Earnings Call Transcript - CRMT Q1 2020

Operator, Operator

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart’s First Quarter Fiscal 2020 Conference Call. The topic of this call will be the earnings and operating results for the company's first quarter for fiscal 2020. Before we begin, I would like to remind everyone that this call is being recorded, and it will be available for replay for the next 30 days. The dial-in number and access information are included on 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 risk 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 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, CEO

Okay. Thank you for joining us, and thank you for your interest in America's Car-Mart. We are pleased to report another solid quarter, and we are off to a great start for the fiscal year. Our topline was up almost 5%, and we added 1,600 customers for the quarter. We are pleased with the significant improvement in our credit results and what that says about our product, service, and the value that we’re adding to the lives of our customers. We believe that taking care of people will drive operational success and long-term value creation. We will continue to invest in training and development of our associates while also educating consumers on the savings we provide in terms of the total cost of ownership, with the goal to keep customers for life and move that market as their credit profiles improve over time. We will leverage the infrastructure we built and grow our top line in customer count. As we have said, even though we are 38 years old and have great history, in many ways, we are a start-up company. Many important initiatives are just getting off the ground, and we are excited about our place in the world. Our team is putting everything we have into giving our customers a great experience and supporting our associates as they build their careers. As we’ve said, our model represents the best way to serve this high-touch market, and we aim to be the best company in the world at providing transportation solutions to credit-challenged customers. I will now turn it over to Vickie to go over some numbers.

Vickie Judy, CFO

Good morning. For the quarter, overall revenues were $172 million with same-store revenues at 3.3%. This resulted from a 4.1% increase in sales and a 9.5% increase in interest income. Revenues from the dealerships and the over 10 years of age category were up 2%. Stores in the 5 to 10-year category were up 4%, and revenues for stores in the less than 5 years of age category were up about 34% to about $16 million. Most of the sales increase was a result of the increased selling price as sales volumes were basically flat. Our average selling price increased to $11,410, a 3.6% increase or $395, compared to the prior year quarter. This was also an increase of $105 sequentially. This resulted from continued high demand for vehicles in the used car market and our efforts to provide a high-quality vehicle for our customers. At quarter-end, approximately 14% of our dealerships were from 0 to 5 years old, 28% were from 5 to 10 years old, with the remaining 85 being 10 years old or older. Our overall productivity was 29 units per month, down from 29.8 compared to the prior year quarter. Our 10-year-plus lots produced 31.8 units sold per month, per lot for the quarter, compared to 32.8 for the prior year quarter. Lots in the 5 to 10-year category produced 26.6, compared to 26.8 for the prior year quarter. Lots less than five years of age had productivity of 21.7, compared to 22.1 for the first quarter of last year. We continue to believe we have potential to increase sales volumes and improve productivity with the ongoing investments being made in our inventory, our field sales efforts, and the digital area. Our down payment percentage was up slightly to 6.5%, compared to 6.1% for the prior year quarter. Collections as a percent of finance receivables were up 40 basis points to 13.5%, compared to 13.1% last year. The average originating contract term was 29.9 months, compared to 29.7 for the prior year quarter and up slightly from 29.8 sequentially. Our weighted average contract term for the entire portfolio, including modifications, was 32.1 months, compared to 32.4 for the prior July. The weighted average age of the portfolio was basically flat at approximately nine months. Interest income increased 9.5% to $1.9 million, compared to the prior year quarter, primarily due to the $41.5 million increase in average finance receivables at an 8.1% increase. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4, up from 16.3. Our gross profit margin dollars per retail units sold increased by $104 to $4,886, compared to $4,782 in the prior year quarter. Our mix of retail units sold was consistent with the prior year. SG&A for the quarter was up $2.3 million to 19.1% of sales, compared to 18.3 for the prior year quarter. This increase was almost entirely related to salaries and benefits, including stock-based compensation as we’re making long-term investments focused on recruiting and developing great associates and an infrastructure to support a growing customer base. We’ve added over 4,300 customers since this time last year, 1,600 since fiscal year-end, and our efficiency improved again this quarter based on the number of customers served per associate. We’re focused on efficiencies and cost control while continuing to invest for the long term, to be able to grow and be prepared to capitalize on market opportunities. As an integrated sales and finance company, we would not have seen the improvements in our credit losses and net income without these investments. For the current quarter, net charge-offs as a percentage of average finance receivables was 5.4%, down from 6.4% in the prior year first quarter. Both the frequency and severity of losses have improved compared to the prior year as a result of our higher quality vehicles, improved deal structures, and improved collections practices. Our focus on customer experience and ensuring customer concerns are addressed in a timely manner have contributed to the reduced frequency of losses. Improved collections, 40 basis points better, and a higher recovery rate contributed to the decreased severity of losses. Recovery rates for the quarter were approximately 27%, compared to 28% last quarter, and 25% in the prior year quarter. We’re very pleased with this continued improvement in credit results and the fact that we have more customers being successful and staying in their vehicles. As a result of these continued improvements in our net charge-offs and the quality of our portfolio, we reduced the allowance for credit losses from 25% to 24.5%, resulting in a $2.6 million decrease in the allowance for credit losses as of July 31. This was a $2 million after-tax benefit in net income or $0.29 per diluted share. Excluding this adjustment, the provision for credit losses on the income statement would have been 22.7% of sales for the current quarter, compared to 26.1% for the prior year quarter. The effective income tax rate was 21.8% for the first quarter of fiscal 2020, compared to 17.1% for the prior year quarter. Income tax expense did include an additional income tax benefit related to share-based compensation for the current quarter and the prior year quarter respectively. We continue to 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 approximately $159 million. We had over $56 million in additional availability under our credit facilities, and our current debt-to-equity is 58.1%, and our debt-to-finance receivables ratio is 28.3%. During the quarter, we repurchased 55,507 shares of our company for $4.7 million at an average of $84.94 per share. Since 2010, we’ve repurchased approximately 53% of the company for $229 million, at an average price of approximately $37 per share. We continue to have strong cash flows. For the quarter, we added $17.8 million in finance receivables, repurchased $4.7 million of our common stock, funded $1 million in net CapEx, and increased inventory by $7.2 million, a total of $30.7 million with only a $5.8 million increase in debt. Thank you. I’ll now turn it back to Jeff.

Jeff Williams, CEO

Okay. Well, thank you, Vickie. As mentioned in the press release, we did open two new dealerships during the quarter, one in Bryant, Arkansas, and one in Conway, Arkansas. These dealerships have gotten off to a good start, and we expect great things from these locations, as well as the other new lots that opened in the last year. We will add additional locations in the future at a rate that matches our ability to support customers and associates at the highest levels. Our focus over the near-term will continue to be to leverage our top-performing general managers, as we have a large number that can serve 1,000 customers or more in their existing markets. These proven leaders are executing at very high levels and they deserve our full support and attention as they pick up market share and help us build our future leaders. As a company, with great customer experience as our guide, we are transitioning into being more aggressive in keeping customers for life and making the necessary investments with inventory, facilities, and associates to make that happen. Once again, we’ve built an infrastructure that can support a significantly higher number of customers, and we believe we have an obligation to grow as communities are better when Car-Mart is there. We will now open it up for questions.

Operator, Operator

At this time, the participants will answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements apply to both participants’ prepared remarks and to anything that may come up during the Q&A. Our first question comes from John Murphy with Bank of America. You may proceed with your question.

Yarden Amsalem, Analyst

Good morning, guys. This is Yarden Amsalem on for John. Could you share with us what you’re seeing in terms of credit availability in the subprime space, as well as the competitive environment there? And I guess relatedly, how low interest rates impact this dynamic?

Jeff Williams, CEO

Well, you know, we continue to see healthy competition out there. There’s still a lot of money available for subprime and deep subprime, so it is competitive. We do believe that our offering and the pricing of our offering is very attractive to consumers. When you look at the total cost of ownership, our job is to educate those consumers on the value that we have on our offering compared to others, but it is competitive. The market certainly is flushed with cash and we’re trying to make our offering better, that customer experience better, and educate those consumers about the benefit and cost savings when dealing with Car-Mart. We have a lot of room, we believe, to be more aggressive with our repeat customers and the customers we know and keeping those customers in the family, but the competitive market is pretty intense.

Yarden Amsalem, Analyst

Okay. And I guess relatedly, are you seeing any change in the credit health of your consumer? Obviously, your credit metrics improved materially in recent quarters, but accounts over 30 days past due picked up a little bit. What do you think was driving that?

Jeff Williams, CEO

Well, it was just a slight increase. We don't look at that as a big deal. A slight increase in 30-plus. I’d say overall, the health of our customers is pretty strong; wages are up; hours worked are up. We’re attracting more repeat customers with the offering. You know, we believe the overall portfolio is healthier today than it was a year ago.

Yarden Amsalem, Analyst

Thank you for the color. I guess my last question: can you maybe talk more broadly on your capital allocation strategy? How you’re prioritizing share buybacks versus investment in managers, store openings, bringing down debt, and so on?

Vickie Judy, CFO

Well, our first order of business is to always make investments for the business first prior to buybacks. When we have excess cash, then we invest in those buybacks opportunistically. But certainly, our first order of business is to take care of our associates so that they can provide the better service we’re looking for for our customers, and that's where our first priority is going to be.

Jeff Williams, CEO

And we have a number of general managers that are very talented in running good businesses. Therefore, capital allocations to those folks is the top priority for us as we try to build market share and improve and increase our already impressive repeat business percentages.

Yarden Amsalem, Analyst

Okay. Thank you, and thank you very much. That’s it from my end.

Jeff Williams, CEO

Thank you.

Operator, Operator

Thank you. And our next question comes from Hugh Miller with Buckingham. You may proceed with your question.

Hugh Miller, Analyst

Hi, thanks for taking my questions. As we think about the improvement in collections that you guys have enjoyed, how much would you say is driven by internal efficiency enhancements that you’ve been able to deliver versus just benefits from the higher quality car?

Jeff Williams, CEO

We do believe that most of the improvements we’re seeing are from internal improvements. We have much better visibility on delinquent accounts. We’re getting resolution with delinquent accounts much quicker than we were before. We’re seeing productivity at the field level that we didn't have; the visibility is better, and we have a great team in place corporately to assist the field with collections efforts and training and hiring in the personnel matters involved with those account reps in the field. So, we think the primary reason for lower credit losses is due to basic improvements in blocking and tackling and running the play in the field, but certainly, we believe we’re putting out a better car, a more mechanically sound car. Customer expectations are higher, especially, as you try to attract a more creditworthy customer; you’ve got to put a good product out there. So that certainly is a piece of the equation too.

Hugh Miller, Analyst

That’s helpful. Thank you. And then, I guess, as you mentioned the initiatives to kind of maintain the customer base, create customers for life, move up the credit spectrum with them, how should we think about that influence over time on kind of the gross margin and also the other income revenue line item as you progress with that customer base?

Jeff Williams, CEO

Well, that’s a good question. Over time, customers—good customers—sometimes have graduated beyond Car-Mart and moved on to special finance maybe at new car dealerships or independent dealers. We believe that when we look at pricing above us and what the customer is paying above us that there's quite a bit of room for us to move up with the quality of car, the age, and mileage of the car, and keep some of those customers that we know and have known and are good credit risks by offering a better product, maybe a little longer term with a lower payment. The car quality would certainly support that. So, we're looking at being more aggressive with inventory and with underwriting and marketing to customers we already know. We believe we’ve got some competitive advantages for markets above us a little bit, which would mean more inventory, carrying more inventory, and ensuring the mix and quality of the inventory is a little higher. Our sales price is also maybe continuing to drift up over time, which is a good thing.

Hugh Miller, Analyst

Got it. That’s helpful color there. And then, as we think about the unit volumes, and kind of some of the headwinds that we’ve seen more recently there, can you just talk to us a little bit about kind of, what’s driving that? I know in the past you’ve mentioned kind of inventory mix and having the right mix to sell is important, but, are you seeing any intensification of competition? Or has there been any benefit that you’ve noticed to this point about some of the website enhancements you’ve made? Just some more color on that and how we should think about unit volumes on a go-forward basis would be great?

Jeff Williams, CEO

We are gaining on it a little bit of a transition. We are certainly improving the quality of our inventory, the quantity, and the quality to be more competitive. Really focusing in on repeat customers, the customers we already know, and it is competitive. There’s a lot of money and we’ve got to educate our consumers about the quality of our car, the value of the service, so we are in a little bit of our transition period with inventory, educating the consumers. The digital side is very new to us. The online credit application, the pictures of inventory online, and the online marketing efforts, we are very new in that side of things within the last quarter or two, and we're very optimistic there. We expect to see some nice movements in all those areas in the right direction with increased volumes. We feel like the market is there for us; the value proposition we bring is fantastic. But we’re in a bit of a transition period, but in the meantime, we're still selling plenty of cars and credit losses are fantastic, so we’re really in a pretty good spot.

Hugh Miller, Analyst

Great color there. I appreciate that. And lastly, the tax rate came in a little lower than what we’re looking for, any guidance you can provide about how we should think about the tax rate on a go-forward basis would be great? Thank you.

Vickie Judy, CFO

Sure. The only difference really is the discrete item of the stock-based compensation and when exercises are done; we always get a benefit from those. We do still continue to have some options that will be expiring over the next few quarters, but we don't know exactly when those get exercised. Otherwise, we should be pretty close or just under that 24% tax rate, excluding those discrete items.

Hugh Miller, Analyst

Got it. Thank you very much.

Jeff Williams, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Kyle Joseph with Jefferies. You may proceed with your question.

Kyle Joseph, Analyst

Hi, good morning guys. Congratulations on another good quarter, and thanks for taking my questions. First, just one more on credit, if you don't mind. You talked about better vehicles and better collections; anything on the underwriting front or any changes in terms of approval rates there?

Jeff Williams, CEO

No. The traffic has been up based on the improvements with inventory and the efforts to improve our field sales efforts. Traffic is actually up. The online efforts have improved online traffic obviously. And so, we're seeing more customers at the dealerships and online, and we’re being a little more selective. That’s a good thing for a finance company. We're always trying to find that right balance and make sure that we’re cherry-picking and getting the very best credit risks, but the traffic has been solid both online and at the dealerships, and we’re being a little more selective on the underwriting. We have some room to loosen up there, but we have room to really go after and be more aggressive with those higher rated customers.

Kyle Joseph, Analyst

Got it. And then one follow-up for me, just given the week we’ve had, can you just remind us how your business performs in economic cycles?

Jeff Williams, CEO

Well, you know, the only recent example is—not that recent anymore—the great recession, and the company's credit results were actually at all-time lows, at the tail end of the last recession. So, by putting a good product out there for a fair price and supporting these customers, if credit were to constrict in the market significantly, that would certainly be a positive for us. As somebody that’s providing good basic affordable transportation with the service to support these customers and the things that happen in their lives, the last recession was actually very good for Car-Mart.

Kyle Joseph, Analyst

Got it. Thanks very much for answering my questions.

Jeff Williams, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from John Rowan with Janney. You may proceed with your question.

John Rowan, Analyst

Good morning.

Vickie Judy, CFO

Good morning.

John Rowan, Analyst

Just wanted to drill down into frequency and severity a little bit more. Obviously, you talked a lot about improving the quality you are providing to the consumer. How much of that decrease in loss frequency is a function of better mechanical soundness of the cars as opposed to a change in underwriting?

Vickie Judy, CFO

The majority of it is related to the cars. I mean, we continue to tweak our underwriting, and obviously see our down payments and our upfront equity and a lot of that stuff is improving. So, I would say the majority of it is related to the car, and just to us getting in front of the customer a little sooner, and making sure we’re resolving any issues on a timely basis. You know, if you let these guys go too far, then they can't get back out of it and they can't catch up. So, I think a lot of it is the car and again our internal processes.

Jeff Williams, CEO

Yes, but if you had to break it out, we feel like the biggest factor in frequency is the good work our folks are doing in the field with visibility. The quality of the car fits in there too, but it’s a combination of things.

John Rowan, Analyst

Okay. And as far as security goes, I don't know if you gave out the information on duration, but we’ve obviously seen over the past year or so, we’ve seen duration come down. We’ve seen down payment go up and the cash conversion cycle improve, which should theoretically—even in a static frequency situation—reduce severity. Is that—can you give the duration figure and speak to how much of that is driving the reduction in severity?

Vickie Judy, CFO

Yes. So, it’s not huge. Our overall portfolio was at 32 months, compared to last year, so not a big reduction in the term. We are keeping customers in their cars a little over a month longer. So, that contributes to some reduced severity there, and the car is better when we, you know, if we do have to repo it and wholesale it. We're getting more on our market values there as well.

John Rowan, Analyst

So, has there been a big change in the number of cars that you’re repo-ing and scrapping as opposed to repo-ing and taking back to auction?

Vickie Judy, CFO

No. It’s been really pretty consistent.

John Rowan, Analyst

Okay. Alright. Thank you very much.

Jeff Williams, CEO

Thank you.

Operator, Operator

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Jeff Williams for any further remarks.

Jeff Williams, CEO

Okay. Well, thank you again for listening to our call and your interest in America's Car-Mart. And as always, we’d like to thank our associates for all the great work going on out there to take care of all customers. We feel like we’re in a great spot as a company. Very excited about our future. We’re all on the same page and pulling in the same direction, and think we have an obligation to grow and serve more customers over time, and that’s where we're going. So, you guys have a great day. Thank you.

Vickie Judy, CFO

Thank you.

Operator, Operator

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.