America's CAR-MART Inc (CRMT) 2007 Q4 法說會逐字稿

Good morning, everyone. Thank you for holding. Welcome to the America's Car-Mart's fourth quarter and fiscal year end 2007 conference call. The topic of this call will be the earnings and operating results of the Company's fiscal fourth quarter and fiscal year ended April 30, 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 the management's comments today may include forward-looking statements, 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 one of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2006 and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Speaking on the call this morning our Skip Falgout, Car-Mart's Chief Executive Officer, Hank Henderson, the Company's President, and Jeff Williams, Chief Financial Officer. Now I'd like to turn the conference call over to the Company's CEO, Skip Falgout. Please go ahead, sir.

Thank you. Most of you have already seen our press release this morning of our fourth quarter and year-end results. The release is posted on our website and is available at the usual financial sites as well. We expect to file the related Form 10-K within the next couple of weeks.

This morning we reported income of $0.17 per diluted share. This result excluding the tax related benefits was in line with our internal expectations. As stated in the press release, the income amount includes $0.05 per diluted share which resulted from the favorable resolution of income tax issues that Jeff will discuss in some more detail later.

This year has been a difficult one operationally for Car-Mart but we believe the hard work and difficult decisions we have been making will serve us well going forward. We expect it to return to quarterly and long-term profitability in this fourth quarter as our numerous initiatives begin to take hold. We aren't done yet nor have all the things we've been doing gained traction, but we do know that we are on the right track.

Hank will address our progress in more detail and the major initiatives that we have ongoing. First, however, Jeff will discuss the fourth quarter and year-end results.

Thanks, Skip. As mentioned in the press release, topline revenues decreased 5.1%. The decrease was principally the result of a 17% decrease in retail unit volume offset by an 8% increase in interest income, a 9% increase in the average retail selling price and a $1.4 million increase in whole sale sales in the fourth quarter. Same-store revenue declined by 9.5% for the quarter as we continue to focus on underwriting and collections and work very hard to structure stronger deals including higher downpayments and shorter terms. Our average retail sales price per unit was 8,384 compared to 7,701 in the fourth quarter of last year. The average retail sales price for the quarter was up 1.1% from our third quarter's average of 8,293. Going forward, we do expect to see some continuing growth in our average retail sales price when compared to prior year results; however, we do expect a continuation of the leveling off of the increases as we've seen in recent quarters.

The decline in unit sales for the quarter was due primarily to the fact that we have tightened up underwriting in the face of increased credit losses. Interest income is up as a result of the effect of higher interest rates offset by a slightly lower average balance and finance receivables. Our effective interest rate earned on finance receivables for the quarter was 12.73% compared to 11.7% in the prior period. It should be noted that we do expect to see a leveling off of our effective income 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 fourth quarter of this year, our gross profit margin was 41.5% of sales, which is down from 43.2% in the fourth quarter of last year and up slightly from 41.4% for the third quarter of this fiscal year. The reduced gross margin percentage resulted from slightly higher operating expenses, mostly repair costs, as we work to keep customers and vehicles; higher volumes and prices for wholesale sales, which for the most part relate to cash sales of repossessed vehicles and breakeven; and the effect of selling a higher priced vehicle.

Our purchasing agents continue to work hard to keep our vehicle purchase prices down. We have seen some recent success but overall demand for our core vehicles does remain high. We will continue to focus efforts on purchase costs, retail pricing and repair costs and would expect to see future gross profit margins approximating or coming in slightly better than the fourth quarter's results.

In the fourth quarter of this year, SG&A as a percentage of sales increased to 19.4% from 18.5% in the same period last year due to the decrease in sales between periods. Actual SG&A dollars were down 1.8% or around $200,000 for the quarter. The decrease was primarily related to lower payroll costs and lower discretionary expenditures offset by some higher advertising costs.

The investments that we made to strengthen controls and improve efficiencies in our corporate infrastructure have, for the most part, been implemented and we are now poised to leverage these costs into the future by being able to support higher sales volumes. It should also be noted that we incurred approximately $90,000 in the fourth quarter of this year in non-cash compensation expense related to stock based compensation.

For the current quarter, credit losses as a percentage of sales were 26.6%, up from 19.6% in the fourth quarter of last year, but down from 30.6% in the third quarter of this year. We continue to aggressively address collections at all of our dealerships. During the fourth quarter, actual charge-offs increased to approximately $15.4 million or about 29% of sales compared to $9.7 million or 16.9% of sales for the prior year fourth quarter. However, delinquencies at April 30, 2007 are down significantly from recent experience and thus far in our fiscal year 2008 we continue to see positive trends as related to delinquent accounts.

At April 30, 2007, our 30 plus past due accounts were at 3.4%. This compares to 3.7% at April 30, 2006 and compares to 5.6% at July 31, 2006; 5.4% at October 31, 2006 and 3.8% at January 31, 2007, our previous three quarter ends.

Percentages for May and into June are in line with the year-end percentages and we continue to make significant progress at the lot level in our underwriting and collections efforts. Also, our allowance for loan losses is at 22% of finance receivables at April 30, 2007 compared to 19.2% at the end of last fiscal year. This increased percentage equates to approximately $5 million in additional reserves to cover future credit losses on a net receivable base which is $10 million less than at the end of our last fiscal year.

On May 8, 2007 we received notification from the Internal Revenue Service that the Company would not be assessed any additional taxes, penalties or interest related to our ongoing audits. Based upon the favorable notification, the Company recognized $500,000 of net income in the fourth quarter for the elimination of associated tax reserves. This was $0.04 per share. Additionally, a favorable state tax law change had the effect of decreasing the Company's effective income taxes by approximately $150,000 in the fourth quarter or about $0.01 a share. Going forward, we do expect our effective income tax rate to approximate our historical experience of 37%.

We saw a decrease in total finance receivable principal balances of $6.6 million or 3.5% during the fourth quarter due to the higher charge-offs and lower sales levels. Our overall debt decreased by $2.5 million for the quarter to $40.8 million due primarily to the decrease in finance receivables with lower volumes and also associated with higher downpayments on new sales.

Our debt to equity stood at 33% and our debt to finance receivables was 23% at April 30, 2007. Also as part of our infrastructure improvements we have enhanced our cash management processes and procedures, and we will be focusing on maximizing operating cash flows going forward. Our debt level has continued to decrease after quarter end as we continue to see strong collections and higher downpayments, and we're seeing some benefit of our adjusted payment terms.

Capital expenditures were right at $800,000 for the quarter. Additionally, we made $900,000 in income tax payments during the fourth quarter.

We did amend our senior credit facilities. The amendments loosened our financial ratio requirements but also increased our interest rates, which is to the revolver fluctuate monthly based on financial performance. Rates on the revolver could go as high as prime plus 100 basis points. Currently we're at prime plus 75. The interest rate on our term loan is now at 8% and it was at 7.3%, but this rates and the rate on the revolver could go back down in the future based on operating performance. Excess availability on our revolving line of credit was 10.2 million at the end of April. As we adjust to our expected operating runrate, we will continue to review our capital structure in the coming months to ensure that we position the Company with adequate liquidity and resources for the foreseeable future.

Now, I will turn it over to Hank.

Thanks, Jeff. Although the actions we've taken throughout this past year haven't yet made it to the bottom line, we are seeing positive indications that we're doing the right things. With regard to collections, our 30-day delinquencies are lower, starting out our current fiscal year as compared to last, and we are beginning to see improvements on our credit losses as compared to last year as well. Beginning May 1, we tightened up our internal targets for our delinquencies slightly with the intention of keeping our collections under better control.

As for sales, our intent is to increase the number of quality sales each month and not just overall sales numbers. While the overall number of units sold is down, our downpayments have increased by over 2%. And in addition to the obvious cash flow benefits we know that this is a significant indicator of better quality sales, which is where our focus is presently.

With these higher downpayments, even though our average sales price has increased by almost 9%, we've actually reduced the length of the term. By improving the quality of sales, we can make more money at a lesser sales level through reducing credit losses and reducing expenses associated with higher repossessions and ultimately increasing our return for our shareholders. The increased quality sales, we are investing more in advertising than this time a year ago. We are improving our sales training and we're currently overhauling and refining our entire sales process to make it more efficient and as pleasant of an experience for our customers as buying a car could be.

Again, all of these efforts are geared towards improving our number of quality sales. And in an effort to better monitor the quality of our sales, our IT department has done an excellent job putting together our own proprietary credit app system. Beginning just this past month, we now have all of our customer's credit information captured into our database at the time of sale, and going forward, we will be able to track the factors that we know to be significant such as residence information, employment time, income, et cetera.

Another significant endeavor for attracting better customers is our new payment protection plan, which we rolled out this month in Arkansas and Alabama. It is a debt waiver agreement that a customer purchases so that if their vehicle is stolen or totaled we will forgive the remaining debt. Penetration rates thus far have been excellent. In addition to being an effective sales tool, this is also very beneficial for customer retention. As we have said many times, keeping our good customers is vital to our continued success. Currently, due to regulations in the various states, we're only offering this product in Arkansas and Alabama but we are working towards being able to offer it everywhere.

And one last significant initiative I would like to mention is regarding the mission vision values of our company. Through our 25 years in business, we've developed a strong culture, yet we'd really never taken the time to put it on paper. This past year we did just that and now recently have them proudly displayed at each of our locations. And I understand many companies have great sounding mission statements or values on paper and they don't often accurately describe what the company really looks like. But I would tell you what we've done is reduce to writing what we're truly all about when we're at our best and what we should always strive for, and this is proving to be a very valuable tool. It has integrated into all of our orientations for new associates and it has been a constant theme at all of our staff meetings and manager's meetings. And I strongly believe that revitalizing and maintaining our culture and values is a key component of assuring our future success.

So with that, I'll turn it back over to Skip.

Thank you, Hank. As with any public company, we aspire to continue to grow the footprint of our business well beyond the 92 dealerships we currently have. But at this time, we believe the right thing to do for our long-term success is to curtail our new store growth and allocation of fiscal and financial resources to enhancing the profitability of our existing nine statewide store base. That will continue to be our primary focus for the 2008 fiscal year. Thereafter, as our initiatives take hold and our infrastructure strengthening progresses, we anticipate that we will once again expand our store base. However, in the meantime, with better execution and by implementing significant improvements in the way we buy and sell vehicles and underwrite and collect our accounts receivable, we can substantially increase our bottom line profitability before we accelerate our new store expansion and topline revenue.

To be clear, our goal for 2008 is to focus on increasing the profitability of our Company and we believe that we have put in place the pieces to achieve that goal.

So that concludes our prepared remarks. So now we'd like to move on to your questions. Operator?

(OPERATOR INSTRUCTIONS) [Matthew Hines] with Jeffries.

Good morning, guys, thanks for taking my call. With regard to the credit initiatives, are you starting to see some traction in your newer stores, in particular? Are the losses there starting to come back in line with the more developed locations?

As I said, it's pretty fresh but yes. I would tell you the speaking very short term it looks like things are coming back in line. I don't have any specific numbers for you but just as we've started out these past couple of months, things are looking better for us.

These higher downpayments in the shorter term really does -- should have that effect. It's a good sign right off the bat when you see those higher downpayments. We will take awhile to see them. In the two year -- how these loans pay out over a two-year term.

[Quentin Maynard], Moorhead Capital.

Just a couple of quick questions for you on the length of the average contract now. Do you know specifically how many months that is, the average contract?

Yes.

Could you share it?

Jeff?

Yes. The average originating contract time period is right at a little over 24 months and that's about close to a month less than it was this time last year.

That's great. As far as the -- [earlier,] you guys have been doing the 10% interest rate in Texas. Is that something that is proving to be a positive effect for the Company and something you think you're going to rollout in other states as well? Or are you still thinking about handling interest rates on a state-by-state basis?

I think it's -- in Texas, it was particularly an underwriting issue to get those stores to getting better customers and with the higher losses we had in Texas. We also have it in Kentucky where we had issues but it's also part of the marketing there with the sales tax issue. I would tell you we don't have any intention to change that anywhere else currently. It seems to be working for us. We're pleased where it is. The other states, we do charge different rates, typically higher in most states. So I would tell you no. But there's no intent to change it in Texas and Kentucky. We think it's working well for us.

Great. Last thing I had just kind of a more qualitative, a numbers question for you. When I look back over your history and we look in 2004, I know you're on a base of 70-ish units, you guys posted roughly $1.50 in earnings. When I kind of look out in the future and say next year you're going to be running on a base of 92 stores. What do you think of the things that can allow you to get back to that level of profitability out of the existing store base. I know over that time you were having the ability to get a little higher gross margin in the cars? I didn't know if you would think there are things that will allow you to get back to that gross margin and that level of profitability for the units? Or if you just think that the market has changed and you just can't expect that level of unit profitability going forward?

I would tell you that the biggest improvement that we'll see in our bottom line will come through reduction in credit losses. That is by far the single biggest thing that we can change, going from this year's annual rate was at 29% of sales or a little bit above that --

And also along with that we certainly have a lot of those newer stores that we anticipate we're going to see better sales out of those. We have several small stores that as you know, we start out small and so we have a lot of opportunity there for several stores to pick up a few extra sales each month. I think the combination of those things will put us in a lot better shape.

Keep up the good work, guys. Thanks.

Dennis Telzrow, Stephens Incorporated.

Jeff, maybe you can clarify. I thought I heard you talking about the lost trends in May and June were similar to third quarter, is that what you said? I couldn't --

The delinquencies and some of our lost rates remain favorable after the end of the quarter. We did have some higher numbers during the quarter but that tailed off toward the end of the quarter and we're continuing to see some good results thus far into the new fiscal year.

Skip or Hank, at what time -- obviously you've got a damper on the unit sales -- at what time will you feel comfortable sort of loosening the belt, so to speak, or what are you looking for to change that perspective?

I assume you're referring to getting their sales back. I would tell you that right now we don't have any intention of loosening our belts any time soon. We know that our credit losses got out of hand this past year and right now we're taking a very, very disciplined approach. As I mentioned, our focus is on improving our number of good solid deals. I mean, everybody who's followed this business knows this business. We can go out and sell a lot of cars but that's not our focus. So I would tell you in the near-term we're going to continue to take a very disciplined approach that when you see our sales numbers you know that we're selling good deals.

And any targeted lost rate that you're looking to somewhere down the road? Is it back to where it used to be, in the low 20s? Or --

I would tell you that's where we'd like to get, as somewhere in that range. Obviously it will take time to get back down there and some of the lower historical rates at 20 and below would probably be difficult with the current market. We are looking to get back into the low 20s and it will probably be a step process. I mean, it takes time to roll these loans through and get all the new things that we have going and the tighter credit terms. But yes, that is our goal and I think what we will see going through this year is us heading in that direction.

Any lots -- with 92 lots and a lot of them open the last two or three years, any of them that need to be shut down just to be rational?

We're always looking at that, Dennis. We've actually turned a couple of lots into satellites of other lots. It's more efficient in certain markets. So, we're always looking at that. But I'll tell you, for the most part we're pleased with the markets we're in. We just need to do a little better execution in some of those markets. But we will look at that very hard. And so the first steps of that is turning a couple into satellites, as I mentioned, and we've already done that late in the fourth quarter and some this year.

And the last question. You did a lot of data mining of information. How have we incorporated that out to the lots to help them write better deals?

Right now where we are it's the managers, because of the -- just the nature of the profession we deal with and what our sales look like, the managers make the decisions on who they're going to sell to. But it's been used more as an educational process of looking at it on an individual lots and the Company overall know them statistically what our significant factors are.

Bill Armstrong, CL King and Associates.

Hank, I think you said downpayments were up. How much are they up by?

A little over 2%.

What would that be in dollars?

A little over $200.

Which actually is pretty significant. When you consider it on a percentage basis, it'd be nearly a 50% increase I guess in downpayment, so, it's significant.

Yes, that is. Gross margins expected to rise a little bit from Q4 levels? Is that just because you're expecting maybe a lower mix of repossessed wholesale sales? Or are you getting better pricing on your retail vehicles?

Mostly it's the effect of continuing to reduce the operating expenses as much as we can. We have seen some good success there but the bigger factor is, like you say, it's the level of wholesale sales that break even compared to the retail sales level. And that ratio has been a little out of whack the last few quarters because of the repossession activity in the levels.

But you expect that repossession activity to start to level off, I would assume?

Yes, that is our expectation.

Absolutely. And also I think we're making a little bit of progress on the cost of the cars we're buying and that will help our margins as well in that dramatic that we're seeing some positive trends there. Even though there is, as Jeff mentioned, a high demand for this core vehicle, this seven or eight-year-old car that has 100,000 miles or so and runs well. But I think our purchasing agents are doing a good job of really working hard to get that average purchase price down, which helps in a lot of respects.

Right. How are credit loss trends at the new stores coming along? I guess, Texas in particular?

Texas stores have not gone backwards on credit losses. They've held about steady this fourth quarter compared to last fourth quarter. And we are working on relatively new loans in terms of the downpayments and the new terms so we haven't seen the full effect of the new deal yet in Texas. But thus far we haven't seen any deterioration and we just haven't been long enough into the new program yet to see some good positives, but we do expect better credit losses in Texas.

You know, Bill, some of these Texas stores currently in the last few months, relatively small in the number of customers, 200 to 300 customers or so. So as we've restricted their sales by the higher downpayments and tighter terms, they've made fewer sales obviously. So it's a little early to see the trends and the credit losses with the new accounts coming in. But I would tell you our expectation is that we'll see some definite improvement in those. It's just a little too early to tell, to tell you the truth.

Okay, just a couple of quick ones. Arkansas, what interest rate are you getting now in Arkansas?

11.25.

Do you plan on opening any new stores this year?

We had -- I will tell you, we don't have specific dates targeted or anything. At the time when we made our decision to slow down we actually at that time had two properties already underway. One of those is in Springfield, Missouri and the other in Athens, Alabama. So we actually do have two places where we could potentially. As of today, we don't have any intentions of opening -- we don't have those slated. But I would tell you as things come in line, we have those locations targeted and we feel confident in how things are going. We may go ahead and open those but beyond that we don't have any other plans at this time.

But I would tell you, Bill, and add to what Hank said that we do have a number of projects going on to the existing lots.

Yes, that's really -- and that's a good point. There's so much growth potential with so many smaller stores out there and certainly it's always been our game plan as smaller stores grow we add offices or move across town or this and that. So there's a lot of growth potential there without actually going and adding new stores.

Last question. Han, you mentioned a -- I think it was a loan protection plan where a loan could be forgiven under certain circumstances? Could you just describe that a little bit more?

Yes, it's pretty straightforward. It's actually a debt waiver. It's just -- it's part of a contract that whereby if a customer's vehicle is stolen or totaled, they don't owe us anything. Many of our customers don't have full coverage insurance or don't maintain it. And a lot of times it's a good customer too. And we get into a tough situation. They get their vehicle totaled. And sometimes even if they do have full coverage insurance, [they] still has to pay it off. And this product provides them a good affordable, dignified way to resolve that and we keep a good customer.

I would tell you practically all of our customers purchase it. They like it, they think it's a great deal. And currently some states we're in still regulate such a thing as if it were insurance. In Arkansas, in our past legislative sessions specifically decided that it is not an insurance product and same thing for Alabama, so we offer it there. And I am very hopeful that throughout this year we get the things worked out that we'll be able to offer it in more states. But we're very excited about it. It's brand-new, we just started it in June, actually. We tested it on three lots [through Beta]. Get the kinks worked out on more of the administrative side of it, rolled it out to the rest of the lots in June. So it's new, we don't have any numbers or anything we're talking about at this time but I think it's a great program. It's very good for our customers.

That's in Arkansas and what other state?

Alabama. And we've actually gone back to existing customers, particularly in Arkansas where there's more of them obviously and it's been well-received by existing customers. So it's a great product. It's just a heck of a sales tool along with the service plan and it will help us attract quality sales, we believe.

And is that -- do you sell it just -- is it just one lump payment up front that the customer makes? Or is it a [plea] or how --

It's financed into the deal.

Okay, so it's just kind of rolled into the loan?

Right, yes.

I will mention just from the accounting perspective, we will not be able to take the entire principal amount of this product to income on day one. It will be amortized, the income has collected. So, it's earned as collected.

Got it. Okay, that's all I had. Thanks.

John Mazanec, Wasatch.

I wanted to see -- ask some questions on the existing, the mature stores versus the new stores, see if I could get a little bit more clarity on that. So could you comment on the credit loss? So it sounds like credit losses like in the Texas stores for example are about flat with prior quarters. Does that means some of the improvement has come in the more mature stores?

Yes. Fourth quarter to fourth quarter, yes, some of our more mature stores had significant increases in the credit losses in both the third and the fourth quarters. So that's been the primary focus, is not only the Texas stores or the newer stores but also the older more established stores is making sure we're writing good deals there.

What about sequentially? What do you see sequentially in the mature stores?

I'm not sure what you mean there, John?

Well, did you see improvement in losses in the mature stores sequentially from Q2 or Q3 of this fiscal year?

In the fourth quarter? Yes, we saw slight increases in the fourth quarter. Not merely --

Wait. So an increase from the --? Okay.

Slight improvements in the fourth.

Okay, yes, okay.

Sorry, I said that backwards. But nowhere near where we expect that to level out. We're still too high. But it has been a slight improvement over the Q2 and Q3 levels.

I think we'll see more improvement, certainly at the end of the year, the last couple of quarters. As you all know by looking at the average that total charge-offs have been higher. And part of that is a reflection of being a little more aggressive in cleaning up the portfolio. So as the new loans are being made, you're not going to see the full effect of those until the next couple of quarters and beyond. And you're seeing in the fourth quarter really still some higher losses as we're a little more aggressive in getting our portfolio where we want it to be.

Do you think you'll ever get to a point where you can release some financial data, I'm going to say class of financial data, so stores that are 10 years old, between five and 10 years old have this profile? Stores that are between five and three years old might have this profile so there's a little bit more clarity on where the profitability is in the business?

We'll certainly look at it. We always want to be as transparent as we can. Quite honestly, sometimes there's some issues with the competitive environment we're in so we sometimes have to balance what we release with the competitive environment. But certainly we'll consider it. And I think you'll see over this year some other things that Jeff is working on that will be -- give you more clarity on our losses and how they compare not just on -- You know if you compare things just to say oh, sometimes the sales can skew the percentages. And so there's some other things we'll do. But to answer your question specifically I don't know. We have talked generally before about the ranges of credit losses on stores of five years, ten years and beyond. And I'm certain we'll continue to do that, but whether we make it a specific part of our reporting, I don't know.

Any data you can provide in that kind of regard will be helpful.

I think you're right, John. We do struggle with that sometimes as you know, how much can we release and what's good for the investing public, well, what is not good for us as an operator out there in the field.

Right. What are you seeing in terms of the overall industry environment in terms of competitors? Are they struggling and going through some of the same -- are they seeing the same credit problems that you have seen?

That's what we hear. Of course it's just anecdotal but yes, most of the people we talk to they certainly said that these past couple of years have been the toughest they've had in business. I would tell you that for the smaller guys, it's more and more difficult for them. And it's certainly much more difficult for people to enter the market right now because it just costs so much more to get business going.

There was a report out by a commentator who studies this business recently last month or so and he kind of analyzed all the factors of the business that affected the buy here/pay here dealer such as us. And if you look at all the ratios and the margins, it's without a doubt empirically with the hard evidence says it's a tougher year and anecdotally the past few months or so, particularly.

Anecdotally, I think what Hank was saying was back that up, it is tougher. Particularly for these smaller operators. I mean we're out there, a number of purchase agents trying to buy cars and they're doing it one at a time and it's tough. It's tough. I think it's one of the areas that our competitives, our size is a competitive advantage. We can go a little further and work a little harder to get cars.

Do you think you can pick up kind of the best customers from some of the other struggling players?

Yes, without question. I think long-term, we certainly will.

You know this payment protection plan that Hank spoke about and he's worked so hard to get in place is one of those things to our knowledge nobody offers it. Now certainly a few people will follow us and that always happens but it is a great thing that attracts customers and hopefully retains customers.

And it will attract the better customers.

Exactly how does that work? Do they pay you a -- they're paying you an additional monthly fee for that protection then, are you buying any type of insurance or just taking -- just more risk, you just --

Well, right now, I'm just speaking for Arkansas and Alabama, it's a debt waiver. And so, no, it's not reinsured. It's just a forgiveness of the debt.

But do you think that creates some adverse behavior by the customer?

Oh, you know, maybe a small percentage. I'm realistic, you know, if we have this out there. But I think that the benefits far, far outweigh any additional risk we're taking. It's not really a close call. For the most part of it, those that, when you have a situation, it's a total direct -- the customer had a real difficult time paying that outstanding principal balance anyway. We always had a difficult decision to make. The customer very often would just not come back to Car-Mart to buy their next car. Even though he's a good customer and he might have owed us $2,000 or $3,000, $4000 and so then as opposed to coming in with us -- to us with that, he would go down the street. And so we're having the customer somewhat pay for that generally, but it really is a good thing for the customer.

And then in terms of the average selling price, do you have any fears that it's getting too high?

Yes, sure we do. And we're fighting against that. That's a big part of what's happened in this business is certainly over the past many years the price of that car has certainly inflated faster than our customer's wages. So it takes a bigger piece of their paycheck to buy a car these days. So yes, a lot of our focus. As a matter of fact, we had a meeting here this morning and a lot of what we talked about is finding good quality cars and trying to make sure we stay in an affordable range for our customer. Also that's why we have so much focus on a higher downpayment. It's not just so we can get more cash in upfront, truly. Our customers need to pay more down so that we can keep their payments affordable. And we also need to get the terms stretched out beyond the expected life of that vehicle. So yes, it's a big concern.

But do you think at this price point you're starting to target a customer that might have other financing alternatives? Or do you think this is still the core buy here/pay here customer?

It is still the core customer. Certainly the more you move up the more you get into overlap but our whole goal is to continue to provide a quality vehicle but still towards the lower end. As I just said, that's where we need to be.

Thanks for the time.

John Langston, Hodge Capital Management.

I guess my question is kind of along those same lines as the average price. It looks like this is the seventh straight quarter that that average price has kind of continued to edge up. It looks like the sweet spot for you all was back in the second and third quarters of '06 when your gross margin was a little north of 44%. I'm just curious, is it that the market has changed and you don't think you can get back down to below 8? Or can you maybe give me a little bit more color on how you're trying to control that average price?

I would tell you that there's kind of two things going on with that. One, certainly cars cost more. The other part of it is we've pretty well carved off the very lowest, lowest end of our vehicle. There was a time when we had kind of a broader spread of the range we were buying cars in, and so the really cheaper cars would pull that average down somewhat. And with our focus on quality, we don't have the lowest end cars as much and so we see our average go up.

Now, if you see the vehicles out there on our lot, it looks for the most part we have the same vehicles. But when we trimmed off that bottom end that pushes our average up a little bit, we feel confident that that's what we have to do to help assure that we've got vehicles out there for our customers that are going to make the term of this note.

Do you foresee there ever being a day where the average price goes back down below 8,000 and is that what -- getting that average price down, is that what it's going to take to get the gross margins up?

It's the biggest factor in margins, yes.

As we said earlier, right now -- and obviously we can improve that margin somewhat through more efficient expense control and that sort of thing. But right now, our big increases are going to come from our focus on improved credit losses.

Bill Baldwin, Baldwin Anthony Securities.

Good morning, Jeff, Hank and Skip. Where does the total downpayment kind of amount to now in terms of percent? What percent are you getting now?

Around 7.5.

About 7.5% of the --?

Yes, sir.

7.5 to 8.

So, historically -- and Bill, I know you've followed us for awhile -- we're more in the 5% range, five-ish. So that's, as Hank indicated, we're up over two points and that's been really since January, Jeff?

Yes, early spring.

Early spring? Yes. And it's maintained through the tax season which we somewhat expected but it's maintained at a good level.

And just so far, starting off this year.

That's a good -- obviously a very good trend then if that's continuing after the tax season. I guess as you indicated, indicative of a somewhat higher, a higher quality customer there.

Right, and obviously that's a big factor in why we sold fewer cars. We're going to [stay there]. So that had a big impact.

Hank was talking last night, there's folks that have shown up at the Car-Mart lot that used to put down $400 and now we're saying it's $600 or $700 because it just works better in the long run for us we know. There's a little time period of adjustment for our customers. And frankly some will still have a difficult time putting up that extra money.

We'll still want to attract our repeat customers.

Absolutely.

We're still not going to want to push our repeat customers up beyond a point where they're comfortable with that downpayment. So there's a little bit of give and take here on that percentage.

Yes, good point.

Well, that's true. But I'm sure your repeat customers too are good customers.

Right.

They have a history of paying their --

It's almost a definition of a good customer.

Right, exactly. So, I mean you don't mind taking a little bit lower --

Absolutely.

-- downpayment there. You know, if you've already done this I apologize, but can you kind of let me know where you are in terms of your initiative regarding developing the various criteria you're going to develop for underwriting loans? Is that process pretty well completed now? Or is that still the work in process and you're still developing your underwriting criteria?

I think it will always be a work in progress. We did go back and we got a lot of data and we played it against successful loans and defaults and really used it more as an educational tool at this time. And as I mentioned, just very recently we finished our new credit app system whereby our sales going forward from this month forward we're capturing all of the data for the (inaudible), that sort of thing. We'll be tracking that. So I would tell you that immediately we're still kind of in the monitoring and information gathering phase and how that -- and it will be more of an educational tool at this time. It won't necessarily be scoring. Scoring is very, very difficult. We're in small towns and there's a lot of situation we had -- of course a part of our credit decision is an interview process and all those things have to be taken into consideration. Right now we are collecting a lot more information than we ever had before. So it will refine.

Have you hired -- I think at one point you indicated you were going to bring onboard at the headquarters a person to be in charge of underwriting. If I'm not mistaken that was --

Yes, we took a step back and looked at a better way to skin that cat and we've contracted with a company to actually help us develop a scorecard. And they are in the process, as Hank mentioned, of just gathering data and matching that against credit reports and other demographic information outside of our system, but to give us a customized scorecard so that going forward we can look at our pool of loans monthly and get a little better predictability on performance. As Hank mentioned, this won't be used on the front-end. This is going to be used on the back end to help us maintain and view the quality of each pool. But that company is very well respected. They're probably 75% finished with their work right now and it's going to give us a real nice customized scorecard.

I guess then in a way this allows you then to measure really your benchmark performance of your lot managers in terms of their decisions and judgments on credit extension?

Right, exactly. And by having this we're going to know -- we don't have to necessarily wait for losses to start rolling in. We'll have this information and we know maybe an individual lot is taking more risk and to the other end too. We may see some lots that we feel like they've tightened up too much. And we can go to those individual stores and sit down and make the adjustments we need instead of just a shotgun approach. And I think this is really the best way for us to approach it at this time. Our managers need the flexibility because truly in our business there's sometimes deals that look great on paper and we really don't need to sell that. But they might pass us (inaudible) so. But being able to know early on, one month out of the gate, hey, we've got a lot -- it appears we've got a -- we took a lot of risk here on this particular lot this month. We can be on that before losses are rolling in and we have the --

Right, so you've got 40 deals to deal with instead of six months of them.

Exactly. So I think this is a solid approach for us just because of the nature of our business. We are buy here/pay here. We're not just --

Right. And you're decentralizing the way you run your business.

Yes, we are. And so much of our business is about the relationship with the customer. We can't get away from that. And we also, we really can't get away from the importance of the manager's discretion. That's very key at this time.

That's right.

What we're trying to do with this, Bill, it's really -- one of our directors coined the phrase. I don't know if this is original but it's a tool -- [part of it] we're helping the toolbox. We're adding another tool to the toolbox to help these managers make better decisions. Not to tell them what decision necessarily to make but help them make a better decision. And it will take some time to test the validity of this. I mean it's coming out the chute it may match up perfectly or it may not. I mean we're going to --

And the scorecard itself is going to be flexible enough so that we can do validations quarterly, semiannually, annually -- this will be a work in process forever as we update the scorecard itself.

We are excited about it, help our managers make better decisions. As Hank said, to track the decisions we make and that we can adjust from there.

Well, your managers make enough money that they -- they should be able to make these judgments.

We want them to make more.

I know. Lastly, and this is subjective here, but based on the tightening that you've done in your underwriting criteria, would you care to make any assessment of what percent of your customer base do you think that came in today would not be a customer of Car-Mart?

That's a good question.

Hank, [why don't you get it].

I will tell you that it varies a lot by town to town and certainly some of the smaller lots where we're new in town, we tend to have a lot more turndowns because people really don't know what we're all about. But I don't have a number for you. Obviously, I will say this, though, it's higher right now across the board. We certainly do have more turndowns today than we did a year ago, there's no question about that.

Is your advertising -- is it keyed to attract in new customers that have not shopped at Car-Mart, that are not current customers at Car-Mart?

Absolutely. And we have had several stories related to us where people have come in specifically from our advertising, so that's encouraging. I would say too just of course, Arkansas, next week we begin our actual advertising for our payment protection plan. It's a Car-Mart commercial in general but it highlights that. And I think that will really tell us a lot because that's obviously something that no one else offers and I hope we'll see a lot of people come in specifically wanting to know more about hey, what is this product.

Bill, our advertising in the past few months and going forward really has not been promotional driven but more branding driven to the quality of Car-Mart. Our associates are repeat customers, that type of thing. And although he's too -- he might not admit it but one of the reasons for the success of these commercials is Hank does them and he does a great job along with many of our associates.

That's strictly a result of not showing up for the advertising meetings. But that's a whole other story.

He was picked but he wasn't there but he does a great job with it. I would also say that just recently, and Hank, you want to talk briefly about this, this advertising to the Hispanic market that you've started that I think is a great idea.

Yes, we probably need to cover that. Certainly particularly in northwest Arkansas is where our focus is. We have a very large Hispanic community here in northwest Arkansas and we have a fellow that's working with us and he's great. And just in the past month we've finished our commercials for that and we're running on all the Hispanic channels, both radio and television, sponsoring some more things. And immediately, even in the month we're in, already starting to see some benefits there. I hate to admit it but we really, in these past few years, done a really poor job in that particular market. But we're stepping it up and I think that's going to be a tremendous benefit for us this year as well.

That's not just advertising but it's folks on our lot, me being bilingual, certainly understanding the Hispanic culture. It's a soup to nuts approach to attract and retain the Hispanic customer and we are really working hard on it. I would tell you Hank's commercials with the voiceover sound better in Spanish than I would have thought. But they came across real well. Real well.

Well, good. Some bilingual associates then on the lots.

Yes, and really some cultural understanding.

We actually -- it was interesting. We took all of our many lots and we actually did seminars on every location for a better cultural understanding and just to promote the -- so that they know how to better serve this customer and it's been -- our associate is real excited about it. And it's a good thing.

Lastly, can you give some color here on what you charge for that debt waiver, the protection plan, what the cost of that is?

Not -- we're not ready to talk about that just yet, if that's all right. We'd like to hold off. Unless you want to come buy a car, then I'll tell you.

Okay, very good. Thank you.

[Quentin Maynard], Moorhead Capital.

I'll make this quick. Just -- it's actually three quick things. One on the credit losses versus historical, earlier you were making commentary that you'd like to see that get back into the low 20s? When you look back on your two, three, four year history, I know that 2005, 2004, even had that into the teens?

Yes, sir.

What do you see on the horizon that make you think that those levels of success aren't achievable in the future?

Well, I don't want to say that they're not. I mean don't get me wrong.

That's what I wanted to make sure. So it's not that you're saying you can't do it, you're just not wanting to bet the farm on getting it there any time soon?

Exactly, I mean, you want to -- we have higher expectations but we need to be modest in what we really think we can do in the nearer term, that being the next couple of years. Part of it, as Hank has mentioned to Jeff, is driven by the car price. I mean if we --

I know but it is a percentage of sales.

Yes. It's just harder to get down to some of those levels with the car costing more. I mean if we could sell a cheaper car on a twelve-month note you'd see a lot lower credit losses. The reality is it's a 24 month note on an $8,500 car, so.

And that may have been 19 or 20 months three years ago.

Exactly.

So that extra four or five months will put you in a bigger exposure position.

Don't get me wrong, [Quentin]. I'm not saying we can't do it, I just want to be realistic in the --

I got it. I just wanted to make sure there wasn't something going on in the overall market that I wasn't aware of there. On a, again a managerial note, the MIT program you guys were rolling out, are you still doing the managers in training?

Yes.

Oh, sure.

Is that something that you're seeing the success you had hoped for et cetera with? Or --

I would tell you that we are in kind of the recruitment process. We actually just recently, and I mean within the past week, we now have a recruiter and that's his task. We have done a lot of work on refining, improving the training modules for that program. We're further along with that than we've ever been. That's in great shape, and now with this recruiter. Even though we're not going out and opening a bunch of stores right now, keep in mind, again, we had a lot of needs because as our individual stores grow we have need for assistant managers and such. We really need this kind of lag time so we can get these guys trained. So we're still aggressively pursuing that program.

Wonderful. Last thing, when you were talking about a debt waiver and mentioned kind of dissimilarity to your service plan, how -- I know in the past you had talked about having some regulatory issues around how long the service plan could be, whether that was something that was real popular with your customers. Is that something you're continuing to rollout and are you having any success with being able to have states allow you to roll that out for a longer period of time?

At this time, our service contract is short. It's five months, 5,500 miles. We still have -- over half our business comes out of Arkansas. And in Arkansas we have to keep that under six months. We do feel like that it's okay for what we do. It's good protection on the front end to ensure the customer they've got the good car. And then certainly we continue to work with our customers to help them get, if they do have issues, to get the repairs done at our rates or in some cases, we do actually help them with repairs and may even finance a portion of the repairs for them.

So we continue to work with our customers beyond the service contract. At this time we're not going out and trying to expand it, although it's something we've talked about from time to time, because we do know we have some competitors that have service contracts that -- they're through a warranty company or something like that. Maybe they don't cover as much as what ours does. And some of our competitors begin to advertise these longer-term service contracts that maybe initiated, we have to revisit in the future. But at this time we're staying with what we have.

(OPERATOR INSTRUCTIONS) You have one final follow-up question. And the follow-up question comes from the line of John Mazanec with Wasatch.

I was just hoping to get a little bit of color on kind of longer-term experience of the Company because I'm listening to this whole discussion. You're obviously tweaking the underwriting here and kind of the management of the business. And since the management team has been involved with the Company for such a long time, could you provide some perspective on whether or not you've ever seen the credit spike out of control like this in the past? Or has it always stayed more consistent than what we're seeing over the last couple of quarters? I don't want to say out of control; that's way too strong.

Yes, I was going to say. Higher than normal, let's say. I would tell you, John, that if you looked at the first 20 years of this Company's history when it grew at a much slower rate, it had -- and each store had a much more of a long time to develop. Certainly the credit losses were lower and I'm speaking of starting 1981 to the year 2000 more or less. And then in the last five years particularly, we have grown faster, obviously, going from 30 some odd stores to 92. And along with that many other things have happened in the market such as higher priced cars, our fuel prices, et cetera.

So I will tell you this is certainly the highest that I'm aware of that credit losses have gotten since, let's say, the year 2000, which I think is ample time. It's also a reflection of all of those factors of growth a little bit ahead of our ability to totally manage and some other external factors. So, the thing about that I would also tell you is I know that we can get those credit losses back down to where they were earlier in the last five years, working hard on these initiatives we're working on and tightening up the credit.

Because the good news about our business is there is a large and growing market of customers that need this car and cannot afford the next level up of financing and pricing and certainly not new car financing. So, the market is there for us and the towns are there for us. And it just is a matter of us tightening up our belt and really, in a good way, standardizing some of our processes and best practices to better handle this customer. So it is high historically but I think we'll see a decrease as we go forward.

And so what was maybe the band, you know from 1981 to 2000, what was maybe kind of the range for credit losses?

You know as a percentage of sales -- Hank might [remember this]. Around 18.5%, give or take, was more or less the average.

[You need] to go back and well, two years back it was down to 17. But that was a different deal because you're looking at meeting the math (inaudible) you've got terms out there and 12 to 18 months payments much lower.

The interest rates were a lot lower too, which means each payment went more to principal and you had less credit loss. So it all has an effect.

Yes, it's just kind of interesting that, I mean, the long-term history of the Company would be -- seems to be that the model is pretty stable. And then it's kind of we've hit a bump in the road here. And so I'm just trying to get some perspective on that.

Yes.

Okay. Thank you.

Mr. Falgout, are there any closing remarks?

Yes. Thank you very much, everyone, for listening to us today. We appreciate it. We mentioned earlier we're filing a 10-K, Jeff, I guess for a couple of weeks here. And we look forward to talking to each of you all in the future. Again, thanks for your interest in America's Car-Mart.

This concludes today's conference call. You may now disconnect.