America's CAR-MART Inc (CRMT) 2007 Q1 法說會逐字稿

Welcome to the America's Car-Mart first quarter conference call. The topic of this call will be the earnings and the operating results for the Company's first quarter ended July 31, 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 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 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 and quarterly reports furnished to, or filed with, the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on this call this morning are Skip Falgout, Car-Mart's Chief Executive Officer; Hank Henderson, the Company's President; and Jeff Williams, Chief Financial Officer. And 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 and 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 this week.

This morning we reported earnings for the third quarter of $0.35 per diluted share, and Jeff will go into the details in a minute. For the last six months or so we have spent a considerable amount of time and effort dealing with two specific areas of our business that we believe over the long run will substantially strengthened our position over that of our competitors and will continue our status as the number one Buy Here/Pay Here company in the country.

First, we have attacked the entire part of our business that revolves around the vehicles we sell. We have assumed that the wholesale market will be tight, although we are seeing some improvement there, and a tight market might not always be the case, however, we want to be ready whatever the market is.

As we mentioned back in July, we have expanded our purchasing efforts geographically, purchasing cars in Florida and elsewhere, and using our size and volume purchasing to obtain more and better vehicles, and getting concessions in fees and transportation costs. We have tightened our repair budgets and our expenditure on wholesale vehicles by more oversight on repairs and better training in this area, as well as quite frankly buying better vehicles that require less repair and reconditioning work.

We have intensified the training and qualifications of our purchasing agents, and are working hard to expand our contacts with our local new dealerships and wholesale markets. In this way we will be able to continue to acquire more cars locally, further reducing our wholesale costs.

We have also gone outside the Company and recruited some strong management talent to work in this area, and Hank will discuss this in a little more detail shortly. In addition, as we mentioned in the press release this morning, we have used our data mining to guide us in upgrading the mix of our inventory with the right vehicles at the right dealerships. This should also assist in lowering credit losses as we can more accurately predict which vehicles are more likely to perform mechanically to determine the note.

All this is beginning to show signs of success. Gross margins were up for the quarter to 44.4% from 43.2% last quarter. This is also a reflection of our ability to pass more of our costs on to our customers, as well as initial positive results on the wholesale side of our business, which Hank will also discuss.

On the credit side, we're having to work more with our customers to get them over the tough conditions facing them. Specifically, our over thirty-day accounts ended the quarter at 5.6%, which is in part a reflection of our patience with these customers. By working with our customers to get them over the hump, these customers that we are successful in saving will be like so many hundreds of thousands of other Car-Mart customers, customers for life.

At the same time we are slightly tightening our underwriting at certain lots to keep credit losses in line, and we are working with our customers to trade them into more affordable fuel efficient cars when it is appropriate.

Our new lots we have opened in the last six months are still performing well, and are for the most part on track. Most of this success is due to our new store development team and the resulting new streamlined opening process, as well as increasing our invested capital at these lots to insure they start with and maintain an adequate supply of high-quality vehicles. These steps, some of which we initially mentioned back in July as well, should get these lots off to good starts and allow them to grow into large, successful Car-Mart dealerships.

This is the way we grow Car-Mart for the long term, by opening new dealerships in new markets and by organically growing them into mature, profitable dealerships that continue to expand within their markets and spread the Car-Mart brand-name. And we will talk more about this in a minute. Jeff is now going to discuss the first quarter results in a little more detail.

Topline revenues for the quarter increased 6.9%. The increase was principally the result of same-store revenue growth of close to 2%, revenues from our 13 new dealerships opened since May 1 of 2005, and the healthy 28% increase in interest income. Quarter over quarter our average retail sales price per unit was up 5.8% to 7,913 from 7,477 in the first quarter of last year. Price increase for the quarter was a little higher than expected, as we focused efforts on retail pricing to help offset some of the margin decline we saw during fiscal 2006. Historically annual price increases have been in the 3 to the 5% range. Going forward we expect to see some continuing growth in our average retail selling price when compared to prior year results.

We saw a slight decline in unit sales for the quarter due primarily to the fact that the prior year quarter was an exceptional quarter. It was the second-largest in terms of unit sales in the history of the Company, second only to the fourth quarter of 2006. Also, the extreme heat had a negative effect on overall lot traffic for the quarter, mostly in the month of July. We had two really strong months in May and June, but lost some ground in the month of July. July was also negatively affected by the fact that we postponed our sales contest this year to August. In prior years the contest was held in July. Our unit sales growth was 6.6% for the prior year first quarter.

Interest income is up as a result of the increase in our average finance receivables portfolio balance of $32 million, and relatively affected increases in the federal primary credit rate, which is the base rate for underwriting in the state of Arkansas. At July 31, 2006 we were charging 11.25% on new Arkansas loans. This is up from 5.75% three years ago. Our effective interest rate earned on finance receivables for the quarter was 12.3%. This compares to 11.4% for the prior year period.

For the first quarter of this year our gross profit margin percentage was 44.4% of sales, which is down from 45.4% in the first quarter of last year. We are, however, pleased with the fact that even though the gross margin percentage is less than last year's first quarter, the percentage is up versus the fourth quarter of fiscal 2006, which was 43.2%, slightly above the full year 2006 percentage of 44.3%.

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 selling price, a function of the higher purchase price, and by higher operating costs, mostly related to increased vehicle repair costs and higher fuel and transport costs.

Lot managers are given some discretion in establishing retail prices, and have focused efforts at the direction of our operations management on increasing margins, even in the face of rising vehicle costs. Going forward we will continue to focus efforts on retail pricing, and would expect to see gross margin percentages approximating the first quarter's results.

In the first quarter this year SG&A as a percentage of sales increased to 18.6% from 17.4% in the same period last year. We did see a decrease in Sarbanes-Oxley-related compliance costs incurred in the first quarter of this year compared with the first quarter of 2005. This decrease was offset by increased cost related to strengthening controls and improving efficiencies in our corporate infrastructure, as well as the increased location costs for existing lots, primarily in the areas of insurance, rent, utility and fuel costs and other inflationary costs incurred in normal operations.

As we have previously discussed, the investment in our corporate infrastructure was much-needed, and will allow us to continue to grow and support new and expanding lots into the future. We have not yet seen the bottom line benefits of these investments but intend to fully leverage these cause into the future.

It should be noted that our overall SG&A expenses in dollar terms came in on budget for the quarter. These expenses are for the most part fixed in nature. Had we hit our internal sales projections for the month of July, our expenses as a percentage of sales would have been better than planned, under 18%. It should also be noted that we incurred approximately $220,000 in non-cash compensation expense included in SG&A related to stock-based compensation under FAS 123R, which we adopted effective May 1 of 2006.

The current quarter credit losses as a percentage of sales was 22.5%, up from 20.9% in the first quarter of last year. Credit losses were higher due to several factors, including higher losses experienced in our locations less than six years old, especially in our Texas lots. Additionally credit losses were slightly higher in some of our more mature stores, stores in existence for ten years or more.

As we have previously discussed, credit losses on a percentage basis tend to be higher at new and developing stores than at mature stores. Generally this is the case because store management at new and developing stores tend to be less experienced in making credit decisions and collecting customer accounts, and the customer base itself is less [seeded]. Generally older stores have more repeat customers. On average repeat customers are better credit risks than nonrepeat 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.

The Company continues to believe that the most significant factors affecting credit losses is the proper execution of its business practice. The Company also believes that higher energy and fuel costs, increasing interest rates, general inflation, personal discretionary spending levels affecting our customers have had a negative impact on recent collection results. At July 31, 2006, 5.6% of the Company's financial receivable balances were over 30 days past due compared to 4.7% at July 31, 2005. We continue to monitor the portfolio and work hard on collections. We are seeing some -- we are, however, seeing seen some continuing weaknesses in the portfolio performance in the early stages of our second quarter of fiscal 2007.

We increased finance receivables by about $6 million, or 3.3%, during the first quarter. Debt increased 3.3 million for the quarter. The increased borrowings were used to fund the growth in finance receivables, increased inventory levels by 1.7 million, and to fund capital expenditures of approximately 700,000.

Additionally, we repurchased 20,000 shares of stock and purchased an existing dealership and its loan portfolio in Tuscaloosa, Alabama during the quarter. 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.

I would like to follow-up on a couple of things Skip mentioned earlier. We do have a number of things that we're doing to reduce credit losses and delinquencies, such as tighter underwriting and improved inventory on certain lots. The exact nature of the underwriting varies by lot, as we individually assess each lot's particular issues.

The improvement in inventories will mean improvement in credit losses as we expect to have fewer losses caused by mechanical breakdowns. But many of our younger lots we are increasing the amount we will spend on inventory to put better, more mechanically sound cars on a lot for sale. And although this requires a higher capital outlay on the front end, we should see better long-term results as more notes are paid to term, with fewer repossessions being caused by mechanical issues. We know that our customer is having a tough time, and so we are doing these things on a lot by lot basis to address and overcome the difficult economic conditions facing our customers.

On the purchasing side we were pleased with results this quarter, which have allowed us to significantly improve our gross margin. But we aren't resting on our results from these few short months. We will keep pressing to get more and better cars and use our market strength to get more and better deals on our inventory, fee and transportation costs.

To help in this area we have hired a gentleman named John Sims to head up purchasing. John has over 20 years experience with Wal-Mart, serving as the Vice President of Canada, and as a regional Vice President. And obviously you don't get to be a regional Vice President of Wal-Mart unless you can produce. John has been with us about a month now, and we have high expectations of the job he can do for us in this new position.

On the wholesale side of our business, which we discussed somewhat in July, we are seeing positive results and increasing prices for the vehicles we sell on a wholesale basis, whether they are trade-ins or repossessed vehicles. During the first quarter we saw an improvement of over $60 per vehicle on the amount we realized on our wholesale sale. And we expect this to get better over time.

Briefly regarding new dealerships, we have opened four this year already with Ponca City, Oklahoma set to open in a few days. And as Skip mentioned, our recently opened stores are doing well. And we already have three additional properties under contract for additional dealerships, and we have a number of other locations we're presently considering. With that I will turn it back over to Skip.

As many of you know, since 1999 when Car-Mart went from being privately owned to being publicly held, we have more than tripled the size of this Company. In 1999 Car-Mart had 29 dealerships, approximately $28 million of pretax income, and about 55 million in accounts receivable. Today we have 89, soon to be 90 dealerships. Last year's pretax was over 26 million, and accounts receivable as of this quarter are over 191 million. Of those 89 stores, over 40 are less than five years old.

Although our business model has been basically the same since 1981, we would not have continued to grow and prosper over 25 years if we weren't constantly making adjustments to the way we do business to anticipate or react to changes in the marketplace.

I feel that we're in one of those periods now. We're modifying certain aspects of our business to be current and anticipate situations, whether external or related to our loan growth. We have grown fairly rapidly with many new managers and personnel. As we work with our managers and they mature into their roles as Car-Mart managers, they and the Company as a whole will exponentially grow and increase the profitability.

Let me illustrate to you what I'm talking about. Most of you are aware of the recent announcement of the acquisition of a local competitor of ours. Each of our competitor's eight stores are in markets were we have been for years, having mature stores, most over 10 years or so. Our average credit losses at these dealerships is about 16%. We know that over time our dealerships will consistently become more and more profitable. Our success in the maturation of these dealerships are measured over years and not quarters.

I hope you all heard us on that one -- about 16%. And those are mature dealerships, and we will talk about states here in a second. But as these dealerships mature, and this is what we expect, that their credit losses over time, the repeat customers, and all those things together will increase the profitability of each of those lots.

You know, Car-Mart is a tremendous growth Company. We will continue to allocate our capital, both financial and human, to get the highest returns and maintain our long history of profitability. Have we grown too fast? We don't think so. We are simply in a period of adjusting to our growth by enhancing our people and our systems. We will continue to manage this Company with a view to the long-term success of Car-Mart.

Finally, I would like to remind you that our annual shareholders meeting will be held on October 18, 2006 in Bentonville, and we invite you all to attend. Our annual report and proxy are being shipped out this week and next. Please note when you review the proxy that we have a new name in there, [Bill Swanston], as a nominee for a Board position. Bill is an experienced and successful executive, having spent his entire professional life at PepsiCo and Frito-Lay from which he recently retired at a senior level executive position. During his 25 plus years at those companies, he has seen and handled many operational challenges, and we look forward to his advice and counsel as a Car-Mart Board member.

That concludes our prepared remarks. Now we would like to move on to your questions. Operator, would you like to start that?

At this time participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements apply both to the participants' prepared remarks, as do anything that may come up during the Q&A. (OPERATOR INSTRUCTIONS). Dan Fannon with Jefferies.

Can you highlight really what the biggest factor is of the lowering of guidance? Because when we heard from you a couple of months ago when you initiated your '07 guidance, and now we are out here today, can we just get a little bit more specific as to the one or two primary factors that you're seeing going on in your business that is causing you to be a little bit more cautious on your outlook?

Probably two factors, and really they regard one area of the business and that is the credit side. We feel that our customer is having a tougher time, and we have experienced higher losses than we expected in delinquencies with that customer over the past couple of months. And that 00 it has probably worsened a little bit. But also, if you look at our Company is a whole, many of -- and frankly most of our locations are doing very well. Maybe, Hank, why don't you get into that? It is mainly the newer stores in a couple of areas. By newer stores, I'm going back to stores a couple of years old that are having more significant problems, but our older more mature stores are just hitting along very well.

If we look at Arkansas, which is where we started, Skip mentioned [aided] a lot in this area. But we still -- over half of our business takes place in Arkansas. And ending this first quarter our credit losses -- just look at Arkansas, we're still under 17.5%.

As Skip mentioned, we have opened a lot of stores out there over the past few years. Got a lot of younger managers that require a lot more and help and oversight, quite frankly, more mistakes. We have to work with them more. And really our credit loss struggles more so on those smaller lots. At the time I think that we need to reel those in somewhat, and as we mentioned, tighten up some of our underwriting standards, a little tougher controls, and get these in line with where we would like to see them, because the credit losses are much higher there than we like to see.

Then when you look at your guidance, what factors from a macro perspective are you assuming? And how much worse do you think your consumer is going to get, and how much -- I am trying to gauge how conservative you view this guidance?

It was certainly not an easy decision to make this adjustment. It was a few cents, but we want to be realistic about it. We believe that -- I think probably the worst is over, unless there is something dramatic that happens. We are seeing some things in our areas, and I'm sure to rest of the country, where fuel prices are going down, which is probably the most direct impact on our customer that flows through his utilities and other things. I would think with respect to how our customer is doing that is going to be relatively stable now. I wouldn't expect to see that get much worse.

However in our business, even the things we do today on underwriting and credit, many of them you won't see the effects of for six to nine months. For example, if we tighten underwriting at certain lots, which we are doing, you won't see the impact of those hopefully improved results for six to nine months down the road.

John Hecht with JMP.

I guess drilling a little further down in the credit side of things, can you breakout the credit change in mature versus new stores? In other words, you mentioned that there were some deterioration in the new stores but you also mentioned there are some in the mature stores. Can you give us the magnitude of that?

Yes. Hank has got some numbers. Hank, why don't you --.

We can speak to that. We have several -- specifically in the state of Texas -- pretty much all of our stores in Texas with the exception of one are very new. And quite frankly, we probably at the time weren't prepared to open as many stores in such a short period of time as we did, and we struggle more with those. But Texas collectively the credit losses there are running close to 30% in Texas. So when you compare that to mature stores it is a significant difference.

The positive aspect of that is we can take you down -- a few years down the road and we do note that as store stores mature and are ready to sell the nice vehicles we managed to gain experience. We know that those come down over time. We just have so many -- and it is also to have that many new stores, it is taxing on our corporate office because they do require more overtime.

That is good color. Do you have a sort of numerical data point for what change we saw in the mature stores credit losses during the quarter?

The mature stores actually I think quarter to quarter were pretty flat as far as their credit losses. We have one or so stores that did a little worse than we would have expected. But other than not, you are not talking there about 25 or so of our stores. That was pretty much on track. The biggest single issue we had is, if you had to pick a region, and that is tied to new stores, it is Texas. Heck, that is where I am from, and it kind of makes me mad, but here is the reality.

We opened up 14 stores in Texas in about a two-year period. In hindsight that was too many stores in a short period time, which we didn't properly structure -- our infrastructure didn't have experienced personnel that we currently do when we open new stores. What that has done is have higher credit losses at those stores that exceed the norm. We expect new stores to average 26% or so credit losses. Those are stores five or six years and under in age. And here we have a group of about 14 stores -- or actually about 16 that are averaging 28, 29%, close to 30. That throws it off.

Now we have a few other new stores in other areas that are more in the norm, some higher, some lower. The mature stores for the most part are where you would expect them -- realistically in some respects, a couple of basis point higher more so based upon the struggles of our customer than anything else, in our opinion.

There's still a spread between the old stores and new stores, but in a specific region we feel like it's gotten a little more out of the range where it should be. So as you can imagine, a lot of our attention is being placed on those stores. We've got good personnel down there. Our VP and our area operations managers, the corporate office spend a lot of time down there. We're going to get these stores on track. However, currently when you look at credit losses excuse the numbers a little bit by having a certain region, particularly in these newer stores being a little higher.

If I interpret that then certainly you can assess that sustained fuel prices are taxing your customer, but it seems like the predominant factor with respect to rising credit costs is still related to younger stores where you're just trying to sort through your customer base.

We've got 40 stores under five years old. And if all we had was eidht stores in those eight towns we mentioned, we wouldn't be having this discussion. Of course, we probably wouldn't be a public company either. It is part of the growth, and it is part of the growth of this Company. As we grow, we have learned a lesson. I guarantee you we're not going to open 14 stores in the same area like we did before.

If you look at our growth in our new store openings in the last 12 months or so what we have tended to do is to fill in in areas where we already have -- so you have some existing infrastructure. That makes a lot more sense. And when we go to a new state like Alabama, we have a very organized plan of how many stores we're going to open in a certain period time, such as four or so in Alabama. But we already we have the area operations manager there. We have really researched that market. We have the infrastructure in place, typically very senior infrastructure, so that we won't go through these things again.

And also, as I mentioned earlier, the folks that are part of our team that helps nurture these new stores from the time that we decide where a location is and who the manager is going to be to its first few months of operations. These things will assist our new stores in becoming more successful sonner. We've got to correct our situations down in Texas, and we are working real hard to do that.

In relation to our modeling, do you expect to see reserve build given where early-stage delinquencies are? You guys are generally kind of provisioned at or ahead of your charge-offs. Should we continue to see that or is there going to be a potential build here given your concerns?

We look at it every quarter. I think we've got a good feel for what -- our reserves at the right level. I am not going to sit here and say it won't change in the future, because we will have to look at it again next quarter. But we have been at this level of 19.2 for about what, Jeff, six quarters or so, something like that. And during that time we have had some fluctuations. And there are many things that you look at that are negative points, positive points. Some of it is just math. We are real comfortable with the number, but I hesitate to tell you -- and I'm not implying it will change, but I hesitate to tell you one way or the other. It is something we look at quarterly, but we are very comfortable where we are today.

Has there been any -- your average term I believe is 25 or 26 months the last time. Is it still about the same or has there been an extension given how you're working with customers?

The average term at the end of July was right at 27 months.

The last question before I get off, I appreciate your taking all my questions here. You said debt was up 3 million, receivables were up a little bit, around 6 million. What were the CapEx and inventory increased numbers?

The CapEx was 700,000 for the quarter. Inventory was up 1.7 million.

Kent Green with Boston American Asset Management.

My question pertains to the SG&A expenses at the rollouts and stuff. I noticed it creeping up a little bit. Is this a new level of SG&A just because you got more stores out there, or is it going to fluctuate?

The SG&A projections for the entire year were right at 18%, and we were above that in the first quarter. And the primary reason for that was the fact that we had sales fall off in the month of July for the reasons we discussed. In dollar terms, the amount of money we spent on SG&A expenses in the quarter were right on budget, exactly what we had projected. But we had a fall off at the top line which hurts us on a percentage basis.

A lot of cost increases have been budgeted and have been projected, and some of those do relate to new stores. Some of those cost increases relate to just general inflation in wages, in insurance, utilities and all those costs that are affected by inflationary pressures. We did have $220,000 worth of non-cash compensation for the adoption of the new FASB on the stock-based compensation in the quarter. All those items were considered and were budgeted. And we did finish right on budget in terms of dollar terms, but our percentage was not where we wanted it to be for the quarter.

Just a follow-up question on the credit side. Is the -- I know you had a program where you were designating regional credit people to go on in, or working on that a couple of years ago. And I wondered if in a new location whether these people were just inexperienced, or it just drifted up just because you got new customers and you have got to get a profile on them? What are the elements that you can address now? Or do you really just have to cut back on the amount of people that are -- or just whatever the credit worthiness of these people and sell less cars?

I think it is a couple of points. Mentioning the credit, or the collection people, we have really modified that, changed that to where their focus is more on the training. They spend the majority of their time training people to collect, not just getting in there and trying to help them collect -- to take a longer-term approach. To look down the road and prepare (indiscernible).

A big factor too with these newer losses, the fact that we do try, or have always tried, to start our lots with as little amount of capital as possible. So really the newer stores have sold a general -- a cheaper car than the more mature stores do just for cash flow reasons. And that is why we mentioned a while ago that a decision we have made as we open new stores we're going to step up and try to sell a better car to reduce some of the mechanical issues they have. That is a big part of it.

Then that combined with the fact that you have got a lesser experienced manager. We have put a lot of great managers out there, but these guys are less experienced, so they probably are not going to have as good a batting average on the front end. And then also the fact that all the customers we sell in these new stores are new customers. We don't have the benefit of the repeat business rolling back in.

When you put it altogether, we expect to see higher losses the first few years in these newer stores. But quite frankly, we didn't do, as Skip mentioned -- speaking of Texas, controlling each of these factors, we didn't do as good a job as we should have. I don't think we really had the folks down there applied the experience of the Company. And that is what we're correcting now, and I think it is a lesson that we have learned as we go into new areas.

But we are at a point now where we do feel like some of those stores with the credit losses out of line, we're going to go in and put some controls in place, and be more selective on who we sell to. And we're also going to do a better job with regard to what we sell. And we will work with the managers to train them. I think we are addressing each of the factors. But the reality is it takes some time to realize the benefits of that in this business. But I think we are optimistic that we know what to do. We've got a game plan, and we expect to see improved results down the road.

John Zolidis with Buckingham.

A question for you about I guess the cash flow. It looked like in the first quarter you had a 7% net income margin, which is really pretty high. And with about 10% square footage growth, I guess I would think that you would have a bigger cash position on the balance sheet, that you would be generating a lot of cash. I was wondering if you could talk to that?

And in a related question on the finance receivables, I'm sure you have considered this, but could you just talk about when you consider outsourcing some of the risks or securitizing those receivables, what considerations make you stick keeping those on the balance sheet versus diversifying or outsourcing that risk? Thanks.

Jeff, do you want to answer the first question and I will answer the second.

As far as the cash growth, we operate with a couple of revolving credit facilities. So any excess cash that we might generate would be used to pay down those revolvers. But we did during the quarter grow receivables by over $6 million, had CapEx of 700,000, grew inventory by 1 million 7, and also bought back some stock. So we didn't have any excess cash to pay down the revolver or to accumulate cash in the first quarter. That is basically -- I believe that answer your question on cash flows.

The cash really flows back into the build up in receivables or the reduction of debt is really where that goes. On your second question, we have considered and looked at different alternatives for moving some of these receivables off our balance sheet. A couple of issues there. One, and maybe this could be the biggest, we like to have control of our receivables. It allows us to deal with our customer in the way we think they should be dealt with, and that is by working with these customers. If we were to sell these receivables to some third-party, I'm not so sure we would still have that control over the receivables to deal with the customers.

Many folks in our business have a much different view of how they deal with the customer and are quicker to repossess a customer or charge them off or deal with them in such a way that you might sell one car, but that may be the end of the relationship. And that is not the way we do business. That is a big part of it.

Secondly, every time we have entertained a discussion about securitizations or other methods of moving assets -- receivables off the balance sheet, by the time the folks who expressed an interest in doing that understand the nature of our business and the Buy Here/Pay Here nature and the servicing aspects -- they could be so difficult -- the level of a discount gets to where the cost of money is just too high. We always look at it, and we're happy to entertain discussions, but we haven't found anybody yet that has figured a way to allow us to do that with the cost of funds that is anywhere near what we currently pay. Until somebody comes up with a better idea, we will keep doing it the way we are doing it.

Those are good answers. Thank you.

Bill Armstrong with CL King and Associates.

On sales, you had a big drop off in July. What was there besides the weather? Because you talked about how a typical customer comes on to your lot because his old car broke down, and he's got to have a car. If that is the case, it doesn't matter how hot it is, he's going to come on to your lot. I guess I was surprised to see so low a number. That is probably the lowest same store sales number you have had, at least since you have been public, and maybe forever possibly. But I was wondering if you could talk about that. What happened during July? Have you seen a rebound since that?

There is a couple of issues going on there, and the heat was probably the biggest. Everything was -- a lot of our sales take place on the weekend. And across the South, just as it happened, it was pretty brutal and people don't get out. But you're right, so many of our customers do buy as needed but not all of them.

In August, August marked our 25 year celebration. And we had planned -- it was August 11, we had a Companywide anniversary celebration. We did make the decision to, rather than have our big summer sales promotion that we typically have for the month of July, we really didn't want to take focus off of this deal we're going to have in August to recognize the Company's 25th anniversary.

So we opted not to do that. I would also, to be completely honest with you, tell you there was one other reason for that. And we did feel like that last year we probably had overemphasized sales somewhat in the month in July. And we look long term. And while we would like to have a great sales month, we said, you know, last July there was so much emphasis on sales we think we had missed the boat somewhat on our collection efforts, and that we weighed the entire decision not to have that big July promotion and it did make a difference.

The heat, combined with not having the same promotion we typically have had the past couple Julys, and the fact that customers are struggling probably more so than typical, it meant for lower sales in July.

I would add one thing too. Part of it I think is we're tweaking our inventory. And some of that was having to change over time. And by that, even though we turn our inventory literally once a month or less, we saw some things happening that the numbers backed up whn you do all the data mining, but also sometimes you are sticking up the phone and talking to your general managers and you're finding out.

And our customers' case kind of changed a little bit. And we needed to change our inventory mix. Really some of it makes total sense. Some of it was a stronger desire for fuel efficient cars. That makes sense. We started really expanding our purchasing of those vehicles. Hank put in place something for our buyers to incentivized them to get more of those, and we had some good results. So I get more of those cars on the lots.

But also what you're seeing kind of unusual is we had a strong demand for SUVs and pickups and the like, mainly because all of a sudden those cars had depreciated so dramatically over the recent months that our customers who have always wanted that vehicle could now afford that vehicle. We changed over the inventory and it took us a little bit of time to do that. We saw a less demand for our bread and butter cars, the Tauruses, the Mailibus and things. So we really kind of tweaked the inventory.

And to answer the second private of your question, yes, we are seeing sales get back to more normal levels. July was really an aberration. At the end of June, we actually were about 16% ahead on unit sales. And we don't report monthly numbers, but actually things were right on track. Snf In July it just fell off for all the reasons Hank mentioned, and maybe one or two we don't even know. But it was just one of those weird months that we had difficulty selling cars. But we don't think that is the way this for the long term. And again, we are seeing that change as the second quarter starts.

Right. Because that has never really been a problem for you that getting sales. Did tightened credit or underwriting standards have any impact?

It could, and over a short term it could because you will turnaway more people. You'll just literally turnaway more people. Part of that is you almost have to be there to understand what we're talking about. But it takes a few days for people to realize that certain cars are on the lots that are really desirable, and that will draw in those customers that you want. In the meantime, you have some customers that don't qualify for those vehicles as you tweak this inventory, which in the meantime could mean some turn downs of customers, or putting them in a lesser car is they qualify for anything.

Yes, underwriting can have an effect on sales. But I want to make sure that you all understand, we understand we're still in a risk business. We are going to sell cars to people who are credit impaired or no credit. That is what we do. Our customers have always been pressed. But we have to be a little smarter, particularly at our new lots, be a little tighter on that. (multiple speakers).

And that is the point too. When we say we're going to tightened up some of our underwriting that is on certain lots. That is not across the board. We've got some of our older, mature stores with 13, 14% credit losses, I'm not going to go in there and tightened up the underwriter. This is going to be more so in some of our newer lots (indiscernible).

Right. I guess on a related question, your average retail price -- your selling price is $7,900. That was up a lot. Does that make these cars less affordable, or was that a matter of what you mentioned before, taking some of those newer lots and increasing the quality and price point of the vehicles on some of those newer lots?

I think some of that increase came from -- we were working harder to pass through some more of our costs with the transportation side. With in general the price of cars being up more that when we price them. That is just going to push the prices up. Really the effect of the improved inventory on the smaller lots that is going to roll in over time. I wouldn't say that during this first quarter that had a lot to do with it.

Then finally there was a comment by the Chief Economist of Mannheim that they were seeing prices for cars at the Buy Here/Pay Here level coming down. Have you seen prices starting to improve?

I think, yes, we have, somewhat and that helps. As Skip mentioned, we are -- at the same time we're working hard to be more selective in what we buy. So we want to -- I guess we're out there cherry picking for the people we want to buy from. That is the expression we use. That is really where our focus is right now is buying good, mechanically sound cars for our customers.

I think what we have seen more than just the prices go down a little is more selection and the ability to cherry pick a little more, instead of just taking anything we could that ran and was (multiple speakers).

If the market is really tight that will -- and we are pressing on our guys out there to buy the cars -- we tend to end up with the marginal car we would rather not. so that is really our focus is to not buy those in the first place.

Does it make sense for you to increase your reconditioning capacity?

I don't think so. Generally that really didn't serve us well. I think what makes sense is if we see more selection out there is to take advantage of that and be more selective. We want to buy better cars on the front end that will will actually require less reconditioning then to step out there and say, hey, we will buy some rougher cars but fix them up. That just doesn't seem to work for us.

[Will Harky] with [Vantahala Capital Partners].

You mentioned some pretty different default characteristics in the new lots were [sold less]. Could you also share the operating margins at lots greater than five years old versus less than five years old?

We don't break that out in our quarterly disclosures, but I would tell you there're three factors that come into play. And those are gross margin, credit losses and SG&A. SG&A is for the most part controlled corporately. The older lots, since they tend to have lower credit losses, will tend to have higher margins on a pretax basis. It is makes common sense. And we do have goals and parameters that we expect from lots of different ages, and really different numbers of accounts which kind of is a better way to internally gauge it by size as opposed to age.

You typically will see a difference in those because of those major two factors, credit losses and gross profit margins will be different. The biggest single difference will be the credit losses. Gross margin tends to run in a narrower range than credit losses, old versus new lots.

I guess I am asking -- you gave a 9% I guess target difference between older lots and new lots, I think 17 versus 26%. And you said the new lots were running at 28 or 29 now.

That was actually certain lots. It depends on how you slice and dice it. It tends to be about a 7 point difference if you divide it six years and older and six years and younger, something like that, in the credit loss area. But those are averages and a lot of stores and you have them -- typically the older stores will be in a tighter range than the newer stores typically.

Right. But gross profit is about equal across them, so we could infer that there might be a 7% different in operating profit margin?

I don't know if I can answer that accurately for you. But I tell you what, if you want to call back off-line some time and Jeff and I will look at it. I don't want to give you an answer that I'm not sure of.

Sure. The next question, it looks like year-over-year for the quarter margins at the operating level declined by almost 3%. If your new stores were hitting plan on the credit losses, what would the aggregate decline on operating margins be?

Again, I would say you're asking for some specifics that I would be happy to work with you on, but I just don't want to give you those numbers without knowing -- haven't worked through them myself.

Okay. More generally on the competitive situation, are you guys seeing -- I know you have said it is a little bit different and tighter supply of cars and so on, but are you seeing other -- are other people struggling too, and how do you measure that?

We are seeing many of our competitors in almost all the locations we are in -- again that is in nine states and 80 towns or so -- 85 towns. Most of the competitors we compete with are local, and we do think they're having more difficult times. We have gauged that by a couple of reasons. One, they tend to be have less inventory on their lots generally, which indicates they are able to buy fewer cars, which again opens up opportunities for us, being a little better capitalized, and we think run our business a little better.

Secondly, and Hank and I both on a pretty regular basis get packages from folks who would like to sell their business to us. And they are not always in areas, or generally aren't in areas where we necessarily would want to be, but it is pretty indicative of the difficulties of this market.

Now having said that, the market as far as the customer base is expanding. It is a great market. It is bigger than ever, which excites us about the opportunities. But at the same time for the mom-and-pops -- for example, when we go up and spend 500 more per car on our wholesale side on 25, 30 cars a month in a specific lot over a ten month period that adds up. It takes a lot of capital to do that. A typical mom-and-pop can't do that. They can't have what is called that much money on the street. They need that money in their pocket. We think from a competitive standpoint this is great for us.

You would expect that the margin change will reverse itself in the next couple of years in a way that would be advantageous to you guys?

Yes, when I look at this Company over the last, however you want to do it, five, six, seven years -- if things -- margins tend to stay in a relatively narrow band. But there will be periods where we will be less profitable, and those that will be more profitability. But at the end of the day our historical levels of profitability I think will be where we expect to be.

Just two more quick ones. How much are you spending -- I know you have been talking about software investment. How much are you spending on that, and is that being expensed or is that going through CapEx?

Most of that is current expense. We do have some capitalized costs that relate to our new software and some hardware that was much needed. But for the most part those costs are in equal needed to help us run that side of the business.

Can you give me a level for that so I can think about whether that will be an ongoing expense or not?

Actually, that has all been factored in to our -- what we disclosed in terms of total SG&A expenses. And I don't have the breakout right in front of me for that portion. But it is all part of that 18% SG&A percentage we're projecting for the year.

Got you. Then finally, it seems like you have a pretty stable base of lots, and then you have expansion. Might you consider increasing your leverage some to increase return on equity?

Sure. (multiple speakers).

I have seen it creeping up over the last couple of quarters, but I guess a lot of -- you guys are under leveraged relative to a lot of I guess people that are a little bit more up the credit scale from you, but subprime lenders.

Right. So what was your question -- I'm sorry --.

I guess the question is would you consider borrowing 20, $40 million more and maybe taking some equity out? Buying back shares?

Yes, you always run through those scenarios where the allocation of capital and what is your best return based upon putting in a certain number of lots or buying back stock at certain levels. We run through those exercises on a regular basis. We have to consider that. We're not a Company that sits with a lot of cash in the bank, because we reinvest that in the growth of our Company. You have to balance that out with your liquidity.

If we were a different outfit that you didn't have to invest in receivables, which take a while to pay off, then you would certainly be out there probably buying considerably more stock than the Company has bought. But we have to measure that with our liquidity and the ability to borrow money, which we're very, very fortunate that we have good lenders that understands and like our business and like the risk profile that we have. It does give us the ability to expand our leverage, and we're looking at it.

Do you have a long-term target for your leverage ratio? I guess debt-to-book or whatever?

If we continue to -- forget stock purchases for a second -- and just continue to grow at the current levels we're growing then your leverage ratio would be pretty consistent with where we are. If we do something dramatic such as acquisitions, and I'm not suggesting there are any there to do, or significant stock purchases, yes, you could see that go considerably higher. It is not unusual for finance companies to be leveraged well in excess of 50% or more.

(OPERATOR INSTRUCTIONS). Bill Baldwin with Baldwin Anthony Securities.

Jeff, how much of your receivables were purchased this past quarter? If you put that out, I missed it, so I just need a little housekeeping question here.

We will have the 10-Q filed in the next couple of days, and the total purchase price for the lot is $460,000, which included the portfolio -- the fair value of the portfolio balance itself.

Didn't you all buy some portfolio over in Lexington?

We did back in March.

That was in the previous quarter.

That's correct.

Just this -- okay. That is all I had. Thank you very much.

Bob Bridges with Sterling Capital Management.

A couple of questions for you. I wonder if we could maybe talk a little bit about your expectations for profit per car trends looking out the next year or two, and just looking at the topics that impact profit that we discussed on this call in the last call. First, acquisition costs of cars seems to be improving with your sourcing efforts, but repair costs are hurting you.

You are seeing lower ability to increase prices going forward. And also with rising interest rates, just the payment for your customer it is, I imagine, going to become more difficult rather than less difficult for them to make a payment point that looks attractive. If you put all those together, what are some of your thoughts about how that should trend going forward, plus any other key points that you think are important to understand?

You have expressed in pretty short summary some of the issues we face. I would tell you when I look back over the last eight years or so and in this quarter and going forward, even with all those things affecting you different ways, I expect the level of profitability on a per car basis to stay in the same area, and that is in the $1,000 to $1,100 pretax per car.

And the reason I say that is -- and I look at even our lots -- particularly our lots that in the mid level of age, even with all these things we have talked about of gas prices and rising interest rates and all that stuff, their credit losses are relatively stable. And on the gross margin side I feel that we will keep our margins somewhere in the range of where our current expectations are, in the 44% range or so. SG&A, we'll be pretty constant. When I see those two big factors, I believe, stand relatively in the same range, I would expect we will earn the same amount per car.

Now we may not earn the same amount per car every quarter, but I think by the time you annualize these things, you'll see it more in this $1,000, $1,100 range. Even last fiscal year -- I don't have the number right in front of me -- which we did have a second quarter where we earned considerably less than expected, we earned about $1,000, or a little over $1,000 a car, $1,050 or thereabouts. Maybe $1,020 or whatever it was.

We operate in a pretty narrow band and I think we'll continue to do that. We are having some success at being able to raise our prices. Part of that -- is it something we do just because we want to have higher revenues? When we raise prices on these cars and go up a little bit on them to our customer, we're doing that was in the expectation that our customer could still paid for that car. But we're getting more of our costs in there. That makes you be slightly hopefully more selective on that customer that he can afford that extra couple of dollars a week.

If you look over the last two years or so our average weekly payment to our customers stayed between $72 and $75. A very narrow band of range, even with all these things going on -- car prices going up year-over-year, $400 or $500 a car. The term has gone up, but we're still right now at about 27 months. And I suggest to you we will stay very close to that car, if not slightly less or slightly more (indiscernible) that number. That is a long answer to your question.

No, that is all very helpful.

I think Hank will stay right in the area (inaudible).

You have talked before about how you set your pricing and your matrix. And I just want to dig a little bit on something you mention there with your durability to over time pick the points where you are going to maybe push pricing little bit higher. How would you score yourselves on your ability to handicap that and that at the right times, while you are trying to balance things like keeping the payment within a narrow band for your customer?

I think part of that is going to come with some of the information we have, where we can really look at vehicles and how they perform. I'm going to give you an example. Hank and I yesterday were looking at vehicles sold over about a one year period and how they performed a year later or so. Sometimes it is pretty obvious some of the cars that will perform better than others over time. Now that is based upon, for the most part it is going to be mechanical for the most part.

But for example, Hank and I were looking yesterday at 2000 Tauruses and 2000 Hyundai Elantras. The difference in the repo rates on those, again a Taurus and Hyundai Elantra, was dramatic, a 20 to 25% difference. Better on the Taurus than the Hyundai. So that kind of tells you some things.

One is, sell fewer Hyundais probably -- that model year for whatever the mechanical reason is. But also there's some cars that you can charge a little more for because they're going to be better cars or more likely to run. That might not necessarily be a Taurus, but it might be a Suburban or a Camry, or those things. We haven't got it all figured out yet. It is something we constantly look at. But we think on our pricing we will have the ability to be a bit more creative, which will allow us to get price increases where it makes sense, without having a negative effect on the credit loss.

Again, for example, a customer is more likely to pay and see the performance that vehicle through the note on, for example, a comparable Camry versus a comparable Ford Escort or Taurus or something else like that. You can see some differences in the vehicles and their performance. So we will try to price, not just according to what we pay for them, but also according to the value.

If you can just clarify one thing, in the Q&A here you have talked on a couple of questions about the difference between your older stores that are more mature, say over five or six years, and the ones are younger and what performance metrics are in your credit portfolio. But at the end of your prepared remarks, you have had a couple of comments about how some of the newer stores -- and I took that to mean maybe the zero to two-year-old stores -- are performing well. Could you describe for us how you look at those brand new stores, what some ranges or bands of performance metrics would be to earn a performing well rating as opposed to maybe just doing okay or doing poorly type assessment?

That is an assessment. I really don't have any specific numbers for you. It is just that we know that of the ones we have opened recently have done a better job with the inventory that we started out with have done a good job with consistent sales. The underwriting, if we go back and look at it, those were more in general subjective factors, but they are getting off to a better start than some we opened just a few years ago.

Which years was it that you opened the 15 stores in Texas or the 14 stores in Texas?

Really, mainly in late '03, and these are calendars, and '04. We have opened 14 stores in about an 18 month, two-year period. And when we look particularly at that group of stores, they have performed as a group worse than the new stores we have opened for the most part since then. And sometimes in a relatively dramatic fashion, which indicates unfortunately we did some things wrong then, but I think we are doing some things right now on how we open those new stores.

And sometimes you will be a little less optimistic on how a new store will do, but [not in] plan. By that I mean, we have got to work harder with these new managers, and don't think that they can do everything themselves from day one. We've got to nurture them and make sure the right infrastructures is there, such as we have done in Alabama.

Or for example, we opened a number of stores in the last year or so -- actually the last nine months -- in Oklahoma, around the Tulsa area. We have been in Tulsa for years, and now we are open in [Clairmore]. We will be open in Ponca City. What was the other --? Stillwater.

So you've got to have some built-in infrastructure, and the right word is have a buddy system that is already there for these stores. So we will continue to open stores in that fashion. In new areas we will have a lot of infrastructure there ahead of the folks, and fill in areas where the infrastructures is already there. I would tell you the stores we opened 2.5 years or so ago are behind the stores we have opened since then. That is what we have to correct.

I appreciate the detail in your answers today. Thanks a lot.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn it over for closing remarks.

Thank you very much for your questions. And if we didn't get to everybody, feel free to call us, and we will be happy to answer those questions that we can. We feel very comfortable going forward with the things we're doing. We obviously didn't have a chance to express everything that is going on here at the Company, but we're excited about some of the changes we're making. We're going to address the issues that we discussed to make things better. We certainly would like to have done better this quarter, but we're looking at things over the long term, and we think we're making the right moves to improve those things.

Again, we would like to remind you folks about our annual meeting in October, and our new Board member that we have as a nominee. And we look forward to seeing any of you all that can make it on October 18. Thank you very much.

Thank you. This does conclude America's Car-Mart's first quarter conference call. You may now disconnect.