America's CAR-MART Inc (CRMT) 2006 Q4 法說會逐字稿

Good morning, everyone. Thank you for joining and welcome to the America's Car-Mart fourth-quarter and end of fiscal 2006 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal fourth quarter and 2006 fiscal year ended October 30, 2006.

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 website at www.Car-Mart.com.

As you all know, some of management's comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. 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 statement. For more information regarding forward-looking statements, please see Item 1 of Part 1 of the Company's Annual Report on Form 10-K or the fiscal year ended April 30, 2005 and its current and quarterly reports furnished to or filed with the Securities 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 Jeff Williams, Chief Financial Officer. Now, I would like to turn the call over to the Company's CEO, Skip Falgout.

Thank you. 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 do expect to file the related 10-Q sometime next week. This morning, we've reported earnings for the fourth quarter of $0.38 per diluted share. For the quarter, revenue was up 13%, net income was up 5.4% and earnings per share was up 5.6%. For the full fiscal year, we earned $1.39 per diluted share. For the year, revenue was up 14.4% and income and EPS were down about 7%.

As most of you know, our year-over-year income and EPS results were negatively affected by our fiscal second quarter, which we refer to here as the hurricane quarter, in which we had the direct and indirect effects of two major hurricanes and a huge spike in gasoline prices. Overall however, we are pleased with our strong top-line growth, even with the results of the second quarter in which we had revenue growth of only 9.5% and same-store revenue growth of only 5.9%. Still, we achieved revenue growth of over 14% from the prior year, which was above our revenue guidance for fiscal '06. Similarly, our net income for that quarter -- the second quarter -- was down about 40% from our expectations.

Revenue growth in fiscal '06 was driven by unit sales growth of about 8%, interest income growth of over 27% and a price increase of about 4.6%. We once again had strong same-store sales of nearly 10% and an increase in finance receivables of over 21%. We are also pleased with the improvement in credit losses. Although credit losses for the year were 21.4% versus 20.1% last year, this year's credit losses factor in the hurricane quarter of 24.6%. I stated in the press release today that credit losses for the fourth quarter were 19.6% of sales versus 20.4% fiscal '05. And in our third and fourth quarters, net charge-offs as a percentage of beginning of quarter accounts receivable were lower than each of the previous 13 quarters.

I would also like to point out a couple of key ratios for you to have and just our strong balance sheet and financial position. First, debt to equity was 0.37 to 1 as of April 30th and debt to finance receivable balances or leverage was about 0.24 to 1. Finance receivable balance principal balances were approximately 185 million at April 30th against debt of approximately 43.5 million. Our return on equity for fiscal '06 was 16.2%.

Also effective in May of this year, we increased our credit line to $60 million and restructured 10 million of that as a term loan at a favorable interest rate. This increase and restructuring of our credit facility in addition to internally-generated cash flow will continue to provide us liquidity for expansion.

I would also like to take a moment to point out that over the last five fiscal years, the Company has grown top and bottom lines at a compounded annual growth rate of right at 17%. We are proud of the growth and pleased with the fact that we've been able to continue to only to operate very profitably, even in tough economic times, but continue to grow our business at a strong but relatively conservative rate. Again, that's 17% over the last five years including this year, which was obviously a down year on an EPS and earnings basis.

Following Jeff's comments, Hank and I will discuss some -- or Hank will discuss some important initiatives we are working on, on the car side of our business. And then, I will return with a few closing thoughts and our fiscal '07 outlook. Now, I will turn it over to Jeff to discuss the details of the fourth quarter and the '06 fiscal year.

As Skip mentioned earlier, revenues are up 13% for the quarter. The increase is principally the result of same-store revenue growth of over 8%, revenues from new stores opened during the last year and the 33% increase in interest income. Quarter over quarter, our average retail sales price was up 4.1% to 7,701 from 7,400 the fourth quarter of last year. Historically, the annual price increases have been in the 3 to 5% range. Going forward, we expect to see growth in our average retail sales price but possibly at a rate lower than historical averages.

In the fourth quarter of the current year, our unit sales growth was 6.9% compared to 7.4%. Overall unit growth in fiscal 2006 came in at 7.9% versus 4.6% for fiscal 2005. Interest income is up as a result of the increase in our finance receivable portfolio balance as well as the increases in the federal primary credit rate, which is a rate for underwriting in the state of Arkansas. At April 30, 2006, we were charging 11% on new Arkansas loans, up from 5.75% three years ago.

For the fourth quarter of this year, our gross profit margin was 43.2% of sales, which is down from 45.5% in the fourth quarter of last year. The Company's gross margins are set based upon the cost of the vehicle purchased with lower-priced vehicles having higher gross margin percentages. The Company's gross margins have been negatively affected by the increase in the average retail sales price, which is a function of higher purchase price and by higher operating costs, mostly related to increased vehicle repair costs and higher fuel and transport costs.

[Port term] supply issues during fiscal 2006 brought on by Hurricanes Katrina and Rita and by the slowdown in new car sales have resulted in higher purchase costs for vehicles. We also had a higher percentage in dollar terms of wholesale sales in 2006 versus 2005. Wholesale sales are generally sold at or near cost with no gross profit. The more wholesale sales we have, the lower our overall growth profit percentage. Going forward, we would expect to see gross profit margin percentages slightly above what we experienced in the fourth quarter.

In the fourth quarter of this year, SG&A as a percentage of sales decreased to 18.5% from 18.6% in the same period last year. We did see a decrease in Sarbanes-Oxley-related compliance costs in the fourth quarter of this year compared to the fourth quarter of '05. This decrease was offset to an extent by increased costs related to the strengthening controls and improving efficiencies in our corporate office, primarily in our information technology department and to increased utility and fuel costs incurred in normal operations. This investment in our IT department and other corporate infrastructure areas was much needed, will allow us to continue to grow and to support new and expanding lots into the future. We have not yet seen the bottom-line benefits of these investments in our corporate infrastructure but intend to fully leverage these costs into the future.

For the current quarter, credit losses as a percentage of sales were 19.6%, down from 20.4% in the fourth quarter of last year. For the year, credit losses as a percent of sales were 21.4%, up from 20.1% last year. Including the second quarter, our credit losses for the year were 20.3%. As Skip mentioned, net charge-offs for the third and fourth quarters were lower than in each of the previous 13 quarters. Significant portion of our provision for credit losses during the fourth quarter related to our estimated expected future losses from the growth in the portfolio. About 2.7% of the fourth-quarter credit loss percentage or $1.5 million related to additions to the reserve based on the net change in the portfolio balance. We do need to point out however that our 30-plus past due percentage is 3.7% at fiscal year-end 2006 compared to 3% at the end of 2005. We continue to monitor the portfolio and work hard on collections. We are cautiously optimistic that we can continue our credit loss experience of 2006 absent the second quarter into fiscal year 2007.

We increased finance receivable principal balances by about 33 million or 21.6% during fiscal year 2006. We currently have about 39,000 accounts, having added 3,700 customers this year. Accounts acquired from the acquisition of Dan's Auto Sales in Lexington, Kentucky in mid-March are included in the increase in finance receivables for the year.

Debt increased around $14 million for 2006, which funded our growth in finance receivables and our capital expenditures. For the year, we spent a total of $5 million in capital expenditures. The majority of this was spent on purchasing land, buildings and improvements for our new locations and for the relocation of existing lots. As previously mentioned in a number of cases, we physically ran out of room at our existing locations and we had to move across or down the street in order to be in a position to sell more cars. We expect that these additions and improvements will allow us to sell more cars in the future at the lots where we expanded our facility.

We also repurchased $1.3 million in stock during the year. We completed the acquisition of Dan's Auto Sales and increased our inventory levels by 2.9 million to support higher sales. We will continue to review our capital structure in the coming months to ensure that we position the Company with adequate liquidity and resources for the foreseeable future.

Now, I will turn it over to Hank.

Thanks, Jeff. Before I get into updating you on some of the operational aspects of our business, I would like to inform you that our accountant has advised us that the material weakness we had in last year's audit in our IT systems and controls has been resolved. We have no material weaknesses this year in IT or otherwise, and we are particularly proud of our IT Director, [Rob Hay], and his staff for not only addressing and resolving these IT weakness issues but also implementing and installing in our dealerships this year the second generation of our proprietary operational software, known as ALIS, which stands for automobile loan information system. This new version of ALIS along with several other software development gives us the systems we need for our continued growth and provides us with even more of the information we need to improve our efficiency.

As many of you know, we have space to squeeze on our gross margins this year, caused in large part by the increase in the wholesale price of the vehicles we sell. This market tends to have cyclical swings based on many factors, not the least of which is the quantity of new car sales and the resolving effect on the number of trade-ins flowing into the pipeline. Over the last few months, we looked inward at how and where we secure our vehicle inventory to ensure an adequate supply of vehicles at the lowest possible price. And to do this, we have done a number of things.

First, we've expanded the areas where we purchase inventory. For example, for the past few months, we have purchased a significant supply of vehicles out of Florida. Whereas this time last year, none of our inventory came from there. And Florida and elsewhere with the volume of vehicles we purchased, we have been successful in negotiating reduced fees and transport costs. We are and have been upgrading our staff of purchasing agents and providing them with more education and training to help them buy better vehicles at lower prices. And with the improvements in our IT systems as mentioned earlier, we have improved our ability to measure the purchasing agents' individual results and provide them with the feedback they need to do a better job.

As we move into newer markets, we are working hard at developing more inventory sources locally. Now obviously, these new sources provide inventory for the new stores but we also see benefit companywide as we develop new relationships with more new car dealerships and wholesalers. With all of these efforts, even despite the tough market, we have not only been able to maintain an adequate supply of inventory, we have been successful in increasing those numbers. In fact, our inventory level on the lots is in terrific shape with about 2,800 cars presently on the lot. By taking advantage of our size and geographical diversity, we are filling our inventory requirements. Whereas, we believe many of our competitors are having a difficult time by being limited for the most part to local purchasing.

Another initiative aside from purchasing that we should mention concerns our own wholesales, primarily our trade-ins and repossessions. We have taken several steps to increase the average amount. We are getting more for those vehicles that we don't put out on our lot as retail unit. We've begun utilizing auctions much more than we have in the past. We are also selling many of these vehicles online, and most of these avenues are exposing us to more buyers. And again, we are taking advantage of our volume to negotiate lower fees, which make these efforts that much more profitable. Considering that we will wholesale around 10,000 vehicles this year, increasing our average wholesale sales price will have a substantial positive impact.

With respect to our new stores and expansions, as we indicated in the press release, we expect to open 12 new stores this year after opening 10 new stores this last fiscal year. We have already opened three new locations since May 1st -- Sedalia, Missouri; Muscle Shoals, Alabama; and Tuscaloosa, Alabama, which was actually an existing dealership that we purchased. We presently have two more new store projects in Alabama underway. One we are hoping to open later this month and the other in August. In addition to these projects in Alabama, we have secured two properties in Oklahoma, one in Missouri, one in Kentucky. And in total, that's three new openings so far this year and six in the works. With all that said, we are well on track to meet our goal of 12 new stores for this year.

[Ed Taylor], our Director of Expansion, is doing a great job facilitating our new store openings and is working hard to improve and refine our process, making it better with each opening. We are looking forward to a great year in 2007, working hard to maintain low credit losses while also working hard to improve our efficiency and profitability in all aspects of our business. Now, I will turn it back over to Skip.

Thanks, Hank. Even with the challenges of the second quarter, we had a solid year. Adversity tends to make you stronger, and this year's tough inventory environment has spurred us to improve our car side of the business. I believe we will see the long-term benefits of the things we are doing today. Also, we continue to build our platform for future growth in our IT systems, our accounting systems, our recruiting and training of associates particularly at the management in-training level and our new store opening and operation processes and personnel. These are exciting moves, which allow us to continue our growth throughout the South Central United States, where there are so many great locations for a Car-Mart.

The business we are in is not an easy business, and no one is breaking the doors down to open multiple buy here/pay here lots, leaving us with mainly local competition. That is great for us because the demographics of the market we are working in is growing. We have huge competitive advantages to our mostly local counterparts. Also, our relative size, sophistication and systems and most importantly our associates and unique [car-write] culture will allow us to continue to be the number one buy here/pay here dealer in the nation. As we indicated in the press release, for fiscal '07, we expect that revenue will grow at 10 to 14% and that earnings per share should be in the range of $1.56 to $1.63, which represents an increase of 12 to 17% over fiscal 2006.

That concludes our prepared remarks. So now, we would like to move on to your questions. Operator.

(OPERATOR INSTRUCTIONS). Dan Fannon, Jefferies & Co.

When you look at the gross margin that was for 4Q, do you see this as the bottom? You guys talked about several initiatives that you think will help expand margin going forward. I mean how quickly do you think we can expect to see the contribution from these new initiatives?

We think we are starting to see some of it now, but it will not be dramatic. By that, I should cite I wouldn't expect it to go from 43.2 to 45 anytime soon or frankly ever depending upon the volume of inventory out there available. But we are beginning to see some slight improvement in our gross margin percentage. I would tell you that it is not really based so much on the reduction in the cost of our inventory; that stayed pretty constant -- even though many of you probably look at the Manheim Index -- and it has gone down over the last about 4 months.

The car that we buy that's the bread and butter of our business, the 3,200 to $4,000 cost car, that has remained pretty constant. There is a huge demand for those cars. However, I would tell you if the new car dealers and manufacturers were to really increase their sales, I think we would see some type -- some loosening in that, but we haven't seen it yet. So what we are seeing is an improvement slight in our gross profit percentage we believe more based upon our efforts than any dramatic change in the market.

Then, when I look at also the other expense line, the SG&A, it came in about 1 million above what I was looking for. First of all, can you give us some detail on what drove that and then where you kind of see that expense tracking in '07?

Okay. Jeff?

Yes, most of the increase relates to the infrastructure improvements we made. Most of those initiatives were started after the end of last fiscal year. The IT department, of course we have significantly beefed up that department, added several people and increased the focus of the Company in that area. We are going to get to seek benefits from that investment in the future, but that's an investment for us upfront on the expense side. We also had significant increases in fuel and utility costs just from operating the business. With 88 lots now, we now have a significant amount of money we spend on a monthly basis with just fuel costs and utility costs; that hit us pretty hard this year. Then, we had 10 new offices added. It takes a while on the expense side to ramp up on new lots. So basically, the expense increase is made up of those three components for the fourth quarter.

I might add that last year in the fourth quarter, we had significant Sarbanes-Oxley costs, most of which -- about 600,000 of which we did not have this quarter. I think looking in hindsight, I think perhaps some of us were looking at it on that SG&A should go down by these onetime costs that should no longer be there. But in our growth and in our recognition that we needed to add infrastructure to IT, accounting, etc., human resources, we ate up -- reinvested most of that onetime savings that we spent last year on Sarb-Ox costs.

To interpret that, we should look at these levels of this quarter as kind of a constant going forward as you guys continue to grow?

That is correct.

Kent Green, Boston American Asset Management.

Just kind of a follow-up on the previous question, it seems to be a delicate balance between what you can charge for the car and pass-through and what your costs are increasing at. Is this true in the newer lots also, or are you trying to open up lots where you could probably sell a little bit higher priced car with better economic conditions in those particular lots? What can you do about say closing down or deemphasizing your expansion where you either can't get interest rates or where you can't get the selling prices?

Okay. First, I will speak to what we can pass through. And you are right; when the market is already tight and we are paying more for cars and then on top of that we are having to go further out -- so we have an increase in the transport cost -- it really is not possible for us to pass all of that through. Now I will tell you that I think we have to pass some of it through, and I think we are going to have to start doing more of that. But obviously, the customer can't absorb all of that and that is really where we've seen a big squeeze on that margin.

As for opening lots that sell a higher-dollar car, it is really -- our whole model is we open very small, conservative with minimal amount of capital, so our new stores do sell across our mix our lower-end car. And as they grow and individually, that particular lot's cash flow increases, then they are able to step up and sell the higher-dollar car. So really across the board, you can look at the ages of our particular lot and you see our older stores do sell a higher-priced car. And that is really what we want all of our lots to work towards. That way, we can build a new building, expand and all that to validate more customers in offering that better, a little bit more expensive car -- kind of gives our better customers a way to graduate from there. Does that answer your question?

Yes, I think it does.

What I would add to that is what we are seeing in the new markets we are going into -- because of the higher cost of this inventory, most of our competitors are needing more money down for their cars. And we still are able to be successful on our collection side by getting less money down, even though the cost of the car relatively has gone up, our percentage has stayed pretty constant at 5 or 6% as a downpayment, where our competitors can put this in the numbers. We see it every day, where our competitors need 1,000 to $1,500 down on the same car that we will accept 500 or $600 down. Having said that, we would like to get as much down as we can but it gives us a competitive edge.

The difficult part of a new market is making sure the best you can to make good decisions on those new customers that even though you're putting them in a less-expensive car, they are the right customers. So we still need to be really careful on our underwriting at the new stores. But we've got a real edge there.

Yes, I understand that. I guess what I'm trying to drive at is that business is either -- you have margin expansion. Or if they forgo margin expansion for the price of pricing, they usually take away market share. It looks like your business model may be shifting to a model -- to a market share model, which would drive units faster. And if you're still making money obviously on a per unit basis, the profit will be less than the competition. So are you taking away market share from -- you've always taken away market share from the locals, but do you have competition from the dealers too here, which I don't even think -- I don't know if they've traded down into your price range or not given the locations because I'm not privy to seeing where your markets are at. I don't see that every day.

Our competition is almost entirely local. Sometimes, there will be a new car dealer that opens a note lot but it is local competition. So I think in part, you are right. But right now, a lot of ours continue to future growth. The possibility will come with selling more cars. And we will try to increase our gross margins as we can. But right now, we will see a lot more out of just selling more cars frankly. It is difficult to expand the margins as we sit here today.

Now, if we have a situation where the inventory cost decreases like it did like three years ago, yes. We will see some margin expansion. Because we can charge more for our cars with this customer based upon the credit risk and the availability of credit for this customer. But right now, as Hank mentioned, we don't want to overprice our cars and get a higher gross margin through our sales. Because at the back end, we will have higher credit losses.

And that is more the pricing. Our concern is more getting the car paid for because we do want to create a core group of customers have repeat business. Our pricing -- that's more a concern with regard to our pricing than it is being able to sell the cars on the front end. As Skip mentioned, the customers does tend to be more downpayment concern with this term payment plan, that sort of thing.

Yes Hank, what is your say unit -- [not a lot of] expansion this year when you all get done because I know it's been accelerated a little bit. And then, maybe you could address the issue of what would you be happy with on say existing lots selling more cars than last year? What kind of percentage growth rates are we dealing with here on both unit -- on new lots and then what would be referred to in other retailers as same-store sales increases which would be in units?

We would like to be up around 10% as far as existing stores. In the end, we don't have a short ramp-up period or anything. We start small. Our whole plan is to continue to grow those stores for years to come. Obviously in some of our very smallest towns, some lots get capped out. But we still have lots that have been out there for a long time, each year pick up a few sales. So I guess the answer would be around 10%.

How many units -- how many lots did you have including satellites at year-end and how many do you think you're going to have at the end of this current fiscal year?

We had 85 at year-end. We expect we have 97 at the end of fiscal '07, as Hank mentioned earlier. 3 of which have already opened; 6 are in the works. And by the works, I mean we have acquired the property or last stages of negotiating a lease. All those will come on relatively more or less in the first half of the year. And then, we will open at least three on the back half of the year.

So we could maybe extrapolate that into saying, maybe you could sell a lot higher level of cars this year than keep working on the gross margins. So if the cars that are -- the expansion physical expansion of the Company should be exceeding the 17% historical level.

Say that again.

Well I could run it off. But it looks like you are going to have about 15% lot expansion plus 10% same-store sales. So it looks like that those numbers could translate into growth exceeding the 17% historical level of profitability as far as gross sales are concerned. And then of course, you may have some margin degradation continuing.

Let me think about those numbers.

Well we are talking about top-line growth and bottom-line growth. So 17% is the bottom-line growth or earnings per share growth, right -- historically?

Correct.

So if you add 10 and 15 together, it sounds like you are trying to accelerate the top-line growth in order to buy unit expansion and same-store sales in order to offset the margin pressures of the short-term.

I wouldn't say it's direct the way we are going about that, but that is a natural yes. We are going to expand the number of cars we sell by our lot expansion. We are going to work hard to increase those margins, and your percentages I would have to think about.

Bob Bridges, Sterling Capital Management.

If you would comment on your selling price trends just over the last couple of years, the rate of growth had been double digits, now down into mid single digit. And you said in your prepared remarks that that price in the future, which has been in that 3 to 5% range recently, it might weaken. What are some of the supporting factors behind that statement that they could be getting weaker instead of maybe trending flat?

On our retail sales price?

Yes.

A couple of factors come into that and what is what type of cars we sell throughout our Company. When we talk about an average price, again we will sell 80% of our cars at a wholesale cost between 5,000 and 9,000. But as that moves among the cars we sell, the average can change even though we are buying many of the same cars at the same price. It just how many high-dollar cars we sell versus how many low-dollar cars we sell. So that average we expect just based on the way cars cost of increase is still an increase. Historically, we spend in the 3 to 5% range.

About two years ago, we actually purposefully increased our average more than the rate of the increase in the car cost as we kind of moved off our sweet spot if you will on the average price on the car if you wanted to sell. So we reduced the percentage of lower-priced cars we sold in lots and increased more in the middle and higher end; that increased the average.

So a long answer to your question is, I think we will see the average retail price go up a little bit as car cost increase. But we are not trying internally to sell a higher-dollar car. We think the price of the car is high enough right now as it is for our customer, and we would like to hold it relatively steady.

In terms of incremental costs to acquire a vehicle, which you have already alluded to in terms of you having to buy farther away more transport costs, there may be still some supply issues in your markets left over from the hurricane. Are you able to quantify what that impact is in terms of incremental wholesale cost you have to bear versus say 12 months ago or 24 months ago in terms of price per car? It's incrementally higher?

Yes. Basically fuel and transport costs reduced our gross margins by about 90 basis points for the fourth quarter. So of the 2.3% increase decrease in gross profit percentage, 90 basis points of that related to increased fuel and transport costs, which related to bringing the cars further and directly related to fuel costs associated with that.

Okay.

To give you an example, we are buying right now probably 8, 9% of our cars out of Florida. And one of the reasons we opened up in Alabama is it's closer to Florida. We will stock many of our (indiscernible) lots with fuller cars. But it takes about $350 or so per vehicle to transfer the car from Florida to Texas, Arkansas, Oklahoma. Now we've negotiated to reduce those transport costs, but it's still more than if you bought the car locally; it had pretty much minimal transport costs. But we've had to do that and source really quality cars, but it does increase your costs.

And you said you're sourcing 8 or 9% from Florida right now?

Florida, yes.

In terms of -- do you have any kind of per car sense in terms of just higher costs for comparable car ex the fuel, ex the transport in terms of what the market is doing in your class cost of car that you are searching for that just do the supply issues, where it's pushing the sell prices higher?

Yes we kind of looked at it. Generally speaking, we are probably paying 100 to 150 more for the same vehicle now than we were a year ago. It's hard to get an exact number on that because you base using averages but you try -- it appears to be somewhere in that range before you include the transport cost and the fuel cost of moving that car.

And in your press release, you commented on the higher separation costs. And I think your model for a good while has been somewhere in the what 200 to $300 or 100 to $300 range of prep between washing and cleaning, maybe putting in the spare part like a battery or something like that. Has something changed in your model on how you prepare? Or is it because you are acquiring just maybe need a little bit rougher -- need a little bit more preparation work than what they have in the last year or so? Help us understand what's going on there?

I would tell you that the latter of what he said his true. When we first met with having a difficult time getting a number of cars, I think that at the end of the May term, our purchasing agents stretched a little more, maybe by a few more marginal cars because the numbers are lower and that does lend to more repair costs. It also lends to more retail (indiscernible). I mean the cars (indiscernible) get to mark them over; we end up having to wholesale a few more of those. So we did go through that for a time. But as we mentioned a while ago, there are several initiatives we have in place. And a big part of that is working harder to expand our areas, expand the cars we are exposed to so that we are not buying as many of those marginal cars. But I think that's why we really saw an increase on that expense this year.

Then maybe one more question if I could -- you talked in the fall about your desire to try to stockpile cars in advance of the tax refund season. I think you've thrown out a number of maybe 800 would be a good number. And if you got 1,200 or 1,500, that would be great. Can you give us a report on how that effort went and what kind of contribution to profitability it might have had?

It's kind of a long story. That whole process has evolved quite a bit. We were doing a lot of stockpiling at various (technical difficulties). Along about the same time, we really realized the need to stockpile more cars at the individual lot. And I think Skip might have mentioned it before or maybe I did, we've got about 2,800 cars out there right now at the lot, which is more than we've ever had. And part of that would kind of be an on-lot stockpile. So we tell you that [a loss] of that, and I really expect to see kind of year-round benefit from that going forward not just at tax time. However in addition to that, we will starting this next fall begin to stockpile cars for tax time. That is something we have to do. We know that supply really gets tight during that time because everybody is in the market for this car; that's when they want to sell. I think it's been a necessary and a good move for us.

Last year, we didn't get quite the benefit on the pricing because that is right when supply got tight from these hurricanes and the other issues. This year hopefully, we will get a little bigger benefit by buying the cars a little cheaper than they will be in the spring of '07. We will have to wait and see, but we will add to our inventory to be prepared for tax time.

John Hecht, JMP Securities.

Hank, I missed what was your average sales price during the quarter?

(indiscernible) 7,701.

Can you guys give me an overview of like a change in both the inventory mix as well as where you are seeing kind of demand behaviors go? Are we seeing less gas guzzlers and more fuel efficient, any change in international versus domestic mix?

As for our customers, that hasn't changed substantially. I think one odd thing that happened this past year was (indiscernible) in the fall when the gas prices first started going up for the new car buyer, the first to buy the $100 car, they pretty much swore off the SUV. Those were vehicles that were typically a little higher for us to get the good ones and so we didn't sell a lot of those. But surprisingly, we actually went through a time where we sold a lot of the gas guzzlers because there were some nicer later-model vehicles that had really been priced down just that particular vehicle that our customers buy. But beyond that, the mix really hasn't changed substantially. We build basic transportation, and that's the way it's always been and that's the way it still is. Obviously, we want all the guys doing the very best to buy the good fuel-efficient vehicles for our customers, but I wouldn't say that the demand there has changed significantly.

Okay. In terms of credit cost, about three-quarters ago, I think we noticed the disparity between the younger and older lots and the gap widening in terms of credit performance. So there was an initiative to change the balance and kind of harness in some of the growth at the younger lots. How is that sort of tactic or strategy coming through? Are we seeing that gap decline?

Yes. In the third quarter, we talked about that then. We did see that gap narrow in the positive sense that the older -- the newer lots were doing better. We'd also -- I don't have the specific numbers for you right here today, but we saw that again in this fourth quarter that the credit losses or the newer losses getting more to where they should be relative to the older lots so that we have seen two quarters in a row of positive impact there with the new stores. And part of that is by some really increased oversight of the new stores and watching what their underwriters are doing but more particularly tying their sales to their projections, not letting them get ahead of themselves and then staying closer to what we expect them to do, not what they might be able to do.

Okay. Skip, I can't remember the House bill number, but is there an update on the tax bill that might give you relief on interest rates in Arkansas?

The number is HR 3505 -- 3505. The most recent update comes from about three days ago, where there was some movement in the Senate Committee that passed the bill to allow the bill to go forward to the floor of the Senate with an amendment that included the Arkansas issue. A fellow by the name of Sarbanes is the Chairman of the committee that has that.

Our lobbyist and lobbying group is very optimistic about three days ago and that something would happen by the end of this session. But again, as you all know, we've heard that before. The pieces are in the right spots to make it happen, but I don't have any update other than some optimistic view by all the people involved, including the staff of the Senator from Arkansas, who is sponsoring this bill for us. But nothing, there's no news at least as of yesterday that I am aware of beyond that.

Last question is in looking at the increase in the warehouse size and then kind of considering the CapEx, the repurchasing and all of those activities, it looks like somewhat less than 50% of your portfolio growth. Well actually, still with more than 50% of your portfolio growth is supported with internal cash flows. Is that a safe -- or are you comfortable with that kind of a mix in terms of growth supported from your own cash flow of your portfolio?

Yes. Although I will tell you probably going forward, we will say more of that -- at least in this '07 year, we probably won't have as much CapEx. This year, we have about 5 million this year. I don't anticipate we will have that much this year. (indiscernible) a lot of ramp-up costs this year that we don't expect to see next year and get more leverage out of them frankly. However, conflict at that level I think we will see it more out of cash flow in the '07 year than we did this year.

Dennis Telzrow, Stephens, Inc.

I guess relative to your guidance and what the fourth quarter came in at, where was the major variance from your expectations?

Two areas, the biggest single factor was the gross profit margin. We thought we'd see a little more improvement in that through the quarter than we did. Coming in at 43.2 is a little below our expectations. That was in dollar terms oh, $600,000 worth of difference. And then the other biggest single portion was the SG&A being a little higher than we expected by 300,000 or so. But those are the two biggest factors.

Looking into '07, are there any SG&A projects that we should be aware of? You've done a fair amount in the last couple years. You just mentioned the IT.

Those were big ramp-up. I think one that you will see and we've targeted quantify just yet but I think it won't be that significant -- is we were looking at some of our pay structure for our associates. You know we always want to reduce turnover, and so we are looking at what we pay in different markets and should we adjust our pay structure. So that is one of the things that you could see the next year that would have some effect on SG&A. But I think going forward, we feel comfortable as a percentage of sales in the low 18%. Jeff, is that right?

18, 18.1.

18, 18.1 or so. We really ramped up a lot in the '06 year. And most of that, we just have gotten the leverage out of them. Our IT department went from say three people to eight. Normally, you'd think that's a bad thing but it's truly been a good thing for us in that based on what they're turning out for us and similar in an HR department, which two years ago we didn't have one frankly, and now there's four people in them. We are not adding staff and bureaucracy just to add it. They've really been helpful in adding or facilitating our growth of these new lots.

So a long answer to your question -- I think nothing dramatic on the horizon. We kind of are where we are.

Last question -- in the purchasing area, did you buy what 6,000, 7,000 cars a quarter -- more?

More than that. We will probably buy -- Hank, what do you think about closer to 8,000 (multiple speakers) in the quarter. About 7,000 you think? Okay, about 7,000.

I guess I'm still a little -- frustration is not the right word -- but you are such a big buyer you think you would get better leverage and you've been getting even in these trying times. And you are saying your competitors are having trouble.

The problem with that is we don't buy -- even though we continue to buy more and more cars, they are all from different people. You know it's easier from this person; it's easier from that person, even going through the auction. We've got a lot of different sellers there. Where we gain a benefit, as Skip mentioned, we are able to negotiate some better transport costs, like these longer hauls out of Florida because we are hauling a lot of cars out of there. We do a lot of business with some of the auctions now, so we are able to get some better fees there. But as far as really getting a better purchase price, it's very difficult.

It would be one thing if we had two locations in two big cities, and you bought all your cars from two of the auctions and one or two wholesalers. Spread out over nine states and trying to buy locally, you don't always get those benefits of the scale where we are getting, as Hank said, but with some of the major auction houses and major wholesalers. Because for them, we are big buyers. So we do go to certain auctions. We are probably the single biggest buyer of cars in our price range, and so we get some good benefits there. But frankly, there's just a lot of pressure on the pricing of these cars. There's a high demand for lower-priced cars that run, and that's a testament to the fact of the size of the market we are dealing in.

[Forrest St. Clair], Skystone Capital.

My question has been answered; thank you.

Peter Beutel, Pegasus.

Skip, can you talk a little bit about getting rid of the trade-ins? We talked a bit about a month, anymore traction on that?

Yes, I have [quenched] with that -- with the wholesales.

You know for so long, I think we really haven't worked our wholesale side of it as well as we could. I think we've gotten kind of less down there. As I mentioned, we are going to sell -- we are wholesaling the course of the year close to 10,000 vehicles.

And many of the towns we are in, a lot of the ways we've gotten rid of that has primarily been through wholesalers just coming by and buying them off our lots. And we've really realized that as we mentioned, car prices have gone up so much we kind of woke up one day and said you know the cars -- the price of the cars that we're buying as wholesale costs have gone up dramatically. But we're not seeing the same increase on the wholesale to the sell, which may be salvaged cars, repo cars, just cars that we are not going to put out on the front line.

We've got to realize an increase there, so we are using auctions more than we have in the past to sell those. We are also -- a lot of our salvaged vehicles are being sold through online salvage sales. And all of this just exposes us to a lot more buyers. And this is really getting started just over the course of the past few weeks. As I mentioned, it's just $100 -- if we can just realize a $100 average increase across those 10,000, that's significant. So we are working hard towards that.

What's been the average sale price of the wholesale cars would you say in the last quarter?

I don't have that number in front of me. But it typically runs -- the average wholesale price is typically right under 1,000.

That's the number we watch really closely. We are seeing some of the initial results of these online sales and auction sales, and they look good. There will be some cars that you won't give a big benefit of, but the others you get a dramatic benefit and that is perhaps a car that we might have wholesaled for 700 or $800. At an auction, they go for two times that. So on average, we do have the expectations to increase the value of our wholesales. It's hard to tell you what the number will be. We will probably six months from now look back and see what is done. But we're already seeing positive impact from that.

Can you give me a number that that's Copart is doing for you -- a number of wholesale vehicles or a percentage?

I really can't. We are just in the beginning of that, and we are negotiating some things. But we are selling through Copart, but that's really kind of just starting. So why don't you ask that in about six months? I can give you a number that's meaningful.

Good. Thanks, Skip.

[Clark Sledge], Sterne, Agee.

My question is a little variation of a previous question. You mentioned that the historical growth rate is 17%. I'm assuming I didn't hear exactly, but that includes the current quarter. Can you comment on the likelihood of that growth rate continuing?

Yes. Over the past five years, what we said is that our top and bottom-line growth rate has been right at 17% including this year, which obviously was a down year from an EPS and net income basis. So even with a tough year, we've grown at 17% top and bottom line. We certainly are optimistic we can continue that kind of growth going forward. Obviously, our guidance on the top line this year is not that high. But if we can get on all cylinders, get some things clicking right, there's certainly an opportunity to continue that historic growth rate.

Bill Armstrong, C.L. King & Associates.

I guess I'm trying to understand why there are still shortages. The hurricane was last August or September. Wholesale prices, as measured by the Manheim and other indexes -- ADESA have been coming down, which would indicate that supplies are easing up. I guess I'm trying to understand why supplies are still tight in your market?

I'll let Hank answer part of this too. But I will tell you the Manheim Index, which we do follow, is a broad index of all the used vehicles. And I think it's accurate and frankly CarMax pointed this out the other day in their release, the higher dollar used cars, there has been some easing in the pricing of the higher-dollar used cars. The lower-dollar used cars, our cars say at 3,500, $3,700 average cost, that has stayed pretty constant.

But I don't still think there's as many of those getting traded in. I think those people are still hanging onto them.

There's an adequate supply out there. By that, I mean there's cars we can get. But we haven't seen a sort of an oversaturation to where you would see a decrease in the cost. And I will tell you where we -- a lot of them are going -- it kind of surprises us in our auctions that we go to and the wholesalers we deal let's say closer to the Mexican border. You see a lot of cars being bought south of the border, all the way down to Costa Rica and other places. There's a demand for these cars.

Part of it is the demographics. In all of the areas we are, they tend to -- the customer needs and can only afford a lower-priced car. That customer we deal with isn't looking at a $25,000 car, where there may have been a 5, 6, 7% price reduction. When we talk to our buyers and our purchasing agents, you'll hear in discussions that it's softened here for a week for two. We frankly heard that out of Florida in the last few weeks that prices have begun to ease a little bit in Florida. But if you ask our buyers in Oklahoma and Texas and Arkansas, they'd tell you they haven't seen any easing at all.

So all in all, yes the hurricane effects we believe are gone. I think the biggest single issue now is that people -- as Hank -- that people aren't trading in those cars because there is no driving force to get them to, such as incentives and those kinds of things that the manufacturers I wish would do. There's just not a big demand for those cars.

I think you might get us to take advantage of it. When there's a price reduction, it will be us because we are in more markets buying these cars than anybody. But we just haven't seen it universally.

Is it possible that since you're now becoming so big that maybe people see a Car-Mart buyer coming in and maybe it's not rate in a price but being more stubborn as far as giving you good deals?

You know that has always been an issue, even before our size because of what we do with the vehicles. They know that we are going to have a good markup on them and set them out there. They know we are not a wholesaler coming in just to make a few bucks. So that has always been an issue that we have contended with but that's a good point.

Now did I hear that you are starting to use acquired cars at auctions more because I think in the past, you really didn't use auctions very much. You pretty much relied on wholesalers and trade-ins to get your cars.

You are correct. As a matter of fact, a few years ago, we didn't use auctions at all. And then over time, we've kind of used them to supplement. And I would tell you that this past year, we've bought a lot of cars through the auctions. It was really necessary as we go out into other markets. We're new in town, and we really didn't have those relationships there and really to buy a large quantity as we mentioned buying cars out of Florida. Those are auctioned vehicles. We've also hit some of the bigger city auctions in the area we are in. We have been able to get a lot of good cars with the auctions. But also, I think those cars do tend to also raise our repair expense a little bit and that added to that.

As I said, we have kept the numbers there as far as the quantity of vehicles. But the quality overall I think has suffered a little bit.

And then too for example, when you're buying typically in Florida, we do get really good cars there for the most part. They are lower mileage, older cars, where retirees or others have driven the cars not that much and they're decently maintained. So the car is a good car. But what you have to add to that is the fees and costs of getting that car to our areas of operation. So let's say you buy a car for $3,100 but then you have to add 300 or $400 to get it to Little Rock or Hot Springs or a little less now to Alabama. So you add that to the cost of the car. But that's what we've had to do to get adequate inventory and good inventory.

Although earlier, you did mention you are buying more rougher cars, which would seem to be the opposite of that.

Well again, we are buying 7,000 cars a quarter. So to maintain the level of inventory, we believe we have done that. We don't try to do that but it happens.

That's certainly not -- by no means do we constantly lower our standards. But I think it's realistic when we have buyers out there that are under the gun and pressured and they're just not seeing as many cars. There's probably a few more marginal purchases made, should've been passed on -- two more get bought.

Would you say that for a comparable car on average, you are getting better or more expensive or less expensive prices that you are paying at auction versus a wholesaler, recognizing that auctions do charge buying fees and some other fees?

I would tell you it's different regionally. There are some areas where I think the costs are comparable. There are some areas I think where the auction prices are a lot higher than we could get otherwise. So that is kind of a regional thing.

How about going north to Chicago or some of the big Midwestern markets for these sorts of vehicles?

We have bought some cars this year out of both St. Louis and Kansas City. We haven't been as far north as Chicago, but we've made a few trips to St. Louis and Kansas City.

Bill Baldwin, Baldwin Anthony Securities.

Couple of questions -- number one, Jeff, can you dollar amount kind of give us an indication of what the wholesale car sales were in the latest quarter versus say a year ago?

Yes, roughly let's see -- about 2.5 million roughly this year versus 2 last year for the quarter -- fourth quarter.

Right fourth quarter versus fourth quarter.

Right.

Secondly, you indicated the variances are primarily on SG&A and the margins. Does that imply then, Hank, that you made your target on unit car sales in the quarter?

Yes. We are right there.

So unit car sales are pretty much in line with what you were looking for then?

Yes, that's correct.

[Adam Meisel], Aquifer Capital.

Can you give us a little bit more context for your 2007 guidance and where it fits in conservative to aggressive and areas for potential upside because the background is I just tried to quickly try to update my own analysis. I struggled to get to -- it takes a lot of conservative functions to get to the range of EPS that you have guided to, so I presume -- just give me a little bit of understanding of how you think about it and where you see upside?

Well there are three main areas that affect that, and this is stating the obvious -- credit losses, gross profit margin and SG&A. Yes, we believe when you look historically that a 10 to 14% guidance on the top end and including in '06 with the tough quarter, we exceeded that 14% and we gave the same top-line guidance last year. Arguably, is that guidance on the conservative side? Certainly, arguably it is.

We see a lot of potential upside in our growth and expansion in our new lots. We don't see as much upside in the sales price side and that's somewhat on purpose. We want to hold that kind of where it is. Yes, you know with credit losses, we've had a pretty good year excluding the second quarter. Could we do better there? That's probably difficult. I mean we do have some external factors that affect our customers -- the high gas prices, economy generally. Everybody's costs are going up. As the car cost has gone up, I think it's normal to expect credit losses to go up a little bit. The term of our notes has gone to 27 months or a little bit over that. So that just actuarially will increase some losses towards back end of some notes and also increase your credit losses because there will be more money going to interest over time as opposed to principal.

Certainly, we see some upside and leverage in SG&A potentially; we really had expectations of that. We do believe through a little better purchasing and maybe some wishful thinking that the market will soften a little bit, that we will get a little upside on our gross profit margins. And I think part of that is likely to come also on the backside as we improve our wholesale sales. We can't quantify that right now, but we think the things we are doing and the initial indications look good.

I think you will see more of these things come to fruition at the back end of the year than the front end. Quarter over quarter, we look at our first quarter this year versus -- '07 versus '06, we've got a tough quarter to measure against and that all these things will have been totally in place. But yes, I mean -- hey, we are not sitting here saying, you know we through this number -- guidance out, expecting that's all we can. But you have to be reasonable in your assumptions and try to exceed them.

That makes sense. Just a couple of specifics just to put it in context -- you had said earlier in the call, I think Jeff, that you would expect SG&A to go from 18.3 last year, maybe 18 or 18.1%.

Yes.

If I just did that kind of in a reasonable revenue growth range near 10 to 14, that would say you are going to still add almost $3.7 million to SG&A from '06 to '07. Is that realistic? That seems like a lot given the investments you have made and what should be a place that you need to add almost $4 million to SG&A in calendar -- in fiscal '07. If you could just give me as an example to follow up my question to try and put all of this in context and it is just not adding up to me.

When you consider the fact that we have added 22 lots also in the last three years counting '07, there's a significant amount of costs associated with just opening that many lots. So that has a big effect on the overall number. And as we spoke about earlier, we do have some salary issues within our current ranks that need to have some attention. And then other than that, you've got just inflationary issues that we have to account for with the projections going forward. We expect the costs, such as insurance and health insurance and fuel costs and all those inflationary-type costs, are certainly a big component of what we expect expensing to look like 12 months from now.

John Mazanec, Wasatch Advisors.

Could you talk a little bit about the acquisition you did and what the acquisition -- would there be more acquisitions? That kind of struck me as out of character.

Yes, they were somewhat out of character but not something we won't do in the future if it presents itself. We did two acquisitions -- one that fell on the last fiscal year and then one that is in this fiscal year. The one last year is Lexington, Kentucky. This year is Tuscaloosa -- similar in the way we approached it. Basically, you are right. Typically and historically, this Company has grown organically by founding new dealerships, starting them out slow and then growing them to be the successes the huge majority are.

Lexington specifically was a town we looked at for months literally. And through zoning and other restrictions, the city had put on -- there was only a small area in which you could locate a used car dealership in the city of Lexington, this town of over 200,000 people. We just couldn't find the real estate to open a lot that made any sense to us. So finally, we were relegated to knocking on doors to see if anybody would sell. That is exactly what we did, and we came up with what turned out to be the premier piece of real estate on that strip of land in Lexington that we could operate a used car dealership.

So there, it really made sense to buy that dealership, and it made sense not just from the location standpoint but also the type of dealership that was operating there in many respects similar to Car-Mart, not all but many, same types of customers, same types of vehicles with some changes -- some variations but close enough to our business model so that the customers we bought by buying the accounts receivable were customers that we felt comfortable collecting from and hopefully selling them the next car too.

So that acquisition made sense, as you can imagine. I can't give out the specific details, but you buy assets at a transaction like this at a discount. You buy the receivables at a discount. That's a negotiated number, which is less than the value of the receivables. Hopefully, if we are successful collecting a significant proportion of those receivables at the end of the day, that acquisition will cost us very little excluding the time value of money for a minute. But also, it gives us in that instance a great location, access to over 350 customers that are already coming to your lot every week or two weeks making their payments. So it just made a lot of sense.

Tuscaloosa was similar in that we wanted to move into Alabama, and there was available real estate in Tuscaloosa. It wasn't quite the tight real estate market. But there, we bought a dealership that had been in business for over 25 years -- really solid individuals that owned the company before -- solid customers, Car-Mart-type customers in a good location that worked well for us. And the price we paid we thought was very reasonable in view of what we expect our return to be. So it does kind of jumpstart the growth of a new dealership.

So I would tell you that we will look at additional opportunities as they present themselves, but we are not going to change our major way we've grown our business by opening new dealerships. But if they present themselves, we'll look at it.

The acquisition in Tuscaloosa, did you pay a price for the land and then buy the receivables at a discount or is it more of an ongoing business that you bought?

Ongoing business. We bought the receivables at a discount and then leased the property -- a long-term lease on the property. Those -- again, of the 12 lots we will open up this year, will there be another acquisition or two in there? Possibly. It's not we don't have any of those planned. But Hank and I both now get a fair number of phone calls of people, who like to sell their business, because there is not many buyers that will come in and can write a check for 0.5 million, 1 million, $2 million or whatever in this industry that will buy the receivables. And most of the individual's wealth is tied up in their receivable balance.

So do they want to sit around and try to collect it for the next three or four years? Or do they want to take their discount today for that receivable base and allow us to take over a good location? So we'll see some opportunities like that. We are pretty cheesy about it. We have looked at others that just didn't fit our Car-Mart profile. They just wouldn't work for us. They're very successful dealerships but just wouldn't have fit well with the way we run our business. So even though they were attractive transactions in the long run, it wouldn't have served us very well. So we will continue to look at them.

There are no further questions at this time, sir.

All right, thank you very much for listening in. If we could answer any of your further questions, feel free to call Hank or Jeff or I. And we appreciate your questions and your comments today. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.