Earnings Call Transcript - CRMT Q2 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the America's Car-Mart Second Quarter Fiscal 2026 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jonathan Collins, Chief Financial Officer. Please go ahead.

Jonathan Collins, CFO

Good morning. I'm Jonathan Collins, the company's Chief Financial Officer. Welcome to America's Car-Mart's Second Quarter Fiscal Year 2026 Earnings Call for the period ending October 31, 2025. Joining me on the call today is Doug Campbell, our President and CEO; and Jamie Fischer, our COO. We issued our earnings release earlier this morning, and a supplemental presentation is on our website. We will post the transcript of our prepared remarks following this call, and the Q&A session will be available through the webcast. During today's call, certain statements we make may be considered forward-looking and 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 provision 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, including important cautionary notes, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2025, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. As a note, the comparisons that we will make today will be the second quarter of fiscal 2026 versus the second quarter of fiscal 2025, unless otherwise stated, and we will make several references to our supplemental materials posted on our website. Doug, I'll turn it over to you now.

Douglas Campbell, CEO

Thank you, Jonathan, and thank you, everyone, for your interest in America's Car-Mart and for joining to hear more about our quarterly results. Let me start by addressing what's in the numbers and what the numbers don't fully capture. Our reported results reflect a net loss of $22.5 million, which includes approximately $20 million in noncash reserve adjustments and one-time charges related to the strategic actions we're taking to reposition this business. More details are on Page 4 in the supplemental presentation on this. These are deliberate investments in our future, and the underlying trends in our business are moving in the right direction. Let me highlight several developments from the quarter that are notable. First, consumer demand remains strong. Credit applications grew substantially year-over-year, clear evidence that despite economic uncertainty, the need for affordable, reliable transportation is robust. And Car-Mart remains a trusted solution for working families. The effects in the broader wholesale market have subsided since the update in Q1 and while elevated relative to the prior year, continue to decline in alignment with what we would see seasonally. In October, we closed a transformative $300 million term loan that removes the capital constraints that have limited our flexibility we referenced last quarter. For example, under our legacy structure, certain covenants limited actions tied to optimizing our store footprint and organizational structure. Now with more flexibility, we're moving more decisively on a multi-phase plan to optimize our footprint, cost structure, and strengthen capital efficiency. These are hypothetical savings. We've already executed on Phase 1 in early November, which included the consolidation of 5 underperforming stores and the elimination of approximately 10% of our headcount as a company. The second phase will be completed in Q3. And when combined, the results generate more than $20 million in annualized SG&A savings. Between these 2 initial phases, we estimate a 10% reduction in our store footprint. More details here can be found on Page 7 in the presentation. I'll let Jonathan elaborate on additional efforts of the term loan and additional actions which will enhance our capital structure. But at a high level, this represents a fundamental step in removing constraints, unlocking flexibility, and aligning our funding model with the needs of a more modern, scalable platform. Our enhanced underwriting platform, LOS V2, which launched in May, continues to deliver measurably better results. During the quarter, we continued to see a shift of our mix towards booking higher-quality customers. We are prioritizing value over volume to build a portfolio that delivers stronger returns. More importantly, this higher-quality underwriting is needed to navigate uncertain environments. As we continue to see customer behavior shift with our Pay Your Way platform, which we relaunched late last quarter, customers continue to migrate from making payments in-store to online, which is an important trend as we look to leverage our new collection CRM. We're also seeing an increase in the accounts with auto recurring payments, which reduces the effort needed to collect. Lastly, customers are utilizing new payment channels like Apple Pay and PayPal. While these do add a level of convenience for our customers, it's also driving more consistent payment behavior, reducing in-store payment-related traffic and associated costs while improving the overall collection efficiency. As adoption continues to grow, we expect these benefits to compound when combined with our collection CRM powered by Salesforce. With this infrastructure now in place or nearing completion, it's creating competitive advantages that will translate into better unit economics and stronger returns. The work we've done positions us to execute from a position of strength, clarity, and discipline. And while there's more to do, the building blocks are in place. These efforts are creating a platform that will enable higher-quality growth and improve our financial performance. And with that context, I'd like to turn the call over to Jamie to review our operational performance for the quarter. Jamie?

Jamie Fischer, COO

Thanks, Doug. Good morning, everyone. Historically, when the macro environment softens on consumers, our business gets more robust. This quarter was another proof point of that with credit application volume up 14.6% from prior year. This is notable for 2 reasons. The first of which is that the company continued to navigate lower-than-normal inventory levels throughout the quarter. This is particularly evident and reflected on the balance sheet when observing the 6.8% variance between the periods. The second is the fact that this has a knock-on effect of reducing website traffic when fewer vehicles are advertised. Despite those headwinds, the team was able to deliver a sales volume result within approximately 1% of prior year. This performance reflects the resilience of the team and a vote of confidence from consumers in our offering. The launch of LOS V2 at the start of Q1 gave our store teams the ability to take advantage of the increased customer applications by prioritizing the highest ranked customers more effectively. Customers in these higher ranks demonstrate lower loss frequency and severity, faster time to breakeven and stronger returns on invested capital. In fact, as highlighted in our supplemental presentation on Page 10, you can see that 76.5% of our volume came from our highest ranked customers, ranks 4 through 7, a 12% improvement in higher-quality bookings compared to prior year since the system went live in May. Revenue increased 0.8% year-over-year, primarily driven by higher interest income and a nominal increase in the average retail sales price. It's important to note that the company had a one-time benefit of $13.2 million related to a change in service contract revenue recognition in the prior year. Absent that benefit, revenues would have been up 4.8%, primarily driven by an increase in vehicle price due to increased procurement costs related to tariffs outlined in the prior quarter. Gross profit margin was 37.5% compared to 39.4% in the prior year. Adjusting for the aforementioned one-time benefit, margins improved by approximately 100 basis points year-over-year and 90 basis points sequentially, driven by reduced repair frequency and severity and improved wholesale retention values. Turning to the operational progress from our enhanced payment infrastructure. The benefits of the Pay Your Way program are becoming increasingly clear. We're seeing measurable improvements in both the customer experience and payment behavior across the portfolio. Over the past 4 months, we've shown significant momentum in customers enrolled in and utilizing our updated digital payment options. These trends are driving improved collections efficiency, reducing in-store payment traffic, and increasing overall payment consistency. During the second quarter, we also exceeded 5% of our portfolio on Auto Pay recurring payments, which represents a 3x improvement compared to our legacy platform. This is partially driven by our customers opting to utilize our incremental payment types for recurring payments like debit card, Venmo, and PayPal as compared to our previous offering of only ACH. We are encouraged by the early success of the Pay Your Way strategy and expect adoption and efficiency gains to continue as the program matures. As Doug mentioned, we're advancing efforts to enhance collection performance through the rollout of a new Salesforce-based collection CRM. Development is complete, and the tool has begun testing in a live environment in one of our stores. We expect to begin piloting in the second half of the fiscal year. This next-generation platform will deliver immediate benefits, including streamlined workflows, improved account management tools, enhanced data collection, virtual payment modification capabilities, and a better customer contact experience. Looking ahead, we plan to introduce additional features such as advanced account routing, AI-driven customer engagement strategies, and self-service options. These enhancements will create a scalable solution capable of supporting a larger portfolio without a proportional increase in headcount. With the investments we are making to support our Pay Your Way program and the upgrade of our collection CRM, we believe this data-driven collections platform will generate meaningful results. In Doug's remarks, he mentioned a multi-phase plan to optimize operations and reduce SG&A. The process for this plan included an exhaustive review of our footprint and talent to ensure our resources are generating the appropriate returns. We evaluated underperforming stores, mapped customer concentrations and geographical overlapping, and assessed market coverage and service levels. From this, we established a phased approach to improve operational efficiency and performance. In November, we executed on Phase 1 by consolidating 5 locations into nearby better-performing stores. The intention with this first phase of consolidation was to specifically solve for underperforming locations that were sharing the same geographical footprint as that of a better-performing store. Early results confirm that this approach was sound. Our existing and new customers continue to be served seamlessly from one location in the same geographical area with a larger staff, more inventory selection, and the same great service they have become accustomed to at Car-Mart. We also conducted a comprehensive review of both field and corporate headcount. Where technology, automation, and process improvements have eliminated manual tasks, we made targeted reductions. These changes were implemented smoothly and operational continuity has been fully maintained. Importantly, these initiatives provide valuable insights that will inform decisions for future phases as we continue to optimize our footprint, cost structure, and enhance scalability over the next several phases. As you can see, we are taking meaningful steps to improve the efficiency of our operations with urgency. With this overview, I'll now turn it to Jonathan to cover our financial results.

Jonathan Collins, CFO

Thank you, Jamie. For the quarter, SG&A totaled $57.2 million, including $3.5 million in one-time expenses, primarily related to store impairment costs from the 5 closures Jamie discussed. On a reported basis, SG&A as a percentage of sales was 20.0% and 18.8%, excluding the one-time charges. Last quarter, I shared that the growth in our SG&A was driven by investments in our people and technology. At that time, I said our goal was to reverse about half of this growth in the second half of the year. I also mentioned that a modernized collections infrastructure would eventually deliver around 5% annualized cost savings, and I outlined that our target to reduce SG&A was to 16.5% of sales. The structured multi-phase plan we're announcing today clearly demonstrates that we're making strong and urgent progress toward these commitments. Our first phase covered 4 components: IT spend reduction through contractor and legacy software rationalization, consolidation of 5 underperforming stores, reorganization of headquarters and field roles, and optimizing marketing spend. Combined, these actions are expected to generate $4.9 million in savings this fiscal year and $10.1 million annualized. The store consolidations alone, moving customers in the nearby better-performing locations, as Jamie described, are expected to contribute approximately $1 million this fiscal year and $2 million annualized. We've also identified additional opportunities in subsequent phases, estimating to deliver another $3.5 million in this fiscal year and $21.3 million on an annualized basis. Upon completion of all phases, our cost reduction initiatives are expected to generate $31.4 million in annualized savings. This is outlined on Page 7 of our supplemental presentation. Building on Jamie's update on our Pay Your Way program, average collections per active customer increased to $582 this quarter compared to $561 in the same period last year. The strength in collections underscores the quality of the portfolio and the effectiveness of our Pay Your Way platform. I want to frame our credit results around a simple theme. Charge-offs were elevated due to normal seasoning and some macroeconomic pressures, but the leading indicators are improving. Net charge-offs increased to 7.0% from 6.6% in the prior year, reflecting the expected seasoning of the loans originated over the past 18 months. This is not surprising. As newer originations mature, they build loss history. What matters is whether the newer vintages are performing better than the older ones, and they are, as shown on Page 8 of our supplemental presentation. The leading indicators support this view. Delinquencies over 30 days improved 62 basis points to 3.14%. Modification activity declined to 6.19% from 6.91%, loss severity declined from $10,677 to $10,325 per unit sequentially, and collections grew 4.6%, outpacing portfolio growth of 2.8%. These metrics tell us the portfolio is getting healthier even as the seasoning math works its way through the P&L. Contracts originated under our enhanced LOS platform now represent over 76% of the portfolio, excluding the non-integrated acquisition lots, up from 72% last quarter. As legacy originations continue to run off, we expect portfolio quality to improve further. Our allowance increased to 24.19% of finance receivables, up sequentially from 23.35%, but down from 24.72% a year ago. The CECL reserve reflects observed loss history and includes a prudent overlay for macroeconomic uncertainty. While underlying credit quality is improving, we believe it's appropriate to maintain this level of reserve until we see further stabilization. The provision for credit loss was $119.1 million compared to $99.5 million last year. The increase was driven by the 40 basis point rise in charge-offs, reserve builds for macro factors, and continued seasoning such as at our acquired locations. As Doug outlined, we made significant progress transforming our capital structure this quarter. On October 30, we closed a new $300 million term loan facility with Silver Point Capital. The loan is 5 years, matures in October 2030, and bears interest at SOFR plus 750 basis points. Importantly, this transition allowed us to fully repay and retire our revolving line of credit. Additionally, we retired a $150 million uncommitted amortizing warehouse facility. As disclosed in our 8-K, the term loan included warrants issued to Silver Point to purchase up to 10% of our fully diluted shares at the market price at closing with a 6-year expiration. While dilutive, we believe this was the right path forward, striking a balance between deal economics and ensuring stakeholder alignment. Our securitization platform continues to perform well. Since the start of the fiscal year, we've completed 2 ABS transactions, 2025-2 and 2025-3, and called our 2023-1 deal in July. In our most recent securitization offering, our Class A notes were almost 8x oversubscribed and our Class B notes nearly 16x oversubscribed. In light of the turbulence in the bond market related to several subprime auto finance companies, we have proactively engaged with our current and prospective bondholders as well as ratings agencies. To highlight our differentiated business model, the controls we have in place, and to maintain confidence in our financial position. We believe this positive engagement reinforces the continued strength of our platform as evidenced by the strong demand on our credit and our ability to attract capital in a challenging environment. The weighted average life of our ABS structures and the maturation of receivables are also important components of our strategy. As ABS notes are retired, the residual collateral becomes available to fund our business in a way that is distinct from our legacy revolving structure. Total cash, including restricted cash, increased to $251 million at October 31 from $125 million at April 30. Debt net of total cash decreased from $652 million to $646 million despite the increase in gross debt related to the term loan. Debt to finance receivables and debt net of cash to finance receivables were 59.2% and 42.6% at quarter end compared to 51.8% and 43.0% a year ago and 51.5% and 43.2% at the start of the fiscal year. Loss per share for the quarter was $2.71. Our net income loss of $22.5 million included approximately $20 million of noncash and one-time charges, $11.8 million from CECL reserve adjustments related to portfolio seasoning and macroeconomic factors, $4.5 million from the retirement of our revolving line of credit, and $3.5 million from store closures and impairment costs. Adjusted EPS loss, excluding these items, was $0.79 per share. With that, I'll turn it back over to Doug.

Douglas Campbell, CEO

Thank you, Jonathan. I want to address what I believe is a significant disconnect between how the market is valuing this business. Our stock is trading at roughly 1/3 of book value. The market sees challenges, our capital structure evolution, macroeconomic pressure on the customers, and broader sector concerns. Those are legitimate issues for the industry and for Car-Mart. But here's what I believe the market is missing. In the middle of all of this turbulence, there's been a validation point. Our term loan provider has provided and committed $300 million into this business. They conducted an extensive due diligence on our platform, our locations, and the quality of our assets and our path forward. It's not theoretical that sophisticated capital validators are putting real money behind what we've been telling you. We have substantial residual equity in our ABS structures, improving credit performance, and strong operational fundamentals. At current valuations, I believe the market is significantly undervaluing what we're building here. Looking ahead, our priorities are straightforward: Complete our capital structure transformation with another ABS transaction and our revolving warehouse facility in the second half of the year; normalize inventory levels to meet the strong demand we're seeing and to set ourselves up for the tax season; execute Phase 2 of our cost reduction initiatives here in the third quarter, and continue demonstrating improving credit performance as higher-quality LOS originations mature. As these initiatives progress, we expect to return to positive GAAP earnings and demonstrate the earnings power of this improved model. We've built the foundation, the path is clear. The demand is there. Now it's about execution. We look forward to updating you on our progress in subsequent quarters. Thank you for your interest in America's Car-Mart, and we look forward to your questions. Operator, please provide instructions for the Q&A session.

Operator, Operator

Our first question comes from the line of John Hecht with Jefferies.

John Hecht, Analyst

It seems like you're positioning yourself to tackle the ongoing challenges while also being better situated when conditions improve. I noticed that the newer vintages are performing quite well based on the loss curves. Is there a way to quantify this, perhaps in terms of cumulative loss expectations for the newer vintages compared to the COVID vintages and pre-pandemic vintages? Any directional insight on how the new book is performing in relation to the legacy portfolios would be helpful.

Jonathan Collins, CFO

Yes, John, thank you for your question. It's great to chat. In previous quarters, we shared a chart regarding a specific static pool. When we transitioned to our new loan origination system, we originated a substantial number of loans under our old underwriting system, ALIS, and we've been tracking their performance over time. Generally, we observed an improvement in the range of 18% to 20% for that particular pool, and that trend continues. When comparing different periods, like pre-COVID, it's important to note the significant changes in customer behavior and offers, as well as the nearly doubled car prices. Loan terms have also been extended, which alters the comparison somewhat. Some years were affected by government subsidies and market dynamics. We believe a more relevant comparison is with our fiscal year 2024 vintages, which were mostly originated just before the switch to the new system. Overall, we continue to see a favorable differential between specific vintages.

John Hecht, Analyst

Okay. That's helpful. It seems that everyone is experiencing similar challenges, but you are focusing on enhancing your position in light of these environmental pressures. Given that, I assume that competitors, especially the smaller ones, are facing significant challenges. Can you provide an update on the competitive landscape and how it influences your strategic thinking moving forward?

Douglas Campbell, CEO

Sure. The sector, obviously, we play in there are not a lot of public comps, John, as you know. What gives us insight and a little bit of confidence into keeping our pulse on the market is obviously, we had built out and still have an acquisitions team. And so we feel a lot of calls from operators who are interested in either selling their business or partnering, et cetera. And we get a lot of feedback as it relates to that. And the sector is under a lot of pressure. It is really, really difficult for operators to both procure capital, to find inventory. And so these are some of the things that are differentiating us from our peers. And then obviously, in markets where there was prior competition, some of those have eased up for us. And so there's this push and pull dynamic where we're seeing some benefits on supply. You have pricing that had been elevated. And so that's providing a tailwind on recoveries, which flowed through to gross margin, which is nice, but obviously showed itself as a headwind on the procurement. What's interesting about our business is that 5 short years ago, we used to sell a car for $10,000 or $11,000, and now the average retail sales price has doubled. And despite that, we're finding homes for these vehicles and customers. And so we don't believe that dynamic is going to change, right? We're going to have to adjust. And what we're trying to do is set ourselves up for the future, set ourselves up in this model to be able to serve customers up and down the credit spectrum so that we can continue to grow through that. And that requires technology. We believe our foresight in trying to make sure that we get these things done and what we've been working on for the last 18 months is really important and differentiates us from our competitors, especially when you consider things like AI and how that will change our business and trying to make sure we stay in front of that.

John Hecht, Analyst

That's very helpful. I have one more question, if that's alright. You mentioned the ongoing challenges in the industry, and that you have focused on managing what you can control, such as expenses and underwriting factors. Doug, in your opinion, I believe affordability is one of the biggest constraints to improving the industry. However, could you share your thoughts on what other factors you are monitoring that might indicate positive trends ahead? Also, how long do you think it will take to see improvements? What milestones should we look for that would suggest the environment is becoming more favorable?

Douglas Campbell, CEO

Yes, that's a great question, John. We need to prepare ourselves to handle any environment. With the changes to our cost structure and the new flexibility we have, we're getting ready to ensure we can manage any challenges. This is especially important considering what's happening across the industry. We need to generate our own growth in the business, which means pursuing higher-quality customers and ensuring we have options regarding the types of vehicles we procure, rather than narrowing our focus. These strategies will provide flexibility within the business. Additionally, we are transforming how we collect payments from our customers, shifting from our historical methods. We are concentrating on what we can control. I can’t predict when the market will improve for consumers, but the current conditions regarding car prices are becoming the norm. There are many innovative ways we can position the business to create value, and we're exploring all options. As we move through the upcoming quarters, our priority is to optimize our cost structure and achieve positive earnings, which is crucial. This will enable us to focus on rebuilding our inventory and capturing existing demand. We have experienced a favorable credit cycle for many years, but it is now shifting, and this pressure on consumers is unfortunate. However, it's also when our business tends to thrive. Historically, we've seen strong performance during challenging periods, and the key is to endure and reap the benefits later. We're ensuring that we're prepared for whatever unfolds in the business.

Operator, Operator

Our next question comes from the line of Kyle Joseph with Stephens.

Kyle Joseph, Analyst

With the new debt in place and you guys talked about application flow is really strong, give us a sense for the timing in terms of being able to meet that strong demand.

Douglas Campbell, CEO

Kyle, thanks for the question. So Jamie referenced the deviation in sort of inventory position through the 2 periods, declining about 7% in terms of total inventory on the balance sheet. We're in that phase of sort of rebuilding inventory. And I think that takes us to work through the quarter and it's more important as we set up for tax time. So in my mind, Q3 is that time to sort of rebuild inventory. And so Q3, just given sort of what's on the slate, we're going to be working on an ABS transaction, rebuilding inventories, and then making sure we set up for a tax time and obviously executing Phase 2 on our SG&A plan. So I think we will be set up nicely here for the fourth quarter to make sure that we can get after it in tax time, especially considering that tax refunds are supposed to be elevated here going into the season. So we're excited to take advantage of that.

Kyle Joseph, Analyst

Got it. It's clear that you completed the term debt despite challenging market conditions, which is an understatement. Can you walk us through your discussions regarding the next phase on the right side of the balance sheet? It seems like a warehouse is in consideration. Could you provide some insight into how you are thinking about structuring that, including whether it will involve one or two facilities and your current status on that?

Jonathan Collins, CFO

Yes. Kyle, good to talk to you. Yes, if you go back for a long time as a company, we managed ourselves with a very simple capital structure and ABL. And one of the things that this term loan provides us with is flexibility. And one piece of that flexibility is to move to what we describe as our capital structure. And so we do anticipate putting a couple of warehouses into our capital structure, and that will provide us with some flexibility from that perspective. We'll continue to leverage the ABS market. That's an important platform that we've engaged with and built over time. Going back, we started this process probably about a year ago. And so part of that process was engaging with various warehouse providers that you needed to complete the term loan first to put cash on balance sheet. And so we do believe that the warehouse structure will be a fast follow, and we're actively working on that from that perspective.

Kyle Joseph, Analyst

Got it, Jonathan. Last one for me. Just in terms of credit performance, just a lot of moving parts out there, and it sounds like some are specific to Car-Mart and some are just kind of the macro more broadly. But at least in terms of leading indicators, it seems like credit is getting better. You guys have rolled out LOS V2. Again, we can see the curves there look like there's overall improvement. And then you balance that with higher charge-offs, which I think you guys explained well, the higher reserve and then broader macro uncertainty. Is that kind of a fair way to think about it? Just that what you're seeing at Car-Mart, you're seeing general improvement. But given what's going on in macro, you're not really willing to call it at this point. Is that a fair way to assess how you're seeing credit?

Douglas Campbell, CEO

That's correct. There's no doubt that this environment is putting a strain on all customers, our customers included. We've been pedaling really, really hard to ensure that the type of customer that we're putting in the portfolio is more durable, and we've spoken about that a number of times through the quarter, the consumer has been navigating continuous pressure seen on tariffs and the cost of goods, etc. And then, of course, all of the SNAP benefit speculation, etc., which we were getting in front of and messaging our fields to ensure that we could deal with that and use the levers within our toolbox to help consumers navigate that. And that was right at the period in closing the quarter. I think that's especially notable just given that we finished off delinquencies at 3.1%, and those continue to trend well. Into November, that low delinquency rate has worked out sort of favorably in terms of the number of unit losses that we take, and that's about down 10% in November when averaged across what we saw in the quarter. I don't know how that plays out through the rest of the third quarter, but it certainly is a good leading indicator, which is why we really focus on that as a key metric, a managerial metric for credit on how we manage our business. And to your point, the dynamic is really fluid. But what's been important to us and this consumer, given our 1 million-plus cars sold in the space, is to ensure that we stick to the playbook on helping customers navigate this environment where we can. And that if it is not going to be successful to call it and get the asset back and ensure that there's quality in the asset and we can recover that and provide good returns to our shareholders. And I think that playbook is working well. Obviously, we'll continue to look at that as we navigate new headwinds like the SNAP thing as an example. But we continue to do that and booking larger amounts of stronger consumers in our portfolio is an important piece of that.

Operator, Operator

Our next question comes from Vincent Caintic with BTIG.

Vincent Caintic, Analyst

I appreciate the detailed information you shared during the call and presentation. You did an excellent job emphasizing the improvements in SG&A that we expect to achieve, as well as what we can anticipate for annualization. I want to focus on revenue and sales expectations moving forward, considering all the operational enhancements you've implemented and those in progress, along with the flexibility from the new capital structure and your changes in underwriting. With all of this in mind, should we anticipate an acceleration in sales volume and sales per store per month? Could you share your level of confidence? Are there factors to consider, such as the store closures you've mentioned, that might create a short-term impact but lead to long-term strength? Any insights on how we should view revenues would be appreciated.

Douglas Campbell, CEO

That's a great question, Vincent. I'll do my best to explain. We have indicated that the total effect of store closures in the first two phases will amount to about 10% of our store footprint, which translates to approximately 15 stores. If you evaluate our average productivity per location, it suggests a reduction in output. However, we are concentrating on the geographical relationship between the stores we are closing and aiming for consolidation. It's important to highlight that we want to continue serving the same customer base. We've mapped out all locations by ZIP code and found that in many instances of underperforming stores, there is significant customer density. We believe we can recover some of the sales by transitioning customers to new locations. While it’s uncertain how much of that we can maintain, the five closures we implemented in early November indicate that we retained over 80% of those sales, which is encouraging. This complicates how we project overall sales loss since we won’t be losing those sales on a one-to-one basis due to our strategic approach in the first two phases. Regarding short-term sales expectations, inventory plays a crucial role. We plan to quickly restock our inventories in Q3, so I anticipate some fluctuations in sales results for that quarter but expect to resolve this by January. Successfully addressing this will allow us to make the most of the tax season. The impact on that will heavily depend on our ability to retain sales from the closed stores. The average driving distance for customers to the first five closed stores is about 15 minutes, and for this next round, it’s projected within a 20 to 30-minute range. This driving distance is key to our sales retention expectations, giving us confidence that we can maintain strong sales, although we'll need to validate that in practice.

Vincent Caintic, Analyst

Okay. That's super helpful. And I appreciate and I thought it was great that you highlighted kind of the valuation of Car-Mart stock versus it's trading at 1/3 of book value. With that, I'm wondering if there are any actions you can take to kind of force that issue to close that valuation gap. Normally, we think about share repurchases, but I know there's a lot of capital structure changes upcoming. But you also talked on the press release about the ability to access a substantial amount of the residual equity in the ABS deals. So just kind of throwing that out there, if there's anything you can do, any thoughts from a structure level to be able to realize some of that value?

Douglas Campbell, CEO

Yes, Vincent, thanks. An important aspect of addressing that gap is providing information. Without information, fear exists. As mentioned in both the press release and the supplemental presentation, we are working to give our investors and analysts more information to help them understand. Actions like clearly outlining the SG&A initiatives we are implementing and the measurable benefits expected, both in the current fiscal year and on an annualized basis, are crucial to this effort. I believe this will aid people in understanding how they can bridge that gap. That is my expectation. Additionally, we are focused on delivering results.

Vincent Caintic, Analyst

Okay. Great. And lastly, I have a question, and I think this one is for Jonathan. I wanted to discuss the credit allowance percentage. On the slide that covered the adjusted EPS and excluded the one-time impact of the allowance percentage adjustment, I'm curious if that indicates that the current rate of 24% is the appropriate percentage to consider moving forward. I just want to confirm my understanding that we are now making a one-time adjustment and that 24% is indeed where we should be.

Jonathan Collins, CFO

Yes, thank you, Vincent. How are you this morning? If we look back historically, the allowance fluctuates within a certain range. Part of this is based on the performance of the portfolio itself, and part is influenced by macroeconomic conditions. We recently experienced a government shutdown and we came very close to seeing issues with SNAP benefits. Looking ahead, as Doug pointed out, consumers are under stress. I can't confidently predict what the macroeconomic environment will look like in six months or a year; there isn’t a clear path to optimistic outcomes. This doesn’t necessarily mean things will be bad or good, but there is certainly some uncertainty. I believe we can all agree on that. Some of this uncertainty is reflected in our allowance, which I expect will remain within historical limits. While I can't guarantee it will be exactly 24%, I also don't think it will significantly exceed what it is now. So, I expect it to stay within a range, and at present, we are within our historical range as a percentage of receivables. We will have to see how the macroeconomic situation evolves.

Douglas Campbell, CEO

I would just like to add, Jonathan, that there is definitely a struggle in the current situation with the consumer due to a worsening environment. They are managing, and charge-offs are slightly increasing. This is undeniably happening. At the same time, the quality of new customers entering the portfolio is improving with each month and quarter. Additionally, there is a qualitative aspect that Jonathan mentioned. For example, there is a forward-looking perspective on interest rates and inflation. Last quarter, we anticipated rate cuts, but now it seems they may be delayed until '26. These factors affect the provision and allowance. It's challenging to quantify precisely. However, since it remains lower than it was a year ago and has slightly increased, I feel it is fluctuating in a way that it should be. Nonetheless, it's really tough to predict how the broader environment will influence this.

Operator, Operator

And I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you all for your participation. You may now disconnect.