America's CAR-MART Inc (CRMT) 2006 Q2 法說會逐字稿

Welcome to the America's Car-Mart's second-quarter fiscal 2006 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal second quarter ended October 31, 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 2 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 website at www.Car-Mart.com.

As you all know, some of the 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. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information, please see Item 1 of Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2005 and its current quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and the 10-Q.

Participating on the call this morning are Skip Falgout, Car-Mart's Chief Executive Officer; Hank Henderson, the Company's President; and Jeff Williams, Chief Financial Officer. Now I'd like to turn the call over to the Company's CEO, Skip Falgout.

Thank you and good morning. Most of you have already seen our press release this morning; it is posted on our website and is available on the usual financial sites as well. We expect to file the related Form 10-Q here in the next few days. This morning, we have reported earnings for the second quarter of $0.23 per diluted share. For the quarter, revenue was up 9.5%. Same-store revenue was up 5.9%. Net income was down 36%, and earnings per share was down 38% from the prior period.

As I mentioned in the press remains this morning, this was an unusually difficult quarter for us and our customers. The impact of the two hurricanes that hit the Gulf Coast was much more significant than we expected. Then when you add to that mix the resulting spike in gasoline prices, many of our customers were really being hammered financially.

The result of these macro issues was to cause Car-Mart to have a relatively poor September in both sales and collections. In fact according to published reports, the month of September was the worst sales month for new car dealers in the state of Arkansas in the last 20 years. Although as you know our results don't often correlate directly with new car sales, this give you some flavor of the environment in the state where we still have over 50% of our business. The effect of this month weighed heavily on the results for the quarter and reduced our earnings for this period versus the same period last year.

On a positive note, we feel very strongly that the balance of the year will be more in line with our historical growth in revenues and earnings. The month of October as well as November, which is the first month of our third quarter, looked more like what we'd expect to see in the sales and credit loss areas. Also our over 30 day past due accounts have decreased from the first quarter, dropping from 4.1% at October 31 from 4.7% at July 31. Our balance sheet remains strong with debt-to-equity ratio of 0.32 and a leverage ratio of 0.21.

We are happy to say the gas in our areas of operation has dropped significantly, generally to under $2 per gallon. I am now going to turn it over to Jeff to discuss the financial details for the second quarter.

Thanks, Skip. As Skip mentioned, the revenues are up 9.5% for the quarter. The increase was principally the result of same-store revenue growth of 5.9% and revenues from new stores opened in the last year. Of the 9.5% revenue growth, 1.8% was related to higher interest income. The higher interest income resulted principally from the increases in the federal primary credit rate, which is the base rate for underwriting in the state of Arkansas as well as the overall increase in finance receivables during the period. We currently charge 10% on new Arkansas loans, up from a low of 5.75% 3 years ago. We expect interest income to be up approximately $4 million, or 28%, for the full fiscal year with a large percentage of that increase coming from loans originated in Arkansas.

Quarter over quarter, our average retail sales price was up 2.5% to 7,301 from 7,120. This is lower than the average retail price during the first quarter, in large part caused by our buyers purchasing what was available in a tight inventory market by relatively fewer sales of higher-priced cars -- the purchase of which is more discretionary.

Historically, annual price increases have been in the 3 to 5% range. Going forward, we expect that our retail sales price will be between its current level at approximately $7,500. In the second quarter of the current year, our unit sales growth was 5.6% compared to 3% in the same quarter last year. Lower growth in the prior year was partially attributable to the decision to move the average retail sales price over the $7,000 level, which had the effect of moderating unit sales during the prior-year quarter. We expect our unit sales growth to accelerate in the third and fourth quarters as we hit the income tax refund season and bring new and expanded dealerships online during the second half of the year.

For the second quarter of this year, our gross profit margin was 44.4%, which is down from 45.8% in the second quarter of last year. The Company has experienced short-term inventory supply shortages brought on by Hurricanes Katrina and Rita as well as a significant slowdown in new car sales during the quarter. We also saw negative effects of higher fuel costs, an increase in vehicle repair expenses during the quarter. All of these factors contributed to our lower gross margin percentage. We are working hard to reduce the vehicle repair expenses; although, we spent a little more this quarter on customer repairs in order to keep some customers in a vehicle that might otherwise have resulted in a repossession.

We also had a higher number of trade-ins during the quarter, particularly in October when we had a $500-off-the-downpayment promotion for any trade-in regardless of its condition. For the balance of the year, we expect our growth profit percentage to be at or near the current level.

The second quarter of this year, SG&A as a percentage of sales increased to 19% from 17.9% in the same period last year. This increase was primarily the result of an increase in certain expenditures related to upgrading the Company's information technology systems, the timing of certain other expenditures, overall higher utility costs and an increase in legal and professional fees -- some of which related to compliance with the Sarbanes-Oxley Act of 2002.

Over the last 12 months, we have spent approximately $1.4 million on SOX and audit services. On a go-forward basis, we expect that number to be closer to $400,000 annually. It should be noted that had we hit our projected sales levels for the quarter, our SG&A percentage would have been in line with the prior-year percentage. Most of our SG&A expenses are more fixed in nature and thus the lower-than-projected topline will drive this percentage up.

For the current quarter, credit losses as a percentage of sales were 24.6%, up from 20.3% in the second quarter of last year. As we have stated in the past, credit losses on a percentage basis tend to be higher at new and developing stores than at mature stores. Anyway, this is the case because the store management at the new and developing stores tends to be less experienced and the customer base is less seasoned.

Generally, older stores have more repeat customers. On average, repeat customers are a better credit risk than non-repeat customers. Due to the rate of the Company's growth, the percentage of new and developing stores as a percentage of total stores has been increasing over the last few years.

In addition, as Skip mentioned, significant negative, external, economic and weather-related issues were prevalent during this period, including higher fuel prices. While the Company believes the most significant factor affecting credit losses is the proper execution of its business practices, we also believe that higher energy and fuel costs had a negative impact on collection results.

Also during this period, significant efforts were made by store management to identify, clean up and write off uncollectible accounts. Again, at October 31, 2005, 4.1% of the Company's financed receivable balances were over 30 days past due compared to 4.7% at July 31, 2005. This is a significant improvement over the July quarter and should be a positive indicator of future credit losses.

Interest expense as a percentage of sales increased 0.5% to the 1.1% for the quarter from 0.6% in the same period of last year. The increase was attributable to higher average borrowings during the current quarter of approximately 35 million as compared to average borrowings of approximately 25 million for last year.

Also, the average interest rate charged during the quarter was 6.5% compared to 4.6% for the previous year. The increase in the average interest rate is attributable to increases in the prime interest rate of the Company's revolving credit facility -- fluctuates with the prime interest rate. As discussed previously, increasing interest rates results in a net benefit to the Company as interest rates on financed receivables originated in Arkansas increased with new originations. The ratio of debt to financed receivables is currently a very low 0.21 to 1 and debt-to-equity of 0.32 to 1.

Effective September 30, 2005, the Company's revolving credit facility was amended. The amendments extended the due date of the facility to April 30, 2009, reduced the interest rate by 25 basis points to prime -25 basis points and increased the line by $5 million to 44.5 million in total to support future growth.

At October 31, 2005, our total debt was 35.6 million compared to 29.3 million at July 31, 2005. The increase in debt was anticipated and primarily related to required tax payments of approximately 4.3 million, increased financed receivables of approximately 3.9 million and increased inventory of approximately 1 million to support future sales levels.

Property and equipment additions during the quarter totaled 800,000 and related mainly to expenditures for new stores, relocation and improvements at several existing properties, which Hank will discuss in more detail. Now, I'll turn it over to Hank.

Thanks, Jeff. Well, as Skip mentioned, we are seeing real improvement in the credit losses and delinquencies area. We ended October with our over 30 day past due balances at 4.1%, which is a marked improvement over July 31 which was 4.7%. Following on that lower delinquency at 10/31, our losses in November were drastically improved in key areas -- the number of repossessions and write-offs and the net credit loss for the month. In fact, the credit loss in November as a percentage of principal balances was one of the lowest in the last 2.5 years actually -- and on a dollar basis was the lowest since May of this fiscal year, and we will work hard to continue this going forward.

On the sales side notwithstanding the tighter inventory locally, we are gearing up for income tax season that believe it or not has already started. We currently have on the lots available for sale approximately 1,800 vehicles with another 800 or so in stockpile waiting titles and delivery to the stores. Income tax refund season seems to start earlier every year, and we are ready with plenty of inventory and a refund-related promotion to get a head start on our competitors.

As I mentioned in the press release, we have three new lots opening this month -- West Plains, Missouri; Claremore Oklahoma; and Van Buren, Arkansas. Each of these dealerships are on long-term leases that are approximately $5,000 per month in rent in total for all those, and we will have expanded approximately 150,000 for all these lots in leasehold improvements and related costs. This is the way we like to start our new dealerships, relatively low-cost going in, so we can invest in more significant capital -- approximately 450,000 for a dealership in inventory and receivables over the first year. These dealerships are located in great filler markets for us, and we expect each of these lots to do very well.

This will give us eight new dealerships this fiscal year, which is in line with our earlier guidance, and we have secured property for two more dealerships this year. One is in Stillwater, Oklahoma, which we anticipate to open in January, and the other in Sedalia, Missouri, which we will open this spring.

Also, we have three expansion projects that are going to be opening this month as well -- Jonesboro, Arkansas; Springfield, Missouri and Ardmore, Oklahoma. Each of these dealerships has outgrown its existing facility and should have significant additional growth over time and is going to be able to merchandise and sell more vehicles and have the room to accommodate the additional staff to better handle collections. More importantly, these new facilities will allow us to offer greater customer service to the many existing and future customers of these Car-Mart dealerships.

We are very proud of the general managers of each of these dealerships. We've got Lee Parr in Jonesboro, Allen Reed in Ardmore and Daniel Bicknell in Springfield, and we appreciate their hard work and dedication to Car-Mart's principles in building up these dealerships. And we feel the additional capital we've invested in these new facilities will pay huge dividends over time.

This is the way we like to grow at Car-Mart -- start small with relatively low capital outlay and when the lots begin to mature and prosper, invest more capital to ensure the future growth. We have a number of other projects just like these in the works, and we will update you on those as we go along. Of the over 50 dealerships we've opened in the last 5 years, many of them will qualify for and justify similar expansion. And now, I'll turn it back over to Skip.

Thanks, Hank. Well, even after as a tough a quarter as this one was, we feel strongly about the balance of this fiscal year and beyond. As we mentioned earlier, we believe we are getting back on track from a sales and collections standpoint, and the reduction at quarter end in our over 30-day accounts and particularly over 90-day accounts is very encouraging.

These improvements don't happen without a lot of hard work and diligent effort in all levels of the Company. In addition to the hard work wherever, we have an understanding of our business developed over 24 years and it does allow us to tweak and refine our business to handle and accommodate different economies and environments.

I do want to be very clear on one thing however. Yes, we did have a couple of pretty big issues working against us this quarter -- hurricanes and high energy prices. But we believe internally we could have done a better job of managing our business to minimize their effects on our results. Now, as you know, we've been in business since 1981 and we've been through many cycles both good and bad and we've maintained our profitability and growth through each cycle and we will do the same now.

I know we talk about this a lot and our Chief Operating Officer, Eddie Hight, reminded Hank and me just this morning that our strongest focus will be on improving our credit losses. I can assure you that everyone in the Company is following Eddie's lead and working diligently to continue to improve in this area.

There's two more things I'd like to add before we proceed to the Q&A part of this call. First, as we mention in the press release, we've increased our stock repurchase plan to 1 million shares. Since July of 2000, we have purchased over 2.5 million shares. Second, in the light of the results this quarter and as we indicated in the press release, we have reduced our earnings guidance for the 2006 fiscal year to $1.43 to $1.50 per diluted share.

Third, Jeff Williams, our Chief Financial Officer, has been with us now for a little over 2 months and has done a great job and we are very proud to have him onboard as part of our senior management team. We've kept Jeff pretty busy his first couple months, but we encourage you to call and meet him in the future. This concludes our prepared remarks. So now, we'd like to move on to your questions. Operator?

(Operator Instructions). At this time, the participants will now answer questions from the callers. I would now like to reiterate that my earlier comments regarding forward-looking statements apply both to the participants' prepared remarks and to anything that may come up during the Q&A. (Operator Instructions). Scott Johnson (ph), Prospect Management.

I have three questions. One, how many stores are included in your same-store sales number? To the 81 open, how many of those are in your same-store sales number?

About 80 (multiple speakers). It's 80 --

-- sales number.

Okay. Help me understand something. Your price per car increased quarter over quarter and your interest rate increased, which results in somewhere around 16 to $20 more a month increase in the monthly payment, and your accounts over 30 days increased from 4.1% to 3.5%. Is that an indication that you guys are loosening your credit standards?

No, I think it's kind of sort of three here -- at least two or three different issues. I'm going to have to go to the back part first. The 4.1% over 30 is versus 3.5% last year. Yes, obviously, it's an increase. But more importantly, if you look quarter over quarter from our July quarter -- is down six-tenths of a point from 4.7. But that is a good thing. You know, when your over 30's decrease that tends to indicate that your future credit losses should be lower. It's not an absolute, but it tends to indicate that.

The sales price issue really if you look year over year, we are up a couple $100 -- $7,100 to $7,300 in the retail sales price rise. But quarter to quarter the first fiscal quarter of this year, actually our sales price is about $7,500, a little less than that. This quarter having a little lower sale price really reflects more of what's available in the market. That is near our target range; however, with the tight inventory our buyers have had to buy what's available than is mechanically sound.

So somewhat this quarter, we were dictated to more by availability than the cars necessarily we would have bought on a regular basis. They are still good cars, but we had to work with what was there. I don't really relate those to an underwriting or credit loss issue, if that makes any sense to you.

Yes, I mean it's just because you guys opened the call by saying that the hurricanes were an impact because of gas prices. Even if someone spends 50 gallons a month on gas, it's a one-time hit of $50 versus the $20 a month increase in their monthly payment for 3 years. I'm just surprised to see --

Well, let me ask on the interest rate issue, really that is relegated to Arkansas. That's strictly an Arkansas issue. Only in Arkansas has that interest rate been changed. It has been 19% in all the other states. Arkansas is the only state that over the last 3 years has seen this quarter-to-quarter percent increase in the interest rates. And it has been a quarter by quarter I would say 25 basis points. Each time as the prime has gone up, we've gone up.

But you're right, that does increase the actual amount that a customer pays for a car certainly in the state of Arkansas. It actually makes it closer to what the actual payments would be over the term to the other seven states we are in. We find actually in Arkansas that generally speaking, our credit losses are lower in large part because that's where more of our older, more mature stores are. You tend to have more repeat customers there for the most part.

So yes, it costs a customer more in the state of Arkansas, yes. So there's some correlation to some credit losses, but it is not out of the pricing of the price we have in the other states as far as what a customer eventually pays for a car.

Last question with regards to your accounts 30 days and over, do you guys -- because it's done by counts instead of dollar amounts -- if they make a partial payment, are they excluded from that percentage?

Yes, this particular number we're referring to was actually the dollar amount. But no, regardless of the partial payment, even if a partial payment is made, it does not pay them up in the account -- was delinquent past 30 days, and that was the number we were using. They are counted in that.

Kent Green, Boston American Asset Management.

My question pertains to store openings. I know you have been pretty active in East Texas. And as I understand it, you're starting to shift that focus a little bit. Can you elaborate a little bit on that, Skip?

Yes. We opened in the last I guess 2.5 years or so about 14 lots in Texas -- maybe that goes back to a little over 2.5 years, and they are pretty well concentrated in East Texas. We will probably not open any new stores in East Texas for the next at least for another year or so, really to consolidate the management and our infrastructure there in Eastern Texas. Plus, Texas is pretty heavily regulated, and then we've seen some things we just need to work through -- some tax issues and regulations more so than other states. So that is part of the reason in this current year, we've gone back and done quite a bit of fill-in really to (indiscernible) all of our lots this year; they are Arkansas, Missouri and Oklahoma -- are the new lots.

I would suggest to you in the next fiscal year, we've got -- I think that Tennessee has also been one lot (ph). The next year, we'll probably look more at a couple of new jurisdictions that are close to us, such as Mississippi and Northern Alabama that we would feel like has many of the same kind of attributes that Arkansas does -- a lot of smaller towns close together. And we are building up our management structure there. So when we go in, we'll have the talent to handle that growth. But we'll probably cool off on Texas for the next year or so.

The second question is obviously the buildup of inventory, which you normally start this time of year and carry through to that spring season, is being exasperated by the used car market with a lot of Louisiana cars out because of the hurricane. Did you cover that when you said you're going to go to 7,500? Do you have to go up in price a little bit to get those cars? Is that what's going on here?

Well, I would tell you that across the board, inventory does cost more now for -- and I would also say right now, we kind of have mixed emotions. One hand, we actually have done a better job than we have years past. Last year was really the first year that said, hey, we are going just stockpile of inventory prior to tax time. And so this being our second time around, we've actually done a better job this year than we did last.

So we are going into this time with more cars stockpiled than prior. So in that regard, we feel good about it. But it's no secret there's a lot of cars across the South that have to be replaced as a result of the hurricanes, and that has a big effect on the cars that we would ideally like to sell being driven up. Also, slower new car sales puts fewer trades out there and that makes it tougher. So yes, we're contented with an increase in the cost of inventory, and that is a battle every day.

We are also finding ourselves -- we're traveling a little bit further -- transport cars a little further than we typically have in the past to make sure that we have the numbers. But that's what we have to do to make sure we have the cars there to sell, where we've gotten just as an example more flexible than in buyers out-of-state you know further like to Florida, where we saw a soft market believe it or not in the northern part of Florida. And they bought quite a few cars there at prices back to where we would have -- buying the same cars in Oklahoma and Texas and Arkansas.

Even with the transport, there's still a good bias for us. And so the hurricanes have caused a short term inventory crisis, and we've heard numbers anywhere from 150,000 to 500,000 cars needing to be replaced. Certainly a portion of those are within our -- the kind of cars we would like to buy. So we are getting a little more imaginative and inventive on branching out to find cars.

As tax refund season gets going January, February, some of those outside markets will get tight, so they'll have their own local tax refund pressure going on. But right now, we have been really successful at some auctions actually, particularly in Florida, and we'll look elsewhere.

Going back to the new stores, what is the store base now that is open and running? And what sort of opening schedule have you put in for the next 12 months roughly?

We have currently -- when these stores open as Hank mentioned we'll have 84 stores, which will be off a base -- we started the year with 76. We will open two more this year in Sedalia and Stillwater, which will give us 10 for the current fiscal year and close out the year with 86 stores. We haven't come up with a specific number yet for the '07 fiscal year, but it is certainly our goal to continue that type of growth at the same percentages as we've had in the past, probably closer to 12 to 13% new store growth. We are actually getting on that right now to start planning for -- what we would really like to get to is to open at least a store a month and really almost do it on that kind of timely basis.

We've sort of done that this year. We are real close to that, and that's our goal for the next year. Just because we're saying we have locations for 10 during this fiscal year that doesn't mean we stop. We're still out there looking for locations, and then we know where we are going and we have got the list out. And actually, our real estate scout has spent the last 3 days on the road, and Hank or I or both of us will be following up in the next few days.

Where would you be on carfo (ph)? You, Hank, and Eddie went with the stores not making money? What is the flash point where you would either close it down or go elsewhere, which I don't even know if you are done. I mean does it make money in the first 12 months or at the end of the 12 months or at end of 18 months, etc?

They're pretty well profitable right out of the gate.

Even with the larger bad debts?

Well, obviously we do have a few of our stores that is trouble more than others. But I would tell you that as we sit hit here today, we don't have any stores that we are contemplating closing down. So that question is not on the table for any of them. So we are not near that point with any of our stores.

Dennis Telzrow, Stephens Inc.

Just sort of two bigger picture questions. One is, how do you manage this business so that -- and granted you had some definitely abnormal events -- but how did you manage this business, particularly in the loss rate, to be able to handle things like -- well, gas prices are low now; who knows where they're going to go next year? So that you either have the cars priced with some flexibility or that customer would absorb some dents to his discretionary income?

Secondly, this on the inventory side. How do you build an infrastructure, which I know you have, but enhance it so that you're not impacted so much by all the macro events and just somehow have a steady source of cars one way or another? Not easy questions, I know.

Well, thanks, Dennis. We'll try to speak to that. As we said, we've opened up 50 stores in the last 5 years. As the stores mature, we have more repeat business. We have improved relationships I think with those customers and also our people gained experience, and we've become more effective in how we are able to work through these tough times.

There's no way in the business we are in we are going ever be able to insulate ourselves from tough times. The key is how do we deal with them, go through it. And we can do better and we can do a more effective job of strengthening those relationships in working with our customers. What we have to do is do a better job and work towards preparing our future managers that much better to have as much experience under their belt as possible when they open their store and then perhaps we need to make -- maybe we need to tighten up a little bit on some of our credit decision on the very front end on a store. Because we have experienced some hard losses with some of those new stores. But you're familiar with our Company; we are constantly tweaking things and these are some of the things we need to look at that we need to improve on.

The more stores has had a store develops and you get more repeat customers, they also tend to be moving up the economic chain a little bit. And those customers tend to be able to handle these macro things a little better. When you have the -- a new store tends to have a lower income customer, who is more susceptible to anything causing a problem. So that is also part of the maturation of the store -- is you get a little better customer, who can handle things a little better.

But Hank is right. We need to do a better job on training these managers on working through these issues, and we'll do things like (indiscernible) a car price. I mean this $7,300 car price for this quarter, it truly isn't by design; it's by availability. But it is one of the things we look at -- is we want to keep our average weekly payment down to a level they can afford like 73, $74. We work real hard on doing that.

We've tried not to increase the term; although, the term over the last couple years has gone up with let's say 1.5 month at trying to work with that customer. Now, when you go out another month, the potential for a default increases by that extra 30 days of payment too that has got to be required. But the fact that we tweak that to try to keep that payment down but still keep the term reasonable -- so it's a constant process.

It's a simple business that requires a lot of execution and to be able to move pretty fast on your feet. I have to tell you though this September, it kind of hit us more than we expected. I mean if you had told me a year ago we'd have a September like this, I wouldn't have believed it. During the month of September, our customers they must have been glued to their TV sets, watching where the hurricane is going to come and what kind of destruction. And we've just -- and then couple that with the fear of the $3 price -- one of the things that we really noticed that affected our retail sales price was -- our cars we sell for let's say 10,000 to $15,000, which is not that big of a portion, but those were down significantly during that month particularly -- knows -- if somebody I mentioned the call were more discretionary, that's that customer that can wait a month or two to buy a car. He doesn't need the car today typically. So we saw fewer of those cars sold, and we need to work hard on getting those cars sold because those are good cars to sell. They are in the top end of our market, but they have low credit losses.

John Hecht, JMP Securities.

A couple questions -- it sounds like you're suggesting there is going to be a -- there is a recovery underway in your financials. And I'm wondering from what -- the greater magnitude, is that going to come from credit, or is that going to come from margins or volumes? What should we in looking at and evaluating our models look to see the greatest positive impact going forward?

I think the more difficult part in the near future would be margins -- gross margin. I think we would like to suggest we will do a little better, but that's going to be with this tighter inventory and pricing issues that will be probably less. Internally, there's probably two things I would suggest to you. One is increasing sales at the topline, increasing revenues with these new store openings and expansions, then also getting credit losses back more in the middle of the range instead of being at the high end of the range.

Every percentage point we drive that down is significant in our net profitability, so I would tell you that credit losses is probably number one, where there is room to improve. We can do more of that internally. On the gross profit margin side, you know, when we pay for cars sometimes well we have to pay for cars. And we could tweak that somewhat by working better on repair costs and those types of things -- but certainly credit losses. Then on the topline, the revenues are something certainly we can drive.

Now, Hank and I were talking about it breakfast this morning, you know if you were just a sales organization and didn't have to worry about collecting, we could drive sales. We could boost the topline pretty quickly, but that wouldn't be smart. So we have to do that with some sense of concern that -- let's drive it properly so that we don't see an issue on the back end. So that is what we'll do and that is why you want to expand existing stores because those tend to have good management teams and you are just adding to a solid base.

And in the new stores probably open more of them but yet control their growth so it doesn't get out of hand. I think those two things together with get us back to where we need to be.

Okay. When it comes to the gross margin that you were just talking about, we saw more or less about 1% decline versus last quarter. Do you know of that 1% decline, how much of that was absorbed in increased transportations costs to get some of the supply of inventory from out-of-state markets?

You know, our fuel costs were up what, Jeff?

I can get that number.

Fuel costs and transportation costs are two things we look at there. Hang on a second; we'll get --

Up two-tenths of those (technical difficulty) was related to transportation and gasoline costs.

Yes. Did you get that John? About two-tenths --

I'm sorry; I didn't hear that.

Two-tenths of a percent of the decrease related to increased gas and transportation costs.

Okay. So about 20% of the decrease in margin was from that. You mentioned that the new stores are doing worse in terms of collections -- or the credit versus the old stores. Do you have any statistics that can explain the difference in credit performance at the new versus old dealers?

Yes, and you can look at it two ways. Actually, we look at it a lot of ways but sort of two ways to look at it. Generally speaking on average, stores over 6 years old and under 6 years old -- one way to divide them -- the over 6 years old tend to have credit losses on average about 19% or so. The newer stores, those over 6 years old, are in about 25.5, 26%. Do you have that in front of you? Something like that -- about a 7% spread, and these are averages now.

Obviously in between, you will see some on each side that are significantly better or worse than the average. But if that kind of spread and then what we historically see is the new stores begin to lower their credit losses as they mature for all the reasons we have mentioned and they get more to the Company average and lower, we have stores that have credit losses as low as -- what is their lowest there, Hank -- 13 or (multiple speakers) 14? About 13%. And that's really low for the risk profile that we deal in. We have very profitable stores that are right there at 22, 23%. They are just as profitable as they can be. But the average of a mature store is about 19, and a 6 years or younger store about 26, 25.5%, something like that.

Okay. Then last question, you mentioned that November is -- it's sort of a right -- one of the better months in the last couple years in terms of credit. When you say that, do you mean in terms of the trends of credit, meaning the improvement of credit, or the absolute levels of delinquencies and charge-off rates?

No, we're referring to the charge-off rates. Actually as you look at it as a percentage of principal balances, November that we just finished was the lowest charge-off month we have had in about what, 2.5 years? And then on a dollar amount even it's the lowest we've had since this past May. So that's a good indication that means you're getting under control there.

Peter Siris, Guerilla Capital Management.

I have got a different kind of a question. There's a technology that we actually once talked about that puts a GPS in the car and allows you to shut off the ignition to the car and know where the car is if the customer doesn't come back and pay. And I have talked to some of your competitors who have used this system, and they say it's significantly improving their whatever you would call it -- their --

Find your car.

Their loss rate. They are finding cars; the cars are not disappearing and people are paying quicker. And I'm curious if you looked at it and what's your attitude towards that kind of product? Because logically, it would sound to me like something like that would make sense.

It would if your problem was you're losing a lot of cars. And in a larger metropolitan area, some of those dealers tend to lose a lot of cars because they get harder to find.

We are not really losing a lot of cars. When we have a loss, typically it's a repossession because for whatever reason the customer can't or won't pay for it, and that device is not going to fix that problem.

It is an issue we have debated thoroughly ourselves as to whether that could ever be helpful. And I would tell you that again we are in a small town, and our plan is to build a relationship with a customer. Obviously, it doesn't always work because we do take a lot of cars back. But at the same time, we do resell a lot of people. And we try to create a relationship of loyalty and trust with customers. As you've heard us mention before, we have many customers who have bought 5, 10, 15 cars from us. And we think sticking a device on their car that would enable us to cut it off if they don't pay us doesn't put us in the direction of building trust. So, it's just something that right now we do not feel that that is consistent with what we're trying to accomplish.

You know, one other thing I would add, Peter, to that is the cost factor; it's still up there --

We have had some very significant --

When we first started looking at those systems, they were probably $500 a unit plus $1,600 for installation. I think now they are down significantly. But you know this year, we will sell 27, 28,000 cars, let's say it's $300 a unit.

No, they are much less than that now.

I know, but what they don't tell you -- trust me, Hank and I have sat in these meetings -- you've got to install them.

They are about $60 to install them, maybe 100.

But you are right; they are a lot less. I would tell you, if I owned one single dealership and sold 100 cars a month in Detroit, which is where these started. You know, Mel Farr started this years ago with a little different customer base and a high incidence of lost cars; they make a lot of sense for that type of dealer.

But I just -- we're not going to say never, but it's certainly not something that we see in our near future, Peter.

Gee, if I bought a car from Mel Farr, I figure I would come pay him every week. I figure, you know, a guy who plays that many years in the NFL, he can come back and catch me fast.

Or have a few of his big lineman do it.

Bill Armstrong, CL King & Associates.

I have a couple of questions. The slower sales -- the same-store sales of 5.9%, was that partially intentional, where I know you were looking at maybe reigning back on some of the new stores and maybe tightening your lending standards? Was that partially intentional?

No, it wasn't. We were out there doing our best to sell cars. We are always, on a store-by-store basis on some stores -- hey guys, we'll open up here and sell more. And on some select stores -- hey, I think you guys need to tighten up. That's always been the case. But companywide, there was no specific tightening of credit or anything like that. We just had a tougher time selling cars.

Was that just a 1-month phenomenon? It sounds like (multiple speakers)?

Yeah, it really was.

It was really the bulk of that challenge did fall in the calendar month of September.

Actually, in August, we were right at projection, I think a couple cars less. In November, we exceeded projection -- October, I'm sorry, we exceeded projection. September fell off the map. We missed it by about 300 cars, our internal projection, which is huge.

Yes, I guess that is surprising. You mention in your press release the hurricanes had a disruption in your customers' lives. But you guys are really not close to the coastal area. You know, you're pretty (multiple speakers) Texas border (multiple speakers) --

It's not (multiple speakers) because of geography, just a (indiscernible) for everyone.

Our East Texas lots were in the line of fire on that second one and really most of them lost about a week of just either being out of business or not enough -- the lost power, all sorts of kind of issues like that. One of the things that hasn't been as well-reported in the press is, there is a lot of areas besides New Orleans that really are just now recovering.

But our issue is, I think September was almost -- it sounds crazy -- almost psychological in a way that people just weren't buying cars -- new or used. You know, we would go up and down the street with our competitors, and we had inventory, we had cars, we had promotions. It was just a terrible month from a sales. To my knowledge, we've never missed by that far in our projections and it was huge.

Looking at your portfolio, at the charge-offs and the decline in the 30-days-plus category, it looks like your portfolio is a lot cleaner now than it was 3 months ago. Is there more to go, or do you feel that you've pretty much cleaned up what needs to be cleaned up there?

We went through some cleanup at the end of the quarter, probably an extra 0.5 million or so of I would call it excess cleanup, if you will.

I think November should be a good indication that we have significantly cleaned it up to where we shouldn't expect anything dramatic going forward. When you see a low percentage of charge-offs, actual dollar charge-offs in the month of November, from a percentage basis but also just from a raw number -- if you look from the beginning of the year to the end of this October quarter, we've increased receivables about $15 million, $167 million or so in receivables.

But when your charge-offs at the dollar level have gone down on a bigger base, that's a good sign. It doesn't mean if we don't do our job, we will not have some issues in the future, but we feel good about what has happened and the portfolio should be in better shape. We really look at our over 60s and over 90s. And right now, those are at pretty low levels, and that's a good sign.

So you are saying November charge-offs are down?

Yes, yes.

Auction prices or wholesale prices, are you seeing any moderation there, or is supply still tight and demand is still (multiple speakers)?

-- and we really haven't seen much release on the price side of it. And as we mentioned earlier, we are starting to kind of spread out a little bit further to open ourselves up to purchasing in some markets that we haven't in the past.

It is a challenge. You know earlier, we discussed our margins, and this also affects our margin because when inventory is tight, prices are up, we tend to end up with a few more cars that can't quite handle our typical markup and so that doesn't help our margin any.

Finally, you've got about 800 cars stockpiled for the tax season. What would be the comparable number this time a year ago?

400.

400? If you could get as many cars as you want at the prices you want, what would be an ideal number, given the number of stores you have right now?

1,500.

1,500?

That's about the kind of lead-time we'd like to see right now on things.

Michael Twilley (ph), Clover Partners.

I don't want to beat this charge-off issue to death, but if you look at your provision of credit losses, just say in East Texas versus the rest of the lots, how does that compare with the rest of the lots?

Well, I would tell you that it's not good. East Texas lots were all again new lots relatively with the exception of Texarkana, which has been there for many, many years. But the new East Texas lots have not performed as well as we'd like. And truthfully, we feel like that's more a management issue than a market issue. We didn't manage our managers as well as we should have and let them get a little bit ahead of themselves. So, those lots are in great towns, great markets; we have good locations. And we should do better there.

Is there any way to put a dollar number on that for the quarter? Just what call it those growing pains in East Texas cost?

If I threw something out, I don't know if it would be even close to right. I don't have that number.

Okay, and then just going forward as you start to fill in in Arkansas and Missouri, Northern Oklahoma, do you expect that those slots are going to have similar credit profiles to the existing locations, given that your managers kind of know those areas better and you've talked about some of your best managers are up there, and you know, maybe if you could just speak to that going forward?

I think we're confident that all the fill-in we've opened in the past year will perform better than we did in East Texas, as you just mentioned. I think we've got a stronger management there, and also they have established lots in close proximity that lends a lot of support, more knowns for a lot of different reasons. I think we are pretty high level of confidence that we will do much better.

An example would be -- a couple of years ago, we opened the Neosho, Missouri, and that is the one right between Rogers, Arkansas and Dalton, Missouri. And that lot even though brand new has had very low credit losses; it has done very well and it's in a known area.

One of the things about going into the new area is the Car-Mart name isn't as well-established, whereas when you fill in like a Van Buren that will be opening -- well, right down the street, we are in Fort Smith and just north we are in Rogers. And you know, we are all over. So everybody -- you are attract even a better customer to start with, and you have those senior managers. And real importantly as Hank was alluding to that our middle management -- one of the reasons we located these new stores in those areas is our middle management, our AOMs (ph), of those have a lot of experience and just adding one more store to their district, if you will.

You know, it really isn't a big deal to them to have too much to handle, but it's great for that young manager to have a real experienced hand overseeing him.

Gene Newstead (ph), UBS.

I just had a couple of things. One, I want to really say, it was a hard quarter and I know that. But your vehicle repair expenses, why is that up so much?

I would tell you, probably stretching a little less (indiscernible) some of the inventory.

So you are buying, not as quality of car?

I think there was some of that, yes.

Are those cars you're getting out of Florida?

Well, these cars, we're still getting everywhere we do. The cars out of Florida represented a handful of cars. We didn't shift to buy everything from there.

I think when times are tight, we do find ourselves instead of passing on a car, we might go ahead and say, we will buy this and go ahead and fix this. So typically, when the inventory is tight, I think we do end up spending a little bit more on them.

Have you bought cars from Louisiana and Mississippi?

We are not buying any flood cars, no. That's not what we're talking about. You know, we've worked with all of our buyers to make sure they know what to look for and what not to buy.

We don't want any of those.

Because we are seeing those cars appearing now in Houston.

Yes, I bet they are --

They are showing up everywhere.

I don't know if I would be far enough to tell one of them, but I hope our buyers sure can because they've been --

Skip, we are seeing them in Dallas too.

Really?

Yes.

Well, hopefully not slip by.

Well, it's tough. The other thing, how much stock have you all bought back in the last 90 days?

probably in the last 90 days, 20,000 or so, is that right, Jeff off of last quarter?

I think 30,000.

Maybe 30,000 in the last quarter.

Do you plan on picking that up to 1 million in the next 12 months?

I wouldn't put a timeframe on it, but we didn't feel like it was a necessity to increase the size of the buyback plan. But it doesn't have a specific time period on it. But we had about 350,000 shares remaining on that plan to buy back, and we increased it to 1 million. Over the last 3 years, we've bought back about 0.5 million shares or so.

Right, so you are approved for an additional 1 million in the next 12 months from today?

In addition to (multiple speakers) period because it doesn't have a time limit on it (multiple speakers).

But 1 million from today, not ex the 350?

Yes, it's 1 million from today. That's correct.

Congratulations, you guys. You know I'm in the business, and everything you've said was true everywhere. So, I will talk to you later. Thanks.

Dan Welden, Jefferies & Co.

A quick follow-up on the margin. You mentioned that you expect the gross margin on sales to be in the current range for the rest of the year. I can understand that this spike in prices has caused those issues. But in the past, you've had a pretty good degree of pricing power; you have been able to move around with used car prices and keep that margin pretty steady. Do you see a return longer-term to the sort of averages of 44 to 46% margins?

Yes, probably so. A couple of reasons -- one, if you look back historically, you know the car retail and sales prices that card has gone up and there is a direct correlation, for the most part, on the more the car costs, the less the margin on that car. So, at this 7,300, $7,500 price point, we are somewhere in that 44 to 46% range, whether on the high end of the profit percentage or the low end will depend on the inventory and repair expenses and also trade-ins. When we take a trade-in, we try to not lose money on those. And if we can keep those as a wash, sometimes we do better, sometimes worse on those. But those are the couple other factors -- repair expenses that will affect that -- had profit percentage. I would suggest to you that it will stay in that range.

Bill Baldwin, Baldwin Anthony Securities.

A couple of questions. Hank, once you get the three lots opened that you have under expansion here in this December -- month of December -- do you have any other lots that are currently scheduled for expansion going forward? And if so, can you (multiple speakers) give an indication when those will be completed?

Yes, right behind the three we're going to be opening this month as far as the new stores go, we're going to have Bill Water (ph) in Sedalia coming up as far as the new stores. Then on the expansion side of it, we've already begun on a project in Lawton, Oklahoma. As a matter of fact, it's the exact same building we are building in Ardmore, Oklahoma; that one will be coming up in a couple months. And then, Longview, Texas; El Dorado, Arkansas; West Memphis, Arkansas -- those are all slighted (ph) for expansion work this next --

Over what timeframe did you say, Hank on the (multiple speakers) on Longview, El Dorado, and West Memphis?

Yes, all the ones that I mentioned will be started within 6 months.

Okay.

Then what we do, Bill, is we kind of -- we are constantly reassessing then we will go back to be on the list again and see who's ready. Those are the ones kind of in the queue, and we find out that too have going on at one time, it's kind of a lot of construction and you want to do only so many at one time. And about five or six at a time keeps us pretty well loaded up.

Right, just this timing worked out; it wasn't by design. A couple of things got set back, and actually one came in quicker than we expected. As we enter, we got six projects we're finishing here in the month of December with three new openings and three expansions all happening right here this month. So, it's a busy time.

Second question for you, Skip or Hank, can you offer a little color as to what the regulatory issues are in Texas that kind differentiates it perhaps from some of your more--?

Yes, I will tell you a couple of things. First off, they actually have regulators, so some of the states you have laws that are not regulated. We go through a legal compliance every year in every state we do business in. Having said that, Texas is very picky on a lot of small issues. Quite frankly, we made some mistakes; they are minor, but yet they are the kind of things that when the regulators come in and go audit your books, making sure you have everything in the file -- titles, etc. -- everything we should do. I mean, the policy is we should have everything they requested in our files.

We didn't do as good a job as we should have, and our auditors should have caught it sooner. We're not talking about major-dollar-loss-type issues but just regulatory issues.

And the sales tax, Texas is one of the states where you pay as you go. We need to make sure we do a better job of allocating all that. It's just a little tougher regulatory environment. Even the licensing process itself takes longer; it is more difficult. We do it; we get it done.

On the service contracts, they have a separate regulation and one of the problems you have two arms -- you have the Department of Motor Vehicles that regulates you as a dealer, then you have the Office of Consumer Credit that regulates you as a lender. Sometimes, their rules don't always coincide, so you may be doing something perfectly right as a used car dealer but find that you didn't have something in the file that the Office of Consumer Credit wants.

So, it's kind of picky but it's the law; we need to hit all of our losses. A matter-of-fact, tomorrow we're having all of our Texas managers in one room, going through all the procedures and (indiscernible) some things in our policies to make sure everybody gets it. We want to work through this; we've actually -- Eddie and I went to Austin about 2 weeks ago and met with Ed -- folks at Ed Dobson (ph) Consumer Credit and told them we're going to fix whatever needs fixing. We had a good meeting with them.

So it really shouldn't affect your ability to do business in the state going forward, or your profitability of business here in the state?

No, it's kind of funny. It's some things like we are moving a manager down here from Oklahoma, who's used to doing it one way, and you did something in Texas that you can't do in Texas, even if it's not illegal or immoral, it just is not the way Texas wants it. So it doesn't really affect profitability.

These issues are basically the responsibility of the lot manager, are they, Skip?

Yes, sir. But they are our responsibility to train them right, (multiple speakers) and catch it when we do something wrong.

So those are fixable issues, then? I mean --

Right. (indiscernible) get fixed tomorrow!

John Mazanec, Wasatch Advisors.

Skip, could you guys talk a little bit more about the allowance for credit losses, the kind of 19.2%? How do you set that and should that be higher, given the macro environment?

Well, it certainly is something that we look at every quarter. We go through an analysis of that based upon the main three criteria -- on an objective basis -- the frequency of loss, the dollar amount of loss, and the timing of when those losses occur going back from pools going back 5 years. And then we look at it in at least also the last 2, 2.5 years. And the last 18 months, we break it down a lot of ways and we get an objective dollar or point figure of what it should be based upon those who are static pool factors of timing, amount, and frequency.

And then, we look at it on the subjective issues or what's going on in the world, what's going on in our part of the world, how do we think we are doing. So, we did look at that as we do every quarter. And this quarter along with our outside accountants, felt very comfortable in leaving it where we saw it based on what the point estimate showed us and what we see as the factors going forward; they are more subjective.

I will tell you, we looked at our higher credit losses this quarter, and we believe that many of those were heightened as far as the amount of our credit losses by some external factors, certainly some internal. But we feel much better going forward, and the fact that delinquencies at the end of October are lower than the end of July is one of those positive factors that we put into that mix.

So anyway, it's long answer to a short question. At the end of the day, we would feel comfortable with that allowance.

What were some of the -- I missed it. At the beginning of the call, you were talking about some credit stats I thought for November -- I thought say (multiple speakers) --

I can say that November gross dollar losses on the credit side were like Hank mentioned -- were at the low point the last 2.5 years so that makes us feel better about that reserve proceeding at the end of October to see the November number really come down.

(multiple speakers) Obviously, the gross dollar amount and a lot bigger base of principal balances will do (multiple speakers) --

Yes, as a percentage, it is very low.

Yes, so as a percentage, it's also at a 2.5 year low?

Correct.

Then, there was some discussion -- I guess you had said Eddie has got some ideas for how you are going to kind of block and tackle, I guess, to improve credit performance a bit. What can you do, and kind of what are some of the fundamental steps you take in terms of improving credit performance? Is it kind of just closer monitoring of your customers, or is it tighter (multiple speakers)?

I think it's a real -- really, what happens in our business so often is we kind of kick ourselves because we feel like we can't walk and chew gum at the same time, but we get really focused on sales in a given month, and sometimes we find that we drift off -- our collection numbers drift off a little bit.

I think that what we have to do is keep our store managers always involved in the collection aspects of their lots. That may seem like too simple of an answer, but I would tell you that that is probably the single most effective thing we can do, is not allow our lot managers to become uninvolved in their own collections process.

I mean, do the lot managers see it in their profitability per line?

Absolutely. But you know, a lot of these guys -- it's not necessarily the funnest part of our business, you know? And a lot of these guys have been at it a long time, and very often, that's a part of their business they would prefer to delegate. It's a tough part of the business, and invariably, what we see is if the manager has tried to delegate that portion of his business, is not as involved as he needs to be, that we have problems in that area. And so, I think that real simply, where we are today is we kind of have to go down the line and make sure that our store managers are very, very involved in that aspect of their individual lot. And if we are successful in that, usually we have good results.

And from a more objective standpoint, we're trying to send very clear signals from the corporate office of our expectations of lots on the sales levels, to where okay, if your projection is 20, that's what we want you to sell, not 30 or 40. So just stay focused on that level of sales -- one or two cars a day, whatever it is, to the size of your lot, or three or four. And don't -- you're not going to impress the corporate office by selling more than your projections. You're going to impress the corporate office by holding your delinquencies down and your credit losses.

Now, having said that, our bigger lots and senior managers, my goodness -- we want them to sell all the cars they can. But on those that are more on the bubble, if you will, on their credit losses, we are holding their feet to the fire. In effect, that is kind of a little bit of an underwriting -- you underwrite a little bit when you restrict the number of cars we want them to sell. Because they will hopefully pick better customers on the front end, because they're only going to sell so many cars. That's typically something we do more with the smaller lots than with the -- or newer lots than with the older lots.

Okay, and then I think a couple of people have kind of maybe asked this kind of question indirectly, but can you talk about kind of credit experience by geography? And I know you kind of talked about East Texas being weak, but what about -- is there any color you can give on either other (multiple speakers)?

I would say, for the most part, we don't really see a lot of impact geographically, as far as our credit losses. I would tell you, and this kind of confused the issue, but it's a fact -- a couple of our lots that have absolutely the very best credit losses in the Company, they happen to actually be in some areas that the have highest unemployment rates, and by all appearances are some of the toughest areas to live in.

Our experience is it's more managerial than geography. When we see the radical differences from lot to lot and some credit loss numbers, it has a whole a lot more to do with who's running the lot than where the lot is located.

And then, last question, just on the stock buyback -- how would you anticipate funding them? I mean, there's obviously the cash flow from operations, but given the growth you guys have planned, that probably uses up a lot of that cash, so would you be comfortable with a little bit higher debt balance going forward, or (multiple speakers)?

Yes, our leverage is, as you know, relatively low. We would not be afraid of increasing that somewhat to buy back stock. Again, we want to make sure we have significant or sufficient liquidity to continue to fund our growth. We grow for the most part out of cash flow, but we do have CapEx going forward, and if we do accelerate our growth somewhat, then we want to make sure we have plenty of room available.

So can you give as any guidance, either in debt-to-equity ratio, or other coverage ratios that you would --?

I would tell you -- it will depend on how much stock we do buy back, but I would think those ratios would be very similar to where they are right now at the end of the year. I wouldn't expect to see a big difference.

Michael Christodolou, Inwood Capital.

Good morning, gentlemen. Skip, I think you mentioned you altered that extra 0.5 million of -- I think you called it -- extra cleanup on your receivables provision, and it looks like that might have added about a point to the 24.6% that you took in the quarter. I'm just trying to get a sense for that; is that denominated by account? In other words, were you able to take some of the delinquency betas you were seeing just to add to that provision?

Have you pulled some things forward, or have you set the stage for taking some extra charge-offs now just to get that book a little cleaner?

No, I think what we really did is we really focused on our over-90s and over-60s, but mainly over 90s and wanted to -- we recognize in our business that once an account gets to that level, the likelihood of successfully refinancing that and getting that back on track becomes decreasingly slim. So, but yet oftentimes, we always hold out hope and the managers do. We have them really, in effect, pull the plug on more of those that we didn't see there was a lot of hope for them, just make the decision and take the loss and get on about our business.

I will tell you, anybody who is in the finance business, periodically you will do this. I mean, there is a cleansing, so I'm not going to say we will never do it again, but we thought at this time, it was particularly appropriate. And you know, some of our customers are having a tougher time; I don't want to get back into all those other issues, but it was just a time that we thought these accounts aren't going to make it.

Let me give you some scale. We have 36,000 customers, a little over that. Our over-90s probably at quarter end were around 100 accounts or so. But there were a couple 100 more than that prior to the quarter end, and those were the ones we cleaned up. So, in a number of accounts -- and let's say all the average account balance on those was probably, I would guess, $4,000 or so. So, we clean those up but periodically, and you'll see that going forward. We're not planning on doing this every quarter; it's just this quarter it was particularly appropriate to do it because we had more than we would like to see in that category.

So hence, by cleaning up, you increased the provision and you did a commensurate, dollar-for-dollar charge-off so it is off the books?

Yes.

Okay. And then, another question on the inventory. I know you had mentioned 2 or 3 months back, the Company did a good buy of some higher-price-point Neons, I believe, from a car rental company.

Yes, I think it was bad timing on those because we haven't done as well with those as we would have -- we bought 20 of them, and (multiple speakers) earlier --

They are more efficient, though, right?

(Multiple speakers) or hired all our cars. We just went through a time where the sales weren't as good on those. Those are much more discretionary purchases than many of the cars we sell. A lot of the stuff we sell is obviously out of need. I think we kind of had bad timing. But no, if anybody out there wants a Neon, come see us!

We had a few of those left.

We'll give you a good deal.

What percentage of your 2,600 cars are on the lots and in your Company holdback inventory would you say are higher than $10,000 retail price points?

Any of those vehicles are on the lot; those aren't held in stockpile right now. We want to (multiple speakers).

Not by percentage basis of all the cars we have, stockpiled and otherwise, above a $10,000 price point. I would say, I don't know if it was about a 100 (technical difficulty). No, it's not less than 10%.

No, less than 10%. The bulk of our cars are in the retail price range of $5,000 to $9,000; that's about 80% of the sales are in the $5,000 to $9,000 retail price. Then, the balance on the top end are below that.

Just a last question, for any of the cars that are designated for a 10 to say $13,000 retail price, what would you say your expected gross margin is on those sales? Are those also in the mid-40s range?

Do you have that?

It's probably about -- hang on a second. We will give you that. Well, he's asking what the gross margin would be on those particular vehicles (technical difficulty). (Multiple speakers).

I would say 40%.

It's about 40%; I think that's about right -- about 40%. Now, on the contra side of those though, our credit losses on those 10,000 and up retail price cars, Hank, runs what less than 10%?

Right now (multiple speakers). Yes.

So we have a very good -- and really, almost every dollar you go up in retail price, up to about 15, which is the highest we will have and there's not many there, the credit losses go down to almost nil at the $15,000 car.

Peter Bortal (ph), Pegasus.

Skip, could you give me some background on your largest competitor in your main market, and some of the smaller competitors, and whether the month of September may have opened up some eyes to the difficulties in the business, and if (ph) you all can capitalize on some larger acquisitions in the markets?

You know, that's a good question. I will tell you that, anecdotally, our -- you know, we don't have any large competitors, as you know. But we do have one competitor in about six markets who may be feeling business is more difficult than they thought. And it is funny; in one specific location, we were looking at expanding and we maybe have a competitor that's going out of business, that we may take over a property.

There may be some opportunities there; we are looking at a couple. I really can't speak to the names of those folks, but you know when you have some tough times like this, it does tend to make some of the folks go, you know, I don't want to do this any more.

Keep in mind, the majority of all of our competition is local (multiple speakers) so --

Well, what's the best use of capital -- a buyback, or a larger acquisition? (Multiple speakers).

Open up new stores.

Yes, probably really opening up new stores. You know, we get a good return on those that capital, on new stores. Having said that, if there was a unique opportunity in an area where there's a onesie-twosie kind of thing, an area we'd want to be in, we would certainly look at that.

The one competitor we have locally in Northwest Arkansas/Southeast Missouri would be a great potential purchase, except they are right where we are. I mean, we don't need those locations; we are already where they are. But if we find somebody else -- and we've got our ear to the ground on that; if something comes up, we would certainly look at it.

We wouldn't want to buy somebody else's problems; Car-Mart has been very successful building from the ground floor up, but having said that, if the right opportunity presented itself -- and there's some good operators out there. There are, but they tend to be the mom-and-pops for the most part.

How many units does the second competitor you mentioned have?

I think six -- in our market. Now, there may be somebody bigger, in an area where we're really not, but in our markets, to our knowledge, about six units.

Second question -- at what point or at what price point in gas would the earnings estimates that you've provided for the rest of '06 have to change? How significant a factor is it, in your opinion?

Well, I think -- well, certainly it's moderated. In most of our areas, we're down below $2 a gallon, which is still high compared to a year ago, but you get down from $3 and plus the expectations of higher. I think part of it is psychological; I think people kind of -- it was just such a shock to pay $80 to fill up your truck.

(Multiple speakers) also happened with all these other things going on, compounded effect.

I think our customers are getting more used to it. They are making some changes in their buying habits, and we probably are selling more minivans than we are full-sized suburbans now. The customers are looking at that, so they are cognizant of it.

I guess if the gas price went back to $3 a gallon, I would be concerned. You know, we would have some more issues to deal with -- not that we couldn't overcome them. But now that it has backed off about $1, people are getting kind of used to it, but they are making some changes. And we're making some changes. You know, September 1, I would suggest to you we had too many SUVs on the lots, not thinking that they would be as soft as they were. In some parts, we were taking advantage of the depreciation in the price of full-sized vehicles like that, because all of a sudden we could buy them at a price that our customers could afford them, so we were making some good headway on that. But I would say that has probably softened, and gas prices at this level -- it's fine. We are okay with that, and any reasonable change above that -- this will be okay, too.

It sounds to me like you are headed in the right direction. Thanks, Skip.

Adam Mazell (ph), Aquifer Group (ph).

Just a couple of quick questions -- you've been on the phone a long time. One, over the last quarter, have you made any changes in actual lot managers, and do you have a number planned? I'm sort of trying to get a sense of whether you are learning from the experience and that's leading to change your views on the people you have out on the front line.

I'm not sure if I understand your question exactly, but I will say it this way -- we fully recognize that the key component on our lots is the lot manager. And we know that we have to do everything right, and that is you've got to hire them right, train them right, and after they are there, take care of them and support them. And I will tell you that we recently have really taken a hard look at all those aspects, and we are stepping up our efforts and doing everything on -- anything and everything that involves the lot manager. Those are being addressed.

I was just -- exactly what I was asking. And then, I was just wondering, if I looked at the last quarter, how many -- if any -- have you replaced? And when you look over the rest of the year, do you have some number targeted on the bubble? And there's always a lower quartile -- people you think you're going to need to replace, or are you comfortable that you've got the right people and you just need to manage and train them?

I would tell you that I think right now, as we sit here today, we are in great shape in that regard. But I don't have any number for you right now, as far as any managers (technical difficulty) like that, but with the number of managers -- or management trainees, as we call them -- in our training program and the individuals that we have running our stores out there right now, I think we are in good shape.

Okay. Totally different questions -- one of the things Jeff mentioned, talking about SG&A, was incremental expenditures on IT. In the past, you've talked about the new Alice (ph) system on your calls. A, was that you were referring to, and kind of B, a little update on where that system is in its development, and have you started to roll it out, how are you using it, and how is it affecting your underwriting analysis (indiscernible)?

As far as the incremental expenses during the quarter for IT, none of those related to the Alice system. It was more related to replacing some outdated equipment in the field, updating some licensing agreements, some incremental travel and out-of-pocket costs associated with some upgrades necessary to get us up a few notches on the IT side, absent the Alice system. Alice is still in process, and I guess I will let Hank comment a little more on Alice.

Yes, we're just on the cusp of beginning to roll out Alice 2 to lease on a few lots, to test and make sure they get the bugs worked out. But it's coming together.

As far as how it's going to affect underwriting, immediately it's not. It doesn't actually give us any more information or anything about the customer. But as we go forward, it does increase our reporting capability, so as we want to know more about our customers. And it also gives us flexibility in how we run our delinquency reports and such. So I think it's going to increase our awareness of what we already have learned about our customers and such over the past 20 years. (Indiscernible) make us more effective. It will also have a module in there the provides our accounts reps with a more streamlined method of getting to the information they need, selecting (ph) accounts. So I do hope that early on, you're going to see some improvement in our selection effectiveness. But we're excited about it, and we are really, really close.

Gentlemen, I have no further questions in queue at this time. Are there any closing remarks?

Yes. I would thank you all very much for joining on the call and your questions, and again, as we said, it was a difficult quarter, but we expect to come out in good shape and move forward for the balance of the year. Again, though, we extend the invitation to anyone who would like to come visit any of our stores, or visit with us in Bentonville, please feel free to do that. And also, extend a welcome to Jeff being on board, and if any of you all have any questions, certainly in the numbers and more financials, feel free to call Jeff at the office. Thank you very much.

Ladies and gentlemen, thank you for joining us today. This does conclude America's Car-Mart second-quarter fiscal 2006 conference call. You may now disconnect.