America's CAR-MART Inc (CRMT) 2007 Q3 法說會逐字稿

Good morning, everyone.

Thank you for holding, and welcome to the America's Car-Mart third quarter fiscal 2007 conference call.

The topic of this call will be the earnings and operating results for the Company's fiscal third quarter ended January 31st, 2007.

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 one of part one of the Company's annual report on 10, on Form 10-K for the fiscal year ended April 30th, 2006 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.

And now I'd 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 of our third quarter results.

This release is posted on our website and is available on the usual financial sites as well.

We expect to file the related Form 10-Q later this week.

This morning, we have reported a loss for the third quarter of $50,000, which is less than $0.01 per share, for diluted share, I should say.

This result is in line with our internal expectations as we work through the higher credit issues that we addressed in our second quarter earnings release in conference call.

Since our second quarter conference call in December, we have commenced several operating initiatives to bring our credit losses back in line and increase our after-tax returns.

Although due to the nature of the credit business, it takes time to see the direct financial results of these initiatives, I can tell you that we are very encouraged by the progress we have made in the past few months.

In particular, the significant reduction in delinquent accounts, not just the over 30 day accounts but also all of the other delinquency measures which we use in managing our business, are showing marked improvement.

Further, although it's difficult to quantify at this time, we believe that the tighter underwriting standards we have initiated will result in improved credit losses in the future.

Hank will address our progress in more detail in the major initiatives that we have ongoing.

First, however, Jeff is going to discuss the third quarter financial results.

Thanks, Skip.

As mentioned in the press release, top-line revenues increased 1.8%.

The increase was principally the result of a 17.5% increase in interest income.

The 10.5% increase in our average retail selling price and an increase in the volume and pricing related to wholesale vehicles, offset by an 11.7% decrease in retail unit sales.

Same store revenue declined by 5.3% for the quarter as we focused on underwriting and collections and worked very hard to structure stronger deals and to attract the better, more qualified customer.

Our average retail sales price was $8,293 compared to $7,507 in third quarter of last fiscal year.

The average retail sales price for the quarter was up about 4% from our second fiscal quarter, which averaged $7,957.

Going forward, we expect to see some continuing growth in our average retail sales price when compared to prior year results, although we do expect a leveling off of the increases we have seen in recent quarters.

We saw a decline in unit sales for quarter due primarily to the fact that we have tightened up underwriting in the face of increased credit losses.

We have focused on making good deals and are passing on a higher percentage of the applications we have seen in the past to bring our credit losses in line.

Interest income is up as a result of an increase in our average finance receivable portfolio balance of about $16 million, as well as the effect of higher interest rates.

Our effective interest rate earned on finance receivables for the quarter was 12.7%, and this compares to 11.7% in the third quarter of last year.

It should be noted that we expect to see a leveling off of our effective interest rate in the future due to the slowdown of interest rate increases, as well as some state-specific decisions to reduce rates in our efforts to help our customers succeed.

For the third quarter of this year, our gross profit margin was 41.4% of sales, which is down from 44.3% in the third quarter of last fiscal year, and 42% for the second quarter of this year.

The reduced gross margin percentage resulted from higher operating expenses, mostly repair costs, as we worked hard to keep our customers in vehicles, higher volumes and prices for wholesale sales, which for the most part relate to cash sales of repossessed vehicles at breakeven, and the effect of selling a higher-priced vehicle.

Our purchasing agents are working very hard to keep our vehicle purchase prices down but have run into some headwind in the markets as overall demand for our core vehicles remains high.

For the remainder of this fiscal year, we continue to focus efforts on purchasing costs, retail pricing and repair costs and would expect to see gross margin percentage approximating or coming in slightly better than third quarter results.

In the third quarter, SG&A as a percentage of sales increased to 19.7% from 18.4% in the same period last year.

The increase related primarily to increased advertising and higher insurance costs.

Additionally, the overall dollar increase between periods was due in part to increased costs incurred to strengthen controls and improve efficiencies in our corporate infrastructure, as well as incremental costs associated with the opening of newer lots earlier in the year.

Total dollars in SG&A was in line with budget, but because our top line sales were below expectation, the expense as a percentage of sales is higher than our prior year period.

As we previously discussed, this investment in our corporate infrastructure is ongoing, although at a slower rate, and we will allow for, this will allow for us to support and enhance our operating execution at the dealership level.

We have not yet seen the bottom line benefits of these investments but intend to fully leverage these costs into the future.

It should also be noted that we incurred approximately $90,000 in non-cash compensation expense during the quarter, which is included in SG&A, related to stock-based compensation.

For the quarter, credit losses as a percentage of sales were 30.6%, up from 20.6% in the third quarter of last year.

We continue to aggressively address collections at all of our dealerships.

During the third quarter, actual charge-offs increased to approximately $17.4 million or about 33% of sales, compared to $9.3 million or 17.5% of sales for the prior year third quarter.

However, delinquencies at January 31, 2007, are down significantly from recent experience and thus far in our fourth fiscal quarter, we continue to see some positive trends as related to delinquent accounts.

At January 31, 2007, our 30-plus past-due accounts were 3.8% compared to 4.7% at January 31, 2006 and compared to 5.4% at October 31, 2006, the end of our second fiscal quarter.

The percentages for February and on into March have come down even further as we continue to make significant process at the lot level in our underwriting and collection efforts.

Also our allowance for loan losses is at 22% of finance receivables at January 31, 2007 compared to 19.2% at January 31, 2006.

This increased percentage equates to approximately $5.2 million in additional reserve to cover future credit losses.

We saw a decrease in total finance receivable principal balance of $4.5 million or 2.4% during the third quarter due to the higher charge-offs and lower sales levels.

Debt decreased by $5.6 million for the quarter to $43.3 million, due primarily to better overall inventory management including the inclusion of more suitable repossessed vehicles in our retail inventory.

Also as part of our infrastructure improvements, we have enhanced our cash management processes and procedures and will be focused on maximizing operating cash flows going forward.

Our debt level has continued to decrease after quarter end as we have seen strong collections and higher down payments during the tax refund season.

We're also seeing some benefit of our adjusted payment terms.

Capital expenditures were right at $600,000 for the quarter.

Additionally, we made $600,000 in income tax payments during the quarter.

We are in the process of amending our senior credit facility and we should have that completed within the next few days.

The amendments will loosen financial ratio requirements but will also increase our interest rates, which is to the revolver fluctuate monthly based on our financial performance.

Rates on the revolver could go as high as prime plus 1% versus a maximum of prime plus 0.5% under our current agreement.

The interest rate on our term loan will increase to 8% from 7.3%, but could come back down in the future based on operating performance.

Excess availability was $8.3 million at the end of the quarter and 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'll turn it over to Hank.

Thanks, Jeff.

As Skip mentioned earlier and as we discussed in our December conference call, we have implemented a number of initiatives to bring our credit losses in line.

First, with respect to underwriting, we have rolled out new payment terms tied to the economic life of the vehicle along with tighter restrictions generally at our newer lots and those lots that have experienced higher credit losses and we believe we are seeing stronger deals being made both with respect to better down payment and more realistic payment terms.

In addition, we have extracted significant customer data and profile information and disseminated this data to our lot managers to assist in the underwriting decision making.

Now, this will be an ongoing process as we develop and refine this internal data, which will give us a huge competitive advantage as we believe we have a large unique data base to draw from for making better front-end credit decisions.

And on the collections side, we have completed the training and retraining of our collection staff and we've added two collection specialists that are making a significant positive difference in the collections at lots that they have focused on to get collections in line.

As Skip mentioned earlier, we have other day-to-day delinquency benchmarks that we use to manage our business and we currently have more lots, upwards of 80% on standard, and in fact, the entire Company was, as a whole, as of the end of February, on delinquency standard.

And in addition, going into March, we have fewer accounts which are potential repossessions or write-offs than we've had in the last several months which, along with lower delinquency levels, this is typically and historically an indication of lower credit losses.

The past couple months, encompassing much of the tax refund season, it has been a more trying time to obtain adequate vehicle inventory at a reasonable price.

However, we have managed to stock our dealerships with a good mix, although we have had to pay up to get many of the more desirable vehicles and we feel like we are making good strides in our inventory management and we expect to see improvement going forward.

With respect to sales, we have seen the overall number of units decrease from last year, largely based upon our tighter underwriting standards.

And going forward, we expect to attract more of the, more qualified customers through our brand-based TV and radio ads in which we highlight Car-Mart's great history of great customer service and we will continue to air similar commercials throughout the rest of the fourth quarter.

Finally, as we mentioned in the press release, we have restructured our associate development department and are updating and improving our training curriculum.

The leaders of our training team have many years of experience in developing quality well-trained associates and we are increasing the number of training positions for management trainees and also improving the depth and quality of the training.

And as we stated in the press release, we will continue to invest in training in all levels of the Company.

All in all, we are pleased with the results and progress of each of the initiatives I've referred to and we will continue to press hard to improve in each of the areas we've discussed.

So now I'll turn back over to Skip.

Thanks, Hank.

There are many operational aspect that we didn't go into today, all of which are important in restoring and then growing our bottom-line profitability.

As I mentioned in the press release today, we believe we have huge upside with our existing store base as we increase profitability at our older, more mature lots and prudently grow the 35 or so newer store that we have.

Then, once we feel comfortable the success of our existing store base but not before, we will resume our new store growth.

As a Company, we celebrated our 25th anniversary this year.

We are definitely in this for the long haul.

We have a long-term outlook on our future and we are very, very confident about our success and growth going forward.

That concludes our prepared remarks, so now we'd like to move onto your questions.

Operator?

At this time, the 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 and to anything that may come up during the question-and-answer session. [OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the question-and-answer roster.

Please hold for your first question.

Your first question comes from Matthew [Hines] with Jefferies.

Good afternoon, guys.

Thanks for taking my questions today.

Absolutely.

In regards to the rise in your average retail sales price of your vehicles, is that just a result of your efforts to improve your fleet quality and also attract a higher quality customer?

Not so much.

Part of it is seasonal and that this time of year, these cars that are the core of our inventory really do cost a little more, sometimes $200 to $500 more for the same vehicle, in the tax refund season so that's a larger part of it.

We do see an increase somewhat in the quality of the vehicles and that is a smaller part of the increase in the average retail price.

We'd actually like to get it down a little bit or at least hold it level to make the cars more affordable for our customers.

And I would expect, Hank, if you agree with me going forward, we'll see those prices tend to seasonally start to go down a little bit.

I would agree with that.

They should soften up over the next couple months.

Okay.

Thank you.

And one more thing.

Have you considered any sort of centralization to your underwriting policies, I guess in terms of to be in automation type of system where underwriting decisions are made on an automated basis?

No.

I'll tell you, we do everything very decentralized.

I'm going to give you sort of a reason for that.

So many of our customers, you really need to be in front of them, meet them, see them, get to know them, develop a relationship, understand their issues, whatever they may be.

Their prior credit history, which is always going -- tends to be something that has an issue in it.

That's one of the reasons that an advisor pays our lots so we put a lot of emphasis on the credit app and the interview at the dealership level.

Having said that, part of our mining our data that that we developed throughout the Company, that is some centralized type information that we disseminate out to the lot levels and will continue to do that and do more and more of that over time as we develop more and more better data and predictive factors.

But I wouldn't see in our future a centralized decision making, punch the key on a computer and is it a yes or no?

As Hank can tell you after many years in this business, so many of our applications of a good customer and a bad customer may look on paper very much the same.

But how that person handles his bills with Car-Mart and also frankly how well we're able to collect from that same customer is critical.

Matthew, I would add to that is I think the most significant thing you'll see in the near future out of us is we're going to be better equipped to really look at our customers profiles as we mentioned before and we'll be feeding that information back to our managers a lot more effectively.

So I really, we feel confident that we're going to improve their batting average on the decisions they make.

So right now, our game plan is still going at it from a decentralized process but I think kind of centralizing our data here provides them a real edge.

Okay.

Thank you very much.

You're welcome.

Your next question comes from [Isaac Schwartz] with [Robaty.]

Good afternoon, gentlemen.

Good afternoon, Isaac.

Hank made the comment that the number of units sold decreased due to tighter underwriting standards.

So I was wondering from this, can we infer that the, that the decrease really came at the problem stores and therefore the stores that had been performing well sold as many, which would of course mean that stores that have been having some trouble sold many fewer than merely being down 10%?

Isaac, I would tell you there, actually, we have seen credit losses rise, unfortunately across the board and so we've tightened up everywhere.

So I would say that our unit counts were down pretty much across the board from this tightening up.

It wasn't just isolated to the newer stores.

Great, thanks.

You're welcome.

And then back to the prior question about the average retail price, does any of that perhaps also come from, if only some of it is from fancier cars being sold, could also some of it be from like the remnants of a Katrina effect where there is just a tighter market and -- ?

Because you mentioned, Skip mentioned that the tax issue and then accounting for some of it and mentioned a slightly more expensive car accounting for some of it.

Could some of it just be from [extranalities] in the current state of the used car -- of the market for used cars that you guys?

Without a doubt.

I mean the core vehicles that we stock and sell tend to be harder to find generally and is a true demand and supply, Economics 101.

There's a huge segment of our population that cannot afford new cars and newer used cars and so there's quite a bit of demand for these cars that are six or seven years old with 75, 100,000 that are good mechanical and cosmetic cars.

And at the same time, I think some of those core cars historically have come more from the traditional domestic manufacturers, Ford, General Motors and Chrysler.

And obviously, we all can read in the paper about what's going on with them.

Now, I think that is my own opinion here.

I think that part of the problem will solve itself over time as others fill the gap, the Toyotas and the Nissans of the world.

What Ford doesn't sell, somebody else will.

People are still buying cars.

But that is an external factor.

I would tell you, Katrina, is certainly, I hope that's behind us, but there are some external factors in the market that still affect the price of cars.

And thank you.

One last question, then.

I was hoping that you could expand on the comment you made in the call that's in the press release, changing the underwriting practices to more closely match the economic life of the vehicle.

Could you maybe give us a unit economic example of that?

What was a prior sort of payment terms and what have they been adjusted to?

I assume that that means bringing the total number of monthly, the life of the loan, down.

Is that -- ?

Jeff, you want to -- ?

Yes.

That's basically what we're trying to do is to make sure we don't set a person up with anything but success in mind when they leave that lot.

And that would tend to bring down an average term, although we are fighting with the higher price at the same time.

So we're doing our best to keep that term down in face of some rising prices at the retail side, but yes, the idea is to make sure that by the time that car gets paid for, it still has a good life left in it and that has resulted in some decreases in terms out of the gate.

Thank you very much.

Sure.

Thank you.

Your next question comes from [Akeel Batia] with [Bally Asney] Asset Management.

Akeel Batia, your line is open.

Your next question comes from [Quentin Maynard] with [Moorehead] Capital.

Hey there, guys, how you doing today?

Fine Quentin, how are you?

I'm doing great.

Just got a few things wanted to run over here.

In Texas, do you know what the delinquencies were looking like in Texas this quarter?

I would tell you, we don't have specifics that we're going to give out in the call, but the delinquencies have significantly improved in all our areas of the Company, all geographic areas, all states, including Texas.

Okay.

And I just wondering also in Texas, have you had any manager attrition or is everybody still there?

Are the units, you still on plan to keep those units open or have you thought about potentially closing any of the stores?

Since our last call, all the locations are still there and all, I believe all the managers there since our December, I believe that's right.

And we are evaluating all of our underperforming stores and we have not made any decisions on what we're going to do in that regard.

And when we do, it will be in the next few months, probably.

Between now and the end of our fiscal year, but we're not in a position right now, Quentin, to tell you that we are.

Okay, all right.

Just a couple other quick things.

As far as new loans, can you give us the average interest rate on new loans?

Jeff?

Of course that varies by state, Quentin.

Sure, sure.

I think you said in the last call that you're going to 10% in Texas?

Yes, Texas is 10% and it varies by state.

Arkansas is at 11.25%.

We've got a few states at 15% and a few states at 19%.

The blended rate for the quarter was 12.7%.

Yes, the blended effective rate for the quarter was 12.7%.

That would probably be fairly close to the fourth quarter anyway, wouldn't it?

Yes, should be close to the fourth quarter, right.

Got you.

And any consideration to stock repurchase?

Yes.

[laugher] All right.

But frankly, I mean, when we need to work with our lender on that obviously when you have a couple of covenants that you're getting amended lenders rightly so are concerned with the use of proceeds of any of the financings and so it's a consideration we have to take along with our banks.

Got you.

And even though you're amending those covenants, currently you're in covenant, is that correct?

Well, we have some issues with some covenants and because of that, we're getting some amendments.

Oh, okay.

As opposed to just waivers.

We're going to amend to make them --

We will continue to have one waiver on the collateral adjustment percentage and then the other covenant violations will be amended.

But this is, we feel like a few good months of good, solid results and we won't see an issue with these covenants.

Okay, all right..

Have you disclosed what the other covenant violations would be?

We have not, simply because the amendment will take care of that.

The fund to debt to EBITDA and the fixed charge coverage ratio are the two ratios that we're having amended in the new agreement that you'll see filed in the next couple of days.

Great.

All right, guys.

Thank you so much for that.

Good luck next quarter.

Thank you.

See you.

Your next question comes from Bill Armstrong with C.L.

King and Associates.

Good afternoon Skip, Hank.

Hey, Bill.

Three months ago you said you wanted to get that average new loan down to about 24 or 25 months.

Is that where you are now or are you still working towards that?

I think we're still working towards it.

The average prior to refinances and Jeff, correct me if I'm wrong, is about 25 months.

And then if you average in also the refinances we do, that extends the term out a couple months to around 27 months.

But the goal of these payment terms is to at least level that off, if not bring down the term, the thing that as Jeff mentioned, we're fighting against a little bit is that as the car price goes up, obviously the way we've structured this, the term does go up, so we, as opposed to seeing a significant decrease, we might just see a leveling off of that term, about 27 months.

Right.

So that led to my next question.

If you're trying to get that loan term down but your average price is going up, obvious the payment's got to go up unless you're getting a bigger down payment so you've got to juggle all that.

And I think you kind of indicated that you're starting to get bigger down payments but is that enough to make a difference?

It's not all in the down payment, but you're right.

Obviously, it's got to come out somewhere.

But we have seen more of the down, also more what we term our special payments and accelerated payments up front.

And then also we have had an increase in payments which should result over time as more of those roll in.

It's really improving our cash flow.

Okay.

I guess two major triggers for consumer defaulting on a loan is either mechanical issue with the car, or the consumer's personal circumstances make him unable to pay.

Are you seeing any change in the trigger?

And is it as your loan losses are increasing, are you seeing more mechanical breakdowns or is it more from the consumer having problems?

That's a really good question.

And you're exactly right.

Mechanical issues are certainly a big component of when a vehicle becomes a repossession.

I would say that obviously because we're tightening up, we recognize that with the higher payments and longer terms and all that, it takes a little more of a solid customer to get the car paid for.

So I would tell you that we probably have seen more issues from the customers' side of late than we have historically, and so with that in mind, that's why we've tightened up.

But the cars themselves are not getting worse in quality?

No.

Okay.

Are you seeing resistance to the higher price points from customers?

I would say some more of our resistance at this point is more from us -- is our willingness, who we're going to put in that vehicle.

We need to make sure they have the means to pay for it so no, not really.

Is there any way you can get that average price back down?

This is the first time you've broken $8,000 and you actually broke through it pretty solidly.

Three years ago, you're only about $6,000 average.

Is there any way to bring that average back down and still have acceptable quality vehicles?

Yes, there is.

Obviously, we have a number of cars we sell below that point and we do need more of them and that's why we're focusing on our purchasing, working with our purchasing agents, exposing ourselves to more contacts, more auctions, more new car stores, more wholesalers, etc. so we can look at more vehicles.

And we just, that side of it really comes through the purchasing department.

We need do a better job buying cars.

Okay.

Thanks.

Thank you, Bill.

Your next question comes from [Clark Sledge] with [Sterne Agee and Leach].

Good afternoon, guys.

Skip, I'm not sure that you didn't get a question a minute ago about this and sort of allude to the fact that you weren't going to be specific, but you've indicated that you've noticed some improvements in collections, and I wondered if you could quantify that any since the end of last quarter.

Yes, we did indicate, I'm not sure which one of us did, that since the end of the quarter in February and so far in March, that our, particularly our over 30 day delinquencies had continued to decrease, and we typically have not put out monthly numbers but I think we ended the quarter at 3.8 and I would say that the end of February, it was even a significant improvement over that number so we feel good about where the trend is on delinquencies.

That's about all I can say right now.

Okay.

All right.

I appreciate it.

Your next question comes from [John Langston] with First Dallas Securities.

Hi, guys.

How are you all?

Hi, John.

Thank you.

You all certainly made some good progress this quarter as far as bringing those 30-plus days past due accounts down below, to 3.8%, what seems to be kind of the lowest point it's been in some time.

And was wondering what your restrictions are on bringing that -- bringing your allowance down to maybe from -- it's historically been around or for a while now been below 20%, a also over 22% here.

What are your restrictions on bringing that down and what might cause you all to bring that allowance back down a little bit?

We don't have any restrictions on either bringing it up or bringing it down.

We look at the loan losses every quarter and do a mathematical analysis, calculation of the pool, and factor in any external factors that need to be factored into that mechanical calculation to come up with our best estimate of what that reserve needs to be.

We've seen such a large increase in units returned over the last six-plus months that the 22% is the right number at this point.

We hope that units return to go down in the, and that reserve can come down in the future.

We're not banking on that, but it would certainly be nice to see that in the delinquencies indicate that if we stay at the current delinquency rates that we'll certainly take a look at that and if we can bring it down in the future, we will.

But that's something we look at every quarter and we'll look at again in the end of April.

Okay.

Okay.

And as far as your margins on cars, I mean, is that solely a function on the product on the lots?

Or is it, I know you all have spoken a little bit to it already.

But is there something else out there that besides just the product, that would bring those margins back up a little bit?

I think there's a few things.

The biggest single issue is the price of the vehicle, what we pay for the vehicle and how much we feel we can reasonably mark that vehicle up for retail sales.

That's the biggest single factor.

But within that, there's a number of other factors such as the repair costs, transport costs, some of our efficiencies and delivery of these cars to the lots, and certainly one big one is buying less expensive cars and working harder to get those.

All those things do add up to making a difference on the gross profit margin and we're working really hard on those things that we can control.

Some pricing we can't but we can sure expand our horizons on where we buy cars.

We can work harder to train our agents better.

We can lower our transport repair costs, and one thing we are doing right now is beginning to be a positive factor.

It turns a negative into a positive, frankly, is to take more of our retail, our repossessions into our retail inventory to make better decisions on a repossession instead of wholesaling that vehicle out.

If it's cosmetically sound and mechanically sound, maybe we spend a few dollars on that car to get it front-line read y but put that car back in inventory, and we've seen an increase in that over this quarter and we're going to continue to see that on a percentage basis.

And that becomes less expensive inventory to put on the lot, obviously, since it's already had some payment down on what you paid for it.

So we're seeing our percentage of repossessions into the retail inventory increase and that should help us going forward.

Okay.

Great.

Thanks a lot, guys.

You're welcome.

Your next question comes from [Bob Bridges] with Sterling Capital Management.

Good afternoon.

Good afternoon, Bob.

In the -- in your comments, remarks earlier, you had indicated that the dollar change in SG&A, I think the two main areas that impacted the change were in advertising costs and insurance costs?

Yes.

And then your -- the bullet points in the press release, you called out several things, specifics in your infrastructure improvement including advertising, also the training costs, extra collectors, changes to your purchasing.

Are any of those other things getting run through SG&A in a significant way?

And if so, I would assume they're not having a material dollar impact or imagine or some of those up in cost of goods?

No, they're all included in SG&A.

And that is, that infrastructure increase that we talked about, those costs are people costs in those areas and that is part of the overall dollar increase we're seeing in SG&A.

But the two biggest are the advertising and the higher insurance costs in here?

Yes.

Right.

Those are the two biggest single items and then we've got several that relate to infrastructure that crossed categories.

Do you have a plan over -- the quarter ago you started some of these initiatives and some of them might go back older than that.

Do you have a sense, kind of on the 12-month basis, what the incremental spend might be in those areas that you called out in the bullet points in the release like the training and the extra collections and so forth?

I have to tell you, we do.

We're still working on some budgets for this.

We don't have exact numbers.

I would expect to see some increase in our training budget obviously, as we bring more trainees into the fold.

So it's not just the books and the trainers but it's the additional payroll for more management trainees and that goes in other areas as we add specialists here or there and perhaps in other areas of our Company where we do have to expand a person or two.

It's hard for me to give you a number right now.

I think you won't see dramatic increases because of the amounts that we do spend on those, we will try to be very efficient in our use of folks and systems.

But I would tell you probably at about 3 months, we can probably give you a little better color on that, Bob.

It would be complementary.

I mean it just looks like on a dollar basis, the SG -- most of these costs or all of these costs are getting run through SG&A line.

On an absolute dollar basis, it does not seem to be moving around a whole lot.

It's not that dramatic.

You're right.

I would hope that the leverage you'll get as these pay benefits will really manifest themselves down the road.

I know you do, too.

Yes, absolutely.

If we look at the sales line, is there any range of same-store sales growth that you would expect in the coming quarters that you'd like to articulate?

Or is it more of a wait and see as you're kind of transitioning your pricing and your terms with your customer and these tougher credit standards?

Yes, we have reduced the expectations of our lots generally.

In other words, to give them a little bit lower sales expectations to the hope to drive better deals as opposed to having more deals.

But as these other things take hold, the underwriting and collections, I'm not going to say we're going to loosen things up but we will look at selling more cars but along these same terms, the tighter underwriting.

That's part of the other drivers that we're using to get these better customers hopefully to the lots, the advertising and things such as that, better and more inventory at the lots to drive customers, but without at the same time changing underwriting standards so yes, eventually, we expect to see our lots begin to grow their sales.

But I'd be hard pressed to tell you right now when I expect to see that in any dramatic fashion.

Sure.

Just one more looking back each quarter at the relationship to what you charge off in the quarter as it relates to how much you provisioned in the quarter.

I'm looking back about three years, 3 1/2 years, and it looks like most of the time you're only charging off around maybe 75% to 90% of the dollars that you provision.

I noticed in this quarter, you actually charged off more than what you provisioned.

Is there any method or rationale as to why that relationship has kind of inverted?

It seems like that's a liberalization of what has been your pattern up to this point.

That directly relates to the growth or the shrinkage of the principal balance in AR.

When your AR balance is growing, a good percentage of your provision relates to charges for that increase in the AR.

I see.

So when we had a decrease in the AR this quarter, we saw just the opposite effect.

Got it.

So it's formulaic.

Yes.

Super.

Okay.

Thanks.

Your next question comes from [Ed McCormick] with [Mica Partners.]

Hey, guys.

Thanks for taking my question.

I was hoping you'd go a little bit into what -- what examples of what you've done to tighten your underwriting standards.

And is this something you've done at a corporate level or is it, do the tightened underwriting standards differ from location to location?

We put it, some specific controls on the newer lots and also some select lots that had significantly higher credit losses.

And in those cases, we do have some defined criteria for a customer profile and I really -- I don't want to get into what that profile is.

But they do have some criteria to work within.

And if the customer, the deal doesn't conform to those criteria, they do contact their area manager and talk through these so there are some strict controls put on certain lots.

Across the board, at all lots, we've examined kind of a customer profile at the stores and really dealt individually with the managers and as we said, tried to feed back some information to them, to educate them on where they need to be tightened up.

But there haven't been specific controls put on those lots that we feel like are already performing well.

And why do you think some of those lots got out of control?

Was there something specific about the lot location, or -- ?

Not the location.

I would say that it varies in different circumstances.

But in general, a lot of it had to do with the overall experience of the manager.

Most, as we said, most of the issues came from the newer stores and we feel like that's probably the most significant difference is just in general the expertise of the manager in making the decision.

Of course, also one of the factors we look at is with higher credit losses, it's not all the decisions that's made on the front end.

We also have to examine the collection practices at the individual stores and in some cases, we may feel like their collection procedures are what are lending to higher credit losses and not just the underwriting decision so really, we look it on a store by store basis.

How can the collection procedure impact the credit loss?

The relation -- the overall relationship that they have with the customer.

Keep in mind that we are buy here, pay here, and that means most of our customers do come in, make their payments in person.

We form relationships with them so when they do have a job change or mechanical failure, that we have a good rapport with that customer and that we work hard to solve those problems.

And the reality is sometimes we have some stores, some managers that do a better job at that, at developing that relationship and also work harder at solving the customers' problems, and our goal is to get all of our lots at that level.

Okay.

And then one final question, you mentioned that some of your customers are struggling.

Is there a particular reason, say layoffs at a particular, in a particular region or an industry that's struggling in your area, or is it more of a general malaise?

How would you characterize your customers' problems?

It's not something that some occurred overnight.

I think it's something that's happened in this business over the course of the past several years, that just quite frankly, the costs of a vehicle to get them back and forth to work, has risen faster than their wages have.

So I do think that these days, for many of our customers, staying in a dependable vehicle is a bigger challenge than it was a few years ago.

As well as all their other expenses.

Absolutely.

I do think that a good, significant number of our customers do struggle more right now than they did in years past.

It's more of a wage stagnation than it is, coupled with a maybe a cost, an inflation, a cost inflation.

That's right.

You could characterize it that way.

Thanks, guys, appreciate it.

You're welcome.

Your next question comes from [Adam Mizel] with [Aquifer Capital].

Hi, guys, how are you?

Hi, Adam.

A couple questions.

First, high level.

Is the current turmoil that's besieging the subprime consumer mortgage market a lagging or leading indicator of what you're going through?

I'm not so sure it's quite that relevant, really, for our folks.

Most of our folks generally don't have mortgages and homes, have their own home.

I don't think they're a part of the rush to those subprime mortgages and all the tweaks that are happening now with the higher rates, and those teasers that now turn into 12% rates.

We don't really see an effect of that.

I mean when we have a delinquency issue or a default issue, it's very, I can't tell you if I've heard of an instance where it had anything to do with their -- with mortgage issues.

And our bankruptcy, Jeff, remind me, bankruptcies have been very flat for us over the last 7 or 8 months.

Okay.

Second question, as you've described in some totals, a rising cost of the car, a changing and more stringent set of underwriting standards, a new and more stringent collection process, and you aggregate all that out.

It sure sounds like your typical customer, and I understand there's no such thing, but as best you can, is changing, and I'm trying then to understand, if I thought to compare and contrast a year ago the demographics and the economics of a Car-Mart customer versus where it is today, because it's got, it sounds like it has to be different.

It is changing a little bit and that is still for the most part, the paycheck to paycheck customer.

But as we go through our profile and look at those customers that are successful in paying off their cars, there are some that -- and this is put together a lot of -- put aside other factors, but just on the income factor.

Those that are not making enough, the fact that they're going to drop off the bottom end of our ability to pay for these cars.

I mean there's some that just cannot make enough money to pay for the cars.

They'll have to drop down to another level so there are some that can't afford a car at its current price.

So that's a change we'll see a little bit and that's why again not to say we're going upscale but to get a slightly more solid customer who can afford this $8,000 vehicle, is a different customer than the one probably a year and a half ago that -- when the vehicle cost $7,500.

Where was that customer previously getting his vehicle?

Does that mean you have a different set of competitors today or a somewhat new set of competitors?

The market we've discussed is a huge market.

I would assume there would be some folks that are having at the higher end of this strata, are having even more credit problems, whether it be credit card debt or others, and they don't qualify for certainly new car financing or any indirect lending at the newer level used cars, and they will drop down to our, the Car-Mart level, if you will.

And that's part of the customer we're trying to get.

It's hard to specifically identify that customer through our advertising and better vehicles and those types of things.

Because we know at the bottom end, you will probably lose some.

But again, this whole customer strata of the -- in the buy here area is a growing number of folks and and it's not just the immigrant population.

It's a huge population of folks and we hear all sorts of numbers bandied about.

But we know in every one of our markets, there's a high demand for these vehicles.

Are these types of insights coming out of your new data analysis and your new systems, or is that yet still to really flow through into the underwriting of the business?

Part of it comes out.

I mean you can look at -- there's a lot of factors that we're using in our customer profile but certainly one of them is weekly take-home pay.

And as you see those that have a lower level of take home pay and the average weekly payment being a certain amount, there does come a point where you recognize that customer really can't afford the car so that sort of takes some of the bottom end out of our customer base.

Okay.

Thank you.

Thanks, Adam.

Your next question comes from David [Berchler] with Stephens Incorporated.

Hi, guys.

Just a couple questions here.

When I look at your -- at the loss rate, 30.6% in this quarter, up from an effective rate of roughly 27% excluding the allowance increase in the second quarter, I mean, do you feel that, I mean, the losses have basically peaked at this point?

How do you feel about them going forward and what's your comfort level with the portfolio on maybe those loans that were written 6 to 9 months ago, if they're kind of peak losses around that nine-month period.

Well, obviously as we've talked through here today, we've talked a lot about how through some of our initiatives and intervariationally, our delinquency numbers have come down.

And so that in and of itself gives us a level of confidence that we're going to see our credit losses trend back down.

So obviously, we certainly feel like they have peaked.

So we sit here today very optimistic as we look at our current state of delinquencies.

Do you think it will be -- it will probably be a gradual, I'm guessing, move down, rather than -- ?

Yes, that would be realistic.

We hope that through this quarter and some through the next quarter, that as we go into our next fiscal year that our portfolio will probably be in as good a shape as it's been in recent history.

And the things that will begin to tell us, as Hank mentioned, are the lower level delinquencies, lower level of units for repossession, and if we maintain what we've seen in the last couple months and through this quarter, this most recent quarter, then yes, I would agree with Hank, I'm very optimistic about the status of our portfolio and credit losses going forward.

Okay.

And then one other question on the sales side.

Selling the cars through [Co-part] -- are you still seeing some benefits through that?

Higher prices and maybe where you even make a little more on the cars?

I really can't speak specifically just to those that we sell through Co-part.

We did some months back make a decision where a lot more of our wholesale, as a matter of fact, most all of them now, were selling through various auction houses including Co-part as an online.

And right now, we do feel like that was a good move for us.

It obviously, it's an efficient way for us to wholesale these vehicles and so we feel good about that decision and we're going to continue to stick with that.

Okay.

Thank you very much.

Thanks, David.

Your next question is a follow-up question from Quentin Maynard with Moorehead Capital.

Actually, guys, I had it answered, thanks.

Your next question is a follow-up question from Bill Armstrong with C.L.

King and Associates.

Hi.

Earlier, I forget who said it, but you said you're seeing an increasing percentage of repossessed vehicles that you're now re-retailing.

What is that percentage, about out of every 100 cars that you repo, how many would you be able to put back out on your lot?

You know, Bill, we'd rather not disclose that.

We actually, believe it or not, have a couple competitors out there that might listen into these phone calls.

Bill, I would tell you on that point, though, this is not so much a really a change of practice.

One of the things we're seeing is because over in recent time we have sold a nicer car, that really kind of changes the situation, we're seeing more vehicles that we can put back out there.

And we also, because we have so much more in these cars, that we're taking a much harder look at these and doing more repairs to these vehicles that we did in years past so I think the point is, we'll see that percentage that Skip won't tell you, we'll see that number go up.

And you've got competitors who resell repo'd cars three, four times sometimes, don't they?

At least, yes.

At least a couple, anyway.

And my recollection was that the, and I know there's a broad range, but the average point at which you get a default is around 10 or 12 months?

Is that still -- ?

Yes, it's 11 to 12 months.

I would think unless the vehicle has really gotten beaten up or they put a lot of miles on it, there's probably a good chance that you could clean it up and resell it.

Yes, you're right.

We're seeing more of that.

Okay.

All right.

Thanks.

Thanks, Bill.

At this time, there are no further questions.

I would like to turn the conference back over to Skip Falgout for any closing remarks.

Thank you, operator.

We appreciate your questions today.

Again, as we said, we're very optimistic going forward.

We think these initiatives we put in place are beginning to take hold.

We've got a ways to go, but we're very optimistic and confident that we've made the right moves, and we look forward to talking to each of you all in the future and thank you very much for listening in.

Good-bye.

Ladies and gentlemen, this concludes today's America's Car-Mart third quarter fiscal 2007 conference call.

You may now disconnect.