return on investment in terms of dollars that you're putting into modernizing and improving the site versus what could be improved throughput at your stores as a result? Jeff Williams Yes, we're very cost-conscious and frugal with our investments. We think we've got a very good approach to improving our digital experience including the webpage. We were really at a point where we had to upgrade what we offered and we're adding an online credit application process to the webpage. We're adding pictures of cars and some other features. It's not going to be a huge dollar investment for us. And we've been working on it for six or seven months already and those costs are not being capitalized. So it's going to be a very cost-effective investment for us and it's something that we needed to do. We did not have a good digital presence at all, and we're going to have a good product within the next few months. But as far as the investment, it's something that we just needed to do especially when we look at customers shopping online and us having the ability to process credit applications online. This is an area we needed to invest in -- that hasn't stopped our investments at the lot level either. So, our goal is to just keep investing where needed especially in people, but we got a lot of opportunity to grow and improve operations and we'll be very frugal and very direct and thoughtful with our investments. Aileen Smith Okay. That's very helpful. That's it from me, thanks for the questions. Jeff Williams Thank you.

[Operator:]

Thank you. Our next question comes from John Rowan with Janney.Your line is open. John Rowan Good morning. Vickie Judy Good morning. Jeff Williams Good morning. John Rowan So I want to just kind of address the improvements on two fronts. So obviously, a lot of your fundamental markers are improving year-over-year. One of the things that you guys mentioned were a lot of internal forces, right, whether it's collection staffing, or the different way you're working and modifying accounts. Can you give us some specific examples within those two areas of what you're doing specifically to improve, you know, collection speed or whatever areas of your business are showing positive comps year-over-year? Vickie Judy So on the collection's side we kind of look at our Cal representatives who make our collection calls, we looked at their pay and the number that we needed per dealership. And then we also got some better visibility into the number of calls they were making, the number of personal visits that were being made with the more follow-up at the corporate level. And then where we saw there were some deficiencies, we followed it through with some additional training from the corporate support team. And so we have a team for each region. So I just think our attention and focus to the details and how we improve and our next direction in that area will be the quality of those calls and business. So we still feel like we have a lot of improvement to do, but that's what we've done specifically in relation to those collections. Jeff Williams And we've got a really talented team that is dedicated to looking at these productivity statistics that we didn't have visibility on before, and then really working through operations to maximize what we're doing out there to serve those customers at a higher level to get resolution on issues much quicker, because we had the visibility. But it started with visibility, and then we put a really good team dedicated to working through operations on improving productivity and then the quality of the work too. It's not just about the numbers; it's about the quality of that work and getting resolutions quickly when one of our customers is having an issue. John Rowan Okay. And then just to kind of touch basically on the external factors, obviously, you guys are doing what you need to do on your side, but we certainly can't ignore the fact that deep subprime issuance is down, and I'm wondering what your take is on the current competitive environment? I mean, we've seen several smaller players, private players, go out of business, we've had, the Honor Finance ABS deal go bad, and we're hearing the reverberations through the market whether it's a higher -- more restrictive structures on some ABS deals post the Honor Finance deal, have any of those things impacted your competitors? I mean, you're self funding, so you can take advantage where others might have weakness in the market, and I'm wondering on top of the internal improvements you've made what if any external factors you're attributing to some of the success, thank you? Jeff Williams You know, it may be slightly better today than it was a year ago on the competitive side. It's a little hard for us to see that sometimes. But there's still plenty of money out there chasing our market and chasing our deals. So there's no shortage of folks going after our customer every day. But there may be some leveling off of the competitive situation. Maybe it's a little better than it was, but I think that we're convinced based on our knowledge of the business and what our folks are telling us from the field, that most of these improvements are really about the non-negotiables and the blocking and tackling and us getting better at what we do. John Rowan Okay. Thank you very much. Jeff Williams Thank you.

[Operator:]

Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is open. Vincent Caintic Hey, thanks, good morning, guys. Just a quick follow-up on the tax refund question, this is a season question. So it sounds like it hasn't really had much of an impact yet. I guess typically seasonally, do you see a bigger impact say in March or in April? Or when should be expect to see a lot of say of pay outs or a lot of down payment activity happen because of the tax refund season. Vickie Judy Yes. So that's typically in February. It starts in February and then it will run some in the March as well, typically the biggest part of February. Vincent Caintic And so there hasn't really been a change here over year from you have seen so far? Jeff Williams Not a big change. There had been some refund anticipation loans, but within smaller dollar amounts and not really driving customer purchasing decision. It's been small, and it hasn't had much of an affect on us to this point. Vincent Caintic Okay, got it. Makes sense, thank you. On the credit so nice seeing the credit improving at the same time that your volumes increasing and your sales traffic increasing and your sales traffic increasing so that's pretty impressive. I am just wondering if you could describe what has been driving credit better if it's been -- how much of that has been on the micro sides of the consumer getting -- your consumer getting better versus the actions that you have taken? And then when you think about recoveries in car prices for 2019, do you have a view where car prices are going to be going? Vickie Judy So, on the credit side, I mentioned that we had lower frequency of losses. And I think a lot of that relates back to the better car that Jeff mentioned; much easier to keep a customer in car that's running. So I think we have done a better job there. And then our collection practices getting the resolution sooner and working through those before they get to the point that they can't recover and it is a loss. So I think that's helped on the frequency side. On the severity side, we talked about our increased collections are down, were flat, but on a 90 day for our equity has improved, and then that fair market value has also helped in that severity. So, I think we will see fair market values stay elevated here for a while. And again I think with our better vehicle and our better processes as far as getting those moved quickly not letting them sit around on a lot and will continue to keep our fair market values up on those recoveries. Vincent Caintic Okay, that's helpful. And the last one from me just quickly, so on your increased traffic and on your the retail sales prices increasing, just wondering how much of that is being driven off of the action that you are doing to improve the business versus what you are seeing with the industry improving? I know you kind of talked about the competition still being very competitive out there, but may bit better year over year. Just kind of wondering if there is a way to parse out the two impacts to your business? Jeff Williams Well, I think having better cars out front, properly cleaned and displayed and titled certainly that one factor in and of itself increases your lot traffic. But then when you combine the efforts in place for our online presence too even though we are not finished with that effort, it will be a while. We are really looking at Google reviews and really trying to maximize the customer interaction on our web page which we got new web page and so we think a lot of traffic is coming from our digital presence. And then also just doing a better job getting good cars, cleaned and titled and out front and ready sale and properly displayed and then blocking and tackling at the lot level when we do have a prospect. So I don't know that I would say much of our traffic improvements is competitive in nature although it might be, it's hard for us to tell, but I do know the improvements we have made internally is certainly helping us with those traffic accounts. Vincent Caintic Okay, helpful. And more question just from your response. So the online presence and increasing you customer interactions on the Web site, is that being driven from the dealership level, or, so the dealership interacts with the customers who are close by, or is it something of a corporate effort where there is people from the corporate level interacting with the customers just to come into the Web site? Jeff Williams It is a -- at this point it's been a corporate effort. But as we go forward, our dealership associates are the ones that have the relationships with our customers. So, I would say we all feel pretty strongly at the end of the day at least for that local general manager and his or her staff that are communicating with our customers digitally, but we are kind of facing into that as we work through the process and try to improve that customer experience. Vickie Judy And they are getting turned over to the dealership. Jeff Williams Yeah, I do get turned over. Vickie Judy But currently as we are learning the best way to do this we are making the initial contact from out of corporate here. Vincent Caintic Okay, got it. Thanks very much.

[Operator:]

Thank you. Our next question comes from Kyle Joseph with Jefferies. Your line is open. Kyle Joseph Good morning guys. Thanks for taking my questions and congrats on another good quarter. Vickie Judy Good morning. Thank you. Kyle Joseph Most of my questions have been answered. Just wanted to talk about your customer's preferences in terms of cars and given gas price fluctuations, have you seen any changes there? Are we still seeing a big demand for trucks and SUVs? Vickie Judy The mix was relatively flat this year compared to last year. I mean the demand for trucks and SUVs are still out there, but we did not see those increase this quarter like we had the past couple of quarters. Kyle Joseph Got it. And then just transitioning to credit, obviously, it's been very strong. And if you could talk to your credit matrix and how you think about managing the business, do you think there is room for improvement? Do you think leaving some deals on the table and just talk about your outlook there. Jeff Williams We feel good about the positive movement with credit results. We are proud of the progress we have made. We do feel like in all areas and including credit that there is things we can do a lot better. So, we are not at all satisfied. We feel like there is a lot of improvements to be made. It's hard to know I think we have talked for a number of years about the fact that our charge offs went from the low 20s to the low 30s and that we are going back to the other direction. There are some things about the industry that have changed that might prevent us from mathematically getting back to where we were in 2009 or '10 but we feel like we do have some room to continue to push forward and to see improved credit results especially when we bring in this fifth non-negotiable we talk about and that's the customer experience. We have seen some really good results in all areas. And we know for a fact we can do a much better job with the customer experience at those key touch points. And the first place that shows up in improved credit results. So we don't have a specific range or a number, but we know we are not satisfied with where we are at even though the trends and the improvements have been something to be proud of. Kyle Joseph Great. Thanks very much for answering my questions. Jeff Williams Thank you.

[Operator:]

Thank you. [Operator Instructions] And I am showing no further questions at this time. I would like to turn the call back over to Mr. Jeff Williams for any closing remarks.

[Jeff Williams:]

Okay. Well, once again thank you for joining us this morning. Thanks for your interest in America's Car-Mart. And have a great day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.