America's CAR-MART Inc (CRMT) 2005 Q4 法說會逐字稿

Good morning everyone. Thank you for holding and welcome to the America's Car-Mart fourth quarter and fiscal year-end 2005 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal fourth quarter and year-end ended April 30, 2005.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next two 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 views. 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 regarding forward-looking information, please see Item 1 of Part 1 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 and good morning everyone. Most of you have already seen our press release this morning and as the operator mentioned, it is on our web site and available at the usual financial sites as well. I would also tell you, we expect to file the related Form 10-K sometime next week.

This morning, we've reported earnings for the fourth quarter of $0.36 per diluted share. For the quarter, revenue was up 16%, income from continuing operations was down 7%, as was earnings-per-share. For the full fiscal year, we earned $1.49 per diluted share which was in line with our earnings guidance for the year which on a split-adjusted basis, was $1.48 to $1.56 a share. For the year, revenue was up 16%, income was up 15% and EPS was up 14%.

Here at Car-Mart, although we're very pleased with the year-over-year results, they could have been better. As you know, at Car-Mart when we don't exceed our expectations, we tend to look more within for reasons why as opposed to blaming outside factors. However this year, we had extraordinarily high SG&A expenses, particularly in the fourth quarter related to external Sarbanes-Oxley compliance related costs. We spent over $700,000 of our shareholders' money on consultants and additional fees to our outside auditors in the fourth quarter alone. These extraordinary expenses cost us about $0.04 a share in earnings in the fourth quarter.

Also, I will tell you that especially during the fourth quarter, management of America's Car-Mart from the lot level on up to our area operations managers, regional VPs, corporate office staff; we were all distracted from our normal oversight obligations as we dealt with Sarbanes-Oxley related issues. During that period, we were not able to devote our full time to managing important moneymaking aspects of our business; i.e., selling cars and collecting receivables.

However, even with those additional costs and distractions as I just mentioned, we met our earnings guidance for the year. We did not enjoy spending that money as we had to in the fourth quarter, but that's the law.

Unit sales this year were up 4.6%. During the fourth quarter, our unit sales were up 7.4%, even including an earlier tax refund season which negatively affected March sales. We expect unit sales to improve this year as we add new stores earlier in the year and expand our existing stores. We have opened three stores already this year with a fourth in Gainesville, Texas set to open any day.

In addition, we've already acquired property in West Plains and Sedalia, Missouri for new dealerships. We also have proposals out and are working hard on three other locations that we believe we can obtain. Our expectation is to open at least eight new stores this year.

A couple of comments before I turn this over to Mark. Credit losses improved from 21.3% last year to 20.1% as a percentage of sales for fiscal '05. Our accounts over 30 days past due at April 30 were 3%. This reduction in losses is a reflection of the commitment we made last year to continue to improve credit losses. We have instituted many initiatives over the last year, including additional staffing, training and education, better incentives to our collections (ph) staffs, along with a slightly higher priced and hopefully better vehicle. We will continue to work hard on this core part of our business.

Also, I'd like to point out a couple of key ratios for you that evidenced our strong balance sheet and financial position. First, debt to equity was 0.28 to 1 as of April 30 and debt to finance receivable principal balances, or leverage, was about 0.19 to 1. Finance receivable principal balances were approximately $152 million at April 30 against debt of approximately 21.9 million. The majority of our growth is funded from net income and our return on equity for the year was 21%.

I'm now going to turn it over to Mark to discuss further details on the fourth quarter.

As Skip mentioned earlier, revenues were up 16% for the quarter. The increase was principally the result of same-store revenue growth of about 13% and revenues from new stores opened in the last year. Quarter-over-quarter, our average retail sales price was up 7% to 7400 in the current quarter from about 6900 in the fourth quarter of last year. Historically, annual price increases have been in the 3 to 5% range.

As you may recall, 15 months ago, we began raising our average retail sales price, which at the time was about 5300. Thus, over the last 15 months, we have brought our average retail sales price up $1100, or about 17%. Going forward, we expect growth to see growth in our average retail sales price more in line with historical growth levels.

In the fourth quarter of the current year, our unit sales growth was 7.4% as compared to 4.9% in the same quarter last year and our 8-year average annual increase in units of about 11%. Overall, unit growth in fiscal 2005 came in at 4.6%. It's sometimes difficult to pinpoint why unit growth goes up or down, but we believe it is a combination of items including a little bit tighter underwriting standards when compared to last year, selling a slightly higher-priced vehicle -- the higher the price, the higher the payments, which may eliminate certain potential customers -- the occasional shortage of inventory and perhaps a little bit tougher economy as gasoline prices takes a few more dollars from the pockets of our customers.

For the fourth quarter of this year, our gross profit margin was 45.5% of sales, which is down from 47.1 in the fourth quarter of last year. As you may recall from prior discussions, our pricing model has a decreasing percentage margin as the sales price of the vehicle goes up. Thus, the higher the sales price of the car, the lower the percentage margin. Since our average retail sales price went up about 7% over the fourth quarter of last year, we would expect to see a decrease in our gross profit margin percentage. But this is not the only reason.

We also had a higher percentage of wholesale sales. Wholesale sales are generally sold at or near cost with no gross profit. The more wholesale sales we have, the lower our overall gross profit percentage. Going forward, we would expect to see gross profit margin percentages close to what we experienced in the fourth quarter.

In the fourth quarter of this year, SG&A as a percentage of sales increased to 18.6% from 17.7% in the same period last year. As Skip mentioned earlier, the increase was due to about 700,000 of Sarbanes-Oxley-related compliance costs incurred in the fourth quarter up this year with no costs -- no similar costs in the fourth quarter of last year. If you remove these costs from the fourth quarter, SG&A would have been 17.2% or one-half of 1% lower than last year's fourth quarter.

In completing our Sarbanes-Oxley testing in the fourth quarter, we determined that as of April 30, we did have a material weakness in our information technology area. It was not a single item in item in our IT area that caused us to come to this conclusion, but rather it was the sum of a number of IT deficiencies. Hank will discuss our plans to correct these various deficiencies in a few minutes.

For the current quarter, credit losses as a percentage of sales were 20.4%, up from 19.6 from the fourth quarter of last year. For the year, credit losses as a percentage of sales were down 20.1% -- I'm sorry -- were 21.1%, down from 21.3 last year. For the year, we believe credit losses were down due to selling a higher-priced car than we did last year. As you may recall from prior discussions, credit losses tend to be higher on loans on lower-priced cars. However for the quarter, credit losses were up a bit from the prior year.

Again, it is sometimes difficult to pinpoint the precise reason why something goes up or down and I have a difficult time trying to explain the increase in the fourth quarter. However, looking at delinquency percentage at the start of each of these quarters, I noticed that the percentage of accounts under 30 days past due at the beginning of each of those quarters was a fair amount higher in the fourth quarter of fiscal '05 as compared to the fourth quarter of fiscal '04. Delinquency levels over 30 days past due at year-end were the same for both years at 3%.

We increased finance receivable principal balances by about 24 million, or 18% during fiscal year '05 and we currently have over 35,000 accounts, adding about 2000 customers this past year.

Debt increased around 6 million for the year, the bulk of which funded our capital expenditures. For the year, we spent a total of 6.2 million in capital expenditures compared to 1.4 million last year. The majority of the increase has been spent on purchasing land and buildings for new locations and a relocation of existing stores. As mentioned in the third quarter call and in a number of cases, we physically ran out of room at our existing locations and had to move across or down the street in order to be in a position to sell more cars. We expect these additions and improvements will allow us to sell more cars in the future at the loss where we expanded the facility.

Now I will turn it over to Hank.

Thanks, Mark. During the Sarbanes-Oxley process, we determined that our IT controls were in insufficient and as a result, we had at April 30 a material weakness in our IT controls. Basically, our access and security safeguards were either lacking or were not able to be tested over enough time to determine that our policies and procedures in IT were satisfactory from the Sarbanes-Oxley control perspective. However, I will tell you that we have been very comfortable with our IT systems and our ability to produce operational and financial data adequate to run our business and produce accurate financial savings (ph).

To address this material weakness and perhaps more importantly over the long run to strengthen our IT operations for our growth, we brought in an IT management professional with extensive experience and was most recently in charge of an IT department with over 500 IT professionals and he brings to us a wealth of experience and knowledge.

Our first order of business in the IT area has been to address any weaknesses we may have, and that process has begun. We will also be bringing out our ALICE II (ph) operations software which is the second generation of our internally-developed software with which we operate our business on a day-to-day basis. I might add that the full implementation of ALICE II was put on the back burner so we could deal with the Sarbanes-Oxley. We were actually about six months behind schedule on implementing ALICE II, but by this time next year, ALICE II should be fully operational at all of our dealerships.

In addition to ALICE II, we are currently in the process of implementing a third-party software package for all aspects of our human resources which includes payroll processing, 401(k) benefits and so forth. This new software when fully implemented this fall will facilitate our continued personnel growth as a lower overhead cost.

We believe that this strengthening and restructuring of our IT department, along with all of the other significant initiatives throughout this past year, will equip us for future growth. And just to recap some of those initiatives from this past year, remember we opened a training facility in Conway, Arkansas which is fully up and running. We also created an HR department where we brought in a very experienced and highly qualified director for that department and we created an associate development department bringing back to the Company one of our past area managers that has several years of experience with us and was most recently working in education.

Also this past fiscal year, we expanded nine of our existing locations and relocated six more to accommodate the growth of each of those. Presently, we have six more expansion projects of existing lots underway right now. And so with that, I will turn it back over to Skip.

Thanks, Hank. All told, this was a solid year for Car-Mart and another year in which we met our earnings expectations. We can do better and rest assured that throughout our company, we have let it be known that we can and will do better.

Our guidance for this fiscal '06 year is $1.63 to $1.70 per share. We need to increase sales a bit and continue our progress in credit losses. We are strengthening the quantity and quality of our inventory and we are still striving to keep our pricing in line. With more and better inventory, both sales and credit losses should see continued improvement.

Also as Hank mentioned with the new lots and the expansion of existing lots, we expect to see additional sales growth. Finally, we look forward to being able to spend more of our time on our business of selling cars and collecting our receivables.

In summary, we feel good about our prospects for '06 and beyond. That actually concludes our prepared remarks and so now, we would like to move onto your questions. Operator, would you handle that?

(Operator Instructions). Dennis Telzrow, Stephens Inc.

Good morning, gentlemen. A couple of quick questions, probably for Mark. It looked like charge-offs were up substantially during the quarter. Does that reference back to what you talked about delinquencies?

I'm sorry -- you said charge-offs were up for the quarter, and what about delinquencies?

Charge-offs were up about 21%, I think, if my numbers were right.

I could tell you that provision was up, whatever, you know, 20.4 this year versus 19.6 last year. I'm sure charge-offs were up a comparable percentage. I haven't tried to calculate that.

Fair enough. With regard to used car prices, any pressure here with what's going on at used car prices Hank?

Well, of course we came through (indiscernible) where we know that the cost of our inventory goes up and that continued to carry over. And we also had some stockpiled cars that were bought during the tax time that I think on average we paid more for. So yes, we did see an increase in our inventory cost.

Do you think that should be expected over the next year? Manheim Index is up a fair amount.

Yes, I think -- well obviously, we hope that the increase doesn't continue, but I think we're pretty much at a level where we can expect to be right now.

Dennis, I noticed that Hank -- the past I want to say six or seven months, Manheim Index was up and in the last month, which may have been probably June or May, it was down for the first time slightly. So I don't know exactly what that tells you, but it could tell you that those -- the price increases that we felt earlier in the year are starting to level off. And then as you know, all of the good car dealers for the most part have had pretty good results the last month or so with incentives.

So the more trade-ins that are in the pipeline, hopefully the more supply will be out there and then prices will if decrease, at least level off.

Last question. Any comments of new lots that opened last year as far as performance and expectations?

I think they're all performing (indiscernible) all those expectations. We are pretty pleased with them. Every one of them seems to be doing pretty well and right on line, including a couple of them we just opened early in this year. They seem to be really starting off very well -- Greenville, Texas in particular -- we've seen some good results. So we're real pleased with the new lot openings.

Let me squeeze in one more. Sarbanes you implied in your press release you'd have more cost here in the first quarter. Any estimate what that might be?

Mark?

Most of the Grant Thornton, which is our external accountant, Sarbanes-Oxley costs will actually hit in the first quarter. And we would expect that their annual audit fee, which also tends to hit in the first quarter, will be higher this year than last year. I am going to say something in the 200 to 300,000 range in the first quarter which would be an increase relative to last year between Sarbanes-Oxley and increase in audit fees this year versus last year.

Thank you very much.

Kent Green (ph), Boston American Asset Management.

My question pertains to, you know, whether you're still seeing pricing power to pass through higher used cars costs, or some of these increased G&A costs, what you're going to get?

That's a good question. I think with respect to the price increases that we could pass on, there does come a point with our customer that you're kid of fooling yourself if you try to charge them more on the front end because you're more likely to have a credit loss from the back end. So I would tell you Ken, I don't see us increasing prices much more than 3 to 5% over this fiscal year which may be more of an inflation type thing. And on average as we sell more higher-dollar cars at some of our lots, move up to those lots where they're selling let's say a 10 to $15,000 retail price car. So we will get some advantage out of that. So you will probably see our average price year-over-year increase that 3 to 5% range.

But specifically on makes and models, I think it's going to be difficult to raise prices. SG&A I believe when we're comfortable will get back to where it should be after we get this first quarter over with. We will have some additional overhead expenses, beefing up a few areas of our company with additional salaried personnel for the most part. But all in all, I think that will be dramatic. So we're looking forward to getting these Sarbanes-Oxley-related costs, which really by the time it's all said and done, will be in the range of $1 million of additional costs that we didn't have in prior years and most of which we won't have going forward.

And then ALICE II conversion, the training schedule, all of these things that have positioned you to say achieve a higher sales or to run a bigger company, more complex company, more units -- is that, what, 1.5 million, $2 million with the Sarbanes-Oxley?

The cost of ALICE II I think is what you're alluding to, Ken. It's really more internally developed, so it's not external consultants that we're paying this money to. So it's time and resources internally.

And then the trading costs, the other stuff -- those are minor?

I would say for the most part. We were having to add a couple of people here, there and add some procedures in there. You know, the Sarbanes-Oxley, if the SEC could have it their way I guess they would want to have two people to do every one job so you have absolute checks and balances. So we will see a few instances where we've had to add people that -- or add (indiscernible) two people which eventually will cause another person to be added or so to handle Sarbanes-Oxley. But at the end of the day, I don't think the additional costs will be significant (multiple speakers) onetime costs.

I would say in the department area, the area that we're likely to spend the biggest increase would be in the IT area with the addition of the new IT director as well as --.

At least one extra person (inaudible).

You know and Kent, this ALICE II is something that -- Hank could speak more to this -- we've been developing for quite awhile and it really is a refinement and enhancement of our current operating system which will make us more efficient in many areas (multiple speakers) particularly, and Hank?

It should definitely give us a better edge internally as far as the way we can track our inventory and so forth. But also just without getting into the technicalities, even just the nature of the conversion of this ALICE II actually makes it easier for us to handle some of these deficiencies in our IT area that we mentioned before.

Unit growth this year, Skip, where were you at at the end of last fiscal year? Then how many within a range do you think you will be able to open this year or want to open this year?

We opened six lots in '05 from 70 to 76. We are stating today we will open at least eight lots in this current '06 year. But I would tell you, like I said, we have three opened already. One will open as soon as we get a phone call from the Texas Motor Vehicle Department giving us our license. And we have two other properties that we have already leased and/or bought. So that right there gives you six and we have three other proposals out that I'm hoping we get on all three for additional locations. So I would say that eight new stores would certainly be what we're shooting for, but I think it will be at a minimum.

And then of course, you're expanding or relocating another five or six, it sounds like.

Yes, sir.

So then you know in total salable square feet or number of inventories or cars or something, unit expansion can be, whatever, 12 or 15% this year?

That's you talking, not me. (multiple speakers).

I would say eight or nine in 76 is over 10, so you know, with expansion.

We historically have done that and I'm uncertainly not going to step out and guide at that high level. But that is the purpose for these new stores obviously and the expansion as we may have mentioned in the past, some of these stores that we're currently expanding we expect to significantly increase their unit sales.

And also, the expansion, you know you need additional office space for collectors and that type of thing, so it's not all sales-driven. It can be collection-driven as well. But yes, those new lots particularly, we expect some significant increase in sales over time with the expansions.

Very good, thank you. Oh, Arkansas, any movement on the usury law changes?

The only help we've had there is Allan Greenspan. He keeps raising the rates by quarter. So actually in Arkansas, we're now charging 9.25% from a low I think. Our lowest was probably Hank, what, 6?

5.75.

5.75. So in the last 18 months, two years, we've had pretty good increase. But the answer to your question is, we just can't seem to get anybody's attention up there right now. I don't have anything to tell you that is positive on the development on the U3 (ph) statute.

Very good, thank you.

Bill Armstrong, CL King & Associates.

Good morning, guys. I have a question on the provision for losses. You had a higher average selling price which as you mentioned in the past and this morning would normally -- you lower gross margin, but also lower provision for losses. So in the first quarter, the loss was as a percentage of sales was higher than it was a year ago. So I was wondering if you could just give us some explanation as to how that happened.

I'm sorry, I'm not sure -- tell me your question again. What is your question?

The question is -- how did the provision for losses increase in light of the fact that your average retail selling price was up?

Okay. So the point is, if we're selling an average higher-priced car, arguably that equates to lower credit losses, so why did it go up in the quarter? And that's a difficult answer to explain. I did mention that at the beginning of each of the fourth quarters this year and last year, we had a fair amount more of accounts that were past due -- the under 30-day past due. From three days to 30 days, it was quite a bit larger in the fourth quarter of this year than it was last year.

I think that that is at least part of an explanation of why credit losses would be higher in the fourth quarter. But it's sometimes difficult to say. And I cannot tell you the breakdown of the credit losses in the fourth quarter of this year -- were they vehicles that we sold 18 months ago, some of the lower-priced cars. I cannot tell you today, but that could be the case.

So these are not -- when you're booking these credit losses, it's not based on the composition of the car that you sell in the current quarter, but it's --?

No, it's a combination of two things. It's actual charge-offs. We repossess a car or we wrote off an account because they stopped paying and we cannot find them, and it's setting the reserve at a level that we think is appropriate. We did not change our reserve as a percentage of principal balances during the fourth quarter. So that didn't really have much to do with it, it was mostly charge-offs and charge-offs were higher fourth quarter this year versus fourth quarter last year.

So then does the provision sort of number that you back into based on the charge-offs and the balance?

Yes. It's a combination of two things -- a change in the allowance, which on a percentage basis, the allowance stayed even throughout the quarter, and charge-offs.

Okay.

Bill, I would add two things too. Year-over-year, credit losses were down by 1.2%. And if you look back at our third quarter of last year, we wrote off a lot of accounts. That's where we made the decision to write off accounts principally related to the cheaper cars, which might have had an effect for having our fourth quarter last year be a little bit better than it normally would have been. So in a comparison, there could be a little bit of that in there where the fourth quarter last year had an easier starting point with more write-offs than the third quarter. I cannot tell you that for a fact, but it makes common sense.

Right, Right. Moving onto the Sarbanes-Oxley, it looks like the 700,000 for the fourth quarter was higher than you originally expected. And then there's going to be it looks like another 2 to 300,000 in the first quarter. Is that pretty much it, or will there be ongoing Sarbanes-Oxley costs going forward?

There will be ongoing Sarbanes-Oxley costs, but we incurred costs of about -- let me get this right -- well, most of the 700,000 in the fourth quarter was not our external -- our independent accountants, but were external consultants we hired to get us to a satisfactory documentation level and assistance in the testing and making recommendations.

We probably will have very little or any of that in the year to come. We will always have the Grant Thornton, their Sarbanes-Oxley testing, that will be ongoing. But even their testing for the next fiscal year, fiscal year '06, I would argue would be lower than what it is this year because this was the first year, the implementation year, and they had a lot of work to do.

So if we, all things said and done, spend $1 million relative to fiscal '05, although a couple of hundred is going to fall in the first quarter, next year in total maybe 2 -- 300.

Okay. I noticed that this, in your guidance, you were not giving quarterly guidance which you have done in the past. Why no quarterly guidance this year?

Bill, we looked at that and thought about it and I guess we're trying to manage this business a bit more long-term than that and -- although obviously, we will reflect each quarter and update our guidance. We thought it might be best for us this year to do an annual guidance.

So we just did it. That's probably as good an explanation I can give you. I think it's the right thing for us to do. And I know there's analysts out there such as yourself that will have quarterly numbers.

Do you think the first quarter earnings, given these additional costs, might be down year-over-year?

Yes. That's why we wanted to make that clear in the press release, that we do have a tough quarter to compare against (indiscernible). So clearly, superior first quarter last year and the '05 year and -- which gives us a tougher benchmark to measure ourselves against. And then secondly, these costs that were not in the first quarter of last year that we will have this quarter that Mark mentioned.

And also as we mentioned, in the fourth quarter our gross profit percentage was 45.5, and that was based on selling a $7400 car. We're probably going to be pretty close to that 7400 in the first quarter this year and we are not going to have the same gross -- I don't have it in front of me what the first quarter gross profit percentage was last year, but I expect it's going to be lower this year.

So 7400, is that the range that we should expect to sort of level off at?

Ballpark.

Okay. Finally, you mentioned in the press release, inventories are building. I know you don't have it in the balance sheet that you published. Can you just give us an approximation of what your inventory position was at the end of the fourth quarter?

Seven -- let's see -- almost 8 million, so it was up about 2 million over last year. I think we'd stay in that range. We possibly could be a little bit higher.

I think -- and we're certainly working towards increasing that throughout the coming year.

And let me just mention something from a comparison standpoint relative to inventory. Years past, we did not have a corporate stockpile area, which is something that we started this year. And it has a little bit to do with selling cars in Arkansas and how we're allowed to do that, that now we more or less have to have this corporate stockpile area to get titles in and sell cars with titles. In the past in the state of Arkansas, most buy-here/pay-here dealers, other used car dealers, sold cars before they had the physical title in hand. The State of Arkansas has frowned upon that and we're in the process of selling -- only selling cars with titles in hand which we have to have more inventory to do that. We get a car in, put it in the corporate stockpile, wait two to three weeks until we get the title, and then we move it to a lot. So that's -- it makes us a little bit more inefficient from a selling car standpoint.

What, you mean that you can (multiple speakers).

And the only thing I would add to that is obviously with the Fed, that's going to raise our average inventory time. We're going to have these cars longer because we're hanging onto them until the title (inaudible) before they are sold.

All in all too, though, it is on those lots where we have already made that transition, I think it certainly helps our customer service, makes it easier for the customer.

Right. So you've been able to sell cars without having the title in hand?

It's been a generally accepted practice in Arkansas in the past years. For example, we buy a car that was traded in at the new car store yesterday and we buy it and get it over there and we sell it. There may be a few days lapsed before we actually get the title delivered to us so we can get it registered. And that has in and of itself created some problems before. So we need to get this switched over. But now, the way we operate is we have the car in our possession, but we hang onto it and don't put it out in front available for sale until we have the physical title in our position.

Right, okay, thanks.

Bill Baldwin, Baldwin Anthony Securities.

Good morning, Skip, Hank, Mark. Two questions. Number one, it looked to me that your interest income in the fourth quarter was actually slightly lower than in the third quarter. And I was just wondering what would cause that with your loan balances being up and (indiscernible) your interest rates kind of moving up. Why would interest income be kind of lagging like that?

Well, looking at what I have in front of me, they were relatively flat. I think they were $7000 apart. You know, I don't have a good answer for that. You expect it to be a little bit higher.

One component in that interest income is also late charges, and there's just one other thing -- late charges and (multiple speakers) NSF fees. And it could be that in the fourth quarter of '05, we were a little bit more lenient in that area. Store managers could waive those fees if they so choose and it could be attributable to us waiving those fees in the current year being more lenient than we were in the fourth quarter of last year.

I see, okay. Secondly, do you have a CapEx target right now or budget made out for fiscal 2006 at this time?

yes. I would tell you, it's not exact as when we -- as you know, when we look for property, sometimes we will buy or lease dependant on whatever we were able to do, particularly a facility, for example, that we know want to be (ph) at that location for the long-term, we tend to buy and build as opposed to lease.

Having said that, all in all, I would expect it to be probably in the $3 to $5 million range for this year. I don't expect it to be the $6 million range (indiscernible) significant expansion, but somewhere in that range, Bill.

Okay. And Skip, do you have a hurdle rate that you expect to earn on CapEx dollars? I mean, do you have some internal rate of return you look for before you (multiple speakers)?

Yes. It has got to be at least what our company average is, about -- you know, north of 20% in the low- to mid-20s. We know we make on a companywide basis sort of per car, which is give or take $1000 per car pretax. And so we kind of map that out and look at capital we spend.

Give you a good example. Hank and I last week were in Mountain Home, Arkansas looking -- which would be a great town for us we think. It's a very -- a lot of you maybe might never have heard of it. I know Ken Green has, if he's still on the line, it's (indiscernible) good fishing. But it's a great town, a good town, one of the few towns in Arkansas where we're not in. But as Hank and I were there, we just could not find any real estate for probably less than $3 to $400,000, you know, pre-building.

So when we look at that and we go, you know, this is a lot that let's say first year we sell 18 to 20 cars a month, are we better off putting a car in Mountain Home with that kind of CapEx, or are we better off looking for another town that we may lease a facility for 2500 a month and sell the same number of cars.

Now having said that, we're still looking at Mountain Home, but we're trying to steal a deal there if we can. But yes sir, you're right. We do look for a return before we go to invest the money.

Okay. I will stick another question in here. Hank on your lots you expanded last year, I think you said you expanded nine lots and relocated six. Have you been able to get the kind of results you were looking for out of those expansions, or is it too early to know yet what --?

Well, it's a little bit of a mix. On a couple of them, we have definitely seen an increase already on those that were done earlier in the year and some others we just recently wrapped up and are in the process of. But I think on each one of these that we've seen this past year was a pretty easy call.

And I would also say, and these were expansions that we planned on. The fact we had to do them, I mean, things are going as planned, ideally, we like to get into a town as inexpensively as possible with the expectation that we'll outgrow that facility. So at each of these, I think things were going according to plan. So yes, we feel good about all of the expansions that were done.

Are you fully staffed now on the buying front as far as buyers for your cars?

Well, with the number of positions that we have, we are. But I will tell you that we fully expect to add some more positions, some more buyers positions throughout this next year. This is an aspect of our business that's been tough for us the past year as we, again, we're trying to buy a better car and more of them. So I think that you will see us step up, and maybe if we're in some of our bigger cities where we have one full-time buyer running that town, we will probably add two full-time guys to try to supplement some of the surrounding lots. So we'll step up that area.

Roughly how much of your cars are you getting from your franchise dealers, and how much are you getting wholesale and through auction?

I would tell you that over the past -- I can't tell you the exact change this past year, but over a long period of time, there was a time where the majority of our vehicles came straight from the franchise dealers. And over time, that changed somewhat. Now I would tell you that more of them do come from the wholesalers and a lesser number directly from the franchise dealers. And that's one aspect though as I just mentioned that if we increase the number of buyer positions where we can better, more thoroughly run those routes, I think we can get more directly from the dealers. But we have seen that changing.

And options stayed about the same?

Pardon?

And options have stayed about the same, or remained about the same?

We continue to go to auctions on occasion to supplement when our levels get low. Particularly that's usually the case in tax time when our sales increase and actually increase for everybody. So getting inventory is tougher, so we go to the auctions. But we try to keep that at a bare minimum. We don't have a designated schedule for auctions.

Thank you much.

(Operator Instructions). Clark Sledge, Stern Agee & Leach.

Good morning. You've given us some numbers to look forward to for 2006. Can you look down the calendar a little further and give us some ideas about what you have for, say, the next three to five years?

That takes a pretty good crystal ball, but I would tell you that I think our guidance for this '06 year, we would like to think it's conservative. I think long-term, this company has grown the top and bottom line in the 19% range. It's always difficult to take (ph), if you look for a long-range growth, we continue to grow at healthy levels even above where we have guided. But it is hard to have that crystal ball, but we're confident in the things we've put in place to continue that growth.

Thanks.

Thanks.

Jordan Hymowitz, Philadelphia Financial.

Hey, guys. I'm just having a little trouble understanding.

Jordan, can you speak up a little bit?

Is that better?

Yes.

I'm just having a little trouble understanding the(technical difficulty).

We just lost you.

Hello?

Speak up louder; we couldn't hear that question.

Okay. I'm having a little trouble understanding the provision policy, so just help me understand something. You guys raised prices which should have resulted in lower charge-offs, and the charge-offs seemed to go up faster than the balance. So I guess my question is -- do you think that, despite the lower gross margin, that the charge-off level will stay the same? I guess that's the first question.

Well, all things being equal selling a higher-priced car now than we did, say, a year ago or two years ago, you would expect lower credit losses, all things being equal, but that's not always the case. I think we're somewhat cautious in what kind of credit losses we're going to assume going forward, in particular, in our fiscal year '06 guidance. I don't think we've -- I would say we probably feel disappointed in the level of credit losses we've had in the fourth quarter. We would have hoped to see -- on balance over the year, credit losses did come down from roughly 21% to 20%. So it moved in the right direction. Why did it go up in the fourth quarter? We're not certain. So, what should we expect going forward?

Well, what's in your projections? Let me ask it that way.

Well, we don't really give guidance on a line-item by line-item basis. We try to factor in all of the appropriate variables and come up with an answer. I think perhaps something to look at is just the long-term credit loss history of the Company. And if you go back seven, eight, nine years, the average is roughly 19.3% in this range from a low of 17 to a high of 21. So I would just --.

But with the higher-priced cars, you would think the number would be on the lower end (multiple speakers).

That's still also a question mark too, though, of how much time it's going to take to see the full benefit of that.

Okay. The other question is -- do you look at the allowance adequacy given that percent of balance independent of charge-offs, or do you say I want to cover charge-offs one times or 1.5 times, because you have to look at it both ways, don't you?

No, you don't really look at it -- I want to cover charges. You look at it and say, based upon mathematical analysis and you consider some other factors, what -- how much money do we think we're going to collect of these receivables? That's what GAAP would tell you to do; what are you going to collect or what are you not going to collect?

Effectively what we do is we look back historically over a certain number of years at the dollar amount of charge-offs and the frequency of charge-offs and we come up with a mathematical number that says -- here's what to expect, and also the length of time prior to when you would charge off a loan -- 10th month, 11th month, whatever. And you put all that in the hopper and you come up with a mathematical number that says your provision or your reserve should be X.

And then under GAAP, (indiscernible), then you look at the intangible or subjective issues of how do you think you're doing, how are economic prospects generally where you're located and some other things. But you don't want to steer very much away from your mathematical number because subjective is, who knows. But we have been doing this for almost 25 years, so you get a pretty good fell for some of these subjective factors, but you need to stick close to the math. So we in effect run what is relatively close to a statistical (ph) analysis mark on the past portfolio performance, and that's where we end up.

And again, if you take into account subjective factors that aren't necessary reflected in the math, more so trends, changes in collection staff, if you will, changes in policy, changes in underwriting, et cetera, and say -- how do we weigh all of this stuff and what should the allowance be? And we go through it and all three of us in this room look at it as well as our audit committee, and then ultimately our external auditors.

Okay, that makes sense. Thanks.

Bill Armstrong, CL King & Associates.

Not to beat a dead horse, but this isn't a critical area. So just to clarify, the charge-offs represent actual charge-offs of actual accounts, as opposed to just an estimate -- is that correct?

Exactly.

Okay. So why would that be higher, given the fact that over the last year, you have had significant increases in the average price per vehicle, which would make you think that your charge-offs would be at least flat, if not even down?

And again, Bill, as I mentioned, at the beginning of the fourth quarter this year, we were coming into the quarter with not quite as clean of a delinquency portfolio as we did in the fourth quarter of the prior year. If you recall in the third quarter of fiscal '04, our critical losses were 25-something percent -- I think that was the number -- and we did a lot of housecleaning, if you will. We wrote off a lot of accounts.

So going into the fourth quarter of last year, we had a very clean starting point, or let's say clean-er than we did in the fourth quarter this year. That is one possible explanation. But there's a lot of dynamics that go along in credit losses. It's not just the quality of the vehicle that we sell, which is arguably better today.

I think you did explain the difference, though, when we (ph) compare quarter-to-quarter. I think that is plainly the answer, and I think that's why we have to look at it year-to-year.

Right. If -- the shorter the period, the more difficult it is to explain. With over longer periods of time, you can explain with better accuracy and so forth. But in a shorter period, you say well why did this go up?

Were some of those charge-offs an effort to maybe do a little housecleaning in terms of your portfolio?

No. They really weren't. It was pretty much "business as usual," really.

Okay, so we shouldn't take this as a trend, that charge-offs and credit losses are rising? I guess that's what people are sort of getting at with all of these (multiple speakers).

I don't think you could just point at the fourth quarter and make some analysis, but it is what it is.

I think the better trend to look at really is, and frankly what we're looking at here is our annual number as opposed to the fourth quarter, you know, our annual credit loss percentage of about 20.1% (indiscernible) is better to look at. As Mark said, from quarter to quarter, sometimes there could be a variation that is difficult to pinpoint, but over time, these things tend to spread out.

Got it. Thanks.

At this time, there are no further questions. Mr. Falgout, do you have any closing remarks?

Yes. Thank you very much for all of the participants and the questions. We appreciate your interest and look forward to a great '06. And if we can help anybody anymore, feel free to callus. We're always available to tell you what we can tell you legally, and come visit our lots. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's America's Car-Mart's first quarter and fiscal year-end 2005 conference call. You may now disconnect.