America's CAR-MART Inc (CRMT) 2005 Q1 法說會逐字稿

Good morning, everyone. Thank you for holding and welcome to the America's Car-Mart first-quarter and fiscal 2005 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal first quarter ended July 31st, 2004.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next three days. The dial-in number and access information are included in this morning's press release, which can be found on America's Car-Mart's Web site at www.car.mart.com.

As you all know, some of management's comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. The statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy at 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 Item I of Part I of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2004, 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 Skip Falgout, Car-Mart's Chief Executive Officer; Hank Henderson, the Company's President, and Mark Slusser, Chief Financial Officer. And now I would like to turn the call over to the Company's CEO, Skip Falgout.

Thank you. Good morning, everyone, and thanks for being with us today. I wanted to give you some highlights for the first quarter, and then ask Mark to discuss certain details of the financials and provide us some insight with respect to those. Hank is then going to talk about the status of our new dealership openings, expansion of a number of our existing dealerships and very importantly our new training center. I will come back after those comments to share my thoughts on the balance of fiscal '05 and provide some other comments. And then as usual, we will open this all up for questions.

Hopefully most of you have already seen our press release this morning. It is posted on our Web site and is available on the usual financial sites as well. We will file our Form 10-Q either later today or tomorrow.

We're very pleased to report earnings per diluted share of 62 cents in the first quarter of fiscal '05, exceeding our earlier guidance of 57 to 60 cents per diluted share. For the quarter, revenue is up 17 percent, income from continuing operations was up 13 percent, and earnings per share was up 13 percent. We are especially pleased with the improvement over last year when you consider the strength of last year's first quarter.

During this first quarter, we opened two new lots and just opened one more, bringing our total store count to 73. The new lots are all in Texas -- Sulphur Springs, Texas; Corsicana and Marshall, Texas. Importantly in the first quarter, we added more than $8 million in finance receivables, while keeping our debt flat at about $23 million.

I am now going to turn it over to Mark to comment in more detail on the financials.

As Falgout mentioned earlier, revenues were up 17 percent for the quarter. The increase was principally the result of same-store revenue growth of 13 percent and revenues from new stores opened in the last year. Quarter-over-quarter our average retail sales price was up 9 percent to about $7000 in the current quarter from about 6400 in the first quarter of last year. Normally our annual price increases are in the 3 to 4 percent range, but the increase this year reflects two things.

First, at the beginning of the prior year, we made a conscious decision to sell more lower-priced cars because they have better margins on a percentage basis and are more affordable to our customers. Thus, we had a relatively low average retail sales price in the first quarter of last year.

The second point is that the beginning of the fourth quarter of last year in the February timeframe, we reversed ourselves, and not only did we substantially reduce the sales of vehicles at the low-end of our price range, we also began to purchase and sell slightly higher price vehicles. If you have been following our company for the last few quarters, you will recall that we made this decision because loans on these lower-priced cars tend to have a higher frequency of default than loans on higher price vehicles. Thus, we gave up some gross margin percentage in exchange for lower credit losses and higher revenue growth.

For the first quarter of this year, our gross profit margin was 46.6 percent of sales, which is down from 48.1 percent in the first quarter of last year. As discussed above, the principle reason for the decrease in our gross profit percentage was the increase in our average retail sales price. Our pricing guide is subset as the selling price increases, the percentage margin decreases.

We still make a larger gross profit from selling a $7000 car than a $6400 car, but on a percentage basis, the less-expensive car will have a higher gross profit percentage. In the first quarter of this year, SG&A as a percentage of sales decreased to 17.4 percent from 18.1 percent in the same period last year. The decrease was primarily the result of a reduction in compensation, insurance and occupancy cost as a percentage of sales. The percentage decrease in these costs is partially the result of selling higher priced vehicles. Selling higher priced vehicles increased the sales without necessarily increasing compensation insurance or occupancy costs.

For the current quarter, credit losses as a percentage of sales were 19.5 percent, a little bit higher than the 19.1 percent in the first quarter of last year. We credit the higher level of credit losses due to the continuing effects of selling lower-priced vehicles through about January of 2004. As previously discussed, loans on these lower-priced vehicles historically have higher than normal credit loss experience.

Delinquency levels continue to be at historically low level since we tightened our delinquency standards last February. Accounts over 30 days past-due were 3.4 percent at July 31st, '04 compared with 4.8 percent at the same time in the prior fiscal year. Interest expense as a percentage of sales was down to .5 percent in the current fiscal quarter as compared to .8 percent in the same period last year. The reduction was due to lower borrowing levels as a percentage of sales and a decrease in the interest rate we are charged on our credit facility.

As of July 31st, we had about 17 million of additional borrowing capacity under our credit facility. Capital expenditures totaled 1.3 million in the current quarter as compared to .5 million in the prior fiscal quarter. During the quarter, we acquired property at five locations, four relocations or expansions and one new location, and purchase modular buildings or made improvements at 10 stores.

Now I will turn it over to Hank to talk about new and existing dealerships.

Thank you, Mark. We have had a busy few months with new dealership openings and expansions, and specifically as Skip mentioned, we have opened three new dealerships in Texas and fourth in Palestine, Texas will open this month.

In Arkansas we will open two new dealerships this month, one in Truman and a second Discount Auto in Russellville. Truman will be a satellite of Jonesboro, and speaking of Jonesboro, which is currently our fifth-largest dealership, we have made arrangements to lease a much larger tract of land nearby, and we will do a build-to-suit building that we anticipate will move into next summer.

With the new Texas dealerships in Texas and the two new Arkansas dealerships, our dealership count will be 76 by or close to the end of this month. And with respect to expansions and/or relocations of existing dealerships, we have relocated our Evansville, Indiana dealership to a new and larger facility, and similarly we have moved to new locations in Searcy, Arkansas, and Magnolia, Arkansas, and we will also relocate in Enid, Oklahoma this month to a larger facility.

We recently completed an addition in Muskogee, Oklahoma to accommodate the growth there, and construction is presently underway to add additional office space to our South Tulsa, Oklahoma location, and we expect to begin work this next month in Fort Smith, Arkansas to do the same there as well. We are also in the process of expanding our Hot Springs, Arkansas location to accommodate its growth.

We have acquired and are remodeling an existing building in Conway, Arkansas, which will provide much-needed additional space for a Conway location, which is our largest dealership. We also have our new Car-Mart training center, which we're very excited about. Conway is centrally located, and therefore, it's an ideal location for associates, managers, to come to and receive both basic training, as well as a much-needed continuing education. This training center will include a mockup of a Car-Mart lot to enhance the training experience, and this is an addition to our company that, as I said, we are extremely excited about.

Rod Cherry (ph), who was manager of Car-Mart Russellville for many years and without a doubt one of the most effective managers we have ever had, is overseeing this project and will be personally providing much of this training. Now Rod an excellent teacher and his skills as a teacher and trainer combined with his many years of experience as a manager will be a tremendous benefit to our company.

You know when we update and expand the existing dealerships we always stress who we are making these improvements for and it is for our customers. Certainly our associates benefit from new and larger and better facilities. The main purpose is to enhance the customer experience. It is the customer, particularly the repeat and those customers the referral business to us, that is truly the reason for Car-Mart's long history of success. Our motto is, we're committed to you, and that is committed to the customer. We are looking forward to these expansions and new dealerships and continuing to grow.

I want to point out a couple of things. Shareholders of our company should be receiving their 2004 annual report and proxies any day now or may have already received some of them. In this year's annual, we have singled out a few of our distinguished associates, and I think you will enjoy reading their perspectives on their careers at Car-Mart. I would like to personally invite each of you to attend our annual meeting to be held on Wednesday, September the 29th in Bentonville.

Also, we have updated our earnings per share guidance to reflect the actual results of this first quarter and our updated guidance for '05. The balance of '05 is that we will earn between $2.2, and $2.36 per diluted share from continuing operations.

That concludes our prepared remarks. So I would like to go onto any questions. Operator, I will turn it over to you.

(OPERATOR INSTRUCTIONS). John Hecht, JMP Securities.

Good morning, gentlemen. How are you doing? Good. A couple of questions. You mentioned some stats with respect to 30-day delinquencies. Do you have any stats with 60 or 90 day plus delinquencies and comparisons with previous quarters?

We do, John. We use those internally. We don't have those available to share with you now, but 30 days is what we generally look at from a comparison standpoint quarter-over-quarter. Can you add anything to that, Mark?

No. I mean we do have the information, 30, 60 and 90. I would tell you in general that the 90-day category, which say a year ago you know had a decent size number in there, and today and really for the last six months there is very little in the 90-day category. Very small.

You know when we tightened our past-due allowances that we allow our lots, we substantially as you know virtually eliminated 90-day accounts -- obviously there are some -- and then minimized over 60. So it is a pretty small number. I just don't have that handy, John.

Okay, thanks. Can you give any commentary on inventory levels and even more specifically, how much of the inventory is related to some of the less expensive cars you were selling in the prior quarters?

Well, I would tell you that our inventory levels over the course of a past few months have probably been better than they ever have been. We have a targets for each lot individually, and we have been very consistently hitting those targets week in and week out.

As far as the higher level, it is a higher average across the board. Many of our larger more mature stores sell a much higher end car which is available, and that is in large part so that we can retain those customers as they graduate to a higher level car. But it is across the board on all of our stores where we have a higher average.

Okay and then the final question is, last quarter at this time it seemed that you guys had characterized the purchasing environment as challenging in the sense of finding the right mix of cars. Will you still characterize it that way or (inaudible) different?

We are very selective in what we purchase, and that is part of it. We don't do reconditioning or anything. We buy ready to sell. And so that means in order for us to buy the number of cars we need, we have to look at a lot of cars. I think that will always be a challenge for us, but right now I think we're meeting that challenge as well as we ever have.

I would tell you, John, we're real close to our optimum inventory on our lots. We're not there, but we are close, but we've got to work harder and we've added probably in this last few months four or five buyers to the company. We have added out -- beefed up the buying staff knowing they are going to have to work harder to find good cars. We have addressed it that way as well and you know had them push out further on their contacts and who the buy cars from. Particularly in these new areas where we don't have these long relationships that have developed, we are working harder to develop relationships on sources. We expect to get it better through more people and work a little harder out there.

Okay, great. Thank you, gentlemen.

Bill Armstrong, C.L. King & Associates.

Good morning, guys. Congratulations on a strong quarter. I had a couple of questions. I was wondering if Mark could explain why the provision for credit losses was up year-over-year due to the lower-priced car sales since you basically got rid of those cars or sold through those cars earlier in the spring? How does that affect -- how was that able to affect the July quarter?

Well, it is a residual effect. We stopped selling the lower-priced cars -- let's call it January or February of '04. So those cars are in the portfolio for at least 24 months and sometimes longer. So as we get further and further away from January and February of '04, those lower-priced cars will have less and less of an impact on it. But many of the cars that were repossessed in the first quarter, May through July, were lower-priced cars that were sold in January and prior.

Right, okay. Are you guys -- looking at your numbers, it looks like you're not seeing the effects of a squeeze on lower income consumers the way many other retailers have been reporting. We just had earnings warning today from Rent-A-Center, for example, citing higher gas prices, slow job growth, etc.. Are you seeing any impact on that, people struggling to make their payments, anything like that?

I would say, Bill, that our customer probably always struggles somewhat. It is the paycheck to paycheck customer. So anecdotally I would tell you I would expect some of our customers to be struggling. One of the things that we have going for us compared to a Rent-A-Center is that what we are providing that customer is a car, and that is probably more important than the TV or the stereo or the couch.

So we are still seeing traffic on our lots, we're still seeing people buying cars, and for the most part paying for them. But I have got to believe that our customer is being affected by increased gas prices. But it has not caused the slowdown that I think some of the other retailers are seeing. Because probably of what we are selling compared to what they are selling.

Right. Just a couple of more. Vehicles per store during the quarter were down 1.9 percent. Is that just a matter of you had higher average selling prices, and so that would naturally cause lower unit sales, or was there something else there?

If I look at it, it is down slightly less than 1 percent I believe. It is principally the new stores we have added. As you add a new story, they are typically going to sell in the 15 to 20 cars a month range as opposed to 30. And we have added in the last two years about 12, 13 stores. I don't have the exact number. So all those stores bring down the average. And frankly, it is not a number I look at. It's not an important number from the standpoint of as we grow that number, it could come down a little more as you add new stores. They are not going to hit that 30 mark for probably their second year on an average basis.

Right. The gross margin decline, that was predominantly just due to the higher average selling price equaling -- creating to a lower gross margin percentage?

Right.

Okay. Nothing else in there that we should key in on?

No, I don't think so. I mean the -- if you compare the expected margin on a $6400 car and the expected margin on a $7000 car, that would explain the difference.

Okay. And then finally, I noticed you are opening two new stores in Arkansas this month. I thought you guys were done in Arkansas.

I will let Hank answer that one.

These are in Northeast Arkansas. That is a growing area. And we have a store in Jonesboro, and as it has gotten bigger, its market area has gotten bigger, and so we are opening a satellite store that will service Jonesboro and Truman. And then in central Arkansas and Russellville, we have a Discount Auto location that has really grown there, but we see more and more of its market is customers that are south of the river, south of the Arkansas River there. So we're actually moving the main store that direction and we also need more space. And we're moving the main store, and our old location will then become the satellite store. It is kind of a reverse type deal for us. But we're very excited about it, and actually they are going to be moving into it next week and it looks good.

Great. Any update on legislation concerning Arkansas interest rates?

I don't have any. Actually there was a meeting yesterday, Bill, of our lobbying group that I was unable to attend, but hopefully I will find out something. We did have a representative of Blanche Lincoln's (ph) office there to update us on where we were from a legislative standpoint, but frankly I do not know the answer yet. So hopefully I will know something next week.

Ivan Sacks, First Dallas Securities.

Congratulations, guys. Solid results. I appreciate the way that you actually commented on the (inaudible) business and how you have corrected those things. And I would like you to please speak, if you would not mind, just on how you addressed the collections issue and what steps were taken in order to have such a good turnaround in that area?

The other thing I noticed that the comps were very strong at 13 percent. Would you mind please commenting on the retention rate of those customers? I don't know what you call it -- that loyalty program -- and how that is holding up?

First of all, on the delinquencies, what we did is created some internal standards for the longer-term delinquencies. We have always had some pretty tough standards internally. But they have been pretty well open-ended as far as defining and how many we allow on the back-end of our list. So what we did is for all of our mature stores we defined the longer-term accounts, so many past 60, 90, etc. and really tightened those up and our people respond. They meet the challenges set forth, and they reach those standards, and so therefore our over 30s have come down substantially. And our whole thought on that is having fewer at the end of the list. Those are more time-consuming accounts. That frees us up with more time to focus better on what we call the front end of our list, and hopefully we will become more effective at reducing repossession saving customers in that regard.

A couple of other things we did, Ivan, is enhanced some training and some incentives for our collection folks, added area collection managers, which for the most part were formally trainers, folks that were pretty strong in this area and give us some more horsepower dealing with problems. We added -- Dustin Southard (ph) is our Vice President of Collections, and he is doing a good job and helping police that and stay on top of it. His only job is collections. Really it is a lot of different things that we have done, hopefully all of which will have an effect on continuing to bring down credit losses.

Thank you. Just finally if you could just comment on I think that retention rate of your customers, how they come back. I think it was at about 40 percent or something? Do people come back?

Yes, that is about right on our repeat business. The mature lot was about 40 percent, and -- Mark, is it 15 percent repeat referral business from our "Sell a Friend" program, something like that?

Yes, 10 to 15.

That is kind of the number we can track, Ivan, on the referral business, and that is from our "Sell a Friend" program where we actually send checks out to folks they refer customers in that buy a car. It's probably more than that on a percentage basis, but those that we track are ones that we actually write a referral fee for. And so that is strong. And as Hank was mentioning, that is one of the reasons our more mature lots we tend to sell a slightly higher dollar car to retain those customers who continue to prove themselves as being creditworthy and who are moving up the chain as far as getting a better vehicle. Being responsible to pay for one. (multiple speakers).

I will tell you we gathered some numbers this past month, and we have our, some of you have heard our silver and gold and platinum clubs, with the people who have bought 5, 10, 15 cars from us over time. And those numbers continue to go up. We have over 3000 customers out there right now who have bought in excess of five cars from us over the years. So as we see that go up, we feel like we are doing well retaining our customers.

That is what I wanted to find out. Thank you very much.

Brad Brown, Anderson & Strudwick.

Just to help familiarize myself, have you guys given a gross margin guidance for '05 at any point in the past or in the recent past?

No, not specifically.

Okay, I'm sorry. I'm looking at the margins here, and I am seeing in '03 they are running around 46.8 for fiscal '03. What I am just trying to figure out is, this 46.5 here for this quarter, is this kind of back to normal. Is this what you're seeing? Is this still going to be high because of their lower-priced cars? I mean are you guys comfortable with these margins is what I'm trying to ask I guess?

Yes. Well, we have not provided specific guidance on gross margins. But I can tell you that in the fourth quarter of last year and the first quarter of this year. certainly in the first quarter of this year, we did not have many or any of these lower-priced cars influencing that margin. And in the fourth quarter of last year, we would have had a little bit, but not all that much. So what you have seen in the fourth quarter and the first quarter should be reflective of where we are at. I'm just trying to go from memory what our fourth quarter of last year was. I thought it was around 46, 47 or 48 something like that.

Okay. And well then, I'm going to bring that same question down on the provision for the credit losses. Getting down to this 19.5 level, definitely a nice drop then from the middle of last year. And then is that sort of -- is that what to expect with the higher price cars?

Again, we generally don't provide specific guidance on line items such as provisions for credit loss. How would you want to answer that, Skip?

Well, I think I would say this. The move to selling the higher price cars is a move that we think will over time reduce credit losses, and I would think, therefore, you will see that kind of reflection in our provision as we go forward. That provision is kind of a mathematical number to determine somewhat on a static pool analysis going back a number of years to determine the frequency and the amount of credit losses, repossessions and write-offs. Certainly last year was a high year for us as far as credit losses on a percentage basis. We would hope with these changes we made to see that go down. I don't think you will see significant gyrations up or down in our provision, but probably somewhere along this level is where I would expect it going forward.

Hey, Brad, I can help you a little bit. Okay, if you go back a bunch of years, our credit loss on an annual basis is between 17 and 21 percent. The last eight or nine years it has fell within that band with last year being really our highest at 21. We have said we expect to do better than that 21 percent. On an annual basis, we expect to be lower than that. And also we historically we have experienced higher credit losses in the second and third quarter than we do in the first and fourth. That is just historical truth. And you know I will not tell you the numbers that we use in our internal forecast and projections, but I can tell you that we follow the historical truth in that we provide a little bit higher credit loss provision in the second and third quarters than we do in the first and fourth.

Okay. That answered really my question. So you said for the last eight to nine years it historically ran between 17 and 21?

That is correct.

Okay. Well, all right. Thanks, guys.

Adam Egelberg, Silvercrest Asset Management.

What I guess I was surprised about, in a good way, is you added about $8 million plus to your receivables balance outstanding and you did not even draw down at all on your credit facility. It was about flat year-over-year. And at the same time you have been relocating stores, you have been buying stores. Hank, I think you told me you're talking about maybe doing more land purchases this year versus leases. And you're building a training center, and you just -- it seems like also reinvested and remodeling other stores.

I'm wondering at what point do you think -- I guess, what is going on with the cash flows? They seem to be very strong. Is it just strong collections, or have you gotten more cash sales or higher downpayments in cash year-to-date? And I am also wondering about your CapEx budget for the year versus last year. And when you think you might have to increase your usage of the credit facility? Long question but --

Mark, go ahead and start on that, and I will --

Well, yes. We did grow principle balances by 8 million. Net of the allowance, they grew about 6.5. And the long-term -- or I'm sorry, the credit facility did not change. It was flat. I think part of that is it has to do with payables -- I'm sorry -- payables and income tax payables. If you have the 10-Q in your hand, which you don't, which will be filed later today, you would see that our liability for income taxes payable went up like 1.5 million or 2 million. I cannot remember the number. But it is just a timing thing. We don't have to make an estimated tax payment during the first quarter. It is not due until August 15. So what happens every first quarter is the income tax payable line goes up, and that is just a timing difference.

In general, if you compare receivables growth to net income, if receivables growth is greater than net income, then we are going to increase our credit line. I mean that is just a general statement. So I think what you saw here in the first quarter is that because we did not have to make our tax payment until the second quarter, that kind of covered up that shortfall.

I don't necessarily like to project what the credit line will be at the end of the year, but I would expect it to be a little bit higher -- not substantially. Possibly 3 million higher or something like that. It depends on a number of things you know, including how much revenue growth we have in growth and receivables and how much CapEx we have versus leased property versus buy property.

And your question about where do you expect CapEx? I mean I think last year we probably spent about 1.5 million. I would say this year it is probably going to be between 2 and 3 million.

I think, Adam, it was probably about 1.3 for the quarter, something like that. We never know for sure when we go into a new town whether we will be buying or leasing, so that number can fluctuate. But I think Mark is right. I would expect to see CapEx to be more in the 2 to 3 range than the 1.5 to 2 range for this full fiscal year.

Secondly, I would tell you that this company really does grow for the most part out of capital as indicative by this first quarter, the tax payment notwithstanding. So I would think you would see the growth by the end of this fiscal year to be for the most part financed out of cash flow with, as Mark said, probably a small increase of debt, $2 to $3 million, something like that. And again, a lot of that will depend on whether we buy or lease the property here or there, that type of thing. That has a bigger effect on it.

That is great. That helps explain it a lot. That is just a terrific quarter. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). John Sykes (ph), a private investor.

Downpayments, when you raised your ACVs on your cars a little bit, were their downpayments affected any? What is your average downpayment now and then?

Downpayment (inaudible) obviously. We have to ask a little more down on a higher downpayment, and they have gone up. Actually over the course of this past year they have improved (inaudible). So I think, too, when you're selling a little bit nicer car, you can get the higher percentage down.

What is your average down running right now?

It is pretty close to 500.

What about (inaudible)? Are most of your payments set up on weekly, biweekly, or monthly?

Probably 40 percent -- this is ballpark -- probably 40 percent are weekly, 45 percent are biweekly or semimonthly, and then about 15 percent -- 10 or 15 monthly.

As far as weekly collections per account, do you know about what it is? I mean are you collecting $60 to $70 per account per week? Do you know that number?

An average payment on a weekly basis, if you go through the whole portfolio, is right around $70.

So as far as how much, you are collecting every week divided by the number of accounts would be what? Do you know that?

Well, I will tell you what, as Skip said, the payment that is due is about $70 per week.

But if several people missed their payments, then you are probably at what? 60?

I don't have a number for you there.

Okay. Thank you.

At this time, there are no further questions. I would now like to turn the call over to Mr. Skip Falgout for closing remarks.

Okay. Thank you all very much for participating in the call this morning. We think it was a good quarter. We are pleased to see that we are continuing to move forward from the fourth quarter, and I again would like to extend the invitation for all of you to attend our annual meeting. We've got some things planned that I think will be interesting for those of you would like to see more and know more about Car-Mart and our culture, meet some of our folks and we look forward to seeing you. Thank you very much for participating.