America’s Car-Mart, Inc. (NASDAQ:CRMT) Q3 2024 Earnings Call Transcript
America's Car-Mart, Inc. (NASDAQ:CRMT) Q3 2024 Earnings Call Transcript March 8, 2024
America's Car-Mart, Inc. misses on earnings expectations. Reported EPS is $-1.34 EPS, expectations were $-1.1. America's Car-Mart, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to Americans -- America's Car-Mart's Third Quarter Fiscal 2024 Results Conference Call. At this time all participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Vickie Judy, Chief Financial Officer. Please go ahead.
Vickie Judy: Thank you. Good morning, and welcome to America's Car-Mart third quarter fiscal year 2024 earnings call for the period ending January 31, 2024. Joining me today is Doug Campbell, our Company's President and CEO. We've issued our earnings release earlier this morning and it is available on our website, along with a slide of supplemental material. We will post the transcript of our prepared remarks following this call, and the Q&A session will be available through the webcast after the call. During today's call, certain statements we make may be considered forward-looking and 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 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, 2023, and our current and quarterly reports furnished to or filed with the Securities Exchange Commission on Forms 8-K and 10-Q. I will now turn it over to Doug for his introductory comments about our third quarter.
Doug Campbell: Good morning, and thank you for joining us and for your interest in our Company. I mentioned in our earnings release that sales volumes fell short of our internal expectations during the quarter. There are times when the results you produce don't align with the level of effort or output, and this was one of those quarters. I want to acknowledge the hard work of our associates, because they do so much to take care of our customers and keep them on the road. I'm very appreciative of the effort put out by the team. I'll start by highlighting some of the positive items that occurred during the quarter and discuss more in detail the drivers of the sales decrease. Last quarter, there was speculation about direction of the credit loss and whether it would continue to degrade, flatten or even improve.
Our associates have worked tirelessly to assist our consumers in navigating an ongoing challenging environment. Throughout the quarter, we reduced the number of unit losses taken when compared sequentially by 9%. As an industry backdrop, delinquency trends worsened throughout the quarter. However, we improved our 30-plus day delinquencies by 30 basis points. This drove a $3.9 million favorable adjustment in the provision for credit loss. We've now completed the planned roll-out of our loan origination system. As with the implementation of any large scale system that is built on change management, there were some challenges in getting it fully in place, but we're happy that those implementation challenges are now behind us. We now have two quarters with the LOS originations driving more money down, stronger consumer profiles and shortened term lengths.
Let me make this point clear. The LOS is a game-changer for Car-Mart, and we're really excited about the system leaving its imprint on the fourth quarter and into the future. As mentioned in the press release, we also entered a strategic partnership with Cox Automotive, which will aid in vehicle movement, repairs, acquisitions and remarketing. I'll cover this more in detail, but let me start with revenue and sales. Revenue was down 7.9% for the quarter, driven by several factors. First, a 19.6% decrease in unit volume was the primary driver. Overall industry softness accounted for roughly half of that. Recall that in our second quarter report, we said that August and September volumes were up or flat, with October contributing to the decline.
Those October trends persisted into the third quarter, with overall application volumes softening by 8.3%. The LOS implementation challenges mentioned, along with balancing volume and deal structure, also contributed to the decrease. The benefits of system updates to the LOS, along with an augmented marketing plan for the fourth quarter, are expected to win back some volume and deliver stronger outcomes. We also had two fewer selling days in the quarter because of holiday shifts. Our stores were always closed on Sundays, but the shift in days for Christmas day and New Year's day landing on a Monday, added two more closure days to the quarter when compared to the prior year's quarter. Additionally, there was severe winter weather in January, which necessitated closures of up to three days at roughly a third of our 154 dealerships in January, which kept consumers from shopping.
These revenue headwinds were partially offset by a 16% increase in interest income and a 7.5% increase in the average retail sales price. That increase in the average retail sales price was driven equally by a mix of ancillary products sold and vehicle price. You'll hear more from Vickie on the specifics on the LOS here in a minute, but let me comment on the results of these deal structures. The credit losses that we're seeing on our loan originations are very positive when compared to the legacy system. However, I want to caution these results are very preliminary in nature, but that's rapidly changing, with now 10,000 originations performing materially different than the loans generated by our legacy system. We plan to share more specifics in the future, but words like substantial and material come to mind when we start to quantify their effect on both the frequency and the severity of loss.
We've mentioned numerous times the importance of acquisitions and it being one of the strongest uses of the capital for our Company. We're proud to announce that the purchase of Central Auto in Hot Springs is complete, and we're actively pursuing other opportunities that we expect to close in the calendar year. I want to provide more detail on this critical initiative that we teased out in last quarter's report. As noted in our release this morning, we've entered into a strategic partnership with Cox Automotive to aid in driving efficiencies within our vehicle supply chain process. I personally have a long history with Cox and their leadership team across several organizations in driving large scale projects that have driven tremendous value.
We've begun to leverage their digital and physical assets as well as their logistics services. This initiative will be centrally managed, removing the day to day burden of processing and overseeing the disposal and reconditioning of assets from our operations team. Strategically, we expect this to allow our dealership teams to have more time selling and helping customers navigate vehicle ownership. We believe this partnership will help address some of the affordability challenges that exist in our industry and we expect it will lead to greater value creation for our shareholders and customers alike. I'll now turn it over to Vickie to cover more details on our financials. Vickie?
Vickie Judy: Thank you, Doug. In my commentary, the comparisons that I will cover will be the third quarter of 2024 versus the third quarter of 2023 unless otherwise noted. As Doug mentioned, LOS has allowed us to improve upon our deal structure, with average down payments for the quarter trending up 30 basis points to 5.1%, also up sequentially by 20 basis points. Our originating term was 43.3 months, improved from 44.1 months sequentially, and for the second quarter in a row. They were up from 42.5 months compared to the prior year third quarter. The weighted average total contract term for the portfolio is at 47.6 months including modifications. The average age of the portfolio improved to nearly 12 months or almost two months better compared to last year.
Our total collections increased 9.3%. The monthly average total collected per active customer rose to $540 from $519. This metric also improved sequentially. We originated contracts in the third quarter that are expected to produce cash on cash returns of over 66% and an IRR over 41%. We provided a table in the earnings release and a supplemental chart on our website that demonstrates our positive cash on cash returns over time. This data reflects our history of earning strong cash on cash returns in various market and macroeconomic conditions. We're very focused on quality of originations and deal structure to maximize these returns, and ultimately, our profitability. The gross profit dollars per retail unit improved 10.5% and the gross profit percentage increased 50 basis points compared to the prior year quarter, primarily due to improved pricing discipline and repair expenses.
There was also an increase in profit dollars sequentially and we expect further improvements in our gross margin as volumes rise and we have more affordable vehicles in our supply chain from the initiatives underway. Net charge-offs as a percentage of average finance receivables were 6.8% versus 5.9% last year and down sequentially 40 basis points. We were pleased with this, especially when considering the sales decline. We experienced an increase in the frequency of losses compared to prior year, which was about 55% of the increase, as well as an increase in severity. Severity continues to be impacted by the longer term lengths, although that has begun to stabilize. Recovery values for the quarter were approximately 24%. Accounts over 30-days-passed due improved in Q3, dropping 40 basis points to 3.3%.
This was also a 30 basis point improvement sequentially. Our customers continue to face ongoing pressures related to the increased cost for housing, energy, childcare, auto insurance. However, that's slightly offset by lower inflation in some groceries and fuel. Sequentially, the Company decreased the allowance for credit losses from 26.04% to 25.74%, resulting in a benefit of $3.9 million to the provision. The key drivers of the adjustment were lower delinquencies at quarter-end and a lower overall inflationary outlook. In summary, the improvements we've made in deal structure, the higher average age of the receivables portfolio, lower delinquencies and our operational initiatives are expected to lead to better customer success and lower credit losses in the future.
Moving on to SG&A. Sequentially, we were able to lower SG&A dollars by $1.3 million. The steps we took in the second quarter to reduce expenses contributed to this sequential improvement. It was slightly offset by increased collections cost related to repossessions. Our SG&A per average account was down 6.7% from $451 to $421. We're very focused on cost efficiency, while continuing to serve over 102,000 customers and providing quality service. Interest expense as a percentage of sales increased to 7% for the quarter compared to 3.6%. In dollar terms, interest expense increased $7 million due to increasing interest rates and an increase in the average borrowings of approximately $145 million over the prior year. Our funding and financing program remained strong.
In December, we called our '22-1 notes and paid them off during the quarter. In January, Kroll upgraded all tranches of our '23-1 notes and the company completed its fourth securitization at the end of the quarter, issuing $250 million in bonds, with a weighted average fixed coupon rate of 9.5%. In February, we renewed and extended our revolving credit agreement to September of 2025, with a $340 million revolver, along with access to $100 million accordion feature. At quarter-end, we had $4.2 million in unrestricted cash and approximately $126 million in additional availability under our revolving credit facilities based on our borrowing base of receivables and inventory. Access to capital with our revolving credit facility and a successful securitization program gives us flexibility and a distinct advantage over many competitors.
Our non-recourse securitized notes represent the bulk of our funding, and our cost of funds fluctuates with the level of interest rates and credit spreads. We remain committed to growth, thoughtful capital allocation and financial management, as well as improving profits and shareholder returns. Now, I'll let Doug close us out.
Doug Campbell: Thank you, Vickie. February is off to a better start than last quarter. We're closely monitoring our consumer and the tax season. Initial refunds are up slightly year-over-year, but they're running a little bit behind last year. Affordability continues to be the biggest challenge in our industry. We're all competing for a similarly priced asset to provide customers with reliable and affordable transportation. Initiatives like the ones that we put in place will aid in addressing these issues and enhance our ability to grow as a company. We do have near-term challenges that we're addressing, such as striking the right balance between loan origination and volumes and our cost structure. We reported progress in the third quarter on key metrics, including gross profit, credit losses and loan originations, and we expect to make additional progress on these and other areas.
We believe that our agility and underlying cash generative nature of our Company continues to position us for long-term profitable growth. We're bullish about Car-Mart's future, because our initiatives will be accretive to earnings and shareholder returns. We'll now open up the line for questions. Operator, please provide instructions to do so.
See also 20 Best Marketing Newsletters to Subscribe to in 2024 and Edge Computing Market Size and Best Stocks To Buy.
To continue reading the Q&A session, please click here.
