Americas Carmart Inc Q4 FY2020 Earnings Call

Good morning, everyone. Thank you for holding and welcome to America's Car-Mart's Fourth Quarter Fiscal 2020 Conference Call. The topic of this call will be the earnings and operating results for the company's fourth quarter for fiscal 2020. 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 website 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, 2019, and its current and quarterly reports furnished to or filed with the Securities 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.

Okay. Well, thank you for joining us this morning and thank you for your interest in America's Car-Mart. With the pandemic hitting us in mid-March, we quickly set our priorities and went to work. Our priority number one was, is and always will be, the health and safety of our associates, our customers, and our communities. We are focused on trying to go above and beyond federal, state, and local guidelines, which were literally changing by the hour for several weeks. Even though we most certainly consider what we do to be essential, it took several weeks to adjust to the various operating restrictions related to minimizing the spread of the coronavirus. As we determined that we could provide a safe and healthy working environment, our next priority was protecting our balance sheet while trying to get clarity on the recipient, the magnitude, and the timing of any stimulus funds, and then predict consumer behavior when those funds actually reached their pockets. We are very confident in our business model and in our future, but we're really focused on getting through this without damaging our balance sheet, so that we could really be in a good spot when things return to normal. With significant disruptions in the supply chain and projected decreases in consumer demand, we focused on the opportunity to reset our inventory with the potential to purchase better cars for the same or less money, and then pass that value on to our customers. Our vehicle supply chain remains somewhat stressed, and consumer demand for our offering has been strong; so we will continue to strengthen our procurement processes as we move forward. We are currently light in some spots with our inventory but expect good progress with the initiatives that we started prior to the pandemic. We are actually starting this new fiscal year with about the same inventory investment that we had at the beginning of fiscal year '20. For almost 40 years now, we've been working with credit-challenged customers by putting them in good mechanically sound vehicles and then working with them through life's challenges after the sale. Our captive lending structure combined with the character lending nature of our business allows us the opportunity to form deep, long-lasting personal relationships with our customers. We give our customers peace of mind regarding their local transportation needs by keeping them on the road. We take the stress out of one area of their life, and for that they place great value on what we offer the market. It is a big responsibility on our shoulders to hold up our end of that bargain, but that is our purpose, our vision, and that is what we've dedicated our lives to here at America's Car-Mart. We have successfully navigated through many challenges over the years, and the pandemic has given us one more opportunity to prove how valuable we are in difficult times. We have always worked with one customer at a time because each situation is different and that will always be our approach. The pandemic has presented an opportunity for us to really walk the walk, and we're very proud of how our team has responded. Now, I will turn it over to Vickie to go over the numbers. Vickie?

Good morning, everyone. Thank you, Jeff. We ended the quarter with a revenue increase of 10.6%, up to $196 million. These were record revenues despite half of the quarter being impacted by the COVID-19 pandemic. We actually had a really great start to the quarter and a successful tax time prior to the start of the pandemic. The increased revenues resulted from a 10.1% increase in sales; volumes were up 1.7% combined with a 9.8% average selling price increase, and a 14.9% increase in interest income. Same-store revenues were up 8.6%. Revenues from stores over 10 years of age category were up 7%, stores in the 5- to 10-year category were up 10%, and revenues per store in the less than five years of age category were up about 49% to $16 million. At quarter end, 17% or 12% of our dealerships were from zero to five years old, 43% or 29% were from 5 to 10 years old, with the remaining 87% being 10 years old or older. Our overall productivity was 30.2 units per lot per month compared to 30.3 for the prior year quarter. Our 10 year plus lots produced 32.7 units sold per lot per month, compared to 32.8 for the prior year quarter. Lots in the 5- to 10-year category produced 28.1 compared to 28.3, and lots less than five years of age had productivity of 23.1 compared to 21.8 for the fourth quarter of last year. Our down payment percentage was 7.8% compared to 8.2%, and collections as a percentage of average finance receivables was at 15% compared to 16% for the prior year comparable quarter. The extension in term, primarily due to the increase in average selling price, accounted for approximately 40% of the decline in collections with the remaining primarily attributable to the increased delinquencies and modifications as a result of COVID-19. The average originating term was 31.8 months compared to 29.8 for the prior year quarter; and also up from 30.8 months sequentially. The average selling price was up $1,103 with a corresponding two months increase in the term. Our weighted average contract term for the entire portfolio, including modifications, was at 33.3 months compared to 32.1 for the prior year. The weighted average age of the portfolio was basically flat at 9 months. Interest income increased $3.1 million or 14.9% compared to the prior year quarter, primarily due to the $73.6 million increase in average finance receivables at a 13.6% 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. Gross profit per retail unit sold increased $377 to $5,232 or 7.8% compared to the prior year fourth quarter. The gross profit percentage was 40.5% compared to 40.7% for the prior year quarter, and up slightly from the sequential quarter at 40.3%. The increased average selling price resulted in lower gross margin percentages but higher gross margin dollars, as our gross margin percentages are lower at a higher selling price. The majority of the vehicles sold during the quarter were purchased prior to the beginning of the pandemic; however, with lower vehicle purchase prices in the market since the pandemic, we feel we will be able to purchase a slightly newer vehicle with fewer miles for approximately the same purchase price, which we hope will eventually result in more leveling off of the average selling price. We did see a slight increase in the number of SUVs sold in this quarter over the prior year quarter as well. While we did hold off on inventory purchases for a period to preserve cash flow, until we had some clarity on restrictions and sales volumes during the pandemic, we do expect to have some good opportunities moving forward to purchase quality vehicles at a better value. SG&A for the quarter was up $2.3 million compared to the prior year quarter at 17.7% of sales compared to 18%. The increased spend over the prior year quarter is primarily due to payroll costs for additional associate count and investments in pay benefits and training. As a reaction to COVID-19, we did significantly reduce expenses, including part-time and hourly payroll, as well as other non-associate related expenses. We were expecting even better leveraging for the quarter prior to the disruption related to the pandemic. The health and safety of our associates and customers was priority; however, we also focused on maintaining workforce engagement with no disruption to associate benefits so that we can adjust quickly as business returns to normal. For the current quarter, net charge-offs as a percentage of average finance receivables was 5.6%, down from 6.4% in the prior year fourth quarter. For the safety and concern of our customers and our associates, we did suspend personal visits and repossession efforts for a period during the pandemic. We're working diligently to get in contact with customers and help them through this process, if possible. We've started back our personal visits and certain repossession activities recently, and we've also begun testing additional outreach with our customers during these changing times with some interactive texting and emails. Again, all in an effort to work through issues and keep customers in their vehicles. COVID-19 has impacted many of our customers and resulted in increased past due amounts with 30 plus past due at 6.2% compared to 2.9% in the prior year fourth quarter. As a result, we did increase our allowance for credit losses from 24.5% to 26.5%, which amounted to an $11.7 million pre-tax charge to the provision in the fourth quarter. Our company has been built on helping customers through difficult times, and our associates are demonstrating their dedication to this mission. The effective tax rate was 15% for the fourth quarter of fiscal '20 compared to 20.5% for the prior year quarter. Income tax expense included an income tax benefit of $160,000 and $434,000 related to share-based compensation for the current quarter and the prior year quarter, respectively. We expect our base effective tax rate to be approximately 23.5% going forward prior to any excess tax benefits from stock option exercises. We continue to have strong cash flows and a solid balance sheet. At quarter end, our total debt was approximately $216 million. We had $60 million in cash and over $23 million in additional availability under our revolving credit facilities. Our current debt net of cash to finance receivables ratio was 25.1% compared to 27.8% at this time last year. For the year, we added $77.9 million in finance receivables, we repurchased $16 million of our common stock, we funded $5.5 million in net capital expenditures for a total spend of $99.4 million with only a $4.8 million increase in debt net of cash. Thank you. Now, I'll turn it back to Jeff.

Thank you, Vickie. I am very proud of our team and very proud of the fact that our results have been solid and our balance sheet has remained extremely strong, which is very impressive in these times. We are optimistic about our place in the world and the future of our company. What we do is unique. We will continue to invest in our people, recruiting, training, retaining, and look to continue to grow market share from our current locations. We believe that a large percentage of our existing dealerships could support 1,000 or more customers over time. We will also continue to open new dealerships and currently have Cabot, Arkansas and Chattanooga, Tennessee in process, and those should open this first quarter. And then we also have new dealership openings scheduled for later in the year for Edmond and Norman, Oklahoma. We also believe that we will have some more opportunities to expand our footprint with strategic acquisitions for good operators with solid market positions who run great businesses. I'd like to reference the folks at Taylor Motors, our recent acquisition. This was a tough business, but we're tough people and our business model is strong. We believe we have an obligation to serve more customers at the highest level, and we will always push ourselves to do more. To be able to continue to service customers during the crisis, we were able to develop and implement curbside and home delivery processes, and we will continue to refine our efforts as market demand dictates. Thank you to all of our great associates who have looked out for each other, and our customers, and help make our communities better. We've done outstanding work in following our cleaning and social distancing protocols, and at the same time fulfilling our essential purpose in our communities. We have grown closer together as a team and we've grown closer together with our customers. Now, we will open it up for questions. Operator?

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 come up during the Q&A.

Good morning, everybody. And it's great to hear from you. Just wanted to start with the first question, just on your comments on demand being relatively strong and supply has been relatively tight. I mean, I was just curious if you can comment, what you mean by this strong demand? I mean, do you think if you had more vehicles in inventory, maybe in the quarter or maybe in the coming quarters, you can deliver a lot more and that you're just a bit supply constrained relative to what appears to be good demand? It just seems curious given some of your customers may have been the most impacted by this crisis, unfortunately. Just curious what you mean by that?

Well, you know when things just came to a halt we weren't sure what demand would be. We were looking to the larger used car market as an indicator of what might be happening in our section and some of the volume decreases were 50%, 60%, 70%. We initially thought we would be down by quite a bit and consumer demand would be down; and while we were down in the latter part of the quarter, we weren't down nearly as much as the overall market. And so, as far as losing sales, I don't know that we lost any sales during the quarter because of the inventory levels. We did end the quarter a little light in certain spots, but the supply constraint certainly is playing into this too. I think a lot of auctions just shut down one afternoon, and so there is quite a mess to get that started back up and cars flowing again, and our vendors and our repair shops, and there was just a big disruption in the supply of cars. But I wouldn't say that had a huge effect during the quarter. I do think we would have sold more cars in March and April, certainly if not for the pandemic; but the supply of cars, in and of itself, wasn't the reason for the decreased sales. We could have sold more cars without the pandemic coming in, with our inventory is as high as it was at the end of February and March.

Could you provide us with an overview of the same-store sales throughout the quarter? Additionally, as we wrap up, what insights do you have regarding the year-over-year change? There seemed to be considerable concern about demand, previously being at zero, yet it appears that your performance has exceeded expectations. Understanding the exit rate of the year-over-year change would certainly help shape our perspectives moving forward.

Yes. February marked the beginning of our last quarter, and it was a very strong month for us, followed by a good first half of March. However, both March and April saw a decline, likely in the low double digits. While this drop was not as significant as the broader market, we did experience a slight decrease. Overall, February was robust, but March and April were down in the low double digits.

And Jeff, was the exit rate in April an improvement or did it remain down by roughly double digits?

It was roughly double digits.

Okay, got you. Okay. And then on the workforce side, I'm just curious how you're dealing with the furloughs; and it sounds like you've decided to go with furloughs as opposed to the PPP despite structure and I guess give us the way you look at the math. How tethered are you to those workers and how fast can you bring them back as the business normalizes and recovers?

We actually didn't furlough any associates other than a few part-time people. All of our other hourly associates, we reduced hours so that we were able to stay engaged. We were still able to stay in contact with them, that also allowed them to keep coming to work some; and so that was a big benefit there.

We still have all of our full-time employees. For the most part, they are still on our payroll rosters, still working, still engaged, still plugged in. So it was very evident to us right up front that we had to keep our great associates in place and engaged as best we could until things normalize. I think we've done a really good job of that.

So as things normalize you can hit the gas on hours and just ramp back up?

Correct.

That's great. Lastly, regarding the provisioning from the quarter, how should we view that moving forward? Do you believe it was sufficient for what we might encounter in the next quarter or two? How do you arrive at that number and estimate it? Additionally, how should we think about the provision and potential losses going forward? How much could they increase, and how do you calculate that?

That's a good question, John. It was difficult because we weren't able to get in contact with our customers like we like to or repossess for a month and a half before going into the quarter or while ending the quarter. We basically looked at delinquencies and historical amounts on when an account reaches a certain delinquency, what does that look like. But there is still a lot of unknown; what happens after all the stimulus money is done, after the extra unemployment runs out, how many jobs come back, and there is a lot of unknown out there but we basically just looked at historically where our delinquencies were.

We focused on ensuring that our customers understand that we are here to support them. We want them to feel secure about their cars and not to worry during this time. Our friendly approach seems to be paying off. With the stimulus funds now available, many consumers are using a significant portion to stay on track with their contracts, making payments and keeping their cars. We are optimistic that the adjustments we made will suffice. Consumers are responding positively; our services are essential for them, as they provide basic affordable transportation in areas lacking public transit. The strong lending relationships we have built with our customers demonstrate the stability of these connections.

Could I ask one last quick follow-up on that? We've heard from dealers that there has been an increase in demand for used vehicles priced at $10,000 and below, particularly from individuals moving away from public transportation. I know this may not directly apply to all your markets, but are you noticing any changes in consumer demand that could lead these lower-end consumers to shift from public transportation to owning vehicles that you offer?

You know, the areas that we serve really don't have public transportation. I can see in other areas where that might be a factor and that would serve to increase demand for that basic car which would potentially result in less deflation than we may be expecting right now, but we don't serve a lot of areas with public transportation anyway.

Okay.

I think what we are seeing, John, is that the people that have a real need for a vehicle are out there shopping; those that might have a choice, it's more of a luxury or more of a want than a need. They are not getting out as much or didn't during this fourth quarter.

Great. Thank you very much, guys. I appreciate it.

Thank you.

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

Good morning, guys. Thanks very much for taking my questions. Hope everyone there is well.

Thank you.

I wanted to discuss credit for a moment, understanding there are many factors involved. Can you provide insight into how delinquencies trended throughout the quarter? We experienced COVID in mid-March, followed by stimulus payments starting in mid-April. How did these two elements affect delinquencies? Did you notice any relief in delinquencies due to the stimulus? Additionally, how have delinquencies been trending so far this quarter?

So if you think about it, our fourth quarter is our big tax time, payment time, where we schedule a lot of seasonal type payments and there are a lot of consumers with cash during that time. So to Jeff's point, we started out February really well throughout the month of February and into March, and then everything just kind of shut down but we definitely did see a little bit of uptick when the initial stimulus money came out. And really, like I said, our collections weren't down by huge amounts; I mean a lot of that was related to the term increase. So I think as we move through this, and what the rest of the stimulus looks like is yet to be announced; but overall, we felt pretty good about the customer payments in the contacts that we had with our customers.

In May, the collection efforts have been quite successful. We're really pleased with how we have engaged with our customers and their positive response to our initiatives.

Got it. That's very helpful. And historically, your allowance has been fairly stable. But given all the uncertainty going on, would we expect that allowance to be a little bit to change a bit more frequently going forward?

You know, like I just said, we hope that we've increased it enough to cover what's coming up here for the next year so that we don't like to change that a lot. But I think there is still just so much unknown right now that it would be difficult to say that we won't need to change it again.

We focus on net charge-offs instead of the income statement provision. Even though we couldn't repossess in the last 45 days of the quarter, we believe that under normal collection processes, our percentages would still have been significantly lower than last year's. Even considering the pandemic, if we were operating normally, the fourth quarter charge-offs would have been less than the previous year's.

Got it. That's very helpful. I wanted to discuss competitive trends, specifically regarding your competitive environment in terms of other dealerships and more broadly, the supply of credit. Can you provide insight into the competitive dynamics in both of those areas?

It's still a bit uncertain out there. Any company that has a significant amount of debt on its balance sheet is likely to face challenges. Although some securitizations have occurred, they are taking a more cautious approach. We believe that our 40 years of strengthening our balance sheet will position us well to gain market share, and we don't yet have a clear understanding of the challenges our competitors are facing. However, we expect that lending will decrease in our markets, presenting a great opportunity for us to capture more market share, although it is still somewhat difficult to assess the situation at this time.

Got it. And then, one last one from me. You mentioned that the auctions essentially shut down around the middle of the quarter. Can you provide an update on whether auction activity has returned to its previous level? I know it was virtual for a while, but would you say the auctions are flowing again at this point? Is there still some work to be done there?

Yes, I believe there is still progress to be made. Some auctions that previously operated in person have transitioned to digital formats, and they may continue to operate this way. From what we understand, there are still significant disruptions to address, and we need to resolve some issues to return to normal. The flow of products is not yet at the level it will eventually reach, and it's been quite chaotic, with certain elements still needing attention. As it stands, the product movement through the auctions is not operating as it should.

Understood. Well, thank you very much for answering all my questions.

Thank you.

Thank you, Kyle.

Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is now open.

Good morning and thank you for taking my questions. I have a couple of quick ones. First, I appreciate the data you provided on trends from March and April. Could you update us on what you're seeing for May so far that might be different? For instance, has the decline in same-store sales for vehicles continued in May? Additionally, considering that the effects started in the latter half of April, could you discuss how those impacts have influenced the business in May, if at all? Is the improvement in payments also perhaps driving the demand you expected to see in May?

I'd say May is pretty similar to March and April in terms of overall trends. And we're still seeing a healthy demand for our product, consumers are shopping, but it is a little less than last year at this point. As we mentioned, collections are strong, but the stimulus money has been out there for a while now. And overall, our sales are down just a little bit in May in line with where we were for March and April. And again, we do expect that to continue to trend positive, we feel great about our market position and picking up market share, what we don't have much control over is the overall market for used cars and consumer sentiment and confidence in all that. So, we're going to pick up market share; it's kind of ahead of our hands as to what that market is short-term. But we're optimistic that we're going to get our share of the market and that volumes are going to increase over time.

Okay, great. Next question on credit. First, regarding the 6.2% delinquencies, does that include forbearance in this survey? Could you clarify that? Then, when discussing the increase in your credit reserves, what kind of loss rates are you assuming? It's challenging to find historical context for this, but I'm curious if you are currently subject to any specific requirements or if you anticipate that in the upcoming quarter.

Yes. So, real quick on CECL; we're not expecting a large impact from CECL on the income statement. We already provisioned out for the loss of our loans, and so there is not a like or much if any expectation for a change there that will take effect this first quarter of '21 for us. And then on the delinquencies in the 30 plus, and how that relates to modifications; we didn't really do any forbearances, no 90-day deferrals or anything like that. We just continued working with our customers individually as we always have, and adjusting their payment schedules to what they can afford in the short term until they started receiving their unemployment or whatever those different situations might be. So for the customers that we had been in contact with, and we were able to make those modifications, they would not show up in the delinquency numbers. But typically, those customers once we've got in contact with them and we've been able to work out an arrangement, those are much more successful customers.

The modifications during the fourth quarter of this year showed a slight increase compared to the fourth quarter of last year. To emphasize Vickie's point, we collaborate with customers individually, and there wasn't a significant rise in modifications year-over-year in the fourth quarter.

Thank you for the information. Moving on to the supply chain, I noted that the options were down, and I'm curious about the extent to which this has affected us. Are the auctions returning? Is that part of the solution for the supply chain, or are there other measures you're currently pursuing? Additionally, regarding new positions, I understand there has been a temporary pause. At this point, can you share your insights on improving the supply chain and overall inventory levels?

Yes. The auction resuming full activity certainly aids product flow, and our ongoing efforts to streamline procurement with preferred suppliers present a significant opportunity for us. With shops reopening to repair cars that need attention, we expect this to be beneficial. We are confident that, hopefully soon, the used car supply will stabilize, leading to good opportunities through auctions, online channels, and our preferred vendor networks. Additionally, we may see some new car dealer stores reopening to us for supply. All these sources, along with purchases from the general public and repossessions, will enhance our supply, enabling us to find reliable, affordable, and mechanically sound cars for our customers, thereby allowing us to increase our market share.

Okay, great. And last one from me. You talked about maybe potential store acquisitions, if you could maybe talk about the environment there? And are you hearing more of other folks, competitors maybe willing to sell to you? Thank you.

Well, we have the Taylor acquisition in March, just before the pandemic, and we've been very pleased with that effort. It's going to be great for us. And we think there are potentially other opportunities like that out there; operators that have been in the business, run good businesses, and may be looking to get out of the business at some point. It's a great way to exit and become part of our team. So, we're looking for good solid market dominant operators who might have an interest in becoming part of what we do, and we think there are some of those folks out there, and we would certainly be open and actively interested in solving those types of transactions and opportunities into what we do.

Okay, great. Thank you very much.

Thank you.

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

Good morning.

Good morning.

I'm curious, when you had to stop or limit repossessions, can you provide an idea of how much that affected your cash collections? I'm looking for a percentage, if available.

We experienced a decrease of about $6 million in collections, with nearly $3 million attributed to the term itself, and the remaining $3 million related to modifications and delinquencies. When we halted repossessions, it impacted collections, although it's challenging to quantify the exact amount. However, as of early May, collections have returned to normal levels, and we are quite optimistic about the collection outlook.

Is it correct to say that the decrease from 16% last year to 15% this year, which represents about a 6% decline in cash collections year-over-year, is partly due to repossessions, considering the 50-50 split mentioned in the $6 million?

That could be a way to look at it, yes. It's not exact but that might be how far our charge-offs might have gone up; it’s still under last year's charge-offs, but there might be a proxy to what true charge-offs might have been, asset recoveries, and repossessions.

Okay, and then…

Because of the situation, we would have been able to contact many of those customers, and typically once we can reach out to them, we can work something out; so it's difficult to determine.

Okay. Do you have the per lot per month sales numbers from May; what was this year compared to last year?

No. Other than to say that May is currently trending similarly to how March and April performed compared to previous years.

Okay. And then just lastly, I just want to make sure, what is the current blended ratio on your debt? I just want to make sure I have it right. Obviously, as you move up, the rate can actually come down should I'm paying for unfunded commitments?

Yes. We're 2.3 over LIBOR.

Okay.

So we're just a little over 3% right now.

All right. Thanks very much.

Thank you.

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

Hey, everyone. Sorry, I have one more follow-up. Regarding sourcing inventory, we've seen many headlines about rental cars facing challenges and possibly looking to sell off inventory. I'm curious if that type of inventory would align with what you're looking to acquire or if it differs from your target.

We have been focusing on moving up market and retaining long-term customers to ensure they remain with us. I believe that rental car companies will provide a valuable source of vehicles and inventory for us in the future, and we are actively exploring this opportunity as a preferred vendor. Our goal is to acquire newer, lower model cars and keep our loyal customers within the Car-Mart family for the long term. This approach will be part of our strategy.

Got it. Thanks very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Jeff Williams for any closing remarks.

Once again, thanks for your interest in Car-Mart, and thanks to all of our great associates out there. We have a great company, great potential, great future; and we're very excited about what we do, and why we do it, and we expect great things from ourselves. And just appreciate you guys listening in today. Have a great day. Thank you.

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